Week 6

Fundraising- Debt Secured and unsecured lending Debentures Derivatives Negative pledge lending Third party securities

Debt - Equity
Raising funds: distinction between raising funds by debt borrowing money, (Loan or Debt capital s.24 Corp Act) or equity finance (Share capital -dividends) Note: shareholder vs creditor : Gearing Ratio

Investment in Loan Capital

Co can raise capital through borrowing rather than issuing shares Debenture is the document that evidences company debt, the holder of the debenture is a creditor of the company As the debenture holder is a creditor, they are not members of the company and cannot participate in the affairs of the company. The purpose of the debenture is to raise money for the company The investor in debentures is entitled to a fixed rate of interest on the loan and Investor has a priority as to repayment over the investor in shares Loan to be repaid at a date in the future and interest is tax deductible. Debentures usually held by trustee on behalf of debenture holders 3

Victorian Finance & Leasing Limited ACN 080 524 689 PROSPECTUS NO. 7 FOR THE ISSUE OF DEBENTURES This prospectus is issued by Victorian Finance & Leasing Ltd ACN 080 524 689 and dated 20 September 2005. This prospectus was lodged with the Australian Securities & Investment Commission (ASIC) on 20 September 2005. ASIC takes no responsibility as to the contents of this prospectus. No Debentures will be issued on the basis of this prospectus after expiry 19 October 2006. The Company does not provide financial product advice in relation to investments in Debentures. The Company recommends that applicants consult with their financial adviser in determining how best to achieve their financial goals and whether investing in Debentures is appropriate for them. Before making an investment decision on the basis of this prospectus, applicants should consider the appropriateness of the investment, having regard to their objectives, financial situation and needs. This prospectus is not a statement of advice and the information given in this document is of a general nature and has been prepared without taking account of applicants individual investment objectives, financial situation or particular investment needs. Permanent Nominees (Aust.) Limited, as trustee for Debenture Holders, has not authorised or caused the issue of this prospectus or any part of it and neither it nor any person related to or associated with it takes any responsibility for any 4 part of this prospectus other than references to the Trustees name.

3.1 Protection for Debenture Holders Purpose of Issue The proceeds from the issue of Debentures pursuant to this prospectus will be used to provide funds for the Companys lending activities. These funds will be primarily on-lent to businesses in the form of equipment finance (by way of leasing and hire purchase arrangements) and loans secured by charges over residential, rural, industrial and commercial properties. The Companys security for the majority of loans will be by way of a charge over plant, machinery or real estate. Security Repayment of all money invested in Debentures issued by the Company pursuant to this prospectus and accrued interest in respect thereof, will be secured by a first ranking floating charge in favour of the Trustee for Debenture Holders over the whole of the assets and undertaking of the Company. In order of priority, the charge granted in favour of the Trustee for Debenture Holders ranks before other liabilities and shareholders funds. Any future bank borrowing which are to be secured by the issue of Debentures (Security Stock) will rank pari passu with the Debentures

Watchdog blocks $1bn in debenture issues Jan 7th 2004 Fairfax press By Gabrielle Costa A swag of debenture prospectuses seeking to raise more than $1 billion have been blocked by the companies watchdog over the past six months after problems were identified in the offer documents. The Australian Securities and Investments Commission yesterday said that since July 1 it had taken action over 14 debenture offers - essentially debt instruments - and in five cases told would-be capital raisers to scrap their offer documents and start again. In 11 cases, an interim stop order was issued, forcing the company to revise some of the information in the prospectus to meet legal requirements and ensure that investors were properly informed. Final stop orders were later issued against some of those companies and in six instances the interim stop order was later withdrawn. In one case, a company was forced to have the prospectus in the marketplace for longer than it had expected after ASIC raised concerns. Some of the Corporations Act breaches identified in the documents included a failure to include a debenture trust deed or appoint a trustee. Some of the documents failed to properly disclose details on possible and actual bad and doubtful debts, and some did not properly explain lending policies and borrowing limitations. In one case the company did not provide up-to-date financial information on performance and profitability and others did not adequately explain how the money raised would be used. ASIC said that some companies had referred to unsecured notes as debentures - which could encourage investors to believe the instruments are more secure than they in fact were.
6

Debentures
S.9 Corporations Act debenture of a body means a chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body. The chose in action may (but need not) include a charge over property of the body to secure repayment of the money.

