ACCA Applied Skills · Corporate and Business Law (Global)
Loan Capital for ACCA Corporate and Business Law
Loan capital is money a company borrows, usually through debentures, and repays with interest. Lenders often take a charge over company assets as security. To solve questions, identify the type of charge, check whether it was registered, then apply the priority rules to see who is paid first.
What this chapter covers
This chapter covers how a company raises money by borrowing rather than by issuing shares. You learn what a debenture is, who can authorise borrowing, and how lenders protect themselves by taking security over company assets. The security is called a charge.
The chapter has a clear chain of logic. First you separate loan capital from share capital. Then you check that the company has power to borrow. Next you meet the types of debenture and the trust deed. After that come fixed and floating charges, registration of charges and, last, priority between competing lenders.
It links to other parts of the paper. Share capital and directors' powers sit close to it, and the rules on authority are the same agency ideas you use elsewhere. It also leads into insolvency, where the order of payment matters. Secured creditors, floating charge holders and unsecured creditors are all treated differently when a company fails. Learn this chapter well and the insolvency material is easier.
LW is an objective exam, and this chapter suits objective questions well. The tests are short and rule-based: is this a fixed or floating charge, was it registered, who ranks first. Each question is all or nothing, so you need precise knowledge, not a vague idea. The distinctions are few, they repeat from sitting to sitting, and they are easy to learn once you understand the reason behind them. Scenario questions in Section B also use them, so they are good value for the effort.
Loan capital: topics in the order to study them
- 1Share Capital vs Loan Capital (Debentures)Start with the basic contrast between owning a share and lending money, since every later rule depends on it.
- 2Company Borrowing Powers and AuthorityBefore looking at the loan itself, learn whether the company can borrow and who may agree to it.
- 3Types of Debentures and Debenture Trust DeedsOnce borrowing is valid, learn the forms the debt can take and how a trustee protects a group of lenders.
- 4Fixed and Floating ChargesYou need to understand the two kinds of security before you can deal with registration or ranking.
- 5Registration of ChargesRegistration rules apply to charges you now know, and they decide whether the security can be enforced against others.
- 6Priority of Charges and Rights of Debenture HoldersThis is the final step: it combines charge type and registration to decide who is paid first and what holders can do.
How to prepare Loan capital
Treat this chapter as a chain of rules. Each step feeds the next, so learn in order and test yourself with short objective questions as you go.
- Read the chapter once for the story: why companies borrow, how lenders get security and what happens when the company cannot pay.
- Write a one-page comparison of shares and debentures covering return, ownership, voting and repayment.
- Make a two-column table of fixed and floating charges covering the asset type, freedom to deal with the asset and effect on insolvency. Then practise labelling assets in short examples.
- Learn the registration rule in plain words: what must be registered, who does it, and what happens to an unregistered charge. Use your syllabus variant's rules and time limits as given in your study text.
- Build a ranking ladder for competing charges and practise short scenarios where you place each lender in order.
- Do timed objective questions on the whole chapter. For every wrong answer, write the rule and the reason in one line.
- Before the exam, rewrite the comparison table and ranking ladder from memory.
Common mistakes in Loan capital
Treating debenture holders as owners of the company.
Fix: Remember that debenture holders are creditors. They have no ownership or ordinary voting rights from the debt alone.
Classifying a charge by its label instead of its substance.
Fix: Ask whether the company can freely deal with the asset in the ordinary course. If it can, the charge has floating features.
Saying an unregistered charge makes the loan void.
Fix: State it precisely: the security may fail against a liquidator and other creditors, but the company still owes the debt.
Ranking charges by the date of the loan alone.
Fix: Check the type first, as a fixed charge generally beats a floating one. Then use order of creation within the same type.
Ignoring who had authority to agree the borrowing.
Fix: Scan every scenario for who signed and whether they had power. Then decide whether the company is bound.
Mixing up the crystallisation of a floating charge with its creation.
Fix: Creation is when the charge is granted. Crystallisation is when it later attaches to the specific assets held at that moment.
Last-day revision: Loan capital
- A debenture is a document acknowledging a company's debt, usually with interest and often with security.
- Shareholders own the company; debenture holders are creditors and are paid interest whether or not profits exist.
- A company's power to borrow depends on its constitution and the authority of those acting for it.
- A debenture trust deed appoints a trustee to act for a group of lenders.
- A fixed charge attaches to a specific asset, and the company cannot dispose of it without the lender's consent.
- A floating charge covers a class of changing assets and lets the company keep trading with them.
- A floating charge crystallises on certain events, such as insolvency steps, and then becomes fixed on the assets held then.
- Charges created by a company usually need to be registered within the statutory period.
- An unregistered charge is generally not enforceable against a liquidator or other creditors, though the debt itself remains owed.
- Between fixed charges, the usual rule is that the earlier one ranks first.
- A fixed charge normally ranks ahead of a floating charge over the same asset.
- Ask three things: what type of charge, was it registered, who came first.
Loan capital practice questions
- Marlow Ltd defaulted on interest payments due under a debenture secured by a floating charge. The debenture states that on default the charg…
- Sable Ltd keeps a register of its own charges at its registered office, open to inspection by members and creditors. Separately, it files pa…
- Vexa Ltd creates a registrable charge. Which of the following is the correct statement about the person who may register it?
- Zephyr Ltd's constitution contains no restriction on borrowing. Its finance director, who has no formal authority to borrow, signs a loan ag…
- Marlow Ltd needs funds. It is considering issuing shares to Ayesha or taking a loan from her. Which of the following correctly describes a k…
- Orla Ltd issues a debenture that is secured by a charge over a specific freehold building, so the company cannot sell the building without t…
- Zeta Ltd, a company incorporated under a Companies Act-style regime, grants a bank a fixed charge over its factory building to secure a loan…
- Delta Ltd created a charge on 1 March and the chargee registered it on 20 April, after the statutory registration period had expired. On 10 …
Loan capital in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Loan capital: frequently asked questions
What is the difference between a fixed and a floating charge?
A fixed charge attaches to a specific asset that the company cannot sell without consent. A floating charge covers a changing class of assets, such as stock, and lets the company keep dealing with them until the charge crystallises.
Why must charges be registered?
Registration warns other lenders and creditors that the assets are already used as security. If a charge that needs registration is not registered in time, it is generally not enforceable against a liquidator or other creditors.
Who ranks first, a fixed or floating charge holder?
As a general rule, the holder of a fixed charge over an asset ranks ahead of a floating charge holder over the same asset. Between charges of the same type, the earlier one usually ranks first.
How is loan capital tested in the LW exam?
It appears in Section A single questions and in Section B multi-task scenarios. Expect short questions on charge types, registration effects and ranking, each needing a precise answer.