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 private company with only one class of shares may allot shares of that class (or grant rights to subscribe for, or to convert any security into, such shares) except so far as the articles prohibit it (s.550). A company formed under the Companies Act 1985 or an earlier Companies Act (broadly, one incorporated before 1 October 2009) can rely on s.550 only once its members have resolved that the directors should have those powers; an ordinary resolution is enough (SI 2008/2860 art 2, Sch 2 para 43(1)–(2)). In every other case (public companies, private companies with more than one class, or a private company allotting a new class) the directors need authority under s.551, given by the articles or by ordinary resolution (s.551(8)); it must state the maximum amount of shares and an expiry date no more than five years from the resolution, or from incorporation if the authority was in the original articles (s.551(3)). No s.550 or s.551 authority is needed for an allotment in pursuance of an employees' share scheme, or for an allotment pursuant to a right to subscribe for, or to convert a security into, shares (s.549(2)-(3)).
• Pre-emption rights (ss.560-561): unless an exception, exclusion or disapplication applies, equity securities (ordinary shares, or rights to subscribe for or convert into ordinary shares; shares whose rights to both dividends and capital are limited to a specified amount are not "ordinary shares", s.560(1)) allotted wholly for cash must first be offered to existing ordinary shareholders in proportion to their nominal holdings, on the same or more favourable terms. The offer must state a period of at least 14 days beginning with the day of sending, supply or Gazette publication, as applicable, and cannot be withdrawn during that period; and the company must not allot to anyone else until that period has expired or every offer has been accepted or refused (ss.561(1), 562(4)-(5); non-cash exception in s.565). Allotment authority and pre-emption are separate requirements. Disapply: for a private company with only one class of shares, s.569 allows the articles or a special resolution to empower directors to allot equity securities of that class without s.561, or with modifications. s.570 similarly permits an articles/special-resolution power where directors have general s.551 authority. s.571 permits a special resolution for a specified allotment under s.551 authority, whether general or particular; it requires a directors' recommendation and written statement of reasons, the amount to be paid and justification of that amount, circulated as prescribed (s.571(5)-(7)). A private company's articles may also exclude statutory pre-emption requirements under s.567.
• 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: may be varied only in accordance with a variation provision in the articles or, if the articles have none, with the consent of the class under s.630: written consent from holders of at least three-quarters in nominal value of the issued shares of that class, excluding treasury shares, or a special resolution passed at a separate meeting of that class (s.630(2), (4)). Holders of at least 15% of the issued shares of the class who did not consent to or vote for the variation may apply to the court to cancel it, within 21 days after the consent was given or the resolution passed. The variation then has no effect unless and until the court confirms it, and the court may disallow it only if satisfied that it would unfairly prejudice the shareholders of that class (s.633(2)-(5)).

Debt finance

• Loans / overdrafts / debentures. "Debenture" has a wide meaning: in the Companies Acts it includes debenture stock, bonds and any other securities of a company, whether or not they create a charge on its assets (s.738). In practice the word usually refers to a document that creates or acknowledges a loan, often one granting fixed and floating charges.
• 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 charges of the same type, the general rule is first in time of creation, provided each charge was delivered for registration at Companies House within the period allowed (an undelivered charge is void against a liquidator, administrator and creditors, s.859H). For registered land, registered charges over the same estate rank in the order shown on the land register (Land Registration Act 2002 s.48(1)).
• A negative pledge in a floating charge (a promise not to create later security ranking equally with or ahead of it) gives the floating chargee priority over a later fixed chargee only if the later chargee had notice of it. For charges created on or after 6 April 2013, the registered particulars must state whether the charge contains such a restriction (s.859D(2)(c)), so a later lender who searches the register will normally have actual notice.

Registration — the killer rule

• Deliver a s.859D statement of particulars and a certified copy of the charge instrument to Companies House within 21 days beginning with the day after the date of creation (CA 2006 s.859A(2)-(4)). Either the company or any person interested in the charge, usually the lender, may deliver them. Where no instrument creates or evidences the charge, no instrument copy is required.
• 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 extending the period (s.859F(3)). The court must be satisfied that the failure was accidental, due to inadvertence or some other sufficient cause, or is not of a nature to prejudice creditors or shareholders, or that relief is otherwise just and equitable (s.859F(2)).
• For charges created on or after 6 April 2013 the company no longer has to keep its own register of charges. It must keep copies of every registrable charge instrument and any variation available for inspection (ss.859P–859Q); failure to keep these copies does not make the charge void, because invalidity for non-registration arises only under s.859H. The sanctions are an offence by the company and every officer in default if inspection is refused or if notice of where the copies are kept is not given for 14 days (s.859Q(5)), and a court order compelling inspection (s.859Q(7)).