Debentures

text :7.10.30

Trustee must be appointed (Ch 2L Corp Act) to protect the interests of the investors in situations where: Co defaults in repayments Co goes into liquidation Receiver appointed to the company ( distinguish from ordinary shareholders) Debentures are securities and therefore they are also financial products in accordance with S.764A(1)(a) Note that a disclosure document must be lodged with ASIC in accordance with Ch 6D of Corp Act

283AA Co Act Requirement for trust deed and trustee (1) Before a body: (a) makes an offer of debentures in this jurisdiction that needs disclosure to investors under Chapter 6D, or does not need disclosure to investors under Chapter 6D because of subsection 708(14) (disclosure document exclusion for debenture roll overs) or section 708A (sale offers that do not need disclosure); or (b) makes an offer of debentures in this jurisdiction or elsewhere as consideration for the acquisition of securities under an off-market takeover bid; or (c)issues debentures in this jurisdiction or elsewhere under a compromise or arrangement under Part 5.1 approved at a meeting held as a result of an order under subsection 411(1) regardless of where any resulting issue, sale or transfer occurs, the body must enter into a trust deed that complies with section 283AB and appoint a trustee that complies with 9

283AB Trust deed (1) The trust deed must provide that the following are held in trust by the trustee for the benefit of the debenture holders: (a) the right to enforce the borrowers duty to repay; (b) any charge or security for repayment; (c) the right to enforce any other duties that the borrower and any guarantor have under: (i) the terms of the debentures; or

10

283AC Who can be a trustee

(1) The trustee must be: (a) the Public Trustee of any State or Territory; or (b) a body corporate authorised by a law of any State or Territory to take in its own name a grant of probate of the will, or letters of administration of the estate, of a deceased person (c) a body corporate registered under the Life Insurance Act 1995; or (d) an Australian ADI; or (e) a body corporate, all of whose shares are held beneficially by a body corporate or bodies corporate of the kind referred to in paragraph (b), (c) or (d) if that body or those bodies: (i) are liable for all of the liabilities incurred, or to be incurred, by the trustee as trustee; or (ii) have subscribed for and beneficially hold shares in the trustee and there is an uncalled liability of at least $500,000 in respect of those shares that can only be called up if the trustee becomes an externally-administered body corporate (see section 254N); or (f) a body corporate approved by ASIC (see section 283GB).
11

283BH How debentures may be described (1) The borrower may describe or refer to the debentures in: (a) any disclosure in relation to the offer of the debentures; or (b) any other document constituting or relating to the offer of the debentures; or (c) the debentures themselves; only in accordance with the following table: How debentures may be described Description When description may be used 1)mortgage debenture only if the circumstances set out in subsection (2) are satisfied 2) debenture only if the circumstances set out in subsection (2) or (3) are satisfied 3)unsecured note or in any other case unsecured deposit note
12

283BH When debentures can be called mortgage debentures or debentures (2) The borrower may describe or refer to the debentures as: (a) mortgage debentures; or (b) debentures; if: (c) the repayment of all money that has been, or may be, deposited or lent under the debentures is secured by a first mortgage given to the trustee over land vested in the borrower or in any of the guarantors; and (d) the mortgage has been registered, or is a registrable mortgage that has been lodged for registration, in accordance with the law relating to the registration of mortgages of land in the place where the land is situated; and (e) the total amount of that money and of all other liabilities (if any) secured by the mortgage of that land ranking equally with the liability to repay that money does not exceed 60% of the value of the borrowers or guarantors interest in that land as shown in the valuation included in the disclosure document for 13 the debentures.

283BH When debentures can be called debentures (3)The borrower may describe or refer to the debentures as debentures if: (a) the repayment of all money that has been, or may be, deposited or lent under the debentures has been secured by a charge in favour of the trustee over the whole or any part of the tangible property of the borrower or of any of the guarantors; and (b) the tangible property that constitutes the security for the charge is sufficient and is reasonably likely to be sufficient to meet the liability for the repayment of all such money and all other liabilities that: (i) have been or may be incurred; and (ii) rank in priority to, or equally with, that liability.

