Analysis of Security Arrangements

Security by Rural or Woolyback for any debt finance raised from Wearside and, in respect of each class of asset, briefly explains the type of security which might be taken over it

The biggest asset that Rural has is the land or freehold property. Tyneside Bank PLC has security over the freehold interests in the land and mines. This is against a loan and it constitutes a charge on the company assets. A charge is a security on the assets of the debtor without a transfer of possession of the asset. A fixed charge is created over a specific asset. In this case, the charge created on Rural’s freehold property in favour of Tyneside Bank PLC is a fixed charge. Security in land or building is called as mortgage.

The other asset is stocks of tin ore. This can be subject to the security called pledge. Pledge is the security created over movable properties, securities documents and financial instruments. The pledged assets are physically delivered from the debtor/pledgor to the creditor/pledgee. The creditor to whom this kind of security is given has preferential rights to the pledge and can be classified as a secured creditor.

The remaining items are book debts and trade creditors. These kinds of assets can be subjected to assignment by the creditor to the debtor. Assignment can be done with respect to the claims or rights that the debtor has against any third parties. Accounts receivable such as book debts and trade creditors can be subject to these kinds of assignments. An assignment has to be made in writing and given to the third party against whom the claim is originally owned

Equity finance or debt finance.

The funding options that are available to Rural may be chosen from equity financing or debt financing. In equity financing, the creditor gets ownership interests in the profits of the company made in future. In debt financing, the borrower has to pay high rates of interests; debt can be arranged from bank or through securities, such as, fixed term bonds and debentures. Both methods have certain advantages and disadvantages.

Debt financing is popular for the reason that it allows the firm to raise the capital from the lender/creditor without having to give ownership interests, meaning that the liability of the debtor is to merely pay back the principal and interest and not share any profits with the lender. The creditor receive the stated interest on the debt but has no claims on the profits of the company. On the other hand, in equity financing, the creditor gets ownership interests in the profits of the firm. Those firms that do not want to share profits will not opt for equity financing; however, they would be accepting of paying a high rates of interest on the loan which will eat into the profits made by the firm. If Rural considers that it is acceptable for it to pay a higher rate of interest on the loan rather than share profits, then it may choose debt financing options like loans, fixed term bonds and debentures.

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1. Lee Roach, Company Law (Oxford University Press 2016) 140.
2. Ibid.
3. Ibid.
4. Anoosheh Rostamkalaei, and Mark Freel, ‘The cost of growth: small firms and the pricing of bank loans’ (2016) 46 (2) Small Business Economics 255.
5. Norman M Scarborough, Essentials of entrepreneurship and small business management (Pearson 2016).
6. Ibid.
7. Ibid.

Equity financing is the option available to those firms that want to raise capital without having to pay interests or even loan amount and share the profit of the firm with the creditor instead. Equity finance also opens up the firm to control by the creditor. Thus, the borrower firm will be required to provide a degree of control over the firm and also share future profits through dividend payments. The point to note would be that if Rural chooses equity financing, it would still allow the creditor to eat into the profits of the firm through dividend payments, but it would not have to pay a high rate of interest over the capital raised as is the case of debt financing. There is sometimes a middle path open to firms that want a combination of debt financing and equity financing; this is Mezzanine financing, which allows the firm to gain the capital without giving up significant control.

The potential defendant in the case would be Rural Mining PLC because Woolyback is a 100% owned subsidiary of Rural. In Adams v Cape Industries plc, the court held that subsidiaries cannot be a part of a single entity for the purpose of fixing tortious liability. In Chandler v Cape plc, the Court of Appeal held that parent company owes a direct duty in tort to a person injured by a subsidiary. In Chandler, the Court of Appeal also laid down some relevant factors that can help determine the liability of the parent company. These factors can lead to the ‘assumption of responsibility’ by the parent company and these include: nature of businesses of the parent and subsidiary company being the same; superior or specialist knowledge of the parent company compared to the subsidiary; knowledge of the subsidiary’s systems of work; and foreseeability of the subsidiary’s reliance on it to use that superior knowledge. These principles were recently applied in Emere Godwin Bebe Okpabi and others v Royal Dutch Shell Plc, where the court refused to consider the subsidiary as a defendant for the purpose of moving the case to Nigeria.

