Capital raising and
capital management
Corporate Law: Law principles and practice
Company capital
Companies raise capital by:
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issuing securities such as shares, creating members; or
borrowing from a bank or issuing securities
representing a form of borrowing
The ratio of borrowed money to members’ funds
represents a form of ‘gearing’ (i.e. greater borrowing =
highly geared).
Corporate Law: Law principles and practice
Company capital cont …
Members’ capital in the form of shares gives rights to
members to vote and participate in the company as well
as receive dividends.
Borrowing funds allows for tax-deductible interest
without the ‘costs’ of looking after members.
Corporate Law: Law principles and practice
The borrowing powers of companies
The legal capacity of companies includes the power to
issue debentures, give security over its uncalled capital
and grant floating charges over its property (Corporations
Act 2001 (Cth) s 124(1)).
These powers cannot be restricted or prohibited by the
company’s constitution (s 125(1)).
Corporate Law: Law principles and practice
Debentures
At common law, a debenture is document that
acknowledges a debt (Corporations Act 2001 (Cth) s 9).
This term is broadly defined as a chose in action that
includes an undertaking by an entity to repay as a debt
deposited with or lent to the company.
Note: this does not apply to authorised deposit-taking
institutions, cheques or bills of exchange.
Corporate Law: Law principles and practice
Debentures cont …
Descriptions of debentures (Corporations Act 2001 (Cth)
s 283BH(2)):
Mortgage debenture: if secured by a first mortgage over
the borrower’s land, securing up to a maximum of 60% of
the value of land (as stated in the disclosure document)
Debenture: by definition it must be secured by a security
interest (tangible or intangible) to secure repayment of all
monies (s 283BH(3))
Unsecured note or unsecured deposit note: when no
security is given.
Corporate Law: Law principles and practice
Fundraising
A company can offer debentures to the public if a
disclosing document (e.g. a prospectus) is prepared.
A trustee must be appointed to protect the interests of
lenders under a trust deed.
The trustee must act with diligence and care to ensure the
borrower does not breach the terms of borrowing
(Corporations Act 2001 (Cth) s 283DA).
Corporate Law: Law principles and practice
The trust deed
The trust deed sets out the rights and obligations of the
parties, including the scope of borrowing activities that
may be carried out by the company.
The deed specifies that the trustee holds the following in
trust for the benefit of debenture holders (Corporations
Act 2001 (Cth) s 283AB):
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the rights of enforcement in relation to repayment, as
well as to other duties under the debenture, the trust
deed and the Act
charges or securities created under the debenture.
Corporate Law: Law principles and practice
The duties of the borrowing company
General duties include the duty to:
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carry on the business in a proper and efficient manner
comply with certain restrictions such as no further
borrowing
make financial and other records available for inspection
by the trustee (Corporations Act 2001 (Cth) s 283BB).
Specific duties include the obligation to:
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ensure that there is a validly appointed trustee on an
ongoing basis (s 283BD)
furnish the trustee with details of charges and copies of
quarterly reports (ss 283BE–BF)
maintain a register of debenture holders (ss 168 and 171).
Corporate Law: Law principles and practice
Company securities
A creditor may demand some security for their lending, by
taking some claim over the property of the company,
which they may seize in the event of a default.
If there are several creditors with claims, then competing
claims must be determined according to the priorities set
out in legislation.
Corporate Law: Law principles and practice
Registration schemes
Personal Property Security (PPS) Register
This will record all security interests in Australia,
including claims on company property in the event of a
default by a company in repaying interest or monies.
The PPS counterpart will be an online service and
accessible to search and register security interests, but it
will be administered by the Insolvency and Trustee
Service Australia (ITSA).
Corporate Law: Law principles and practice
Registration under the Personal Property Securities Act
Secured parties, such as lending institutions and others,
can register their security interests on the online PPS
Register, which also allows for searches of details of a
registration or of security interests registered against a
particular grantor.
There are two main benefits of registration for a secured
party:
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It defines the priority status of the secured interest
relative to other security interests over the same
collateral.
It ensures the security interest survives the insolvency
of the grantor.
Corporate Law: Law principles and practice
Personal Property Securities Act 2009 (terminology)
There are similarities between the new legislation and the
old system of ‘charges:
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security agreement: financing agreement, mortgage,
charge
security interest: fixed charge
secured party: mortgagee, chargee, lender, retention of
title supplier, lessor
collateral: secured property
grantor: borrower, mortgagor, chargor, lessee,
purchaser under retention of title agreement
circulating asset: inventory or accounts receivable
purchase money security interest (PMSI)
Corporate Law: Law principles and practice
The registration process under the PPS Act
Section 149 of the Personal Property Securities Act 2009
(Cth) provides that:
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a person may apply to the PPS Registrar to register a
financing statement, or a financing change statement,
with respect to a security interest or certain personal
property
a registration may perfect a security interest, which
may give the secured party an advantage under this
Act in enforcing the interest
Corporate Law: Law principles and practice
The registration process under the PPS Act cont …
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a person must not make an application with respect to
a security interest unless the person believes on
reasonable grounds that the security interest is, or will
be, held by a person stated in the application to be a
secured party
the PPS Registrar is responsible for giving verification
statements to secured parties, who must give notice of
the statements to grantors
publication may be used as an alternative to giving
verification statements.
