Financing a business — equity, debt, charges & registration

BLP.10 — Financing a Business: Equity, Debt, Charges & Registration

Equity finance (issuing shares)

• Allotment authority: Directors of a company with one class of shares may allot freely (CA 2006 s.550). Otherwise authority is needed under s.551 (ordinary resolution / articles).
• Pre-emption rights (s.561): new equity shares must first be offered to existing shareholders pro rata. Disapply by special resolution (s.570/s.571) — a frequent SBAQ point.
• No allotment at a discount to nominal value (s.580). Shares may be issued at a premium → premium goes to share premium account (s.610).
• Class rights: vary only per the articles or s.630 (75% consent of the class). 15%+ of the class who did NOT consent can apply to court (s.633).

Debt finance

• Loans / overdrafts / debentures. A debenture is just a written acknowledgment of debt, usually secured.
• Security types: fixed charge (specific asset — borrower can't deal with it freely) vs floating charge (over a class of assets, e.g. stock, that "floats" until crystallisation, when it attaches).

Priority (the classic trap)

• Fixed charges rank ahead of floating charges, even a later fixed charge over the same asset usually beats an earlier floating charge.
• Between same-type charges: date of creation governs (subject to registration).
• Negative pledge clause in a floating charge only binds a later chargee with actual notice — registration alone is not deemed notice of the clause.

Registration — the killer rule

• Register a charge at Companies House within 21 days of creation (CA 2006 s.859A).
• Failure = the charge is VOID against a liquidator, administrator and any creditor (s.859H), though the debt remains payable and immediately repayable. Late registration needs a court order (s.859F).
• Also enter in the company's own register of charges (s.859P) — but failure here does not void the charge (admin offence only).

Tax / figures to know

• Corporation tax: 19% small-profits (≤£50k), 25% main (>£250k), marginal relief between.
• Loan interest is generally a deductible trading expense; dividends are not deductible (paid from post-tax profit) — key debt-vs-equity distinction.

Common traps

• 21 days runs from creation, not execution-plus-grace.
• Unregistered charge: debt survives, security dies.
• Don't confuse s.550 (one class) with s.551 (authority needed).
• Floating charges rank below preferential creditors and the prescribed part on insolvency.
• Class-rights objection threshold is 15% (s.633), not 25%.