Tax / figures to know

• Corporation tax (financial year 2026, non-ring-fence profits): main rate 25%, small profits rate 19% (Finance Act 2025 ss.13-14). The small profits rate applies to a UK-resident company that is not a close investment-holding company and whose augmented profits do not exceed £50,000; marginal relief applies between £50,000 and £250,000. Both limits are divided by one plus the number of associated companies and reduced proportionately for an accounting period shorter than 12 months (CTA 2010 ss.18A-18E). See BLP.15.
• Loan interest is generally a deductible trading expense; dividends are not deductible (paid from post-tax profit) — key debt-vs-equity distinction.

Common traps

• The 21 days begin with the day after the date of creation fixed by s.859E: for a deed, the date of delivery (or delivery into escrow); for a non-deed instrument that takes effect on execution, the date of execution.
• Unregistered charge: the security is void against a liquidator, an administrator and creditors of the company (s.859H(3)); the debt survives and becomes immediately payable (s.859H(4)).
• s.550 applies only to a private company with one class of shares allotting more of that class, where the articles do not prohibit it and, for a company formed under the 1985 Act or earlier, the members have adopted s.550 by ordinary resolution; otherwise the directors need s.551 authority, subject to the s.549(2)-(3) exceptions.
• On insolvency, so far as the company's general assets are insufficient, floating-charge assets are used for winding-up expenses (IA 1986 s.176ZA) and preferential debts (s.175(2)(b); s.40 in a receivership) before the charge holder, and the prescribed part is set aside for unsecured creditors (s.176A). "Floating charge" here means a charge that was floating as created, so crystallisation before the insolvency does not lift it above these claims (s.251).
• Class-rights objection: 15% of the issued shares of the class, non-consenting holders, application within 21 days (s.633), not 25%.

Choosing finance and protecting the lender

• Equity usually gives ownership and voting rights and can dilute existing holders. Share capital is not ordinarily repayable on demand; dividends need lawful distributable profits and the relevant decision. Shareholders rank behind creditors on winding up.
• Debt creates contractual payment duties. Interest and repayment are governed by the loan terms rather than distributable profits. Lenders do not acquire shareholder votes merely by lending, but covenants and consent rights can constrain management. Overdrafts are commonly repayable on demand; term loans specify maturity, instalments and events of default. The actual facility controls.
• A legal mortgage over land, a fixed charge over identified assets and a floating charge over a changing asset class provide different security. A director's personal guarantee creates a separate contractual claim; it does not merge director and company. Check the company's capacity, the directors' authority under its articles and any required consents before borrowing or granting security.
• Classification depends on the rights and control actually created, not the label: freedom to remove charged assets from the security points to a floating charge (Spectrum Plus [2005] UKHL 41). Crystallisation restricts dealings but does not undo the statutory treatment of a charge floating as created. See BLP.11 for insolvency triggers and s.245, which may invalidate a recent floating charge except to the extent of protected new value.
• Satisfaction of secured debt or release of charged property can be recorded at Companies House under s.859L. The register entry and the underlying contractual release are distinct matters.

Financial records and accounts

• Every company must keep adequate records explaining its transactions, showing its financial position with reasonable accuracy and supporting compliant accounts (s.386). Records include receipts, expenditure, assets and liabilities, with stock and goods-transaction detail where applicable. Officers must be able to inspect them. Private companies preserve records for three years and public companies for six, subject to insolvency rules; overseas records require the statutory UK returns (s.388).
• Directors normally prepare individual annual accounts; s.394A provides a specific exemption (s.394). Preparing accounts, filing accounts and delivering a confirmation statement are different obligations. Filing exemptions do not abolish the underlying records duty. See BLP.01 for ordinary filing periods and their exceptions.

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