LECTURE 6 : LOANS AND DEBENTURES

Company Law
LW 4024
OVERVIEW

 Companies rely on 2 sources of funds for its business activities ie share capital and
loan financing.
 Loan capital is primarily made up of longer term borrowing of a company.
 However unlike share capital which will only be returned to shareholders upon
winding up, loan has to be repaid.
 Loan capital includes permanent overdrafts, unsecured loans and secured loans.
 A common long term loans is in the form of a debenture.

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SHARE CAPITAL V LOAN CAPITAL
SHARE CAPITAL
Co issue shares to shareholder. This is
called share capital.
Shareholder will obtain dividend and it is
not fixed and depends on profits.
Shareholders can attend meetings
Shareholders have voting rights
A s/hr is a member of a co.
LOAN CAPITAL
Co. acquires capital from debt financing.
This is called loan capital.
Interest is fixed
Creditors cannot attend company meetings
Creditors do not have voting rights
Creditors(debenture holder) is an external
creditor.
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DEBENTURES

Section 2 (1) CA 2016 defines debenture to include

debenture stock, bonds, notes and any other securities
of a corporation whether constituting a charge on the
assets of the corporation or not.

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DEBENTURES

Common law definition:

Levy v Abecorris Slate and Slab Co where Chitty J stated the

following:
 A document which either creates a debt or acknowledges it and any document
which fulfils either one of these conditions is regarded as a debenture.

Bensa Sdn Bhd v Malayan Banking Bhd, where the Malaysian High Court stated the following:
 Any obligation, covenant, undertaking, guarantee to pay or
acknowledgement of a debt.

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 CHARGE
 When a company borrows money it can give any type of security which is usually in
the form of a charge.

 The ‘chargor’ is the person who grants the charge; in this case it would be the
company.
 
 The ‘chargee’ is the person who takes the benefit of the charge; in this case, the
creditor.

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 CHARGE

As security in favour of a lender, a company may create 2 main types of

charges i.e.

• a fixed charge and

• a floating charge

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 FIXED CHARGE
A fixed or specified charge is one that attaches to a specific asset owned by a company. As the fixed charge is
attached, the company cannot deal with the assets unless with the prior consent of the lender. If the company were
to do so without the lender’s prior consent, the assets continue to be subject to the charge until they are released
by the lender.

Re Yorkshire Woolcombers Association Ltd (1903)

It was held:
1.that it was not necessary that the property should exist at the time when the charge is created or that the company
should own the property
2.it is sufficient that the relevant property is ascertained or definite or capable of being ascertained or defined in the
instrument creating the charge so that there can be no doubt that the property is caught by the charge.

It is possible to create a fixed charge on:

• land
• the book debts of a company
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 WHO CANNOT BECOME A
DIRECTOR
Floating charges
The meaning of floating charge is clearly explained in the case
Re Yorkshire Woolcombers (1903) as having the following characteristics:

1. if it is a charge on a class of assets of a company present and future

2. if that class is one which, in the ordinary course of the business of the
company would be changing from time to time

3. if you find that by the charge it is contemplated that, until some future step
is taken by or on behalf of those interested in the charge, the company may
carry on its business in the ordinary way as far as concerns the particular class
of assets.
 FIXED AND FLOATING CHARGES
The question of whether a charge over existing book debts of a company
amounts to a fixed charge or a floating charge depends on the facts of each
individual case.

Siebe Gorman & Co Ltd v Barclays Bank (1979)

It was held that a fixed charge over book debts had been created in favour of the
chargee bank where the charge instruments provided that the chargor could not
charge or assign these debts and, most significantly, had to pay the proceeds into an
account with the chargee bank. Further, the chargor should not “without the prior
consent of the bank in writing purport to charge or assign the same in fav

Re Brightlife Ltd (1987)

It was held that it was a floating charge that had been created on the book debts
because the chargor could pay the proceeds of the charged book debts into its own
account and use them in the normal course of business.
 CRYSTALLIZATION OF A FLOATING CHARGE
 

When a floating charge crystallizes, it no longer hovers over a class of assets

which are subject to the charge, but becomes equivalent to a fixed charge
because from the time of crystallization, the company cannot deal with any
item within the class of assets without the consent of the charge holder.
 

This may take place for example, when the company ceases to carry on
business or goes into liquidation, or when the debenture holder appoints a
receiver to enforce their security.
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WHEN DOES CRYSTALLISATION OCCUR?