14

Company charges
1. debenture may be secured by a charge over company property-- these are secured loans 2. s.261 - 282 governs co charges, registration and priority 3. Co charges must be registered within 45 days 3. Company charges vs mortgages

15

Company charges
Types of charges
1. Fixed charge: attaches to a specific item of property and company cannot dispose of the property w/o the consent of the lender 2. Floating charge: floats over a categories of property e.g. trading stock. Company is able to dispose of these assets in the ordinary course of business and replace them with other assets. Floating charge holders have no legal or equitable interest in specific assets while it is floating.

16

Charges required to be registered SECT 262

Subject to this section, the provisions of this Chapter relating to the giving of notice in relation to, the registration of, and the priorities of, charges apply in relation to the following charges (whether legal or equitable) on property of a company and do not apply in relation to any other charges: (a) a floating charge on the whole or a part of the property, business or undertaking of the company; (b) a charge on uncalled share capital; (c) a charge on a call on shares made but not paid; (d) a charge on a personal chattel, including a personal chattel that is unascertained or is to be acquired in the future, but not including a ship registered in an official register kept under an Australian law relating to title to ships; (e) a charge on goodwill, on a patent or licence under a patent, on a trade mark or service mark or a licence to use a trade mark or service mark, on a copyright or a licence under a copyright or on a registered design or a licence to use a registered design; (f) a charge on a book debt; (g) a charge on a marketable security, not being: (i) a charge created in whole or in part by the deposit of a document of title to the marketable security; or (ii) a mortgage under which the marketable security is registered in the name of the chargee or a person nominated by the chargee; or (iii) a charge where there is an agreement in force under which the chargee (or a person who has agreed to act on the instructions of the chargee) controls the sending of some or all electronic messages or other electronic communications by which the marketable security could be transferred; (h) lien or charge on a crop, a lien or charge on wool or a stock mortgage; 17 (i) a charge on a negotiable instrument other than a marketable security.

Crystallisation
Floating charges crystallise (become fixed and attach themselves to the assets over which they floated if the terms of the charge are breached) (automatic crystallisation) Crystallisation is likely to occur when there is: 1) A default in payment of interest 2) A breach of restrictions on future borrowing (note negative pledges) 3) Allows value of assets to drop below certain value 4) Company ceases to deal with charged assets in the normal course of business

18

Registration
S. 263 provides for registration of company charges within 45 days of their creation however if the charge is not registered it is not invalid The reason for registration is to allow: 1) Potential creditors to check for existing charges over company property, 2) It is notice to the world of the existence of the charge, 3) priority of charges registration of the company charge is conclusive evidence of the charge s. 272 Failure to register the charge may lead to postponement of its priority in relation to later charges that ARE registered.
19

Priority
1. first fixed charge in time if registered 2. Fixed over floating ( unless there is notice of a prohibition on future charges in the floating charge and that prohibition is registered) (279(3)) 3. A prior registered charge loses priority over a later registered charge if the later one was created first but registered later and the other chargee was aware of this.(280(1)(a)) 4. Registered over unregistered unless the unregistered charge created first and the holder of the registered charge had actual or constructive notice of this(280(1)(b)). 5. Unregistered charges take priority according to their time of creation(281)).

20

charges that cover present and future debts. Charges generally only cover the liability at the time the charge was registered for priority purposes(282(1)). unless specified amount of future liability registered (282(3)) Charges created within 6 months of of a liquidator or administrator being appointed are void s.266 Charges in favour of Officers 267 prohibits the enforcement by Officers(directors) of a Co of charges they have taken over the company assets within 6 months of the creation of the charges without permission of the court.

21

Certain charges void against liquidator or administrator

SECT 266 (1)

(a) an order is made, or a resolution is passed, for the winding up of a company; or (b) an administrator of a company is appointed under section 436A, 436B or 436C; or (ba) a company executes a deed of company arrangement; a registrable charge on property of the company is void as a security on that property as against the liquidator, the administrator of the company, or the deed's administrator, as the case may be, unless: (c) a notice in respect of the charge was lodged under section 263 or 264, as the case requires: (i) within the relevant period; or (ii) at least 6 months before the critical day; or
22

