LAW 3200 – Law of

Corporate Finance
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Contents
The concept of capital in corporate law......................................................................................................2
Increasing share capital through the issue of new shares...........................................................................3
Pre-emptive rights...................................................................................................................................5
The rules of capital maintenance................................................................................................................5
Acquisition of own-shares.......................................................................................................................5
Financial assistance to purchase shares in the company and redemption of shares...............................6
Payment of dividend................................................................................................................................7
Conclusions..................................................................................................................................................8
Debentures..................................................................................................................................................9
Debenture Outline.....................................................................................................................................10
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The concept of capital in corporate law

The concept of capital has a restricted and technical meaning within company law. A company’s
capital adds up to all of the cash or the value of assets received by a company from investors in
return for the company’s shares. In Verner v General and Commercial Trust [1894]1 capital in
the context of corporate law was taken to mean money obtained or subscribed according to the
Articles or what is represented by that money.

The Companies Act stipulates that companies maintain a stated capital account. Section 30
specifies that that account is to consist of the proceeds of every issue of shares of any class.
Where the shares were sold for cash, the total value of the cash must be included in the account
without any deductions for expenses or commission. Where the issue was for consideration other
than cash, the full value of that consideration. The account must also reflect any amount
transferred to stated capital from surpluses in any other account of the company.
The doctrine of capital maintenance was developed to ensure that the company's capital is
maintained in such a way that it will be able to meet its obligations to its creditors. The doctrine
essentially entails a collection of rules, first developed by the common law and later adjusted by
statute, for ensuring the proper maintenance of the company's capital. The value of a company's
share capital provides creditors with a sense of whether the company is in a position to repay any
amount they may consider lending to the company. As such, at common law, aa company was
not permitted to reduce its share capital and return money to its shareholders, nor was the
company permitted to pay money to shareholders, whether in the form of dividends or otherwise,
unless the company has profits out of which to make the payment.
The original common law position was espoused in the case Trevor and another v Whitworth
and another (1887)2 which established the rule that a company is not permitted to purchase its
own shares even if this was allowed in the articles of the company.
Further to that, two important rules emerged from the case Hill v Permanent Trustee Company
of New South Wales [1930]3. These rules have since become accepted principles of corporate
law and can be summarized as follows:
1. a limited company having a share capital may not reduce its share capital except as
authorized by statute
1
2 Ch. 239
2
122 App. Cas. 409
3
AC 720 (PC)
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2. distributions of a company’s assets to its members, whether in cash or otherwise, may

only be made out of profits available for the purpose
To give effect to the principle of capital maintenance, extensive procedures have been
incorporated into the Companies Act to ensure that various mechanisms used by companies for
legitimate purposes cannot be misused to remove share capital from the company when it is not
in the creditors’ interest for this to be done. The rules apply to the sums of money paid by
shareholders to the company, i.e., the share capital.

Increasing share capital through the issue of new shares

Section 25 of the Act specifies that shares shall be movable property and shall be transferable in
the manner provided for under the Act. However, no clear definition of a share can be found in
the Act. The definition proffered in Borland’s Trustee v Steel [1901]4 that “a share … is an
interest measured by a sum of money and made up of various rights contained in the contract.” is
a helpful guide. The correlative rights of holding shares include the right to attend and vote at
meetings, to receive dividends, to inspect the company's records, and to sue for wrongful acts.
At any time after registration, the company may decide to increase its share capital by issuing
new shares. As such, the Companies Act outlines the process and the rules to be followed by a
company seeking to increase its share capital through the issue of new shares. Unlike a capital
reduction, an increase in share capital is not considered by the courts and legislature to be a
particularly problematic issue. Since it entails adding value to the company, the issue of new
shares is not regarded as threatening the position of the company's creditors. Accordingly, the
core company law rules regulating the issue of new shares are designed to protect the rights of
existing shareholders.
There are several reasons for which a company may seek to raise additional capital, including as
in Punt v Symoms & Co. Ltd [1903]5, or as in the instant case to finance a restructuring of the
company. If, however, the issue of shares is meant to forestall a takeover bid, this will not be
permitted. This has somewhat been relaxed by section 96 of the Act which imposes a duty of
care on directors and requires them to act in the best interest of the company. This is in line with
the doctrine of proper purpose. Thus, in Teck Corp Ltd v Millar (1972), it was held that
directors ought to be allowed to consider who is seeking control and why. If they believe there

