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Week 6
Topic 7
Debentures and Loan Capital

Textbook Chapter 18
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Chapter 18 – Debenture and Loan Capital

Company Finance = share capital vs loan capital:

Happy time ☺ Fundraising • Pros & cons from company’s perspectives

The nature of debt finance:

• Sources of debt capital
o Bank
ABC Pte Ltd o Private lender
o Debenture
Assets Liabilities
Loans/ Company Charges:
NCA (Fixed) Debenture • Fixed charges
Equipment • Floating charges
Factory o Crystallisation of floating charges
Land • Registration of charges
• Invalidation of charges
• Priority of charges during winding up
Equity
CA (Current) Shares Capital
Inventory
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Share capital compared with loan capital

Debentures
Debt finance
and Loan
Capital
Learning Company charges
Objectives
Registration of charges
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Share Capital vs Loan

Capital
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• What decisions to consider when raising Assets Liabilities

Company funds for company?

• Debt to equity ratio – gearing ratio
A/c Receivable A/c Payable
Loans

finance • Costs of debt and equity

• Long term and short term sources
Debentures

of funds
• Most optimal level is Shareholders’ Equity
• Max amount of debt that can be Shares
serviced
• Ordinary shares
• Without affecting dividend pay- • Preference
outs shares
• And preserve future profitability • Treasury shares
Reserves
• Sources of company finance:
• Share capital Retained Earnings
• Debt finance
• Trade finance
• Retained earnings
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Debt finance 18-100 to 18-195

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Nature of debt finance

• Compare debt vs equity capital in the

table in previous slide

Sources and types of debt

Debt capital:
finance • Banks
• Debenture issue
• Private lender eg shareholders

Secured vs unsecured
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What are debentures?

• Common law definition - “any document which is evidence

of a debt”
• S4 CA - “includes debenture stocks, bonds, notes and any
other securities of a corporation whether constituting a
charge on the assets of corporation or not”
• Commercial understanding - secured transferable loan stock
(usually listed) with securities by way of fixed or floating
charge over specific assets of the borrowing company.
Debt finance Why do companies issue debentures?

• To raise money
• The company is the borrower, sometimes there is a
guarantee by a related party (guarantor), and investors are
the lenders who acquire debentures to receive interests
(income stream) and principle at the end of the term.
• Debentures listed on the SGX can be traded and can be
liquid
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• Requirements for public issue of debentures:

• Appoint a trustee for debenture holders
under a trust deed - Rule 308 SGX Listing
Manual
• Keep a register of debenture holders and
make copies of trust deed available to
debenture holders and shareholders - s93 CA
• Comply with the disclosure requirements in
Debt finance Pt XIII Securities and Futures Act; and
• If the debentures are to be listed on SGX,
meet the requirements contained in Listing
Manual
• https://www.temasek.com.sg/content/dam/temasek-corporate/our-
financials/bond-offer-
2018/Temasek_offers_2.7percent_5year_T2023_SGD_Temasek_Bond.pdf
• https://www.temasek.com.sg/content/dam/temasek-corporate/our-
financials/bond-offer-
2018/Temasek_offers_2.7percent_5year_T2023_SGD_Temasek_Bond.pdf
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Bonds from
newspapers
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WEDNESDAY, MARCH 10, 2021 THE STRAITS TIMES.pdf

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What rights do debenture holders have?
• The rights which debenture-holders have are mainly
contractual and are contained in the debenture itself
• If debenture is appointed by a trustee, then debenture
holders will have rights under the trust deed
• The Companies Act also confers certain statutory rights on
debenture holders and / or their trustees, many of which
are rights which are similar to those granted to members
of a company
• The right to take action to restrain ultra vires act
Debt finance (s25(2) CA)
• The right to receive notice of any proposed
notification to object clause in constitution (s33(3) CA)
• The right to receive notice of proposed financial
assistance (s76(10)(f) CA) and to apply to court to
oppose such a proposal (s76(12) CA)
• The right to receive audited financial statements and
audited reports (s203(2) CA)
• The right to seek court relief for oppression (s216 CA)
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• Register of debenture holders and transfer of

debenture
• S93 CA - must keep a register of debenture
holders and make it available for inspection by
debenture holders
• Debenture may be transferred in companies:
• Steps to transfer in private companies include -
Debt finance 1. Transferor makes a request in writing to
company to transfer his debenture
2. Company requests by notice in writing the
delivery up of the documents between 7-28
days
3. The debenture will then be cancelled or
rectified, transfer registered
4. Company given 60 days to comply with
allotment issues, transfer etc
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Company charges 18-200 to 18-240

