Mercia | Taxation, Business & Finance Advisers

Why Take Security Over a $2 Company?

1.          What is a $2 Company

1.1        The so-called $2 company refers to a proprietary company with an issued share capital of $2, consisting of two $1 shares. The collective liability of shareholders in such a company is limited to $2.

1.2        Although a company incorporated with a two dollar share capital may rely on loans from, or guarantees from its backers for its initial working funds, if such a company is successful it will therefore be able to pay large dividends from the profitable use of loans instead of share issues.

1.3       A $2 Company would be  normally be a small proprietary company after formation, sec45A Corporations Act 2001. A small proprietary company would usually prepare special purpose financial reports not general purpose financial reports. Contact your accountant to understand this further.

2.          Does this mean that a $2 Company has no assets?

2.1        No.

2.2        For example, a $2 company may be operating a business that has significant amounts of stock-in-trade.

2.3        Security taken over the assets of a $2 company can be prospective and therefore extend to assets acquired at a future time (e.g. the usual fixed and floating charge over subsequently acquired assets).

3.          What is a charge/debenture

3.1        Akin to a mortgage registered over certain or all of the assets of a company — secures the obligations of the chargor usually to pay money pursuant to the terms of the security instrument.

3.2        The security instrument contains various contractual powers for the chargee (usually in the event of default):

(a)       Appointment powers (controllers/receivers);

(b)      IA powers to appoint to investigate the affairs and financial position of the Chargor company;

(c)       Warranties & representations (for example):

(i)        there are no other security interests that haven’t already been disclosed;

(ii)       no event of default has occurred;

(iii)       no litigation or other proceedings are on foot or threatened against the company that could have a material adverse effect on the security;

(iv)      prohibitions on further charging or liens over the security;

(v)        no leasing/selling of secured assets without the consent of the security holder;

(vi)      proper incorporation;

(vii)     nothing exists that would have a material adverse effect on the Charge;

(viii)    all the representations are warranties and usually expand throughout the life of the provision of financial accommodation.

3.3      Types of Charges

(a)        Fixed charge: fixed to designated asset(s) — security holder can only call upon those assets as security in the event of default.

(b)      Floating Charge:  ‘floats’ over all of the assets of the company, crystallising in the event of default. This gives the security holder flexibility in choosing which security interests it wishes to call upon.

4.        Positive and negative obligations to keep company in order

4.1      Statutory and common law provisions regarding:

(a)      maintaining adequate books and records;

(b)      carry on business in a proper and efficient way;

(c)      pay Taxes;

(d)      comply with leases and material contract;

(e)      protect Charged Property;

(I)       comply with public authorities;

(g)       take action on environmental / hazardous issues;

(h)       not alter improvements;

(i)        not dispose of assets other than in the ordinary course of business;

(I)    not declare a dividend if and Event of Default has occurred and is not remedied.

5. Events of Deflault

5.1        In summary:

(a)       non payment;

(b)      non-performance of obligation;

(c)       incorrect representation;

(d)       misapplication of funds to unapproved purpose;

(e)       faulty works;

(I)        cross defaults;

(g)       insolvency;

(Ii)       interruption to business;

(i)        enforcement proceedings;

U)    collateral security enforceable;

(Ic)      deregistration;

(I)        change of business without consent;

(m)     capital reduction;

(n)      change in control;

(o)      unenforceability;

(p)      destruction/jeopardy;

(q) material adverse change.

5.2        General

(a)       acceleration provisions — immediately payable;

(b)      Power of Attorney;

(c)       trust provisions;

(d)      voidable payments

6.         Personal Properties Security Act

6.1        New legislation — expected to come into effect May2011

(a)       Uniform legislation — the same approach will be applied to nearly all security interests in personal property throughout Australia regardless of the form or place of the transaction, legal personality of the grantor or the location of the parties or the secured property.

(b)       The ASIC Register of Charges will be superseded by the national PPS Register — the particulars of the ASIC Register of Charges will be transferred to the PPS Register.

(i)        The Pp5 register will be in the form of an online ‘noticeboard of actual or prospective security interests in personal property.

(c) The new regime will provide for priority rules for competing priority

interests, and will also facilitate the resolution ofpriority disputes.

(i)        Priority will be determined by the rules in the PPSA ~and not by reference to priority rules under the general law.

For Australian Securities and Investments Commission definition of a company <click here>.

For a number of Asset Protection considerations  <click here>.

To Setup a Company <click here>.