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Limitations on Borrowing or Issuing Shares

Limitations on Borrowing or Issuing Shares

Internal Company Rules

If you borrow money, the loan has to be authorised in accordance with your company's internal rules (i.e. its Memorandum of Association and Articles of Association) and should not contravene restrictions in other borrowing or security documentation.

With capital finance, you will need to issue shares and the requirements for shareholder approvals are generally more complex. In any event, you cannot assume that the directors have unlimited powers and your company's Memorandum and Articles of Association should be checked.

As to share issues, you should check in particular whether you need the shareholders' approval for the issue of new shares, and whether shareholders have pre-emption rights over new share issues (in private companies they normally do).

As for loans, you should check whether you need the shareholders' approval and also the extent of other restrictions in the Memorandum and Articles of Association such as limits on borrowing by directors or on using company assets as loan security. The lender will normally require your company to pass a formal board resolution approving the loan.

Group Commitments

If you are within a group of companies, the lender may require that other members of your group give guarantees so that each group company guarantees the liabilities of the others (cross-guarantees).

If your company is borrowing for any reason connected with buying its own shares or shares of other companies in its group, or if financial assistance is being provided to another person to do so, your powers to do either are greatly limited by complex legal rules. Specialist advice is essential.

Security Issues

A lender will wish to ascertain what security is available and you will need to check what assets may be offered. In the case of land you may need to check, for instance, the whereabouts of title deeds and ensure that there are no restrictions against providing the land as loan security. Existing lenders or investors documentation should be checked to ascertain whether their consents are required to give further loan security. Bank facilities and other security documentation often includes a negative pledge prohibiting the creation of further secured debts.

It might also be prudent to check whether any defunct charges are still registered at the Companies Registry or the Land Charges Registry against your company or premises (in which case they may well need to be removed) and that all existing charges on your premises have been properly registered. To speed up matters, it may be helpful to obtain an independent valuation of the security if it has not been revalued recently.

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