Financing a Business

Introduction

A company that wishes to grow, acquire assets or simply survive a difficult trading period must be able to **raise finance**. This chapter examines the two principal routes — **equity finance** (issuing shares) and **debt finance** (borrowing) — and the rules that govern each. On the equity side you will master the **allotment of new shares** (directors' authority under **ss. 550–551 CA 2006** and **pre-emption rights** under **s. 561**), the **transfer and transmission** of existing shares, and the **buy-back** procedure under **Part 18 CA 2006**, all underpinned by the **maintenance of capital** doctrine. On the debt side you will compare **overdrafts, term loans and revolving credit facilities**, the common contractual terms of loan agreements, and the **taking and registration of security** (fixed charges, floating charges, mortgages and the **negative pledge**). The chapter closes with the **distribution of profits**, **accounting and record-keeping** obligations, and a bank of **SQE-style single best answer questions**.

Assessment focus

For the SQE1 FLK1 Business Law and Practice assessment you must be able to **apply** the rules on financing to realistic client scenarios. Expect single best answer questions that test: the **steps and resolutions** required to allot new shares (authority under **s. 550** vs **s. 551**, and disapplication of pre-emption rights under **ss. 569–570**); the consequences of a **transfer** of shares for shareholders' percentage holdings and voting control; the **buy-back** procedure and whether a buy-back is out of **profits** or out of **capital**; the **priority of charges** and the effect of a **failure to register** a charge at Companies House under **s. 859H**; and the relative **advantages and disadvantages of debt and equity** from both the company's and the investor's perspective. This is a closed-book assessment — you must recall the relevant section numbers, resolutions and procedural steps from memory and apply them quickly under time pressure.

Study tips

1) Memorise the **allotment decision tree**: one class of shares + private company incorporated after 1 Oct 2009 ⇒ directors have authority under **s. 550**; otherwise an ordinary resolution is needed under **s. 551**. 2) Pre-emption rights (**s. 561**) apply only to **ordinary shares** allotted for **cash**; they can be disapplied by a special article (**s. 567**) or by special resolution (**s. 569** where s. 550 applies, **s. 570** where s. 551 applies). 3) For a **buy-back**, first ask **out of profits or out of capital?** — out of profits needs only an **ordinary resolution** (s. 694); out of capital needs the extra **special resolution, solvency statement and auditor's report**. 4) Learn the **charge priority rules**: a registered **fixed charge** beats a floating charge even if the floating charge was created/registered first; fixed charges rank by **date of creation** if registered; an **unregistered** charge is **void against a liquidator, administrator and creditors** (s. 859H) but still valid against the company. 5) Charges must be registered within **21 days** beginning the day after creation (**s. 859A**). 6) Distributions may only be made out of **accumulated, realised profits less accumulated, realised losses**.