COMPANY LAW Essay Example | Topics and Well Written Essays - 2500 words

COMPANY LAW - Essay Example And when this problem occurs, Black Books may find itself enmeshed in huge debts owing to corporate inactivity; (iii) loss of control on the company—this means that in the event of incurring huge debts due to poor performance, the lenders may request that the current management at Black Books be replaced by receivership or administration that are external and has little knowledge of how Black Books has been run (Mead and Sagar, 2006). The major problem associated with incurring huge debts or going insolvent is that it may destroy a company’s brand image that had been developed for years. And if this condition occurs or left to persist, it would be difficult for Black Books to regain the loyalty of its long- 2 time customers who may have begun to boycott the company’s books for another one (Omar, 2004). However, the main advantage of sourcing operating capital through loan or borrowing from lenders is that Black Books could claim tax relief on the interests payabl e to service the loan (Mead and Sagar, 2006). ... But using share capital appears safe for Black Books (if the company has chosen this method earlier on) because there would be no fear of going bankrupt owing to the restrictions on the utilization of Black Books’ assets placed under the lenders as collateral securities. Hence, Black Books can continue to operate and protect its brand image from being sullied due to insolvency and the take-over of the company’s administration by a new set of managers, who may lack adequate information about the true state of the company (Omar, 2004). 3 (ii) Black Books is expected to create debentures, which are the documents detailing the terms of borrowing capital loan from the lenders. Black Books has also indicated in the debentures some floating charges on some or all of its assets so as to fulfill the requirements stipulated by the lenders. However, some formalities must be strictly followed in order to draw up the appropriate debentures necessary for Black Books to get the loan. And each of the formalities has legal consequences as explained in the series of processes below: (a) Black Books approaches Lender to borrow ?500,000; the formality here is offering a legal mortgage of the company’s land as a security for the loan in favour of the Lender. This entails that the Lender has powers on the property—it could either restrict Black Books’ access to the land or sell it off when the company failed to pay the loan interests (Dakin et al., 2002). (b) Black Books wants to issue a first floating charge over the company's assets to the extent of ?100,000 in favour of the company's major trade creditor, Supplier, and include a "negative pledge" clause—the essence of a negative clause is to give the