Loan

 Capital
i.e.  raising  capital  through  borrowing
All  trading  companies  have  the  implied  power  to  borrow  for  the  purpose  of  business  -­‐  included  
in  the  objects  and  found  in  paragraphs  of  the  12th  and  13th  schedule  of  the  CA’65

Meaning  of  ‘Debenture’ Differences  between  Shares  and  Debentures

“A  document  which  either  
creates  a  debt  or  acknowledges  
it,  and  any  document  which   Debentures Shares
fulfills  either  of  these  
A  document  issued  by  a  co.   The  interest  of  a  shareholder  in  a  co.  
conditions” containing  an  acknowledgement  of   measured  by  a  sum  of  money  and  is  a  
-­‐  Levy  v  Abercorris  Slate  &  Slab  Co. its  indebtedness bundle  of  rights  and  obligations

Creditors  of  the  co. Members  of  the  co.

Section  4(1)  CA’65  -­‐  debenture  
therefore,  NO  voting  rights therefore,  have  voting  rights
includes  debenture  stock,  bonds,  
notes  and  any  other  securities  of   Receive  interest  on  loans Receive  dividends  if  declared
a  corporation  whether  
Receive  interest  whether  or  not  the   Dividends  are  not  fixed  but  will  
constituting  a  charge  on  the  
co.  is  profitable depend  on  profits  and  the  amount  
assets  of  the  corporation  or  not. recommended  by  the  directors

May  be  issued  at  a  discount Must  NOT  be  issued  at  a  discount

Has  priority  with  respect  to   Receive  repayment  after  creditors  but  
repayment can  participate  in  surplus  assets

Advantages  and  Disadvantages  of  Debentures

Advantages
1. The  board  does  not  (usually)  need  the  authority  of  a  GM  to  issue  debentures.
2.  As  debentures  carry  no  votes,  they  do  not  dilute  or  affect  the  control  of  the  co.
3.  Interest  is  chargeable  against  the  profit  before  tax.
4.  Debentures  may  be  cheaper  to  service  than  shares.
5.  There  are  no  restrictions  on  issuing  debentures  at  a  discount.

Disadvantages
1. Interest  must  be  paid  out  of  pre-­‐tax  profits,  irrespective  of  the  profits  of  the  co.
2. Default  may  precipitate  liquidation  and/or  administration  if  the  debentures  are  secured.
3.  High  gearing  will  affect  the  share  price.