In this case, the assumption of responsibility is clearly made out. The Head Office Directive to Woolyback 2019/14 issued by Rural to Woolyback clearly states that the safety measures taken by the Wollypack for its employees are causing higher costs and recommends that that in order to recoup costs, every tenth supporting timber must be removed and all employees instructed to move quickly through these parts of the mine to minimise risk. This document also notes that all matters relating to structural timbers and mine safety must be conducted in accordance with the Group’s Mine Safety Policy. The injury to Iqra Iqbal was caused when she was dashing under a seam of rock and there was a collapse at the mine. The Health and Safety Executive report clearly mentions that the policies applied to mine safety were inadequate to protect against the collapse. As these policies were the result of the decision taken by the Board of Directors of Rural, it is Rural that is the proper defendant in this case. As the law requires consideration of the gravity, nature and imminence of the risk to employees and the steps by which such risk

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8. Francisco Covas, and Wouter J Den Haan, ‘The role of debt and equity finance over the business cycle’ (2012) 122 (565) The Economic Journal 1262.
9. Corry Silbernagel, and Davis Vaitkunas, ‘Mezzanine finance’ (2012) Bond Capital 1.
10. Adams v Cape Industries plc [1990] Ch 433
11. Chandler v Cape plc [2012] EWCA Civ 525.
12. Ibid.
13. His Royal Highness Emere Godwin Bebe Okpabi and others v Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Limited [2017] EWHC 89 (TCC).

is addressed, the cause of action against Rural is made out. Employers are required to undertake effective risk management. Failure to do so gives a cause of action to Iqra. Therefore, in such as situation, if Iqra is successful in obtaining judgment against any of those defendants, she can successfully enforce an award of damages against the parent company.

The cause of action in this case arises from the negligence in preparation of forecasts for Easton. The cause of action relates to the breach of standard of care related to the advice given by a professional. The objective standard of care in this case would demand that the care and skill expected from a prudent member of a particular profession or with specific skills is achieved; this is the standard of care to be expected from a prudent member of the same profession as the defendant in the case. The defendant in this case can be Metal Market Analysts LLP as well as Annabel Stannum as a joint tortfeasor.

In Williams v Natural Life Health Foods Ltd, the court held that for the application of the doctrine of creating a joint tortfeasor liability between the director and the company, there must be some evidence of personal dealing between the director of the company and the party that is claiming negligence by the director and claiming joint tortfeasor liability. In this case, Annabel Stannum has stated at the end of the letter that she can “personally assure you, as the senior analyst here with over 25 years’ experience in the industry, that these projections are the very best and most accurate analysis you will get of the sector.” The question is whether this personal assurance would amount to personal dealing with Easton for the purpose of the application of the principle of law laid down in Williams v Natural Life Health Foods Ltd. On the basis of the Williams judgment, the liability for negligent information given by a director of the company arises only if the direct has made some direct or indirect conveyance to the claimant, and the latter relies on the information. In the absence of such information, only the company as a separate legal person, would be liable for negligent information. However, in MCA Records Inc v Charly Records Ltd (No 5), the court found the director to be the joint tortfeasor with the company if the director were personally involved in the tortious action.

The forecasts prepared by Annabel were negligently made with the effect that Eston is an unsecured creditor of Woolyback, having paid large sums in advance for tin that Woolyback is not able to supply; Easton stands to lose £400,000 due to this negligence. Apart from Metal Market Analysts LLP, Annabel Stannum can be attached as a joint tortfeasor as she personally assured Easton as the senior analyst with more than 25 years of experience in the industry.

