Chapter 10 Company Charges Borrowing is an important means by which a company can finance its activities. Every trading company, unless prohibited by its memorandum or articles, has an implied power to borrow money for the purpose of its business, and to give security for the loan by creating a mortgage or charge on its property. The borrowing power is exercised by the board of directors subject to the provisions in the memorandum and articles of the company. The company may exercise its borrowing power only upon the commencement of its business.

Ultra vires Borrowings A company that borrows beyond the authority conferred by the memorandum or articles of the company becomes null and void. The company cannot ratify such contract. The lender cannot sue the company for the return of the money but has the following remedies: Injunction and recovery Subrogation Sue the directors of the company for breach of warrant authority. When the borrowing of the company is intra vires but outside the scope of the directors; it would need the ratification of the share holders and then relation between principle and agent would apply.

Debentures A debenture is a document given by a company under its seal as an evidence of a debt by the holder usually arising out of a loan secured by a charge. The contract will include provisions for repayment of the loan and the ability (generally none) of the creditor to attend company meetings or otherwise influence company policy. A debenture is transferable document by delivery or the completion of transfer

Convertibility of the instrument Kinds of Debentures Debentures are classified into different categories on the basis of the following: Convertibility of the instrument Non convertible debentures Partly convertible debentures Fully convertible debentures Optionally convertible debentures Security of the instrument Secured debentures Unsecured debentures

c. Redeemability of the Instrument Kinds of Debentures c. Redeemability of the Instrument Redeemable debentures Irredeemable debentures d. Registration of instrument Registered debenture Bearer debentures

Secured Debentures A lender may insist on having some claim upon the assets of the company if the loan is not repaid or if other terms of the contract are broken by the company, for example, if interest on the loan is not paid, or to ensure re-payment of the principal if the company goes into insolvent liquidation. Any of the assets of a company, for example, real property, machinery, goods in the course of production or book debts, can be charged to provide security for a loan but its uncalled capital can be used as security only if this is expressly authorized by the memorandum.

Charges Securing Debentures A company can issue debentures either secured or by a charge on its property. Such charge may : Fixed charge (or specific charge) Floating charge A fixed charge or specific charge is one which is created on some ascertained and definite property of the company such as building or machinery, etc. The effect of such a charge is that the company cannot deal with such property freely, i.e. it cannot sell without the consent of the holder. Again in the winding up of the company, the holder of a debenture secured by a fixed charge ranks as a secured creditor in respect of debt due to him on the debenture.

Charges Securing Debentures Floating charge is a charge by which a company could create over a type or class of asset rather than a specified asset. A floating charge confers no ownership rights in respect of the charged class of assets. Hence, a floating charge would be valueless until it converted it into a specific or fixed charge. Until the charge crystallises, the company can usually deal with the charged asset in the ordinary course of business.

Distinction between fixed and floating charge A fixed charge generally prevents the company dealing with the charged asset without the consent of the charge holder and is, thus, an inappropriate form of security for assets which are constantly changing. A floating charge is that it leaves the company free to deal with the charged asset in the ordinary course of business without consulting the charge holder (although the security contract may restrict this freedom). Since a floating charge is over a class of assets, the chargee is uncertain as to the value of his security at any moment before the charge ‘crystallises’.

Crystallization of Floating Charge Crystallization, when a floating charge becomes a fixed charge over the assets currently comprising the relevant class, occurs automatically on the happening of certain events, namely: (a) if a receiver is appointed by the court or any chargee; (b) when winding up commences (even a member’s voluntary winding up); or (c) when the company ceases to carry on its business as a going concern.

Conversion and Amalgamation of Companies The conversion of a company is an operation by which its legal form is changed without being creating new legal personality. For example, private limited company may be changed into Share Company and vice versa. Conversion does not result in the creation of a new legal person, but is treated for all purpose as a continuation of the original company. Conversion must conform to the rules contained in the company law specially those rules that govern conversions and rules of Article of Association.

Procedure and effect of conversion Procedure of Conversion The decision of conversion of a company into another form may pass by unanimous or majority required by the law or articles of association. A resolution or agreement for conversion of one company into another has to be notified through publication. Conversion neither increases any liabilities upon member nor deprives the right of members partially or wholly.

Procedure and effect of conversion A conversion takes effect from the date of its registration. It does not affect the continued existence of the original company, and therefore causes no interruption of its activities. The assets of the former business organization transfers to the new company from the date of registration. The creditors of the former company retain all their rights, as regards the new business organization. They may also object and demand their debt to be paid before conversion takes place. The conversion does not effect the rights and liabilities of the members towards the former company.

Amalgamation of A company An amalgamation is the operation by which two or more of companies into only one company and by which the members of the amalgamated companies receive shares issued by the company benefiting from the amalgamation. It may either result in the creation of a new business organization to which one or more business organization contribute their assets and debts or in the contribution of the assets and debts of one or more business organization to another existing business organization to another existing business organization.

Amalgamation of A company In amalgamation, all property and rights forming the assets of the amalgamated business organization are transferred to the beneficiary business organization. The beneficiary business organization must comply with the undertakings and agreements entered into by the amalgamated business origination and all claims and liabilities of amalgamated business organization will be transferred to the beneficiary business organization.

Procedure of Amalgamation The decision of amalgamation is taken by each business organization. Such decisions have to be approved by Share holders and also the creditors of amalgamated company. The terms of amalgamation is drawn up which transfers all assets and liabilities to the amalgamated company. End.