CAPITAL AND FINANCING

OF A COMPANY (2)
 LOAN CAPITAL
▪ Company has an unlimited capacity: section 21

▪ The company may borrow from the bank or public through the
issue of debt secure in the form of debenture
 DEBENTURE
▪ What is debenture? – s. 2(1)

▪ Section 158(4) and section 171

▪ Types of company that can issue debenture to the public

– s.43

▪ Types of documents that a company may issue upon

accepting the money from the lender –s.158(5),(6a),(6b)

▪ Nature of debenture – similar with the nature of share

 Cont.

▪ Debenture may issue with or without security

▪ Security that can be created by the company are two

types : charge and mortgage

▪ What is the difference between charge and

mortgage?
 CHARGES
▪ Can be divided into two types
a) Fixed charge
b) Floating charge

▪ Fixed charge is a charge that attaches to specific

property owned by the borrower. The company
cannot dispose the charged assets without the
leave of the lender’s consent.
 FLOATING CHARGE
▪ Floating charge is a charge which float above the specific
categories of assets such as its inventory.

▪ The company is free to dispose off these assets in the

normal course of business and to replace them by acquiring
the same category of assets in the future
- Re Yorkshire Woolcombers Assoc. Ltd

▪ The creation of floating charge may enable the company to

dispose of it trading stock in the ordinary course of
business.
 FLOATING AND FIXED CHARGE:
THE DIFFERENCE
▪ Evans v Rival Granite Quarries Ltd

“ a floating charge is not a future security. It is a present

security which presently affects all the assets of the
company expressed to be included in it. On the other
hand, it is not a specific security as the holder cannot
affirm that the assets are specifically mortgaged to him”

▪ The floating charge did not give the holder any legal or
equitable interest in the specific assets of the company
 THE PROCESS OF
CRYSTALLIZATION
▪ A floating charge can be change to a fixed charge
through the process of crystallization.

▪ A floating charge is crystallized due the followings:

- the borrowing company is wound up

- the company ceases to carry out its business
- the company is default in payment
- due to the option of the creditor by giving notice to the
company
- due to happening specified event as provided in the
debenture – leads to automatic crystallization
 Cont.
▪ Automatic crystallization of the floating charge – no
action is required by the creditor

▪ Eg: appointment of receiver/ winding up/cessation of

business - Re Woodroffes (Musical Instruments) [1985]
2 All ER 908.

▪ Silverstone Marketing Sdn Bhd v Hong Ban Hin

Trading Sdn Bhd

▪ Merchant Bankers Bhd v Highland Chocolate &

Confectionary Sdn Bhd
 CREATION OF MULTIPLE CHARGES
OVER THE SAME PROPERTY
▪ Can there by several charges of the same type OR different type
be created on the same property?

▪ Can a company create more than 1 fixed charge over the same
property?

▪ Can a company create more than one floating charge over the
same property?

▪ Can a company create different types of charges over the same

property?

▪ How would all these charges rank with one another during winding
up of a company?
 PRIORITY OF CHARGES

▪ Fixed charge v Fixed charge

▪ Refer to the characteristics of a fixed charge

▪ Rank according to the date of creation, following the law

of property.

▪ Floating charge v Floating charge

▪ Refer to the characteristics of a floating charge

▪ Same with the fixed charge in terms of ranking

 PRIORITY OF CHARGES

▪ Exception: the law allows the subsequent charge to rank “parri

passu to” or in equal with other previous floating charge

▪ If a company wishes to create a second floating charge over its

undertaking ranking before the first, the debenture securing the first
charge must so provide. Otherwise floating charges rank for priority
in the order in which they were created.

In Re Benjamin Cope & Sons Ltd [1914] 1 Ch 800 said:

“where the company has created a charge over the whole of its
undertaking, the 2nd floating charge created over the same assets
would take priority after the 1st floating charge unless the terms
of the prior charge allowed the company to create subsequent
charges with and equal or higher priority”
 Cont.