Corporate Law: Law principles and practice
Searching the PPS Register
The Personal Property Securities Act 2009 (Cth) restricts
who can search the PPS Register, what may be searched,
and the purpose of the search.
Anyone may access the register to search for data with
respect to a security interest or personal property.
Searches can only be undertaken by reference to certain
criteria (e.g. the details of a grantor or a serial number).
Corporate Law: Law principles and practice
Attachment and creation of enforceable rights
For a security interest to be enforceable against the
grantor, the security interest must have attached to
collateral.
Attachment occurs pursuant to a contract under which the
grantor is given rights in the collateral and accepts money,
or does some other act by which the security interest
arises (Personal Property Securities Act 2009 (Cth) s
19(2)).
For the secured party to maximise its position under the
PPS in relation to the security interest, the interest needs
to be ‘perfected’.
Corporate Law: Law principles and practice
Priorities under the PPS Register
Secured parties, such as lending institutions and others,
can register their security interests on the PPS Register,
which is a ‘perfection’.
Registration on the PPS Register provides two main
benefits for a secured party.
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It defines the priority status of the secured interest
relative to other security interests over the same
collateral.
It ensures the security interest survives the insolvency
of the grantor.
Corporate Law: Law principles and practice
Priorities under the PPS Register cont …
The priority status is determined by general default
priority rules that are subject to specific priority rules that
apply to the Purchase Money Security Interest (PMSI).
The default rules provide that:
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a perfected security interest takes priority over an
unperfected security interest (Personal Property
Securities Act 2009 (Cth) s 55(3))
priority between two or more perfected security
interests is determined in favour of an earlier perfected
security interest over a later one (s 55(5))
priority between two or more unperfected security
interests is determined in favour of an earlier attached
security interest over a later one (s 55(2)).
Corporate Law: Law principles and practice
Specific priority rules under the PMSI
A secured party with a PMSI may benefit from a superpriority, which defeats all other security interests in the
collateral, including those created and registered before
the PMSI (Personal Property Securities Act 2009 (Cth) s
63).
Persons such as retention of title (ROT) suppliers and
lessors take priority over all other security interests
(including earlier ones) in the collateral, provided they
have met the registration requirements of the Personal
Property Securities Act 2009 (Cth).
Corporate Law: Law principles and practice
Specific priority rules under the PMSI cont …
In order to receive a super-priority, PMSI must be
registered within specific timeframes, which vary
according to the type of personal property and depending
on:
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whether the collateral falls into the class of inventory
or non-inventory
whether it is tangible or intangible property
its intended use by the grantor (Personal Property
Securities Act 2009 (Cth) s 63).
Corporate Law: Law principles and practice
Enforcement of security interests
Rights and remedies of enforcement of security interests
in the event of default are contained in ch 4 of the
Personal Property Securities Act 2009 (Cth).
Note other rights might exist under statute, common law
and equity (s 110).
Rights might include the seizure and disposal of property,
though certain notices must be given before this takes
place.
Corporate Law: Law principles and practice
External administration
The Personal Property Securities Act 2009 (Cth) does not
alter the underlying rights of various parties in the case of
external administration of a company.
Receivership
A secured party can enforce their rights in the event of a
default by the creditor. However, when a receiver is
appointed they have superior powers under the
Corporations Act 2001 (Cth) when taking possession of
the property.
Corporate Law: Law principles and practice
External administration cont …
Administration
A party holding a security interest in the company has the
right to appoint an administrator to the company (s 436C).
The security interest is perfected (i.e. registered) under the
Personal Property Securities Act 2009 (Cth).
Liquidation
The Personal Property Securities Act 2009 (Cth) does not
affect the procedure for the winding up of a company or
the priorities of various parties in insolvency.
Corporate Law: Law principles and practice
Liquidation cont …
Note, however:
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The security interest must be registered, otherwise an
unregistered or unperfected security interest, or
circulating security interest, will vest in the grantor
company upon insolvency (Personal Property
Securities Act 2009 (Cth) ss 267, 267A).
Secured parties with title-based security interests, such
as retention of title suppliers or lessors under PPS
leases, can enforce their interests over property and the
liquidator cannot take these.
Priority payments and priority of employees’ claims
continue to apply (Corporations Act 2001 (Cth) ss
556, 561).