Question

Question 5 Al Ameen LLC is in financial trouble. The company decided to raise funds through the directors’ decision to issue debentures and raise the funds from various sources of loans. Therefore they availed loan of RO. 150,000 made by Samar, the relative of one of the directors, and this loan was secured through the issuing a fixed charge over the property where the Company conducts his main business. The property was valued at RO. 150,000.The company’s articles of association require that all loan agreements are first approved by the board of directors before they can take effect. The fixed charge provided to Samar was not agreed by the board of directors and it was not registered. Having obtained the loan, AL Ameen LLC failed to make repayments as they became due to the bank or to pay its staff their wages. Further evidence has come to light that before any of these loans were agreed, the auditors of the company had advised the directors of AL Ameen LLC to get the approval of the financial statements in the relevant meetings. Answer the Questions:

a) Discuss in your words how this critical situation can be handled by Al Ameen LLC.

b) Identify which category of source of finance is utilized by the company?

c) Discuss your views on advantages of contributing as debenture holder.

Answer 1

a. To take stock of the situation,

The loan has been procured without proper prior approval of the Board of directors , as required in the company's articles of association--

as the board of directors did not approve of a fixed charge being created on the company's current operating premises,

the loan agreement was not registered--

even though, they decided , in general ,to raise funds through issue of debentures and raise the funds from various sources of loans.

It looks , they had not objected to the lender being a relative of one of the director-- but all they objected was the charge on the premises--as security to the loan received.

Further, even the auditors of the company had alos suggested to the directors of AL Ameen LLC to get the approval of the financial statements in the relevant meetings.

In light of the above,

now that AL Ameen LLC failed to make repayments as they became due --

Sameer will have no claim against the company .

Only, his relative -director may have to make good the loss & he cannot recover his loss by taking possession of the the company's assets , namely the business-premises---- reasons being

he does not possess proper board approval

the loan is not also registered--so does not have even the legal recourse---

loan was not contracted as specified , in the articles of association

But in the event of liquidation , he will be paid before the owners & employees.

b. the loan is a long-term loan with fixed charges , periodic interest payments , at agreed percentages.

It is a more secured form of financing, ie. In the event of liquidation, they are paid in order of priority , before owners & employeees.

c) Advantages of contributing as debenture holder

1. More secured than shares

2. Priority of payment , in the event of liquidation.

3. Fixed interest income for the holder of this instrument.

4. Also tax savings due to interest expense, for the issuer.

5. Mostly the company, ear-marks some assets as security , even though not explicitly agreed.

6. Some companies create sinking fund, to accumulate money , to repay.

7. For the issuing company,ownership is not altered, but finance is procured.