SEMINAR 5

LOAN CAPITAL

TOPIC 9:
DEBENTURE &
CHARGE
INTRODUCTION

By issue of
shares to get
SHARE CAPITAL
A co may
raise
funds By BORROWING
from lenders to
form LOAN
CAPITAL
 INTRODUCTION
Section 21 CA2016 a co has full
capacity to carry on/ or undertake any
business / activity, to do any act which
it may do / to enter into transactions.
It has full rights, powers and privileges
for those purposes.

A CO has POWER to
BORROW MONEY for its
business / activity
 INTRODUCTION
Section 211(2) CA2016 provides
that the BOARD has ALL POWERS
necessary to manage, direct &
supervise the management of the
co’s business. This power can be
modified by the co’s constitution.

Unless restricted by the

constitution, the POWER
TO BORROW is vested
with the BOARD.
INTRODUCTION
A private
A public co
co
 MEANING OF DEBENTURE
• DEBENTURE to include stock, bonds,
sukuk, notes
S2(1) CA2016 • & any other securities of a corporation
whether constituting a charge on the
assets of the corporation/ not

BENSA SDN BHD • ‘Debenture also includes bank debt, any

OBLIGATION, COVENANT, UNDERTAKING /
V MALAYAN GUARANTEE TO PAY / any
acknowledgement thereof’
BANK BHD

LEVY V • ‘A document which CREATES A DEBT, /

acknowledge the indebtedness of the co’
ABERCORRIS
SLATE
 MEANING OF DEBENTURE
• May invite the public to subscribe
to its shares/ deposit money with

A public it.
• If deposit money – it is a form of
BORROWING & as evidence for

co the loan, the co ISSUES

DEBENTURE.
• Approval from Securities
Commission is required

• The debenture may be secured by a

CHARGE over the co’s assets

CHARGE • May be FIXED / FLOATING.

• The lender is known as A DEBENTURE
HOLDER & has rights on the CHARGE
MEANING OF DEBENTURE
2/6/2020
Floating Charge
RM80,000
Registered

10/6/2020
Fixed Charge
RM200,000
Registered

20/6/2020
Floating Charge
RM50,000
Registered

15/7/2020
Fixed Charge
RM150,000
Not registered
 RIGHTS OF DEBENTURE
HOLDERS

3 Sue for
REPAYMENT
4 Take
2 Remedy
POSSESSION
against
of asset
OPPRESSION
charged

1 Audited RIGHTS OF 5 Appoint

FINANCIAL DEBENTURE RECEIVER &/
STATEMENTS HOLDERS manager
 RIGHTS OF DEBENTURE HOLDERS
1 AUDITED FINANCIAL STATEMENTS

S257 requires
the co to SEND
A COPY of its
AUDITED
ACCOUNTS to
the
DEBENTURE
HOLDER upon
AUDITED ACCOUNTS
request
 RIGHTS OF DEBENTURE HOLDERS
2 REMEDY AGAINST OPPRESSION

S346 If affairs
of co is
conducted in
an oppressive
manner /
discriminates/
prejudicial to
OPPRESSIVE/ DISCRIMNATE/ PREJUDICIAL him, he may
MANNER APPLY REMEDY
(minority
protection)
RIGHTS OF DEBENTURE HOLDERS
3 SUE FOR REPAYMENT

May ENFORCE (take legal

action) the loan agreement/
co’s obligations

1 If co FAILS TO REPAY the

loan stipulated in the
debenture /

2 co BREACHES any of the

conditions in the debenture
(loan agreement)
 RIGHTS OF DEBENTURE HOLDERS
4 TAKE POSSESSION OF ASSET CHARGED

If CO BREACHES any covenants in the debenture

Debenture SECURED by co’s ASSETS

Debenture holder entitled to TAKE POSSESSION 

& SELL the charged ASSETS USED the amount to SETTLE $
OUTSTANDING LOANS

Appoint a RECEIVER
&/ manager To MANAGE & SELL the charged property
 RIGHTS OF DEBENTURE HOLDERS
5 APPOINT RECEIVER &/ MANAGER

3 Effect of
Appointment

2 Role 4 Powers

A
RECEIVER
1 Who? 5 Liability
&
MANAGER
 RIGHTS OF DEBENTURE HOLDERS
5 APPOINT RECEIVER &/ MANAGER
3 the case ‘… does
NOT MANAGE the
property in the
sense of buying/
2 The case defined selling …’ 4 the case ‘…
‘a receiver is a merely TOOK the
person RECEIVE INCOME & PAID
RENTAL & OTHER the NECESSARY
INCOME OUTGOINGS…’

