Unit 4: Comm Law

Debt

money or assets obtained by a company when it does any of the following: debentures, loans, lease agreement, obtain credit terms from its suppliers, obtains overdraft facilities from banks

Securities

any shares ,debentures or other instruments issued or authorised to be issued by a profit company, therefore securities are both debt and shares

Reckless trading

If a company continues to carry on business and incur debts and in the opinion of a reasonable business person there is no reasonable prospect of creditors receiving payment when due

Director reckless trading

Where a director knows the company will not be able to pay its debts when they become due and continues to incur debts well knowing there are no assets to service debt

Equity

consists of shares and retained income

Shares

one of the units into which the proprietary interest in a profit company is divided

Retained income

Implies a decision by the company to retain profits for future operations rather than to pay out a dividend, is a further form of funding a company

Solvency and liquidity test

A company satisfies the solvency and liquidity test at a particular time if, considering all reasonably foreseeable financial circumstances of the company at that time

(a) the assets of the company, as fairly valued, equal or exceed the liabilities of the company, as fairly valued; and

(b) it appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of-

(i) 12 months after the date on which the test is considered; or

(ii) in the case of a distribution, 12 months following that distribution

Solvency

Factually solvent – assets exceed liabilities. Directors tasked with preparing a list of company assets and liabilities and determine their fair values

Liquidity

assets can be turned into cash (directors have to prepare cashflow statements)

When does solvency and liquidity test apply

Right after the dividend has been declared

When the dividend will be paid (and looking at 12 months after the dividend is paid)

Authorised shares

Ordinary shares

Preference shares

Unclassified shares

Blank shares

Ordinary shares

does not carry any special class of rights such as voting or preferential dividends, but they have certain rights attached to them

Preference shares

accords the holder a preference over the class of shares w.r.t payment of dividends (usually fixed returns)

Unclassified shares

BOD can re-classify shares into one or more existing classes of authorised shares before they are issued

‘Blank’ shares

MOI does not specify the preferences, rights or limitations – Directors have the power to allocate to these shares in the future

Issued shares

they are allocated to a particular shareholder or shareholders and they cease to be merely potential shares in that sense

Pre-emptive rights

upon the issue of any new shares of the company, existing shareholders may have the right before any other person who is not a shareholder to subscribe for a percentage of the shares

Unissued shares

those shares that have been authorized but not yet issued

Debt instruments

securities other than shares of a company and include: debentures, promissory notes and loans.

Debenture

long term loan owed to the company evidenced by a document showing the amount owed.

Promissory note

is used to record that one party promises to pay a sum of money to another party at a later date

Certificated security

one that is evidenced by a certificate

Uncertificated securities

as securities that are not evidenced by a certificate or written instrument and are transferable by entry without a written instrument, and are therefore securities that are held and transferred electronically

Nominee

a person approved to act as the holder of securities or an interest in securities on behalf of other persons

Transfer of shares

maintain a securities register, reflecting:

1. the names of the current holders of shares

2. other securities, even if the shares are held by nominees

Participant

a person who administers securities and who has been accepted as a participant by a central securities depository

Share transactions Totally Electronic (STRATE)

A central securities depository is licensed to operate the electronic system for the holding and transfer of uncertificated securities

Transfer of certificated security

requires an agreement to transfer the securities

a document showing that there is a transfer, and registration of the change of ownership in a company’s securities register

transfer takes place by cession

Transfer of uncertificated securities

may be affected only by a participant or central securities depository on receipt of either a properly authenticated instruction, or an order of court. Transfer of ownership takes place simultaneously with registered transfer.