SECT 267 Charges in favour of certain persons void in certain cases

1) Where: (a) a company creates a charge on property of the company in favour of a person who is, or in favour of persons at least one of whom is, a relevant person in relation to the charge; and (b) within 6 months after the creation of the charge, the chargee purports to take a step in the enforcement of the charge without the Court having, under subsection (3), given leave for the charge to be enforced; the charge, and any powers purported to be conferred by an instrument creating or evidencing the charge, are, and are taken always to have been, void.
23

Negative Pledge Lending

A negative pledge is a )Negative pledge lending is an unsecured loan on the basis that the assets of the company will not be offered as security. b )contractual promise not to borrow more money using the same company assets as security C ) a promise by a borrower that he will not create any future right in respect of any or all of his assets in favour of another creditor which would rank ahead of that of the lender to whom the promise is given. In unsecured lending the lender relies entirely on contract terms to protect his loan rather than on proprietary rights by way of security in the assets of the borrower

24

Negative Pledge
Negative Pledges are found in: Loan agreement In a loan agreement which aims to control borrowing and to prevent other creditors from being preferred. Debentures creating fixed and/or floating charges In a debenture to prevent other creditors from obtaining competing security interests or to preserve priority over charged assets-should be noted on register

25

The effects of the Negative Pledge

Breach of the Negative Pledge will amount to a breach of a term of the contract and the remedies available for such breaches will apply to the breach of the negative pledge. Most often a breach of the negative pledge is made an event of default in the loan agreement and where there is breach, it will entitle the lender to call for immediate repayment of the loan. The negative pledgee can also obtain an injunction restraining a breach of a negative pledge.

26

 When a negative pledge is created any subsequent lender who takes security with notice of the clause may be sued in tort by the prior lender for interfering with the latters contractual relationship. The modern thinking on this matter is that the tort extends to direct or indirect interference with contractual rights even where there is no breach of contract, provided it seems if the interference (which does not amount to a breach of contract) has been brought about by unlawful means.

27

 It is important that the negative pledge clause is drafted in such away that it would not be treated as a security that would have to be registered under the law. In Australia under the corporations Act a security has to be registered and is subjected to the payment of stamp duty In the case of Bond Brewing Holdings Ltd v National Australia Bank Ltd (1990) 1 ACSR; (1990) 1 ACSR 445 (Full Court) (1990) 65 ALJR 239 (High Court) held that NAB was not entitled to appoint a receiver as a remedy for breach of a negative pledge covenant

28

Third Party Security Guarantees

Not a security, but often supported by a third party security in circumstances where a company borrows money Not an interest in property Def: promise by which person (guarantor/ surety) undertakes to answer for the present or future obligation of the principal debtor. This gives rise to a secondary liability on the part of the guarantor.

29

 Compare with Indemnity: an unconditional promise by one person to another that the obligation of the third party will be discharged; this is a primary liability which exists independently of the liability of the primary debtor Importance of the distinction between the terms- where primary debtor has some defence negating or reducing the liability, the validity of the guarantee depends upon the principal debt being enforceable. If the principal debt is unenforceable, then the guarantor escapes liability because liability cannot occur until the debtor has failed to meet his obligations. With an indemnity contract the surety remains liable.

30

 Bank documents often purport to be both guarantee and indemnity. A guarantee can be for a single credit transaction or for several: bankers usually prefer continuing guarantees. Guarantees must be in writing and supported by consideration. Consideration can be a problem when the guarantee is only intended to cover existing advances and no other advances are contemplated or covered by the guarantee.

31

 Many of the cases regarding guarantees concern situations where the bank: Remiss in adequately explaining the nature, scope and terms of the liability to the prospective guarantor Misrepresented facts or concealed relevant information from the guarantor Failed to ensure that the guarantor received independent legal advice as to the obligations undertaken.

32

Grounds for avoiding liability under a guarantee

Mistake Misrepresentation Duress Undue influence Unconscionable conduct Deceptive, misleading, unconscionable and unjust conduct under consumer protection legislation.( eg Consumer Credit Code or TPA)

33

Guarantees and Disclosure

A guarantee is not a contract of uberrimae fidei (utmost good faith) only unusual or unexpected features must be disclosed. Note Amadio: the obligation is to disclose any special arrangements or transactions of the types which a surety would not naturally expect, particularly if they effect the nature or degree of the guarantor's responsibility. Commercial Bank of Australia v Amadio Lack of real and genuine consent non disclosure, misrepresentation, misleading and deceptive conduct Undue influence and unconscionable conduct Lack of independent legal advice

