Question

QUESTION 1 ​ 5 MARKS What are “insolvent transactions”? Provide an example. Explain the “presumption of insolvency”?. QUESTION 2 ​​​​​​​​​​5 MARKS Explain how lenders can secure their loans. Provide an example. Distinguish secured creditors and unsecured creditors. Provide an example of each. ​​​​​​ QUESTION 3 ​​​​​​​​​5 MARKS How are shares in a company transferred? Provide an example. Explain the steps involved to transfer shares in ‘listed’ companies.​​ ​​​ QUESTION 4 ​​​​​​​​​5 MARKS Explain the differences between debt and equity financing. Provide an example for each type of

Answer 1

Ans 1

Insolvent or ‘voidable’ transactions are payments or transfers from a company’s asset pool to a third party that are made while the company was insolvent or at a time/in a manner that otherwise causes detriment to the company.

Other types of voidable transactions include:

• Uncommercial transactions – occur where it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to its benefits/detriments. Insolvency should be proved at the time of the transaction.

• Unreasonable director-related transactions – occur when a director or close company associate enters into a transaction where a reasonable person in the director/associate’s circumstances would not have entered into the transaction, having regard to its benefits/detriments. Insolvency need not be proved.

for example, if a company had accounts payables–money owed to suppliers–coming due in the short term. However, the accounts receivables–money owed by customers–are not being paid in time to pay the company's payables.

The insolvency presumption usually prevents the debtor or trustee from having to present evidence of insolvency. This makes sense because, in almost all cases, a company does not transition from solvency to filing for bankruptcy during the look-back period

ANS 2

Secured debts are those for which the borrower puts up some asset as surety or collateral for the loan. A secured debt instrument simply means that in the event of default, the lender can use the asset to repay the funds it has advanced the borrower.

Common types of secured debt are mortgages and auto loans, in which the item being financed becomes the collateral for the financing. With a car loan, if the borrower fails to make timely payments, the loan issuer eventually acquires ownership of the vehicle. When an individual or business takes out a mortgage, the property in question is used to back the repayment terms; in fact, the lending institution maintains equity (financial interest) in the property until the mortgage is paid in full. If the borrower defaults on the payments, the lender can seize the property and sell it to recoup the funds owed.

Secured Creditor vs Unsecured Creditor

A "secured creditor" is a creditor that has a lien on an item of your property. A lien is an interest in property that allows a creditor to have your property sold to satisfy your debt to that creditor. Mortgage lenders and car lenders are secured creditors. They have voluntary liens on your property.

An "unsecured creditor" is a creditor who has no interest in any of your particular property. Most credit card issuers are unsecured creditors. Outside of bankruptcy, there are only two ways an unsecured creditor can get paid. First, you can pay the debt voluntarily. This is the way most debts are paid. The other way unsecured creditors get paid is much harder. They must sue you, get a judgment against you, and ask the sheriff to seize your particular property and sell it to satisfy the creditor's claim. When the sheriff seizes your property for an unsecured creditor, that unsecured creditor has an involuntary lien and becomes a secured creditor for bankruptcy purposes.

Even in bankruptcy, the secured creditor has greater protection because its lien on your property is usually honored. The bankruptcy does not remove it.

Ans 3

Shares can be transferred from a shareholder to another person (either a new or existing shareholder). Shares are transferred by way of gift or sale. Typically, shares are transferred to introduce a new shareholder.

So long as a company has enough shares, it’s possible to transfer shares in a limited company any time after incorporation.

Before you take any action on changing your share structure within your company contact your Account Manager so we can understand and advise on your plans.

The process

Any transfer of shares needs to be formally actioned by you as the director. You will need to complete the following steps:

1.Confirm your shareholdings

Before you transfer any shares, you need to confirm your current shareholdings, the number of shares you wish to transfer and the resulting share structure of your shareholders. If you are transferring shares to a new shareholder you will also need to confirm their name, date of birth, nationality, residential address, proof of ID and relationship to the other shareholders in your company.

In some cases, you may have insufficient shares in your company to allow your intended transfer. This would mean that you need to allot new shares. If you are unsure about the number of shares in your company, please contact your account manager.

