DBS

16 “Businesses that turn to debt based crowdfunding are usually older and more established than their equity crowdfunding counterparts, and firms may well be taking out a loan for a specific project.” – CityAM THE REPAYMENT ORDER FOR INSOLVENT COMPANIES SECURED CREDITORS holding a legal mortgage, a legal charge or a fixed charge. PREFERENTIAL CREDITORS – mainly amounts due to employees for arrears of wages and holiday pay. A "prescribed part" of the sum remaining is put to one side for unsecured creditors. Creditors such as those holding a debenture which grants a "floating charge". UNSECURED CREDITORS – those who do not fall into any of the above categories, including VAT, PAYE, CIS Tax, NI, Corporation Tax, trade creditors and expense creditors (often the main group of creditors in any insolvency). This would include bond holders/loan note holders with no security. SHAREHOLDERS / MEMBERS – after everyone else has been paid in full. PRIORITY + SOURCE: PURNELLS CROWDFUNDED BONDS, DEBENTURES AND LOAN NOTES The other debt based securities which are issued on a similar basis to crowdfunded bonds are debentures and loan notes. Like a bond, when a company borrows money, a debenture or a loan note can be given to the creditor as a loan document. Each of these securities details the terms and conditions of the loan, including the rate of interest and repayment date. Whilst only a company usually issues a debenture, companies and individuals can issue loan notes and bonds can be issued by Government Agencies, financial institutions, corporations and companies. However, in the case of debt based securities, the issuer will be a company or corporation. If the crowdfunded bond, debenture or loan note is issued by a public limited company (PLC), debenture, bond and loan note holders will benefit from the protections that the PLC company structure provides. For instance, they are required to produce audited annual accounts and there are additional controls and responsibilities on company directors 9 . However, it is more usual for a crowdfunded bond, debenture or loan note issuer to be a smaller company. Like a crowdfunded bond, debentures and loan notes are not listed on an exchange, so the existence and depth of any secondary markets are not assured. In addition, a debenture or loan note is generally freely transferable. Unlike shareholders, bond, loan note and debenture holders typically have no voting rights at shareholders’ meetings and have no direct control over the running of the company. However, interest payments to holders of these securities must be made before dividends are paid to those with an equity stake and, if the company goes into liquidation because it’s unable to pay its debts, debenture holders take priority over the shareholders. Crowdfunded DBS can have security in the form of assets of the issuer. For a bond and loan note, such security would need to be secured by issuing a separate debenture or through the appointment and use of a security trustee – an independent entity which holds the assets allocated (or the debentures registered against them) as security on behalf of investors. In some cases this is the regulated platform itself. In the case of the debenture, the security over the asset, in the form of a charge, is registered with a public body, by being filed at Companies House. This prevents other parties being able to take security against the assets in question, unless a Deed of Priority is created. (A Deed of Priority is created where more than one lender takes security over a company.) The level of security that a debenture provides is dependent on whether it is registered as a fixed charge (against a particular asset) or a floating charge (against a company’s assets in general that can change in value or quantity) or both, and what other debt may be secured against the same assets. Borrowers cannot dispose of assets subject to a fixed charge without the charge holder’s permission, whereas a company can deal with floating charge assets (such as cash, book debts, stock and fixtures and fittings) during the normal course of business without obtaining the lender’s permission. This only ceases if the borrower defaults and a receiver or administrator is appointed. On the insolvency of a company to which an investor has loaned funds, the monies that become available for creditors are distributed in a set order and this informs the real level of security that investors hold. In addition, whilst it is possible for debt to be issued pari passu (with equal rights of payment or equal seniority with existing debt), a fixed charge can not only ensure investors are at the head of the creditors queue if a company goes into liquidation, but it can also allow the creditor to sell the assets to recover the loan. So, it’s easy to see why fixed charges are the most popular form of security for debt based securities investors. If there are two charges of the same type, the creditors would be paid in the order that the charges were created.