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Let’s start with a

story…

Slide 16
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OCBC (secured
creditor) $50k 5% 5
years $1k per
month – fixed
charge over the
refrigerator

DBS (secured Cheryl’s Pizza Bar UOB (secured creditor)

creditor) $50k 5% 5 Loan – Debenture
years $1k per $100k 5% 10 years $1k
month – floating per month – fixed
charges over stock charge over oven

ingredients

Suppliers on
Landlord credit terms

Slide 17
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• A company charge is a security given

by a company over some or all its
assets in favour of a creditor
• Secured loan - company has offered
some of its assets as collateral, if the
Company company defaults in payments, the
charges - creditor will generally have the right to
sell those assets and recover
Overview outstanding loan. If there is
insufficient funds to settle the loan,
the unpaid balance will become
unsecured debt.
• Fixed charges and floating charges
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• Fixed charges
• A fixed charge is one that is intended by the parties to attach to a
specific item of property (such as land or a piece of equipment) in
such a way that the company cannot dispose of the property
without the consent of the lender
• If the asset subject to a fixed charge is transferred without the
consent of the chargee, the charge would follow the asset,
subject to exception of a bona fide purchaser without notice of
the existence of the charge who may have a good title to the
asset
Fixed charges vs • Floating charge:
• A floating security is intended by the parties to cover a class of
Floating charges property but not to attach to specific items within the class until
some future event occurs; at that point the charge crystallizes into
a fixed charge over all the property under charge
• Until the event occurs the chargor (borrower company) is free to
dispose of items within the class in the ordinary course of
business so that the taker (buyer) from the chargor acquires the
property free of the charge. That enables a company to borrow
on the security of a stream of assets flowing into and out of its
ownership
• Can be created over company’s present and future assets - raw
materials, stock in trade, inventory
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• Does not depend on the label with which the parties give to
the security, it is up to the court to decide.
• Some guidelines used Re Yorkshire Woolcombers Association
Ltd (1903) - a charge is a floating charge is:
1. Whether the charge is over a class of assets of the
company present and future
2. Whether the class of assets is one which, in the ordinary
course of business of the company, would be changing
from time to time, and
Fixed charges vs 3. Whether it is contemplated that until some future step is
taken by the parties interested in the charge, the company
floating charges may carry on its business in the usual way as far as
concerns the particular class of assets in question
• Most important consideration - the chargor’s freedom to deal
with the assets, it does not depend on what the parties call the
charge
• Holroyd v Marshall (1862) - fixed or floating charges can be on
assets which are in existence or to be acquired in the future
• Re Lin Securities Ltd (1988) - charge over securities (shares,
bonds etc) were not specifically identified by serial numbers,
thus they were floating charges
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• A chargee who takes a charge over book debts is likely to also

take a charge over collected book debts. This is because as
soon as the debt is repaid, the book debt will be extinguished,
and the collected book debt will be deposited into a bank
account
• A fixed charge over book debts would provide the lender with
Charges over security but it would mean the company cannot deal with the
book debts and proceeds without the lender’s consent.

book debts • Lenders who want a fixed charge over book debts have come
up with an innovation - the uncollected book debts would
(account remain subject to a fixed charge whereas the collected book
debts would remain the subject to a floating charge - not
allowed under National Westminster Bank v Spectrum Plus
receivables) [2005] - company was free to deal with the book debts - so the
nature of the charge is a floating charge, not a fixed charge
• One way to circumvent this is for chargee to ensure that
proceeds collected are paid into a blocked account and
allowed chargee to apply proceeds to reduce the borrowing
facility - control their freedom to deal with the proceeds - thus
creating a fixed charge.
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• Company with a floating charge has freedom to deal

with the assets under charge on a happening of
certain events.
• Crystallisation is the transformation of a floating
Company charge into a fixed charge over assets within the
charges – class of assets that are subject of the charge and
owned by the company at the time the event
What is triggering crystallisation occurs
crystallisation? • Crystallisation may be triggered by appointment of
liquidator, cessation of company business or event
of default or failure of condition
• Once crystallisation occurs, the company is unable
to dispose of the assets without the consent of the
creditor.
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Registration of 18-300 to 18-380

charges
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Registration of
charge Charges must be registered with ACRA:
• Informs people who deal with
company that there is a creditor or
chargee who has rights in property
• Failure to register a registrable charge
may result in the charge being void
against liquidator and creditor of
company
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How are charges registered?

