Law and Ethics

Session 2

Company Finance

Online Revision Bridging Course

1) Definition of ‘share capital’

2) Preference shares and ordinary shares compared

3) Loan capital and debentures

4) Fixed and floating charges

5) Registration of charges

Contents

2

Company Finance

4

• Borland’s trustees v Steel Bros & CO Ltd (1901)

“......the interest of the shareholder in the company, measured for the purposes of liability and dividend by a sum of money”

Definition of a Share

5

• Ordinary Shares

• Standard shares, Most common type

• The biggest risk takers (last to be paid on liquidation)

• Rights

• Variable dividend

• Return of capital (on liquidation)

• Attend and vote at company meetings

Types of Shares

6

• Preference Shares

• Carry more rights than attach to ordinary shares, usually more expensive. Don’t usually have voting rights.

• Rights

• Fixed dividend

• Return of capital on liquidation

• Paid before ordinary shareholders

Types of a Shares

7

• Deferred Shares

• Have special rights or restrictions attaching to them but are deferred for a period of time or on the occurrence of a specified event e.g dividend rights may be deferred.

• Redeemable Shares

• Maybe be ‘bought back’ by the company

Types of a Shares

8

• Nominal Value – lowest value a share can be issued at

• Market Value – price at which the share actually sells

• Authorised Share Capital – Total maximum amount of capital a company can issue

• Issued Share Capital – total amount of capital that a company has issued

• Called up/uncalled Capital – amount paid/amount outstanding• Partly paid Capital – shares that have not been paid in full

• Reserve Capital –unpaid amount reserved exclusively for liquidation

Share Capital - definitions

9

• The value received in excess of its nominal value when a share is sold at a price above its nominal value

• Must be held in the share premium account as undistributablecapital (un-denominated capital)

• Exceptions

• Mergers

• Group reconstructions

• Acquisition of Shares of a Body Corporate

Share Premium

10

• A share cannot be issued at a price below its nominal value. (category 3 Offence – Class A fine and /or imprisonment for up to 6 months on summary conviction)

• Company must pay the difference plus interest.

• A shareholder who knowingly buys a share at a discount may be liable to repay the deficit

Issuing Shares at a Discount

11

• Raised by borrowing. A company's borrowing power must be exercised in accordance with the provisions of it’s constitution

• Examples,

• Overdrafts, Secured loans, unsecured loans

Loan Capital

12

• Defined in Levy v Abercorris Slate & Slab Co (1887) as a document that creates a debt or acknowledges it. It states the terms and is issued by the company to the lender (debenture holder)

It states:

• the obligation to repay principal plus interest

• the specified security (charge) provided for the loan

• the events that will allow enforcement by the lender

• the role and powers of the debenture holder

Debentures

13

• Types

• Single Debenture – a single loan

• Series of Debentures – different loans by different lenders on different dates, all part of an overall loan

• Debenture Stock (Public Companies) – creates “debenture stock” a loan fund which a number lenders invest in on

exactly the same terms. Administered by trustees (protects lenders interest)

Debentures

14

• Security on borrowings usually takes the form of a charge over a asset of the company

• In the event of default on repayments the debenture holder has the right to take over the asset

• The most common charges are fixed and floating

Fixed and Floating Charges

15

• Most powerful type of charge

• The charge attached to a physical asset of the company e.g., buildings, plant

• The company cannot sell or create another charge on that asset without the lender’s permission

• Only discharged when the debt is fully repaid

Fixed Charges

16

• Floats over all or part of a current asset e.g., stock, book debts

• Company can transfer freely the current assets without the permission of the lender

• Floating charges only attaches to an asset when it crystallised. This may be due to

• Default on repayment.

• Liquidation

• Receivership

• Cessation of business

• Notice (agreed future date for crystallisation)

• Once the charge attaches to an asset (crystallisation) the company loses the benefit of dealing with the asset in the ordinary course of business without the lender’s permission

Floating Charges

17

• Company must register the charge with the CRO within 21 days of creation (CRO MAINTAINS A REGISTER OF CHARGES)

• Date of creation, description of the charge, amount of debt it relates to, property to which it applies, names and details of person(s) entitled to it.

• Court extends the time to register if:

• Failure to register was accidental

• Failure has not prejudiced the creditors or shareholders of the company

• Its just and equitable

• FAILURE TO REGISTER

• Charge becomes void and company is liable to a fine

• Must repay the loan in full

Registration of Charges

18

Shares and Debentures Compared

19

Shareholders and Debenture Holders Compared

DisclaimerCare has been taken to ensure that all data and information in Academy lectures is factual and that numerical values are accurate. To the best of our knowledge, all information in the Academy lectures is accurate at the time of publication. Accounting Technicians Ireland and its lecturers assume no responsibility for errors or misinterpretation of the information contained in these lectures or in its use.

Copyright

This material is issued by Accounting Technicians Ireland to itsstudents, affiliates, members and fellows. It may not be used inwhole, or in part, for any course of study and/or examination of anyother body whatsoever without prior permission in writing fromAccounting Technicians Ireland.

This material, or any part thereof, may not be made available in anylibrary, and it may not be reproduced, in whole or in part, stored in aretrieval system or transmitted in any form or by any means –photocopying, electronic, electrostatic, magnetic, pdf, mechanical,recording or otherwise, without prior permission in writing fromAccounting Technicians Ireland, 47-49 Pearse Street, Dublin 2.