Question Tag: Company Financing

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  • 4 Marks

BL – May 2015 – L1 – SB – Q2b – Company Law

Explain the term "debenture" in relation to a company’s securities.

In relation to a company’s securities, explain the term “debenture”. (4 Marks)

A debenture is a long-term security issued by a company, typically bearing a fixed rate of interest, and secured against the company’s assets. It is a type of loan that allows the company to raise capital without surrendering ownership or control. The holders of debentures are creditors to the company and are entitled to repayment of the loan plus interest at an agreed rate.

  • 10 Marks

BCL – Apr 2022 – L1 – Q3b – Types of capital and the financing of companies

Suggest financing methods for AirQuick Ghana office and explain advantages and disadvantages of each method.

b) AirQuick is one of the world’s leading aerospace companies. AirQuick and the Ghana Civil Aviation Authority have conducted a feasibility study in Ghana with the intent of setting up a subsidiary in Ghana. The study which ran for two years has been concluded and a new subsidiary office of AirQuick has just been established in Ghana to serve the West African hub. You have been given a two-year contract in the legal department.

Required:

i) As a business law expert, you have been asked to suggest TWO (2) ways to finance or sustain the activities of the AirQuick Ghana office. (6 marks)

ii) Explain ONE (1) advantage and ONE (1) disadvantage of each financing source identified in i) above. (4 marks)

i) Ways of financing a company Companies are financed using either share capital or loan capital Shares are measured in terms of interest. A shareholder is not a creditor of the company for the money he has invested in the company Shares are of no-par value. (Section 43 of Act 992), meaning the shares have no particular amounts or value attached to it in the Constitutions of the company. A company may raise a loan capital and, or long-term funds by the issue of a debenture or of a series of debentures or of debenture stock in order to finance the business without increasing its share capital. A company shall, within two months after the allotment of any of its debentures, or after the registration of the transfer of any debentures, deliver to the registered holder of the debentures, the debentures or a certificate of the debenture stock under the common seal of the company or as certified by two directors and the Company Secretary of that company. Debentures may be secured by a charge over the company’s property or may be unsecured by any charge. With recent Public-Private-Partnership arrangements, government is encouraging private sector investments and sometimes subsidies or tax reliefs are granted. Section 60 of the Central Securities Depository Act, 2007 (Act 733) provides as follows: a) Debentures, shares bonds or notes issued or proposed to be issued by a corporate body and any right, warrant or option in respect of them b) Bonds, treasury bills or other loan instrument of the Government of Ghana or any country c) Rights or interest, whether described as units or otherwise under a collective investment scheme. d) Other rights or instruments as the Minister responsible for Finance may, by notice in the Gazette, prescribe. (6 marks)

ii) Advantages and Disadvantages of financing methods

Financing Method Advantages Disadvantages Shares Flexibility over the use of its finance. The use of shares makes the company determine the type of shares to float. Shareholders ordinarily want the company to continue into the foreseeable future and will reluctantly be driven to press for bankruptcy. Makes the company appealing and saves it from the payment of initial investment or interest. Reduces the likelihood of the company becoming bankrupt. Issuing shares calls for the disclosure of critical financial and non-financial information to the public. Initial stages of offering shares involve elaborate proceedings which can shift the focus of the company. Management of the company determines dividend payout to shareholders. Need to constantly update shareholders on the activities and performance of the company. Management can hide behind any negative events and decisions not to declare dividends. Debentures Encourages long-term funding of the company. It’s cost-effective compared to other funding options. Holders can secure their investment by securing a charge. Control of shareholders and profit share ratios are maintained. Can reduce growth as there is no flexibility in the payment of interests. Reduces management’s control and use over assets used as charges. Bank Loans Opportunity to negotiate for a repayment holiday. Company knows the rate of interest as it is fixed for the term of the loan. Loans do not affect the shares in the company. Difficult requirements that companies need to satisfy. Strict repayment schedules. Payment of penalties by defaulting companies. Huge processing fees. Loans are not repayable on demand. Bonds Helps retain more cash in the company. Does not dilute the value and holdings of existing shareholders. Offers are means of stabilizing the finances of the company at a fixed interest rate. Flexible way of raising debt capital. Constant payment of interests even if the company makes a loss. Potential reduction in the company’s share value if net profit declines. Liking imposition of strict and unfavorable convents by investors Rigid compliance with listing rules and regulations. (4 marks)

  • 6 Marks

BCL – Mar 2024 – L1 – Q5b – Types of Capital and the Financing of Companies

Explain the concepts of a fixed charge and a bond in the context of company financing.