4
1 Ch 279
5
2 Ch 506
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will be substantial damage, their powers to defeat those seeking control will not necessarily be
considered as improper.
The rules to be followed when issuing shares are laid out in section 28 of the Act which
stipulates that shares may be issued as often as the directors determine, subject to any limitations
in the company’s articles. Section 28(3) provides that the directors may determine the value of
the shares to be issued, subject to the limitation at 28(4) that this price is not to be set below the
minimum issue price in the company’s articles unless authorized to do so by a special resolution.
Further, where shares are to be issued for consideration other than cash, the acceptable forms of
consideration are to be detailed in the company’s articles and such consideration is to be valued
by an independent valuator.
The prohibition on issuing shares at below the minimum issue price is intended to protect
creditors and existing shareholders. Creditors are assured that the company has received the full
amount of the stated share capital and share capital has traditionally been considered important
by creditors as a financial cushion. Shareholders are protected from new shareholders obtaining,
at a reduced price, equivalent rights to participate in the voting and wealth of the company as
they, the existing shareholders, have.
Once these shares are issued and paid for, section 31 (2) of the Act stipulates that the full
amount received for the shares is to be added to the stated capital account, and 31(3) importantly
prohibits the company from reducing this account except under the Act. Where the company is
adding to the stated capital account, section 31(5) mandates that a special resolution is needed if
the amount to be added has not been received by the company as consideration for the shares, or
the company has offered outstanding shares more than one class or series. Thus, notwithstanding
that the issue of increasing share capital is less contentious than capital reduction, there are still
several rules the directors are required to adhere to.

Pre-emptive rights
Another issue the directors must address before new shares are issued is any pre-emptive rights
shareholders may have. In the Companies Act 1991, section 33(1) reserves pre-emptive rights
for shareholders but only if the articles of the company so provide. The purpose of such pre-
emptive rights is to protect existing equity shareholders from their rights in the equity or residual
wealth of the company, and their share of the voting rights, from being diluted by the issue of
new shares. Statutory pre-emption rights give equity shareholders the right of first refusal to take
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up any new equity shares. Each equity shareholder is entitled to be offered that proportion of the
new shares as would preserve his proportionate interest in the equitable share capital of the
company.
If these shareholders are opposed to the proposed restructuring, they would be entitled to the
appraisal remedy granted under Part IV of the Act. Section 19 of Part IV entitles the dissenting
shareholders, either 28 days after receiving notice or after learning of the resolution to write to
the company and demand fair compensation for their shares. This would amount to a capital
reduction as the company would need to pay for those shares and remove them from the register
and the share capital account.
Once shares have been issued under the Act, and the stated capital amount has been adjusted to
reflect the consideration received, the rules of capital maintenance must be applied by the
directors in their dealings with the company's capital account. These rules will now be discussed.