34

Third Party Security& wifes equity

2 Situations where the law applies to render the contract and security void, an exception to indefeasibility of title (1) Wife, aware of the obligations she is undertaking, is procured to become her husbands surety by him exerting undue influence over her, Governed by the law dealing with undue influence and unconscionability (Yerkey v Jones) (2) Wife becomes her husbands surety but A) does not understand the effect or nature of the guarantee B) transaction was voluntary (Guarantor was a volunteer i.e. obtained no benefit or gain), C) the lender knows that the guarantor as wife of the debtor is in a relationship of trust and confidence and thus may not have had full and accurate explanation of the transaction BUT the lender did not explain the transaction to the wife or ensure that a solicitor had explained it to her. (Garcia v NAB)
35

Royal Bank of Scotland v Etridge H of L 2001

This case is a significant decision in the area of guarantees and married women. The claims by the plaintiff in this case were based on undue influence( 7 ) and negligent advice ( 1 ) Ld Nicholls said that: Banks should be put on inquiry in any non commercial guarantee...creditor should take reasonable steps to bring home to the individual guarantor the risks he is running by standing as a surety creditor must take steps to protect its own position as much as that of the person acting as a surety. furthermore Ld Nicholls said banks should 1) communicate with the wife directly seeking the name of the solicitor 2) provide the solicitor with the relevant financial info needed to advise the wife
36

Royal Bank of Scotland v Etridge H of L 2001

3) if the bank believes the wife is being misled or not entering the transaction of her own free will ,it must inform the wifes solicitor, 4) the bank should obtain written confirmation from the solicitor of the above.

37

TPA / ASIC UNCONSCIONABLE CONDUCT

ASIC-(Australian Securities & Investment Commission Act 1989) S. 12D A Corp shall not in trade or commerce engage in conduct that misleading or deceptive or is likely to mislead or deceive S .52 TPA wording is identical but S.51 AF excludes this part from operating in the area of financial services

38

Crisp v ANZ Bank 1994

Mr. Crisp gave the Bank a mortgage over his home as guarantee to the bank for the moneys owed by his wife and daughter resulting from a business the women owned. Mr Crisp had given the guarantee after the bank manager said the business overdraft would have to be stopped and cheques dishonoured unless the guarantee was givenOn the day Mr Crisp went to the bank to sign the documents the manager had already given instructions to dishonour several cheques. The manager didnt mention this to Mr Crisp. The Business collapsed -Mr Crisp argued guarantee was invalid under S.52 TPA (misleading/deceptive conduct)and that he wouldnt have signed had he known that the cheques had been dishonoured.Federal Court set aside Mortgage.

39

LETTERS OF COMFORT
Term used to describe a document that is " a letter of intent, of awareness, of negotiation, of assurance, responsibility.." " it denotes a document under which comfort is given to the lender by the assumption not of a legal responsibility but of a moral responsibility only.. " a letter, written frequently by a parent company ( or govt) and given to a lender for the purpose of inducing the lender to advance a loan to a subsidiary of the parent company.."

40

The legal issue arising from these " letters" concerns their legal effect. Are they legally binding? There is no legislation governing them and very little case law. Generally three forms of comfort letters can be identified: An undertaking by a parent company to maintain its commitment in the subsidiary An undertaking by the parent company to use its influence to ensure that the subsidiary meets its obligations under the primary contract. 'mere' confirmation that the parent company is aware of the loan agreement, but without any express tem that the parent company is prepared to take any responsibility for the primary obligation of the subsid.

41

 Why would the parent company use a letter of comfort rather than a guarantee? The letter and wording may reflect the parent company's intention not to commit itself to any legal liability. The expression in 1)the letter may be used to enhance the parent company's image by being associated with the subsidiary 2)the letter may clearly limit its responsibility for the loans taken by the subsidiary. 3)The letter may be used to avoid a contingent liability on the balance sheet ( some jurisdictions require contingencies to be noted on parent co balance sheets)

42

4)The letter may be necessary because the parent company's existing credit arrangements may prohibit guarantees (or limit the amount. 5) The letter may be used to avoid taxes on guarantees that exist in some jurisdictions Case: Kleinwort Benson Ltd v Malaysian Mining Corp Berhad

43