A loan taken by a company limited by shares may or may not be secured by a charge.

Required:

In reference to the above statement, explain the following:

i) A fixed charge (3 marks)

ii) A bond (3 marks)

i) A Fixed Charge:

Debentures form part of a company’s loan capital. There are two types of secured debentures: debentures secured by a fixed charge and those secured by a floating charge. A debenture secured by a fixed charge is a loan to the company for which specific property of the company, such as land, buildings, vehicles, plant machinery, or equipment, is used as security to ensure repayment of the loan. In contrast, a floating charge covers general assets or undertakings of the company, allowing the company to continue dealing with those assets until the occurrence of a certain event that “crystallizes” the floating charge into a fixed charge.

A fixed charge on a property has priority over a floating charge affecting that property unless the terms of the floating charge specifically prohibit the company from granting a later charge that has priority over the floating charge, and the person in whose favor that later charge was granted had actual notice of that prohibition at the time when the charge was granted.

(3 marks)

ii) A Bond:

A bond is a written promise to pay money. It is an obligation to pay a fixed sum of money at a definite time with stated interest, and it makes no difference whether a bond is designated by that name or by some other name, as it possesses the characteristics of a bond.

(3 marks)

  • 6 Marks

BCL – Nov 2017 – L1 – Q5c – Types of Capital and the Financing of Companies

Explain the key differences between debenture holders and shareholders.

c) What differences exist between debenture holders and shareholders? (6 marks)

Key differences between debenture holders and shareholders are as follows:

  • Status: Debenture holders are creditors of the company, not members, and therefore have no right to attend and vote at general meetings of the company, whereas shareholders are members and have voting rights. (1.5 marks)
  • Issuance of Shares/Debentures: Shares must not generally be issued at a discount to shareholders, while this prohibition does not apply to debentures. (1.5 marks)
  • Repurchase: A company is generally prohibited from purchasing its own shares, whereas there is no such prohibition on a company from purchasing its own debentures. (1.5 marks)
  • Payment of Interest/Dividends: Interest on debentures must be paid when due, either out of capital or profits, while dividends can only be paid out of profits, not capital. (1.5 marks)

(Total: 6 marks)

  • 10 Marks

BCL – Mar 2023 – L1 – Q5a – Types of Capital and the Financing of Companies

Distinguish between fixed and floating charges and explain circumstances for crystallization.

a) A company may raise a loan capital and/or long-term funds by the issue of a debenture or a series of debentures or of debenture stock in order to finance the business without increasing its share capital. Debentures may be secured by a charge or may be unsecured by any charge.

Required:
i) In THREE (3) ways, distinguish between a fixed charge and a floating charge.
(6 marks)

ii) Under what TWO (2) circumstances can a floating charge crystallize into a fixed charge?
(4 marks)

i) Differences between Fixed Charge and Floating Charge:

  • The charge that can be easily identified with a certain asset is known as a Fixed Charge. The charge that is created on assets that change periodically is a Floating Charge.
  • Fixed Charge is specific in nature, unlike Floating Charge, which is dynamic.
  • Registration of movable assets is voluntary in the case of a Fixed Charge. Conversely, when there is a Floating Charge, registration is compulsory irrespective of the asset type.
  • The Fixed Charge is a legal charge, while the Floating Charge is an equitable one.
  • Fixed Charge is given preference over Floating Charge.
  • Fixed Charge covers assets that are specific, ascertainable, and existing during the creation of the charge. On the other hand, Floating Charge covers present or future assets.
  • When the asset is covered under Fixed Charge, the company cannot deal with the asset until and unless the charge holder agrees to it. However, in the case of a Floating Charge, the company can deal with the asset until the charge is converted to a Fixed Charge.

(Any 3 points @ 2 marks each = 6 marks)

ii) Circumstances for Crystallization of a Floating Charge:

  • If a company fails to repay the loan or enters liquidation, the Floating Charge becomes crystallized or frozen into a Fixed Charge. With a Fixed Charge, the assets become fixed by the lender, so the company cannot use the assets or sell them.
  • Crystallization can also happen if a company ends operations or if the borrower and lender go to court, and the court appoints a receiver. Once crystallized, the now-fixed-rate security cannot be sold, and the lender may take possession of it.

(2 points @ 2 marks each = 4 marks)

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