The rules of capital maintenance

Acquisition of own shares
It has been acknowledged that the purchase of its own shares may be beneficial to a company in
several ways. This includes using those shares to provide stock-options as incentives for
employees without having to issue new shares or in small companies having a purchaser
available in the event of the death or retirement from the company's business of one of the
principal shareholders
On the other hand, if this practice is not regulated it can result in severe prejudice to creditors by
reducing the company's capital to the extent that it becomes unable to pay its debts.
Consequently, the statute has intervened to develop rules to govern the practice of capital
maintenance and reduction by limited companies.
Thus, modern Companies Acts typically contain provisions enabling a company to purchase its
shares once certain requirements are met. Once provided for by statute, this power does not need
to be expressly contained in the company's articles of association, but the exercise of the power
may still be subject to the articles. For example, section 43 of the Companies Act 1991
authorizes a company, subject to a special resolution, to reduce its stated capital in the special
circumstances contained in the section.
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Moreover, the exercise of this power is subject to statutory solvency requirements. In Guyana,
this is provided for in section 38 of the Companies Act 1991, which allows a company to
purchase its own share. For this to be valid, there must be a statutory declaration by the
Directors, which must also be filed with the Registrar. The Directors must declare that, in
making the purchase, there are no reasonable grounds for believing that the company is unable,
or would after the payment be unable, to pay its liabilities as they become due. The Directors
must also declare that the realizable value of the company's assets would not, after the payment,
be less than the aggregate of its liabilities. Also, section 38(3) prohibits a company from
purchasing its own shares if, after the purchase, the only shares remaining on the register will be
redeemable shares.
Notwithstanding this, section 39(2) allows the company to purchase or otherwise acquire shares
to satisfy the claims of a dissenting shareholder.
Financial assistance to purchase shares in the company and redemption of shares
The prohibition on the provision of financial assistance by a company to facilitate the purchase
of its shares is considered an extension to the rule in Trevor v Whitworth which prevents a
company from purchasing its own shares. The ban was introduced to deal with two perceived
cases of abuse in the company. The first is the manipulation of a company's share price brought
about by the company assisting with the purchase of its shares; and the second is the use of an
acquired company’s assets to pay off the debt incurred to buy the company. Lord Greene M.R in
Re VGM Holdings Ltd [1942] explained that following the end of the First World War, of a
financier taking out a short-term loan to finance the acquisition of shares in a company and then
using the assets of that company to repay the loan ‘gave rise to great dissatisfaction and, in some
cases, great scandals’
This prohibition has been codified by statute. Thus, under section 54 of the Companies Act,
1991 a company or any of its affiliate companies is prohibited from directly or indirectly giving
financial assistance through a loan, guarantee or the provision of security or otherwise for, or in
connection with, purchase or subscription made or to be made by any person of or for any shares
in the first-mentioned company.
Despite this blanket prohibition, the Act provides for the provision of financial assistance under
specified circumstances. First, subsection (2)(a) allows such financial assistance to be given
where it is approved by a special majority and a statutory declaration made by the directors that
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the company will remain solvent. Second, sub-section (2)(b) allows a company to give financial
assistance in the ordinary course of business if lending money is part of the company's ordinary
business. And, at sub-section (2)(c), the company is permitted to give financial assistance to an
employee who is not a director, if it is following a plan for purchasing shares in the company or
an affiliated company to be held by a trustee, or to enable them to purchase shares in the
company or an affiliated company to be held by them by way of beneficial ownership.
A related issue is that of redemption of shares. In the case of redeemable shares, the terms and
conditions governing its redemption are usually set out in the company’s articles when the shares
are issued. Section 40 of the Act permits redemption of shares, provided that it is paid for out of
profits and will not result in the company becoming insolvent.
Payment of dividend
The Companies’ Act 1991 at section 50 provides for the declaration of dividends by a company
in respect of any year or period. The same provision, however, at subsection (3) specifies that
such dividends are only to be paid out of profits. Moreover, the role of the Directors according to
section 50(4) is merely to recommend that a dividend be paid, and it is for the company to make
the declaration. Most importantly, section 50(5) makes it explicit that no dividend is to be
declared if such a payment would result in the company being unable to pay its liabilities as they
become due, or would cause the realizable value of the company’s assets to fall below its
liabilities and stated capital.
Moreover, section 51(1) specifies that the company is not required to eliminate past revenue
losses before dividends from profits of subsequent years are paid. The rest of the section detail
other rules to be applied when paying dividends, and this is also subject to the general solvency
requirement.
Given that Directors are the ones entrusted with the responsibility of recommending the
dividends, it is expected that in executing this duty they will act bona fide in the best interest of
the company. In so doing, they must ensure that payment of dividends would not be in breach of
the capital maintenance doctrine and the provisions of section 50 of the Act by ensuring that, as
reinforced in Bond v Barrow Haematite Steel Co, ‘dividends must not be paid out of capital …
dividends must be paid out of profits’. This rule emerged through the common law to give further
effect to the capital maintenance doctrine.
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Conclusions
The doctrine of capital and the concept of capital maintenance are no doubt essential to the law
of corporate finance. Given that directors are charged with the management of the company and
owe a fiduciary duty to the company, it is essential that they closely comply with the rules set out
in the Companies Act and the company’s articles regarding the raising of capital and capital
maintenance.
The directors of Foresite Inc, therefore, are under a duty to ensure to protect the pre-emptive
rights of shareholders. These shareholders are of course free to refuse the offer and apprise
themselves of the appraisal remedy. If the shareholders' dissent and demand fair compensation
for their shares, this would be an allowable capital reduction under the Act, and the adjustment
would need to be reflected in the stated capital account.
This is essential if they are to escape liability, as specified by the Companies Act at sections 84
and 85, which holds that the directors will be jointly and severally liable improper share issues
and failing to comply with the capital maintenance rules.
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Debentures
The scenario provided in the question, where a company seeks a loan of $100,000,000.00 from
the bank, a Debenture would be the appropriate instrument for securing such a loan. A debenture
was described in the case Levy v Abercorris Slate and Slab Co (1887) as ‘a document which
either creates a debt or acknowledges it … [there is no] precise legal definition of the term, it is
not either in law or commerce a strictly technical term, or what is called a term of art.’
A similar description was used in CBC Pension Plan v BF Realty Holdings Ltd [2002], but
with the important addition that Debentures “are often, but not invariably, coupled with a charge
or security”. In the Companies Act, 1991 debenture includes debenture stock and any bond or
other instrument evidencing an obligation or guarantee, whether secured or not.
Relative to other debt instruments, debentures are very secure, as the debenture holder's right to
interest and capital repayment takes precedence over equity investments and unsecured creditors
in the disposal of the assets of the borrowing company either subject to their security or on
liquidation. An added layer of security is provided by the debenture holder's right to create
charges to secure the loan to the company. This was noted by the CCJ in the case LOP
Investment Ltd v Demerara Bank Ltd and others (No. 2) where the court remarked that “the
Companies Ordinance 1913 and the Companies Act 1991 provide regimes for companies to
create charges to secure their borrowings, the charges being perfected after due registration.”
Debentures are often created under a trust deed, as provided for under the Act, with the added
advantage under section 253 that the debenture holder can require the trustee to provide
information on all outstanding debentures, the principal owed on each outstanding debenture and
the aggregate principal for all outstanding debentures.
Another important advantage of securing the loan using a debenture is that the debenture-holder
has the power to appoint a receiver or a receiver-manager over the assets secured by the
debenture under the circumstances specified in the instrument.
Standard debenture clauses include the following, and these are outlined in the draft instrument
below:
1. the Parties Clause
2. Conditions precedent
3. Security clause
4. Covenant clauses
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5. Default provisions

