How to establish a company in UK with the help of Creditors Guarantees given to a Creditor for his Financial Support to the Debtor


In the field of business, one may require financial assistance at any point of time. This assistance may be provided via different sources in different scenarios. However, give and take remains an integral part of business. Hence, in return of the monetary assistance, the grantee has to give the person providing financial assistance, something. This may be either in the form of equity or in the form of some security. Those who want to open a company in London, may have a better understanding of types of security, charges and its conditions after going through the article thoroughly. The topic discusses the different types of securities that can be given in debt financing.

Guarantee given to Creditors

The task of register your business UK requires affordable money but for the establishment and growth of the company, a good amount of finance is needed. When a company intends to get financial aid from any Lender, it has to sign an agreement with the lender. That agreement determines the extent of liberty to be given to the borrower as well as the extent of security to be given to the lender. Generally, the borrower may like to have least obligations on him. Similarly, the lender may also like to have the most secure agreement to protect his money from going wasted.  Hence, taking into consideration the point of views of both the parties, the agreement should be designed in a way that is suitable to both of them. However, the parties may have to compromise on some of their demands to settle the matter on a common ground.

The lender may help the borrower to open a company in London, but he cannot trust the borrower without any written agreement. For a lender, the only guarantee is a security. This security may be given in different forms. The different forms of the security determine in what order the disbursement of assets must be made if the borrower fails to pay the debt within the deadline.  Upon the bankruptcy of the borrower, the money may be most commonly returned in the form of either mortgages or charges. The charges may be either floating or fixed.

For further elaboration of the definition of security, the case of Armour is presented as follows:

Held: A lender with security is given the right of ownership over the asset of the debtor, by the debtor. Hence, at time of financial ruin in the business of the debtor, the secured lender, in comparison to other unsecured lenders, has the preference over the property that was presented to him as a security. The debtor can transfer his right over the asset to the lender. However, this right must be returned to the debtor after the debtor has paid the loan. It should be noted that a hierarchical prioritisation is depicted by this form of security.

Guarantee given in form of Charges

At the time of registering a new business UK, the company has least chances of facing any crises such as any unbearable loss. However, with the passage of time the risk factor increases. Riskier transaction result in greater loss. There may be a Bankruptcy situation. At the time of insolvency, the indebted person may pay the loan in form of charges. However, these charges are different from the charges that are defined by statutory laws. These are equitable charges. These charges do not require the possession of any belongings of the debtor. Hence, there is no transfer of entitlement of the property.

To understand the “charges” better, the Charnley case has been studied in the text that follows:

Held:

Consider a business transaction, where the debtor intends to hand over his belonging to pay the debt to the creditor in future for security. Also, a right is given at the time of transaction to the creditor to demand the availability of the property. However, he may be able to make use of this right only in future and by the order of the court. In such a transaction, security given to the creditor may be termed as charge.

  • Hence, demonstrating that a mere intention of charge will prove enough as a security.

The case of Carreras Rothmans, is presented as another example.

Held:

A security may be termed as an equitable charge when the property is presented as a security in future. Moreover, the ownership does not change. Hence, the debtor remains the owner the property throughout. However, the creditor has the right to ask justice from court by requesting the auction of that property. He may also ask for a receiver’s appointment. Nevertheless, he is not allowed to take the ownership of the property.

  • Negative pledge clause is an agreement which secures the floating charge holders by giving them priority over the rest of the charge holders. Hence, the same property cannot be guaranteed to the rest of the lenders by the debtor.

Types of Charges

A method to raise funds after registering a new business UK is Charge. The benefit of charge is that the debtor is not forced to give away his ownership of his belongings.