1 RE MANCHESTER
& MILFORD
1 5 the case ‘… the
MANAGER
CARRIED ON the
RAILWAY CO
WHO? TRADE/ BUSINESS
 RIGHTS OF DEBENTURE HOLDERS
5 APPOINT RECEIVER &/ MANAGER

3 RECEIVER RECEIVES
INCOME & PAYS the
2 MANAGER OUTGOING including
MANAGE the co’s OUTSTANDING
LOANS owed to
DEBENTURE HOLDERS

4 Role of DIRECTOR is
1 Manager & SUPERCEDED but are
Receiver are NOT DISPLACED
COMPLEMENTARY totally & still
ROLEs
2 RESPONSIBLE for their
duty with ROC

ROLE
 RIGHTS OF DEBENTURE HOLDERS
5 APPOINT RECEIVER &/ MANAGER

3 NO EFFECT on the
LEGAL PERSONALITY of
the co. Remains a legal
entity.
2 there are debenture
WITHOUT THE POWER TO 4 DOES NOT DISCHARGE
APPOINT – have to APPLY CONTRACTS entered into
TO COURT for the the co BEFORE the
appointment s374(c) & appointment of RECEIVER
s376

5 DOES NOT TERMINATE

1 s374(a) & s375(1) the
debenture EMPOWERS
the DEBENTURE HOLDER
3 EMPLOYMENT OF
EMPLOYEE unless NEW
CONTRACT/ receiver SOLD
to APPOINT a receiver &/
manager by INSTRUMENT EFFECT BUSINESS/ EMPLOYEE
SERVICCES INCONSISTENT
with Receiver
 RIGHTS OF DEBENTURE HOLDERS
5 APPOINT RECEIVER &/ MANAGER
3 b. Lease, let, hire,
dispose the
property
c. Borrow money on 4 d. Convert the
2 a. enter into security of property property into
possession / take money
control of the
property e. Carry on any
business of the co

5 f. Execute
1 s383 stated in 6th
Schedule of CA2016
4 documents
g. Bring & defend
USUAL POWERS are: POWERS legal action on
behalf of the co
 RIGHTS OF DEBENTURE HOLDERS
5 APPOINT RECEIVER &/ MANAGER

2 Has POWER TO
SELL THE ASSETS
/land CHARGED under
the DEBENTURE –
MELANTRANS SDN
BHD
1 s390 may OBTAIN 3 s384 if there is
INFORMATION on the UNCERTAINTY of
affairs of the co from powers/ duties may
co’s promoters, APPLY TO COURT for
officers & employees direction

4
POWERS
 RIGHTS OF DEBENTURE HOLDERS
5 APPOINT RECEIVER &/ MANAGER
2 s381 ALTHOUGH
AGENT will be LIABLE for
DEBT INCURRED by
Receiver/ Manager to
carry out functions
unless provided
otherwise by instrument 3 s382 LIABLE FOR
1 s375(2) receiver & CONTRACTS entered
manager is an AGENT of into by Receiver/
the CO unless the Manager UNLESS
instrument states PROVIDED OTHERWISE
otherwise BY INSTRUMENT / the
CONTRACT

5
LIABILITY
CHARGES
 CHARGES
3
Crystallisation 4 Negative
of floating Pledge Clause
Charges

5 Priority of
2 Types
Charges

6 Registration
1 Definition CHARGES of Charge
 CHARGES
2 s2(1) Charges to
include a MORTGAGE &
3 The COMPANY
any agreement to give /
CREATED the Charge is
execute a charge/
known as CHARGOR
mortgage whether upon
demand/ otherwise

1 The charge on the

asset of a company 4 The LENDER in whose
securing a debenture favour the charge is
may be either a fixed created is known as
charge or a floating CHARGEE eg a bank
charge
1
Definition
 CHARGES
ILLINGWORTH V HOULDWORTH
Fixed Charge
“A specific(fixed) charge is one that
2 Floating
fastened on ASCERTAINED and
definite property or property capable
of being ascertained and defined, ..
Charges

ILLINGWORTH V
HOULDWORTH Floating

1 Fixed Charge
“a floating charge on the
other hand is ambulatory

Charge and SHIFTING in its

2 nature, HOVERING
OVER and so to speak
floating with the property
which it is intended to

Types affect, until some event

occurs or some act is
done which causes it to
settle and fasten on the
subject of the charge
within its reach and grasp.”
 CHARGES
2 A co CANNOT DEAL 3 A DEBENTURE
with the ASSET HOLDER SECURED
WITHOUT THE BY A FIXED
CHARGE is the
CONSENT of the
HIGHEST RANKING
LENDER class of creditors.

4 Fixed charge gives

1 Fixed Charge is a the holder an
CHARGE which immediate security
ATTACHES to SPECIFIC over the property IN
ASSETS OWNED BY PRIORITY of
THE CO
Fixed subsequent
claimants.