Registration of • S131(1) CA - within 30 days of creation of the charge, the

company must lodge a notice in the prescribed form with the
charge ACRA and
• S131(1A) CA provide where requested by the Registrar, a copy
of the charge to the ACRA
• S131(3) - types of charges that are registerable
• S131(3AA) CA - all floating charges over company’s property,
business undertaking, book debts, good will, patent,
trademark, debenture, uncalled capital
• Section 132 permits the chargor (the borrower) and any
person interested to lodge documents - imposes obligations
on the part of company and officer to register, failure to
register may attract fine and default penalty
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How are charges protected?

Registration of • S131(1) CA - If charge is not registered within 30 days, it may
be void against the liquidator and any creditor - becomes
charge unsecured debt, so it is in the chargee’s interest that the
charge is registered
• However, if the charge is not registered, the charge is void on
account of non-registration and the money secured by the
charge becomes immediately payable - s131(2) CA
• Negative pledge clause in the instrument of charge - a chargee
may request for a negative pledge clause to be inserted such
that it restricts the company from giving any charge that ranks
with, or in priority to, the floating charge, without the consent
of the holder of the floating charge
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Invalidation of When can charge be invalidated by

Companies Act?
charges • Unregistered charges as against
liquidator or creditor - liquidator
may deal with this charged asset,
leaving the chargee to queue for
payment as unsecured creditor.
• Under certain circumstances, some
preferred creditors may have
priority over floating charge
holders in the event of liquidation
and receivership – s203(6) IRDA
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• A floating charge created in favour of a connected person or any other

persons within a period of 2 years (connected person) or 1 year (other
Invalidation of person) of the commencement of the judicial management or winding up

floating charges in respectively, shall be invalid, except to the amount of cash paid to the
company at the time of or subsequently to the creation of the charge,
insolvent companies together with the interest (if any) pursuant to any agreement.
• The floating charge shall remain invalid unless the secured creditor is able
– s229 IRDA to prove that the company was solvent after the creation of the floating
charge.
• Any floating charge given by the company in the above periods will, unless
the company was solvent immediately, be invalid except to the extent that
it was given to secure new money. Even if the floating charge is invalid, the
debt will remain as an unsecured debt.
• The proceeds of realisation of assets under a floating charge will first be
used to pay certain priority claims in accordance with section 203 of the
Insolvency, Restructuring and Dissolution Act 2018 before satisfying the
claim of the lender secured by the floating charge.
Source: About Liquidation or Winding Up (mlaw.gov.sg)
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What is priority?
• Order of priority determines whether one chargee is entitled to have its
Registration of claim satisfied from the asset ahead of another chargee who also has a
charge over the same asset

charge - • If the claim by the first ranking creditor exhausts the property over
which the security has been given, there will be no property against
which subsequent secured creditors can enforce.
Priority • Order of priority -
1. As between two fixed charges - the charge created first has priority
2. As between a fixed charge and a subsequent floating charge, fixed
charge prevails
3. As between a floating charge and a subsequent fixed charge, the
fixed charge has priority unless the subsequent fixed chargee has
knowledge of the existence of the negative pledge clause in the
floating charge
4. As between 2 floating charges over the same assets, it will generally
depend on the specified terms of the instrument creating the
charges to determine which takes priority, usually first created takes
priority
5. As between a floating charge over the whole of a company’s
undertaking and a second floating charge over a specific class of
assets, priority depends on whether the first charge allows
subsequent charges to be created with an equal or higher priority.
If not, second charge wins with permission in the absence of
negative pledges
• A negative pledge is a restriction of future charges on the same assets
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Order of asset distribution in times of liquidation subject to s328(5) CA s203(6)

Priority - Ranking of Insolvency, Restructuring and Dissolution Act (IRDA)

claims during • Fixed charge

• Preferred debts -
liquidation a. costs and expenses of winding up for insolvency practitioners
(Topic 14) b. Costs of liquidator and auditors
c. Cost of application to wind up
d. Employees’ wages or salary*
e. Retrenchment benefits*
f. Workers injury compensation
g. CPF for 12 months*
h. Leave – annual leave, vacation leave
i. Taxes
• Floating charge
• Workers injury compensation
• Taxes
* This amount is subject to max of 5
• Unsecured debts months’ wages or up to $13,000,
• Preference share holders whichever is the lower amount – to be
adjusted by the order of the Minister
• Ordinary share holders
from time to time
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Receivership –
to be considered in Topic 12
18-400 to 18-470
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Tutorial Questions