As mentioned above, when a debtor does not lose the ownership over his property but may have to sale the property to pay for debts at the time of bankruptcy, this is known as charge. A charge may have types. The types are discussed in the text below:

  • Specific Charge:
  • Also known as Fixed Charge, specific charge is the kind of security given to the creditor by which:
  • If the debtor has a charged property, he keeps the ownership with him.
  • However, to sell his belongings he requires the Creditor to permit him for this act.
  • The reason is that some specific assets of the debtor are subjected to fixed charge. And in case of insolvency, those specific belongings can be recognized with ease and used for an auction.
  • It may also be understood as a property that has some measurable worth, and can be auctioned for some measurable worth is subjected to a fixed charge. And the creditor may find that property subject advantageous in terms of profit. In that case it becomes highly unethical that the company uses that property for selling purpose without the creditor’s permission.
  • As in Re Cimax case, Held: The company cannot use that asset for any auction or bid to which a charge that is fixed, is linked unless the creditor allows the company for this act.
  • Charge on time varying assets:
    When the charged group of assets is replaceable after some period or as per need of the company, the charge that they are subjected to is the second type of charge. It is commonly known as floating charge. These assets can be disposed off by the company, or dealt with in any way that lies under the regular business dealings.  An interesting point is that, they can be sold to anyone without the permission of the creditor. And the purchaser may get the ownership of the charged asset. The charge floats over all the assets of a company collectively and may transform into a fixed charge in situation of any crises. The crises may include winding up etc. In any default event, this fact is taken into consideration that the charge was a floating type initially.

Scenarios suitable to both the charges:

Once the new comer in the field of business is done with register your business UK , the next step is to finance the company. A key technique would be that the borrower places him the position of a creditor and thinks like him before choosing any charging technique. This topic defines the points that a creditor may consider before taking a decision.

It is crucial for a creditor to decide for the type of charge to be incorporated in the agreement. However, this can be done by mere observation. The creditor has to focus on the type assets being used for the generation of earnings. If there is just a solo machinery, it is better for the creditor to opt for fixed charge. However, if there are a number machineries used in the production area of the company, Floating charge is more suitable option.

The following examples of cases provide illustration for Floating charge:

Consider the case of Re Cimex, 

Held:

  • Floating charges are applicable to assets whose value and size varies with time. It gives the company the leverage to sell the assets at any time in routine business. As the fixed charge does not allow for it, this demonstrates the practical benefits that floating charge has over fixed charge. All the assets may be covered by floating charges.

Take into account Re Yorkshire case,

Held:

  • Romer LJ defines the three qualities that may be found in a floating charge. they are as follows:
  • It is a charge applicable on the current and future group of assets of a company.
  • The group of assets subjected to charge, may change their value from time to time in business’s normal course.
  • The charge allows the company to continue its normal business. And only interrupts the normal working of the company when those interested in the liability perform any action.
  • According to Lord Scott, the distinguishing feature of a floating charge is that it allows the company to keep conducting its normal transactions unless interrupted. However, the first two qualities do not add to the uniqueness of a floating charge.
  • According to Goode, Floating charge provides a security in form of the time varying assets, whereas the debtor is allowed to use the assets willingly in normal business transactions. The way a creditor is engrossed in the benefactions before crystallisation takes place, has a resemblance with the attentiveness that a beneficiary has towards trust reliefs.

The Berg Analysis of Yorkshire Woolcombers: 

The analysis by Berg informs that the points inferred from Woolcombers do not revolve around the ability of floating charge to hover over the assets and the property of assets to change their worth with time. In fact, it rather focuses on two points that may easily be understood. They are mentioned in text that follows:

  • Book debts that is the money that has to be yet received by the company, may be termed as the present assets of that company. Book debts, if subjected to a fixed charge then at the time of bankruptcy, may result in the following scenario:
  • As soon as the charge is implemented i.e. at the time of insolvency, the book debts and the earnings of those book debts may get parted.
  • This may be done to pay the debts.
  • If a scenario takes place, where all the future and current book debts of a company, are subjected to liability in form of charge. As long as none of the clauses of the company demand the prevention of using book debts and their earnings in regular business, the charge will not be taken as a fixed security. For a fixed charge may take away the main cash flow from the company.

For further illustration, consider the case of Re Spectrum,

Held:

Lord Scott stated that the above mentioned inferences were supported by Council Privy. In the view of Lord Millet the first two qualities of the floating charge, that demonstrated the hovering nature over assets changing with time, were not the features that distinguished it. However, the third characteristic, mentioned by Romer LJ, was what made the difference between a fixed charge and a floating charge quite clear.

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