Rural will change its name to Tingalore PLC:

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14. Baker v Quantum Clothing Group Ltd [2011] 1 WLR 1003, SC.
15. Uren v Corporate Leisure (UK) Ltd., [2011] EWCA Civ 66.
16. Wallace v Glasgow City Council [2011] Rep. LR 96, IH.
17. Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577.
18. MCA Records Inc v Charly Records Ltd (No 5) [2003] 1 BCLC 93.
19. Also see, Koninklijke Philips Electronics NV v Princo Digital Disc GmbH, [2004] 2 BCLC 50; Contex Drouzhba Ltd v. Wiseman, [2007] EWCA Civ 1201.

This would require a special resolution by the company as per Article 10.1 of the Articles of Association. This special resolution will have to be adopted in the Shareholders’ general meeting. This means that shareholders representing not less than 75% of the eligible shares must agree to change the name of the company.

Rural will borrow a further £2 million from Wearside. This will be secured by the existing security.

Rural’s decision to borrow £2 million from Wearside and to secure this with an existing security will have to be taken in the shareholder’s meeting because the Articles of Association does not give any such power to the Board of Directors.

Rural will issue 1,001,000 fully paid up ordinary shares of £1 each, at a premium of £9 per share, to Urban Equity Ventures LLP (“UEV”) (which is not currently a shareholder), in cash; an

As per Article 7.2 of the Articles of Association, the allotment of the shares in the company can be done by the directors of the company. Therefore, a resolution shall have to be adopted in the Board of Directors’ meeting for allotting the shares to UEV.

Rural will apply the funds to purchase plant and equipment, and to make a loan to Woolyback to enable it to get back on its feet.

The directors of the company are empowered to make the decisions regarding the management of the company’s business under Article 3 of the Articles of Association. Therefore, a resolution relating to the purchase of plant and equipment may be passed by the Board of Directors at the meeting.

As a consequence of the transfer of share capital in favour of UEV, which amounts to 1,001,000 fully paid up ordinary shares, UEV will receive voting rights in Rural. The implementation of some of the proposals may be impacted by the control of UEV. The proposals related to Rural borrowing a further £2 million from Wearside and application of the funds to purchase plant and equipment, and to make a loan to Woolyback to enable it to get back on its feet. Now even UEV will get control on how these proposals are implemented.

Dig deeper into Analysis of Section 61 of the Trustee Act 1925 with our selection of articles.

Cases

Adams v Cape Industries plc [1990] Ch 433

Baker v Quantum Clothing Group Ltd [2011] 1 WLR 1003, SC.

Chandler v Cape plc [2012] EWCA Civ 525.

Contex Drouzhba Ltd v. Wiseman, [2007] EWCA Civ 1201.

His Royal Highness Emere Godwin Bebe Okpabi and others v Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Limited [2017] EWHC 89 (TCC).

Koninklijke Philips Electronics NV v Princo Digital Disc GmbH, [2004] 2 BCLC 50 MCA Records Inc v Charly Records Ltd (No 5) [2003] 1 BCLC 93.

Uren v Corporate Leisure (UK) Ltd., [2011] EWCA Civ 66.

Wallace v Glasgow City Council [2011] Rep. LR 96, IH.

Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577.

Books

Lunney M and Oliphant K, Tort Law: Text and Materials (Oxford University Press 2013) Roach L, Company Law (Oxford University Press 2016).

Scarborough NM, Essentials of entrepreneurship and small business management (Pearson 2016).

Journals

Covas F and Den Haan WJ, ‘The role of debt and equity finance over the business cycle’ (2012) 122 (565) The Economic Journal 1262.

Rostamkalaei A and Freel M, ‘The cost of growth: small firms and the pricing of bank loans’ (2016) 46 (2) Small Business Economics 255.

Silbernagel C and Vaitkunas D, ‘Mezzanine finance’ (2012) Bond Capital 1.