▪ The court in this case precludes a company which has created a

floating charge over its assets from creating another floating charge
over all of the same assets ranking equally with, or in priority to, the
first floating charge, except with the first chargee's permission

▪ However, it is possible to create a second floating charge over a

part of the assets with priority over the first charge (Re Automatic
Bottle Makers Ltd [1926] Ch 412).

▪ This means there is a possibility for the second floating charge to

rank in pari passu (equal) with or in priority to the prior floating
charge.
 Cont.

▪ In Griffiths v Yorkshire Bank PLC [1994] 1 WLR 1427,

Morritt J held that if a company creates two floating
charges at different times and the second crystallizes
before the first, then the fixed charge created on the
crystallization of the second shall take priority over the
first charge even after that the first one has crystallized.

▪ However, opposite conclusion was reached in Re

Household Products Co Ltd and Federal Business
Development Bank (1981) 124 DLR (3d) 325 which
provides that equitable interests take priority in order of
creation.
 PROTECTION TO FLOATING CHARGE
HOLDER
▪ As a protection to the floating charge holder, it is usual
to have an instrument creating such charge to stipulate
that the company is not at liberty to create subsequent
charges either fixed or floating ranking in pari passu
(equal) with or in priority to a floating charge.

▪ This is called Negative Pledge Clause – A pledge made

by the company that it will not create any charge over
the assets covered by the floating charge with priority
over the floating charge.

▪ By having the negative pledge in the instrument, the

company is being restricted from creating subsequent
charge that may take priority over the earlier floating
charge.
 NEGATIVE PLEDGE
▪ What is it?
It is a protection to the holder of floating charge in terms of priority of
payment of debts by the company.

▪ The protection is given by inserting in the document creating the charge

which is between the company and the creditor, the ‘negative pledge’
clause to the effect that any subsequent charge will not have priority
over the floating charge.

▪ It is a contractual promise given by a borrowing company that it will not

grant charges in favour of other creditors without the prior consent of a
lender.

▪ It is binding on the company and any breach of the pledge is a breach

of contract in the charge document which may allow the lender to
enforce the charge.
 THE EFFECTIVENESS OF NEGATIVE
PLEDGE
▪ The negative pledge is a contract between the
company and the creditor.

▪ If the clause is inserted in the document creating

the floating charge and later registered at the
office of registrar, it will then be a public document.

▪ It could be assessed by everyone who has a

dealing with the company.
 THE APPLICATION OF
CONSTRUCTIVE NOTICE
▪ Section 39: The application of constructive notice as
regards the document/instrument creating a charge.

▪ Constructive Notice vs Actual Notice = Actual knowledge

▪ Registration of a charge constitutes a constructive notice of

the existence of the charge to any subsequent charge.

▪ Constructive notice: A subsequent chargee will generally

be taken to have knowledge of an earlier registered
interest.
 THE APPLICATION OF
CONSTRUCTIVE NOTICE
▪ The doctrine of constructive notice is applicable on the
documents relating to instrument of charges.

▪ Documents – see section 66 (6): document which is

required to be executed by any written law, resolution,
agreement or constitution in accordance with subsection
(1).

▪ As such, if the negative pledge is registered in the

document for the registration of charges, it will becomes
effective to all chargees regardless of whether they have
actual notice or knowledge about it.
 REGISTRATION OF CHARGES
▪ All charges must be registered: section 352

▪ Effect of no registration: Section 352 (2) of CA 1965

▪ Depends on the types of property of which charge is created over

▪ What about the loan? Can it be recoverable? Section 352(2)

▪ Whose duty to register the charges? Section 352(8)

▪ The keeping of register of charges: section 357/362

 REGISTRATION & PRIORITIES
▪ Priorities are not effected by the order of registration. It
follows the order of creation and as long as a charge is
registered within the time given, it will take priority according
to the normal rules of property law. (United Asian Bank
Case)

▪ When a charge becomes void for non-registration, the

chargee loses whatever priority he might have and becomes
an unsecured creditor

▪ The non-registration makes the charge void against the

liquidator and other creditors. But as between the company
and the chargee there is still a debt which is not affected by
such charge- s.352(3)
 PRIORITIES OF CHARGES: GENERAL
RULE
▪ Fixed charge is a secured charge and therefore it ranks according to
their order of creation: the maxim ‘first in time prevails’

▪ If fixed charge is created later over the same property in which the
floating charge is created before, the fixed charge will rank first since it
attaches to the property at the time of the creation.