2.Hold a board meeting

The share transfer must be approved through a board agreement. A board meeting should be held to review the stock transfer form and agree the transfer. Be sure to keep detailed minutes of your meeting that clearly display the revised share structure and share holdings. These minutes will need to be kept safe with your company records, they’ll later be used when updating Companies House and also provide a solid audit trail. If you’re an inniAccounts client, we’ll send you a template for the minutes of your meeting.

3.Complete a stock transfer form

A stock transfer form (or J30 form) is a standard document that can be used to transfer existing shares. It contains details of the seller (or gifter) of the shares and the receiver, the type and number of shares being transferred as well as any consideration that has been paid for the shares. As director, you need to complete these details before signing and dating the form. It’s standard practice to complete a stock transfer form in black ink and BLOCK CAPITALS. This form will need to be stored with your company records. If you’re an inniAccounts client, we’ll send you a template of the stock transfer form.

In some scenarios, once a transfer is agreed, a stock transfer form certificate may be required. In most cases, if the shares are being transferred for ‘nil consideration’ i.e. gifted, then a certificate is not required.

4. Issue new share certificates

Having agreed your share structure, you will need to issue new share certificates detailing the shareholdings – these will render any previous share certificates as effectively cancelled. If you are an inniAccounts client, we will send you a template share certificate to be signed and dated.

5.Update your company’s confirmation statement (CS01) with the new share totals

You now need to update your company’s confirmation statement, with Companies House, to show the new share structure within your company. If you transferred shares to a new shareholder, you need to include their details in your confirmation statement.

Don’t forget
If a shareholder has over a 25% holding in the company, you will need to add them to the PSC register as part of your confirmation statement.

Basic Procedure for Transfer of Share in a Public Company  

A company to give effect to the transfer of shares must follow the following steps:

• The deed of Share transfer in form SH-4 must be duly executed both by the transferor and the transferee.
• The share transfer deed must bear stamps according to the Indian Stamp Act, and Stamp Duty must be given in the State concerned.
• A person giving his signature, name, and address must witness the signatures of the transferor and the transferee in the deed of transfer.
• The relevant share certificate or allotment letter should be attached to the share transfer deed and deliver the same to the company.
• The deed of share transfer must be deposited with the company within sixty days from the date of such execution by or on behalf of the transferor and transferee.
• After receiving of share transfer deed, the board shall consider the same. And if the documentation for transfer of share is in order, the board shall, by passing a resolution register the transfer.

Ans 4

Equity Financing

Equity financing involves selling a portion of a company's equity in return for capital. For example, the owner of Company ABC might need to raise capital to fund business expansion. The owner decides to give up 10% of ownership in the company and sell it to an investor in return for capital. That investor now owns 10% of the company and has a voice in all business decisions going forward.

The main advantage of equity financing is that there is no obligation to repay the money acquired through it. Of course, a company's owners want it to be successful and provide the equity investors with a good return on their investment, but without required payments or interest charges, as is the case with debt financing.

Debt Financing

Debt financing involves the borrowing of money and paying it back with interest. The most common form of debt financing is a loan. Debt financing sometimes comes with restrictions on the company's activities that may prevent it from taking advantage of opportunities outside the realm of its core business. Creditors look favorably upon a relatively low debt-to-equity ratio, which benefits the company if it needs to access additional debt financing in the future.

The advantages of debt financing are numerous. First, the lender has no control over your business. Once you pay the loan back, your relationship with the financier ends. Next, the interest you pay is tax deductible. Finally, it is easy to forecast expenses because loan payments do not fluctuate.

• Debt financing involves the borrowing of money whereas equity financing involves selling a portion of equity in the company.
• The main advantage of equity financing is that there is no obligation to repay the money acquired through it.

Equity Financing vs. Debt Financing Example

Company ABC is looking to expand its business by building new factories and purchasing new equipment. It determines that it needs to raise $50 million in capital to fund its growth.

To obtain this capital, Company ABC decides it will do so through a combination of equity financing and debt financing. For the equity financing component, it sells a 15% equity stake in its business to a private investor in return for $20 million in capital. For the debt financing component, it obtains a business loan from a bank in the amount of $30 million, with an interest rate of 3%. The loan must be paid back in three years.

Please give the good feedback(Thumbup)