Debenture Outline
ISSUED UNDER THE AUTHORITY OF THE COMPANY’S ARTICLES OF
INCORPORATION AND PURSUANT TO A RESOLUTION OF THE DIRECTORS
DATED THE 6th day of July 2020.
1. PARTIES
Between
D&D Distribution Co [‘The Company’] registered under the Companies Act, 1991 and having
its Registered Office at 191 Anira Street, Queenstown, Georgetown
And
Guyana Bank for Trade and Industry [‘The Bank’] registered under the Companies Act, 1991
and having its registered office at High and Young Street, Kingston, Georgetown
2. PRINCIPAL OF THE LOAN: The Company hereby acknowledges and binds itself to
pay Guyana Bank for Trade and Industry so much of the loan hereby secured as may have
been disbursed or as may be payable to Guyana Bank for Trade and Industry under and
under the Loan Agreement or by this Debenture.
The Company will pay the loan in the principal aggregate amount of $100,000,000.00
(one hundred million dollars) and interest as hereinafter set out following the provisions
of paragraph 3 of this Debenture.

3. INTEREST: The Company shall pay interest at the rate of 11% (eleven) percent per
annum calculated on the daily outstanding balance or at such rate as the bank may
determine. The Company acknowledges the right of the Bank, upon receipt of 30 (thirty)
days prior written notice, to adjust interest rates from time to time.

4. PAYMENT OF PRINCIPAL AND INTEREST

(a) Per the Loan Agreement, the Company shall pay interest on the loan at a rate
of 11% (eleven) percent calculated on the daily outstanding balance. Interest
payment shall commence the day after the disbursement of the loan. Such interest
shall be paid monthly on the last day of each month in each year. Interest accrued
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on the loan is payable in equal monthly installments or at such other rate as the
Bank may from time to time by notice in writing give to the Company as well as
after or before judgment obtained. The said loan shall be disbursed within one
week after the execution of this Debenture. The Company shall repay the
principal sum borrowed over a period of 48 (forty-eight) months

(b) The Company shall have the option to repay without penalty all or part of
the outstanding loan subject to giving the Bank 30 (thirty) days’ notice of
intention to repay.