 Usually, debentures containing a floating charge also impose a prohibition on the

company granting any fixed charges over the assets that are the subject of the floating
charge. This is because fixed charges that are created after the floating charge would
rank before the floating charge for payment in the event of insolvency of the company.
 In other words, despite the fact a fixed charge is registered after a floating charge, it
would be paid in preference to the floating charge.
Malaysian International Merchant Bankers Bhd v Highland Chocolate &
Confectionary Sdn Bhd (No.2) (1998)
The court affirmed that crystallisation occurs automatically on the occurrence of a
specified event in the floating charge and without need for a notice to be issued to the
floating charger.
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WHEN DOES CRYSTALLISATION OCCUR?


Some express crystallisation events that the courts have held to be valid include the following:
(1) appointment of a receiver and manager under a prior ranking fixed and floating charge;
(2) charging or attempting to charge its assets by a chargor contrary to the provisions of a restrictive covenant against
creating any prior or equal ranking charge;
(3) the giving of a notice to the company converting the floating charge into a specific charge in relation to the
charged assets speci ed in the notice;
(4) any defined event of default, for example, the making of a demand by the debenture holder for all money due;
(5) dealing with the charged property contrary to an express restrictive covenant against dealing with the charged
property other than in the ordinary course of its ordinary business.

The effect of crystallisation is to deprive the chargor of the autonomy to deal with the property comprising the
security in the floating charge in the ordinary course of business or otherwise.

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REGISTRATION OF CHARGES

 S 353 CA 2016 lists 11 types of charges which must be registered

 S 352(1) a charge that is created must be registered within 30 days.

 S 352(2)- Failure to register the charge would rendered it void as against the

liquidation and other creditors.

 S352 (3) when the charge becomes void, the money secured shall immediately

become payable.
 S361- the court may grant extension of time to register for good reason.

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REGISTRATION OF CHARGES
 The term “charge” includes a mortgage and any agreement to give or execute a charge or
mortgage whether upon demand or otherwise.
 Johore Para Rubber Co. Ltd v Registrar of Companies, Malayan Union (1948)

A company procured a loan from a finance board and a memorandum of charge was executed
by the company on August 15, 1947. The charge was duly registered with the Registrar of Titles
at Johore Baru on September 9, 1947. On the same day, a copy of the charge was dispatched
by post to the ROC for registration under Section 81 of the then Companies Ordinance 1940,
which required, inter alia, a charge to be submitted for registration within 21 days of its
creation. The ROC had refused to register the charge stating that the 21 days should run from
August 15, 1947.
The court held that the charge over the land was created on the day it was registered with
the Registrar of Titles i.e. on September 9, 1947.
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REGISTRATION OF CHARGES
 Non-registration of a charge will render the charge void against “the liquidator and any creditor” of the
company and the money secured shall immediately become payable.
- Section 352 CA 2016
It follows that it is the security and not the debt which is avoided.
 If a charge is not registered in the manner prescribed, it will affect priorities.

Re Monolithic Building Co (1915)

It was held that a subsequent holder of a floating charge had priority over a holder of a legal mortgage
created first but not registered, notwithstanding that the holder of the floating charge had actual notice of the
legal mortgage.
Ricky Thong Yew Fook v OCBC Bank (Malaysia) Bhd (2003)
A fixed deposit given as a pledge was held to be a registrable charge.
It was held that the failure by the bank to register the charge meant that the charge was void
against the liquidator.
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 PRIORITIES OF CHARGES
 Below are the general principles. They may be superceded by agreements between the
lenders.
 Fixed charge v fixed charge
In this scenario, there are 2 fixed charges created over the same assets. The first charge
created will have priority.
 Floating charge v floating charge
Where there are 2 floating charges created over the same assets. The first charge created
will have priority.
 Fixed charge over floating charge
There are 2 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.
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PRIORITIES OF CHARGES

 Floating charge v fixed charge

 There are 2 charges created over the same assets. The first charge is a floating charge,
followed by a fixed charge.
 General principle – the fixed charge, even though it is second in time, will have
priority. This is due to the nature of the first charge, i.e. a floating charge, which
allows the company to deal with the charged assets in its ordinary course of business
to maintain itself as a going concern. This includes the right to charge its assets as
security for loans in the form of fixed charges.

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REGISTRATION OF CHARGES

 However, the outcome may be different where there is a negative pledge clause
in the floating charge document; the company having given an undertaking to
the lender holding the floating charge that it will not create another charge over
the same assets ranking in priority over the floating charge.

 Although the negative pledge clause is not a security, it is an undertaking by the

company; and its breach may entitle the lender holding the floating charge to
recall the loan. Further, the negative pledge clause may be supplemented with
an automatic crystallisation clause.
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NEGATIVE PLEDGE

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 conditions are fulfilled:
1. The floating charge document contains a negative pledge clause;
2. The holder of the fixed has actual notice of the negative pledge clause

 It is to be noted that Section 39 CA 2016 imputes knowledge on third parties upon the
lodgement of the charge particulars with the ROC and the availability of the charge
document at the company’s registered office.
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