Charge
 CHARGES
2 A floating charge is 3 The company MAY
one that does not attach DEAL WITH ITS
to any fixed asset, until ASSETS without the
it is crystallized. lender’s consent.

1 A co creates a Floating 4 When the charge

Charge over its assets. The CRYSTALLIZES, it
assets can be specific / a drops down to attach
class of assets. Example itself to the assets of
current assets are co’s stock the company,
in trade, book debts & BECOMING A FIXED
uncalled capital.
Floating CHARGE.

Charge
 CHARGES
3 Until the Charge
2 The ASSETS may
crystallises, the co
CHANGE from TIME
CAN DEAL WITH
to TIME in the co’s
THE ASSETS in the
ordinary course of
ordinary course of
business
its business

4 On OCCURANCE of
1 A charge over a
CERTAIN EVENT, the
CLASS of ASSETS
charge will attach &
PRESENT & FUTURE
become FIXED.
Characteristics
of Floating
Charge
 CHARGES
1 If the company goes into
LIQUIDATION, all floating charges
automatically crystallize.
2 The APPOINTMENT OF A RECEIVER
by the court or by a creditor under a power
contained in the debenture has the effect of
crystallizing floating charges. (UMBC V
OFFICIAL RECEIVER)

Floating charge becomes a fixed 3 A floating charge will

charge when an event occurs crystallize when the company
which CRYSTALLIZES it. This CEASES TO DO BUSINESS.
may occur in several ways: (RE WOODROFFLES LTD.)
3
Crystallisation
of Floating
Charges
 CHARGES
4 It is possible to provide in the
instrument that creates the
charge that it will crystallize at the
OPTION OF THE CREDITOR.
E.g. the debenture may be so
drafted as to give the HOLDER
THE OPTION TO CONVERT the 5 There is a
floating charge into a fixed possibility that a
charge by giving notice to the
company. (GRIFFITH V floating charge may
YORKSHIRE BANK) crystallize
automatically upon
the HAPPENING of a
SPECIFIED EVENT.
3
Crystallisation
of Floating
Charges
 CHARGES

SILVERSTONE MARKETING SDN BHD V HOCK

BAN HIN TRADING SDN BHD
The Pf, as executing creditor, had conducted execution over
the Df’s movable property & the court bailiff had seized all the
movable property on the Df’s premises.
The Pacific Bank (claimant) subsequently filed a notice
alleging that the title to the items concerned vested in the
claimant’s name as the HOLDER OF A DEBENTURE signed
by the Df for the claimant’s benefit. The Pf disputed the
claimant’s claim.
The issue was whether the Pf (as executing creditor) or the
claimant (as debenture holder) had PRIORITY over the
PROPERTY concerned.
 CHARGES
SILVERSTONE MARKETING SDN BHD V
HOCK BAN HIN TRADING SDN BHD
 CHARGES

SILVERSTONE MARKETING SDN BHD V HOCK

BAN HIN TRADING SDN BHD
The claimant relied on DEBENTURE CLAUSE which
provided that all of the Df’s goods kept on its premises
had been charged to the claimant by a floating charge
which would AUTOMATICALLY BECOME A FIXED
CHARGE IN THE EVENT A THIRD PARTY ATTEMPTED TO
SEIZE THE DF’S GOODS. The Pf argued that the debenture
clause which was an automatic crystallization clause was
invalid in law and could not be enforced.
The COURT decided in favour of the claimant Pacific Bank.
The clause of automatic crystallization which allows a floating
charge to automatically become fixed if an event occurred
was VALID and is enforceable in Malaysia.
 CHARGES
4 s39 CA2016 provides for
Doctrine of constructive notice.
3 BREACH will allow the PUBLIC is deemed to have
LENDER TO ENFORCE NOTICE / KNOWLEDGE of the
THE CHARGE CONTENT OF THE CHARGE
documents registered with ROC/
made available @co’s office.

5 s352 requires the co to

2 Negative Pledge is
LODGE WITH ROC particulars
BINDING ON THE CO of the charge within 30 DAYS
FROM CREATION OF THE
CHARGE. S362 co must keep a
copy of the instrument creating
the charge.

1 Definition. An
UNDERTAKING requested
by the LENDER that the co
4 Negative 6 The SUBSEQUENT LENDER
has constructive notice of
the clause & NOT TAKE IN
NOT TO CREATE ANY
FURTHER CHARGES over Pledge GOOD FAITH if PRIOR
APPROVAL from the existing
the SAME ASSETS unless floating charge was NOT
with PRIOR CONSENT of the
Lender.
Clause OBTAINED.
 CHARGES
PRIORITIES
Once a company has
BORROWED FROM
TWO OR MORE lenders
and purports to give
each of them security
over the same assets,
the question of priority
of charges will arise.
PRIORITIES
If the company then
defaults in payment to
lenders, the question
arises as to which
lender has priority in
enforcing the security.