▪ Why? Because floating charge is an equitable charge and not legal

charge

▪ But if the floating charge is crystallized (not because of winding up),

then it will rank ahead than the other fixed charges created after it
(subject to the date of creation). – Belgard Motor Case [2015]

▪ General Rule: All charges in the same category shall rank according to
their date of creation
 PRIORITIES OF CHARGES
▪ Fixed Charge v Fixed Charge:The first charge in time of creation
will have priority.

▪ Floating Charge v Floating Charge: Where there are two floating

charges created over the same assets, the first charge in time of
creation will have priority.

▪ Fixed Charge v Floating Charge: There are two charges created

over the same assets. The first charge is a fixed charge, followed
by a floating charge. The fixed charge which is also the first in time
of creation will have priority.
 PRIORITIES OF CHARGES
▪ Floating Charge v Fixed Charge: In this scenario, there are two charges
created over the same assets. The first is a floating charge, followed by a
fixed charge.

▪ The general principle is that the fixed charge, will have priority. This is due
to the nature of the first charge, that is, it is a floating charge

▪ However, it will be different answer if there is a negative pledge clause in

the floating charge document;

▪ Any breach may entitle the lender holding the floating charge to recall the
loan. Further, the negative pledge clause may be supplemented with an
automatic crystallization clause.
 Cont.

▪ D Brian Limited (In Liquidation) T/A East Coast Print

and Publicity: A crystallization notice served prior to
the commencement of a winding up can validly
crystallize a floating charge and therefore obtain
priority for that charge over preferential creditors’
claims during liquidation.
 Cont.
▪ United Malayan Banking Corp Bhd v Aluminex (M) Sdn Bhd
(1993), the court held that in a contest between a floating charge
and a fixed charge, the floating charge will have priority if the
following conditions are fulfilled:

(a) The floating charge document contains a negative pledge

clause; and

(b) The holder of the fixed charge has actual notice of the negative
pledge clause. ( no more applicable: read section 39 of the CA
2016).

▪ Unsecured creditors rank behind secured creditor and rank equally

between themselves. (pari passu principle)
 THE FLOATING CHARGE HOLDER AS A
SECURED CREDITOR

▪ The holder of floating charge cannot prevent the company

from paying to its unsecured creditors until it is crystalized :
section 392

▪ Once the floating charge is crystallized, the chargee is

entitled to rank as a secured creditor and therefore can
take before the unsecured creditor in any liquidation.

▪ In Belgard Motors Case [2015], the court provides a clarity

as to the priority of payments in winding up. The Court
confirmed that once floating charge crystalized on or
before winding up, it will rank in priority to claims of
preferential creditor.
 PREFERENTIAL CREDITORS

▪ The preferential creditor is a creditor who is granted preferential status

during an insolvent liquidation by receiving the right to first payment.

▪ When a company enters liquidation, each class of creditors must be

paid in full before funds are allocated to the next.

▪ Creditors are ranked as follows:

a) Secured creditors with a fixed charge
b) Preferential creditors – Wages to employees, salary, vacation
leave, Socso, EPF, taxes etc: section 392 & 527 of the CA 2016
c) Secured creditors with a floating charge
d) Unsecured creditors
e) Shareholders
 THE FLOATING CHARGE IN WINDING UP

▪ Floating charges created within six months before

the commencement of the winding up of the
company is invalid except to the amount of monies
paid to the company at the time of the creation of
the charge : s.529

▪ The charge however is not invalidated if the

creditor proves that the company was solvent
immediately after its creation: Sabah Bank Bhd v
Ho Juan Hua & Anor
 RIGHT OF DEBENTURE
HOLDER

▪ ENTITLED TO ATTEND MEETING

▪ ENTITLED TO OBTAIN REMEDIES –

SECTION 346