LOAN CAPITAL &

DEBENTURES
PART III
 Priority of Creditors

 Upon winding up, priority of company’s creditors/debts

arises.
 The assets used as security for the company’s secured
creditors can only be used to pay off the debts owed by
the company to these creditors ( by liquidate/sell off)
 General assets of the company that are to be used to
settle the unsecured creditors will exclude assets charged
to secured creditors.
 It would be necessary to determine the priority when the
company’s assets are insufficient to pay all the company
creditors
 Fixed Charges

 When the company had created few fixed charges:

Ranking in order of creation/registration except when the
later charge ranking parri passu or in priority of the earlier
charge.
(Note: A company may create several charges on the
same asset)
1st 2nd 3rd
Fixed I Fixed II Fixed III
 Floating Charges

 When the company had created few floating charges.

Ranking in order of creation/registration except when the
later charge ranking parri passu or in priority of the earlier
charge

 Re Automatic Bottle Makers : First floating charge

authorises the creation of second floating charge in
priority

1st 2nd 3rd

Floating I Floating II Floating III
IMPORTANT NOTE

 When floating charges crystallise upon winding up - The

crystallization does not affect its nature (as floating charge
) for the purpose of registration nor does it improves its
priority over other charges existing at the time of
crystallization. i.e. the charges are still considered as
floating charges.
 Fixed and Floating Charges

 Fixed charges have the priority over floating charges,

irrespective of time created/registered, provided the fixed
charge is registered (refer illustration A)

 Except where a negative pledge clause existed in the

instrument of the floating charge and later fixed chargee
have knowledge of the negative pledge clause
(refer illustration B)
 Illustration A
Company created Fixed I, then Floating I and later Fixed II

1st 3rd 2nd

Fixed I Floating I Fixed II

 Illustration B
If the Floating I have negative pledge/restrictive clause and Fixed II have
knowledge of the clause

1st 2nd 3rd

Fixed I Floating Fixed II
 Negative Pledge/Restrictive Clause

 When company created floating charge, it may still sell or

charge the assets (subjected to a floating charge) in the
ordinary course of business.
 To avoid that a negative pledge is included into a floating
charge
 When there is a negative pledge, the effect is - floating
charge would have priority over a later fixed charge
 Negative Pledge/Restrictive
Clause
 A clause which stipulate that the company is prohibited
from creating subsequent charges without the consent of
the chargee
 It is a contractual promise given by a borrowing company
that it will not grant further charges without the prior
consent of the creditor
 However if the borrowing company grant further charges
without consent of the creditor, subsequent charges are
still valid.
 Negative pledge only affect priority
 The negative pledge clause will only take effect (i.e affect priority) if
the subsequent fixed chargee has notice and knowledge about it.

Companies Act 2016

 Sec 352(1) - …a statement of particulars of the charge in the manner
prescribed by the Registrar (refer item 7)
 If the form has been properly filled out indicating that there is a
negative pledge/restrictive clause, then constructive notice doctrine
applies.
 However if item 7 is left blank(the form improperly filled) then the
constructive notice doctrine would not apply.(actual notice)
(Refer case : Tan See King – Part II Effect of registration)
 Kay Hian & Co(Pte) Ltd [1989] 1MLJ 284
F: A contest between prior floating charge and subsequent
fixed charge
H: Person asserting priority over a registered floating charge
had to prove that they had no knowledge of the
negative pledge.
In this case such had been lodged with the Registry of
Companies and the defendants failed to do so.
 Affin Bank Bhd v Malayan Banking Bhd [2009] 3 CLJ 320 –
Court of Appeal
F: Wembley created a charge in favour of Maybank – all
assets & undertaking; there is a negative pledge(1st
charge)
- 2nd charge created over 8 million shares of Wembley in
favour of Affin
- Affin knows about the 1st charge & negative pledge;
through form 34 (CA 1965)
- Later when Wembley defaulted, Affin sold the shares
- Maybank claimed that the shares are part of its charge
and it has priority over Affin’s charge
Held :
 The shares are part of the first charge. Maybank’s charge
over the shares had priority over Affin’s charge
 Preferential Creditors

Preferential creditors may affect the priority of floating charge.

They are actually unsecured creditors who must be paid in priority
to other unsecured creditors.
 Who are preferential creditors;
Sec 527(4) : those identified in sec 527(1)(b),(d),(e) AND
Sec 527(3) -Money borrowed to pay employee’s salary or
vacation leave.

 Sec 527(4) : The preferential creditors are entitled to be paid in

priority to the company’s debenture holders of a floating
charge
 Kenneth Teh Ah Kim & Anor [1998] I MLJ 289
H : EPF contribution payable by the company has priority
under secs 191(1) & 292(1)(e) over any claim of the
debenture holders in the floating charge

NOTE: Payment to the preferential creditors can only be

made out of the assets secured by floating charge and not
those secured by fixed charges
 Unsecured creditors

 The unsecured creditors would be last in priority.

 Unsecured creditor’s claim would be settled only after the
claims of secured creditor are met; unless the unsecured
creditor had obtained judgment( judgment debt)

 Unsecured creditor would have priority over the floating

charge when obtained judgment against the company
before the floating charge crystallize.
 Eg: Trade creditors- provide goods/services,
Rental (landlord)