5 Priority
of
Charges
 PRIORITY OF CHARGES
3 Fixed Charge v
Floating Charge

2 Floating Charge 4 Floating Charge

v Floating Charge v Fixed Charge

5 Priority 5 Floating Charge

1 Fixed Charge v vs unsecured &
Fixed Charge of preferred
Charges creditor
 PRIORITY OF CHARGES
1 Fixed Charge v Fixed
Charge
There are TWO FIXED CHARGES
created over the SAME ASSETS. The
1st CHARGE in time OF CREATION
will have priority
1 Fixed Charge v Fixed
Charge
PRIOR FIXED charge takes
priority over subsequent fixed
charge.
5 Priority
of
Charges
2 Floating Charge v
Floating Charge
There are TWO FLOATING CHARGES
CREATED over the SAME ASSETS.
The 1st CHARGE in time of
CREATION will have priority.
2 Floating Charge v
Floating Charge
PRIOR FLOATING charge
takes priority over subsequent
floating charge, unless the
term of the prior charge
allowed the company to create
a subsequent charge ranking
equally or of higher priority
(RE BENJAMIN COPE & SONS
LTD)
 PRIORITY OF CHARGES
4 Floating Charge v Fixed
Charge
FLOATING charge will take
priority over later fixed charge
if:
(a) If the debenture creating
4 Floating Charge v Fixed the floating charge
RESTRICTS THE POWER of
Charge the company to grant later 4 Floating Charge v Fixed
FIXED charge takes priority FIXED charge (negative
over floating charge even if
Charge
pledge), and
the fixed charge is created FLOATING charge will take
after the floating charge, but priority over later fixed charge
so long as it was given if:
before the floating charge (b) The later charge had NOTICE
crystallizes OF THE EARLIER FLOATING
charge and the restriction
contained in it.

3 Fixed Charge v Floating SIEBE GORMAN CO V

Charge
There are TWO CHARGES
5 Priority BARCLAYS BANK
The MERE NOTICE OF THE
EXISTENCE OF A FLOATING
CREATED over the SAME ASSETS.
The 1st Charge is a FIXED
CHARGE, followed by a FLOATING
of charge is in itself
INSUFFICIENT to constitute
the requisite knowledge of
CHARGE. The FIXED CHARGE
which is also the 1st in time of
CREATION will have priority.
Charges the restrictive clause
(negative pledge) contained
in the charge.
 PRIORITY OF CHARGES
5 Floating Charge vs
unsecured & preferred
creditor
Once a floating charge
CRYSTALLIZES, the charge is
entitled to rank as a secured
creditor and will therefore BE
PAID BEFORE THE UNSECURED
CREDITOR in any liquidation.
5 Floating Charge vs
unsecured & preferred
creditor
When the company is wound up,
or when a receiver is appointed
on behalf of the debenture
holder or possession is taken of
property subject to a floating
charge, certain preferred
creditors are entitled to be PAID
IN PRIORITY to the holder of the
floating charge.

5 Priority
of
Charges
 CHARGES
3 Failure to REGISTER
will result in severe
consequences for the
lender, the co & the co’s
officers. The CHARGE
WILL BE VOID. Co
2 S352(8) any person committed an OFFENCE. 4 If the Charge is void,
INTERESTED in the the loan secured under
charge may also take the charge will become
steps to REGISTER the PAYABLE IMMEDIATELY
charge within 30 DAYS. s352(3)

5 s357(3) the
1 s352(1) the co shall
register the details 6 CERTIFICATE OF
REGISTRATION issued by
charge with ROC within Registration ROC is a CONCLUSIVE
30 DAYS from its
CREATION of Charges EVIDENCE. R v
REGISTRAR OF CO
 CHARGES
2 if the charge is a
FLOATING CHARGE, the
charge has to also prove
that the co was SOLVENT
immediately after the
creation of the charge s
1 if a co created a charge 529.
3 s123, s224, s225
within 6 months of the
PROHIBIT a co from creating
commencement of its
a charge to FINANCE the
WINDING UP, the charge is
purchase of its SHARES & to
VOID if the liquidator
secure loans granted to its
proves that the co was
directors. It is enforceable
INSOLVENT WHEN THE
against the co.
CHARGE WAS created

6
Charges
UNITED MALAYAN BANKING CORP V ALUMINEX
(1993)

The court held that in a contest between a floating

charge and a fixed charge, the floating charge will
have a priority. If the following conditions are
fulfilled, the floating charge document contains a
negative pledge clause & the holder of the fixed
charge has actual notice of the negative pledge
clause
THANK YOU
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