Week 9: Commercial and Corporate law - Dividends and Loan Capital

What is a dividend?

A share of the company's profits paid to a shareholder.

Who typically decides if and when to pay dividends?

The directors of the company, as per the replaceable rule s254U.

What does s254V state about when a dividend becomes a debt?

A company is not liable to pay a dividend until the time for payment arrives.

What is a final dividend?

A dividend declared based on profits disclosed in the company's finalized annual accounts.

What are franked dividends?

Dividends on which tax has been paid, with fully franked dividends indicating a full company tax rate of 30% has been paid.

What can happen if directors authorize a dividend payment contrary to s254T?

They may become liable for insolvent trading and ordered to compensate the company.

What is the distinction between share capital and loan capital?

Share capital is equity provided by shareholders, while loan capital is debt obtained from lenders.

What is a debenture?

A type of debt instrument that companies use to borrow money from the public.

What is the significance of the Corporations Act regarding borrowing?

It regulates the authority of companies to borrow money and the conditions under which they can do so.

What is a security interest over a company's property?

A legal claim on the property to secure a loan or obligation.

What is the difference between a circulating and non-circulating security interest?

Circulating security interests relate to assets that change in form, while non-circulating interests are fixed assets.

Why should security interests over company property be registered?

To protect the rights of creditors and ensure priority in claims against the company.

What is the role of directors in relation to dividend payments?

Directors must ensure the company is solvent before declaring dividends and comply with statutory duties.

What is gearing in corporate finance?

The ratio of funds borrowed by a company compared to its share capital.

What is the impact of high gearing on investors?

Higher gearing generally indicates greater risk for investors.

What is the authority of public companies regarding borrowing?

Public companies may borrow money from the public if they comply with disclosure requirements.

What is the consequence of invalid dividend payments?

Directors may breach their duties, be forced to pay invalid dividends, or face statutory injunctions.

What is the importance of the company's constitution in dividend payments?

It outlines the rules and procedures governing the payment of dividends.

What are the implications of the global financial crisis on dividend payments?

It led to changes in regulations allowing companies to pay dividends based on assets exceeding liabilities.

What is the role of auditors in relation to dividend payments?

Auditors may be liable if negligence in their duties leads to the company becoming insolvent due to dividend payments.

What is the procedure for declaring a final dividend?

A resolution must be passed at the AGM, and the company must be solvent at the time of declaration.

What is the legal framework that governs the payment of dividends?

The Corporations Act and the company's constitution.

What is the difference between debt financing and equity financing?

Debt financing involves borrowing from non-owners, while equity financing involves capital provided by shareholders.

What is equity financing?

Acquiring funds from owners through the sale of shares in return for earnings, such as dividends.

What is a key advantage of debt capital?

It does not dilute the owner's ownership interest in the company.

What is a disadvantage of debt capital?

Repayment of debt can interfere with cash flow.

What is one tax benefit of debt capital?

Interest on the debt is tax-deductible.

What is the role of a trustee for debenture-holders?

To act on behalf of debenture-holders according to the terms of a trust deed.

What is a floating charge?

A security interest in a circulating asset.

What is a fixed charge?

A security interest in a non-circulating asset.

What happens if a company declares a dividend that makes it insolvent?

Directors may be personally liable under s 254T for breaching regulations.

When does a declared dividend become a debt of the company?

A dividend generally becomes a debt when the time for payment arrives, but immediately upon declaration if declared at an AGM.

What is the significance of the PPS Register?

It registers security interests and affects the order of priority for debt repayment.

What are convertible debentures?

Debentures that allow the holder to convert them into shares at a later date.

What is a Romalpa clause?

A provision that prevents transfer of title until goods have been paid for.

What is the main difference between debt capital and equity capital?

Debt capital must be repaid with interest, while equity capital gives ownership and dividend rights but dilutes control.

Can shareholders compel payment of dividends?

No, shareholders do not have an automatic right to dividends unless specified in the company's constitution.

What is an oppression remedy?

A legal remedy available to minority shareholders who feel unfairly prejudiced by majority decisions.

What is the maximum percentage of land value that can be secured by a mortgage debenture?

Not more than 60% of the land value according to a qualified valuer.

What is the effect of registration on security interests?

Registration is deemed effective from the time the item is searchable on the PPS register.

What must a company do before offering debentures to the public?

Appoint a trustee who acts on behalf of the debenture-holders.

What happens if a lender is not given adequate security for a debenture?

The terms 'unsecured note' or 'unsecured deposit note' must be used.

What is the legal definition of a security interest under the PPS Act?

A right attached to personal property that can be enforced against the property.

What is the impact of the PPSA on the distinction between floating and fixed charges?

The distinction is becoming largely irrelevant as the PPSA takes hold over commercial transactions.

What is the consequence of inaccurate information on the PPS Register?

It may affect the order or priority of payment of debt.

What must be considered when deciding between debt and equity financing?

Legal capacity, return on investment, amount of return, and deductibility of expenses.

What is the general rule regarding the timing of dividend payments?

Dividends are typically paid when the time for payment arrives, unless declared at a meeting.