5. CONDITIONS PRECEDENT: The Company warrants that all necessary authorities and
permissions necessary for the Company to enter into the Loan Agreement and this
Security Agreement and to perform its obligations thereunder have been obtained.
6. SECURITY: The Company HEREBY ESTABLISHES THE FOLLOWING CHARGES
to secure the repayment and discharge of the Loan and payment of Principal Monies
Interest and Principal intended to be hereby secured and all other monies payable in
respect of the Loan or this Debenture (as well as any expenses and charges arising out of
or in connection with the acts authorized under this Debenture). The charges hereby
created shall be a first fixed CHARGE, on the Company’s immovable properties
described hereinunder:-
Parcels: 150, 151, 152, 153, 154, 155, 156, 157, 158, 161, 162, 163, 164, 165,
166, 167, 168, 169, 170, 171, 172, 173, 174, 175, 176, 177, 178, 179, 180, 181,
182, 184, 185, 186, 187, 188, 189, 190, 191, 192, 193, 194, 195, ZONE:- E.B.D.,
and a first Floating charge on all of the business assets, property, undertaking
and goodwill of the Company both present and future including it uncalled
capital for time being.
THE SECURITY hereby given to the Bank shall be continuing security for
payment of principal money and interest without prejudice and in addition to any other
security whether by way of mortgage, charge, guarantee or otherwise howsoever which
Citizens Bank may now or at any time hold on the property of the Company or any part
thereof for or in respect of all or any part of the principal monies interest thereon or any
charges, costs or other expenses incurred hereunder or in respect hereof.
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7. COVENANTS: The Company shall not have the power to create or permit the existence
of any mortgage, lien, debenture, charge or security interest affecting its property or any
part thereof ranking in priority to, pari passu with, or subject to the charges hereby created
without the prior consent in writing of Guyana Bank for Trade and Industry and on terms
and conditions satisfactory to the Bank. Any debenture mortgage or charge hereunder
created by the Company (otherwise than in favor of the Bank) shall be expressed to be
subject to this Debenture.
THE FOLLOWING PROVISIONS shall apply to any notice required by or under the Debenture
to be served on or given to the Company or the Bank, namely:

I. Such notice shall be in writing

II. Such notice shall be sufficiently served if it is left at the registered office of the
Company with any person believed to be in the employment of the Company or is
affixed or left for the Company on the land or any house or building hereby charged.
III. Such notice shall also be sufficiently served if it is sent by post in a registered letter
addressed to the Company or the Bank by name at that place of business, office or
counting-house of the Company or the Bank as the case may be, and if that letter is
not returned through the Post Office undelivered, then that service shall be deemed to
be made at the time at which the registered letter would in the ordinary course be
delivered.

8. DEFAULT: Notwithstanding anything hereinbefore contained if the Company shall

commit an event of Default, as hereinafter set out, the principal amount hereby secured
and outstanding together with interest and such other amounts payable under the Loan
Agreement shall become due and payable immediately, and this security shall be
enforceable upon written notice by Citizens Bank to the Company. A certificate issued by
an officer of the Bank as to any amount due by the Company shall be prima facia evidence
thereof.

Each or any of the following shall be deemed to be an EVENT OF DEFAULT:-

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(a) A default shall occur in the payment of Principal, Interest, or any other
payment required under the Loan Agreement or this Debenture.
(b) A default shall occur in the performance of any other obligation on the part
of the Company under the Loan Agreement or this Debenture and such default
has not been remedied within 28 (twenty-eight) days of receipt of notice from
Citizens Bank of such default.
(c) Any act of default occurs under the terms of any security given by the
Company to the Bank.
(d) The Company shall have become unable to pay its debts as they mature or
any action or proceeding shall have been taken by the company or any other party
whereby any of the assets of the Company will or may be attached for the
payment of its debts or distributed among its creditors.
(e) The Company shall have taken or suffered any action for its reorganization
liquidation or dissolution (save for reconstruction or amalgamation or arising out
of insolvency), or the suspension of its operations, or shall have had a receiver or
liquidator appointed of all or any part of its assets, or shall have ceased to carry on
the business contemplated under the Loan Agreement.

9. Without prejudice to the powers and reliefs conferred upon Citizens Bank under the
general law, this Debenture confers upon the Bank the powers following, in the event of a
default by the Company under the Loan Agreement or this Debenture:-
(a)to accept from the Company possession of the Property charged under this
debenture;
(b)authority to enter premises where the property is situated and to take possession of the
said Property without notice or demand and legal proceedings;
(c)to accept on-demand from the Company payment of all expenses reasonably incurred
by Citizens Bank in protecting, in whatever manner, its security including selling or
howsoever otherwise disposing of the Property;
(d)if Citizens Bank sells the property, to require the Company to pay to the Bank on
demand any deficiency remaining after application of the net proceeds of the sale to any
indebtedness under the Loan Agreement or this Debenture.
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(e)at any time after the principal monies, interest secured by this Debenture shall have
become payable or if an event of default has occurred, the Bank may appoint by writing a
Receiver of the property hereby charged upon such terms as to remuneration or otherwise
as it shall think fit and may from time to time remove any Receiver as appointed and
appoint another in his or her stead.
A receiver so appointed shall be the agent of the Company and the Company shall be
responsible for such Receiver's acts and defaults and his or her remuneration, costs,
charges, and expenses to the exclusion of liability on the part of the Bank. Any reference
to a Receiver so appointed shall be deemed to include a reference to a receiver and/or
Manager.