Corporate Law Update: Debt v Equity

In times of cyclical downturn and adverse operating conditions, companies are vulnerable if they have a high exposure to debt. Directors who have used personal borrowings to acquire large amounts of shares in their companies add to that vulnerability and risk. Where adverse conditions continue and repayments are not made, lenders quickly lose faith in the management and the business of the corporation.

Recently, the Australian Stock Exchange (ASX) and the Australian Securities and Investments Commission (ASIC) issued warnings to the market about disclosure of directors' margin loans, material events under financing arrangements, short selling and market manipulation.