AYB230 · Corporations Law
Financing a Company
This Topic 9 chapter covers how a company raises money — equity vs debt — and who ranks where if it later fails. It compares shares (ordinary, preference, cumulative/non-cumulative) and the power to issue them (s124, s254A&B) against debt (debentures, secured loans), introduces the crowd-sourced funding regime (s738H/J/L/ZC), and explains security interests under the PPSA — circulating vs non-circulating, and how perfection sets priority. It is examined as short-answer and applied ILAC, often asking who is paid first on a winding up.
What this chapter covers
- 01Equity vs debt financing: tax, repayment, control and risk trade-offs
- 02Shares as transferable property; issuing (company gets money) vs selling (transfer)
- 03Power to issue shares (s124; classes under s254A&B; limits via s113 and proper purpose)
- 04Ordinary vs preference shares; cumulative vs non-cumulative dividends
- 05Crowd-sourced funding regime: eligibility, intermediary, offer document, $5m cap (s738H/J/L/ZC)
- 06Debentures and secured loans; the role of a personal guarantee
- 07Security interests under the PPSA: registration / perfection = priority
- 08Circulating vs non-circulating security interests and the priority order
Equity vs secured debt & security priority (short-answer / applied)
- +1Issue: What are the differing consequences of raising the $500,000 by equity vs secured debt, and who has priority over the equipment if Tidal is wound up?
- +2Law: Equity is raised by issuing shares (s124 power; s254A&B classes); debt is borrowing via a debenture or secured loan. Interest is tax-deductible while dividends are not; dividends are discretionary and payable only out of profits, whereas interest is a fixed obligation. Under the PPSA, registration/perfection of a security interest gives priority, and a non-circulating interest ranks ahead of a circulating one in a liquidation; the liquidation order follows s555/s556.
- +1Application: Issuing shares imposes no repayment obligation and grants no security, but dilutes ownership and gives the investor votes and capital growth. The secured loan must be repaid with (deductible) interest, but the bank, having perfected a non-circulating security interest over the equipment, ranks ahead of unsecured creditors and members on that equipment in a winding up.
- +1Conclusion: If Tidal liquidates, the bank (perfected non-circulating) is paid first from the equipment; ordinary members rank last and equally (s555). Equity avoids repayment but dilutes control; secured debt must be repaid but gives the lender priority.
Key terms
- Equity vs debt financing
- Equity financing raises money by issuing shares (no repayment obligation, but dilutes ownership and gives investors votes and capital growth); debt financing borrows money to be repaid with interest. Interest is tax-deductible and a fixed obligation; dividends are not deductible, are payable only from profits, and are at the directors' discretion.
- Share: issue vs sale
- A share is a transferable ownership interest, treated as personal property. An issue creates new shares and the company receives the money; a sale (transfer) moves an existing share between holders and the company receives nothing. The company decides on an issue under its s124 power, subject to the class rules (s254A&B) and limits such as s113 and the proper-purpose duty.
- Ordinary vs preference shares
- Ordinary shares carry dividends, voting rights and a claim to repaid capital plus surplus on a winding up. Preference shares carry a fixed dividend and a priority claim to repaid principal; cumulative preference shares carry forward any unpaid dividend to later years, while non-cumulative shares lose it if no profit is available.
- Crowd-sourced funding (CSF)
- A regime letting eligible companies — proprietary and unlisted public companies with revenue/assets under $25m, offering ordinary shares (s738H) — raise small amounts from the public through a licensed intermediary (s738L) using a CSF offer document (s738J), subject to a cap of $5 million in any 12 months (s738ZC).
- Security interest & the PPSA
- A security interest gives a lender rights over the company's property as collateral. Under the Personal Property Securities Act, registration (perfection) of the interest determines priority: an earlier-perfected interest beats a later-perfected one, which beats a first-attached unregistered interest. Perfection is what converts a security into a priority in a liquidation.
- Circulating vs non-circulating security interest
- A circulating security interest is taken over current assets the company can deal with in the ordinary course (e.g. stock, receivables); a non-circulating interest is over non-current assets the company cannot sell without the secured party's consent (e.g. plant and equipment). A non-circulating interest ranks better in a liquidation.
Financing a Company FAQ
What is the difference between equity and debt financing for a company?
Equity raises money by issuing shares: there is no obligation to repay and the company keeps its cash flow free, but ownership is diluted and shareholders get votes, dividends (from profits, at the directors' discretion) and capital growth. Debt is borrowing — a debenture or secured loan — that must be repaid with interest; interest is tax-deductible and a fixed obligation, lenders usually take security, and they get no capital growth. The choice trades repayment risk against control and tax treatment.
What is the difference between issuing and selling shares?
Issuing creates new shares and the company itself receives the subscription money — it is how a company raises equity. Selling (transferring) moves an existing share from one holder to another, so the company receives nothing; it just updates the register. A company decides on a new issue under its s124 power and the class rules in s254A&B, and the issue must be for a proper purpose.
Who ranks first over secured property if a company is wound up?
The secured creditor whose interest is perfected and non-circulating. Under the PPSA, perfection (registration) determines priority, and a non-circulating security interest (over non-current assets such as equipment) ranks ahead of a circulating one (over current assets). Within the broader liquidation order (s555/s556), the secured non-circulating creditor is paid from its collateral first; ordinary members rank last and equally (s555).
What are the limits of crowd-sourced funding?
Only eligible companies can use it — proprietary and unlisted public companies with consolidated revenue and assets under $25m, offering ordinary shares (s738H). The offer must go through a licensed intermediary (s738L) using a CSF offer document (s738J), and the company cannot raise more than $5 million in any 12-month period (s738ZC). It is a tightly capped exception to the general bar on a proprietary company raising funds publicly.
Exam move
Build a two-column compare in your notes — equity (shares) vs debt (debentures/secured loans) — covering repayment, tax (interest deductible, dividends not), control/dilution, and security. Learn the share vocabulary (ordinary vs preference; cumulative vs non-cumulative; issue vs sale) and the s124/s254A&B power to issue. Memorise the financing thresholds: the CSF $5m/12-month cap and <$25m eligibility (s738H/ZC). The exam payoff is usually the priority question, so drill the PPSA logic: perfection (registration) sets priority, non-circulating beats circulating, and both rank ahead of unsecured creditors and members, with the full liquidation order in s555/s556. Always finish a financing problem with the winding-up ranking and cite the section.