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 Company  Charges

What’s  a  Charge? Registration  of  Charges

(D’94  Q11b;  J’97  Q10a;  D’99  Q11c)
Section  4  CA’65  -­‐  including  a  mortgage  and  any  
agreement  to  give  or  execute  a  charge  or  
mortgage  whether  upon  demand  or  otherwise. Section  108(3)  CA’65  
-­‐ An  encumbrance  upon  property  that  gives  the   -­‐ Fixed  and  floating  charges  must  be  registered  the  
holder  rights  over  that  property  usually  as   Registrar  of  Companies
security  for  a  debt  owed. Section  108(1)  CA’65  
-­‐ Security  means  that  in  the  event  of  a  company   -­‐ within  30  days  of  their  creation  of  the  charge.  
being  wound  up,  the  creditor  with  a  secured   -­‐ Failure  to  register  a  registrable  charge  will  result  in  the  
debt  will  have  priority  of  what  is  owing  to  him     charge  becoming  void  as  a  security  against  the  
out  of  the  value  of  the  property  which  is   liquidator  and  any  creditor  of  the  company.  However,  
subject  to  that  charge  over  any  unsecured   under  s.  108(2),  the  charge  is  still  valid  against  the  co.  
creditor. The  money  borrowed  becomes  immediately  repayable.
-­‐  Co.’s  Charges  may  be  Fixed  or  Floating. Section  109(1)  CA’65
-­‐  Documents  and  particulars  required  to  be  lodged  for  
registration  may  be  so  lodged  by  the  company  
concerned  or  by  any  person  interested  in  the  
documents.  
Fixed  Charge  and  Floating  Charge -­‐ However,  if  default  is  made  by  failure  to  register  a  
charge,  the  co.  and  every  officer  in  default  is  liable  to  a  
Fixed  Charge fine.
-­‐ A  charge  on  a  specific  asset  or  assets  of  a  co.   Section  111(2)  CA’65  
Such  a  charge  attaches  immediately  to  the   -­‐ Upon  registration  of  a  charge,  the  Registrar  will  issue  a  
asset  concerned  and  a  company  may  not  freely   certificate,  which  is  conclusive  evidence  that  the  
dispose  of  the  asset  thereafter.  A  chargor   requirements  as  to  registration  have  been  complied  
cannot  dispose  of  an  asset  subject  to  a  fixed   with.
charge,  free  of  the  charge  unless  he  gets  the   Section  114  CA’65  
consent  of  the  chargee.  Any  disposition  of   -­‐ Allows  for  an  extension  of  time  for  registration,  as  well  
such  an  asset  without  the  consent  of  the   as  a  rectification  of  the  register  of  charges.  
chargee  will  remain  subject  to  the  charge.   -­‐ An  application  would  have  to  be  made  to  the  court.
Land  is  frequently  the  subject  of  fixed  charges.   -­‐ Before  the  court  allows  the  extension  of  time,  it  must  
be  satisfied  that  the  omission  to  register  on  time  was:-­‐
Floating  Charge (i) accidental  or  due  to  inadvertence  or  to  some  other  
-­‐ A  charge  which  does  not  immediately  attach   just  cause;  or
to  the  assets  concerned  and  gives  the  chargor   (ii)  not  of  nature  to  prejudice  the  position  of  creditors  or  
freedom  to  continue  to  deal  with  the  assets  in   members;  or
the  ordinary  course  of  business.   (iii)  it  is  just  and  equitable  to  grant  relief.
-­‐ Has  3  characteristics  (according  to  Romer  J  in  
Re  Yorkshire  Woolcombers  Association)
(i) It  is  a  charge  on  a  class  of  assets  present  and  
future.
(ii)  The  class  of  assets  fluctuates  in  the  ordinary   Priority  among  charges  over  the  same  property
course  of  business. (Assume  properly  registered)
Same  type  of  charge  (i.e  all  fixed  or  all  floating  charges)
(iii)  Until  such  time  that  the  lender  takes  steps  
-­‐ Charges  take  priority  according  to  their  date  of  creation  
to  enforce  his  security,  the  co.  is  free  to  deal   (order  may  be  altered  if  the  charge  is  not  registered  within  30  days  
with  the  assets  in  the  ordinary  course  of  the   of  the  creation  -­‐  becomes  an  unsecured  creditor)
business.
Different  type  of  charge  
-­‐ Fixed  charge  takes  priority  (since  attaches  to  assets  at  time  of  
creation)  over  a  floating  charge  (as  charge  only  attaches  upon  
crystallzation  -­‐  equitable  charge)  even  though  it  was  created  after  
it.  
-­‐ Unless  -­‐  create  a  negative  pledge  clause  so  co.  cannot  create  a  fixed  
charge  over  the  same  property  and  make  sure  subsequent  chargee  
has  actual  notice  of  such  prohibition.

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 Floating  Charges
(D’08  Q5)

Advantages
1. Extends  to  all  property  of  the  company  i.e  a  wider  
class  of  assets  can  be  charged.
2. Co.  still  maintains  the  freedom  to  sell  the  property  in  
the  ordinary  course  of  business  i.e.  the  company  can   Characteristics
No  Particular  working  is  needed  to  create  it.  If  the  company  
deal  freely  with  the  assets.  (carry  on  business  as  normal) retains  the  right  to  deal  with  the  charged  asset  during  the  
3.Advantageous  to  a  co  which  has  no  fixed  assets  but   ordinary  course  of  business  until  that  charge  crystallizes,  
has  a  lot  of  stock-­‐in-­‐trade  (as  no.2) then  that  charge  is  a  ‘floating  charge’.  The  nature  of  a  
floating  charge  was  summarized  as  follows

in  Re  Yorkshire  Woolcombers  Association  Ltd

Disadvantages (i) It  is  a  charge  on  a  class  of  assets  (present  and  future)
(ii)  The  class  would  be  changing  in  the  ordinary  course  of  
business;  and
1. The  value  of  the  security  will  be  uncertain  as  the  co.  is   (iii)  The  company  may  carry  out  its  business  until  some  
free  to  deal  with  the  assets  in  the  ordinary  course  of   future  step  is  taken  by  the  lender  to  enforce  its  security
business.
In  Illingworth  v  Houldsworth
2. The  floating  charge  ranks  lower  in  priority  in   (i) Ambulatory  and  shifting  in  nature,  hovering  over  the  
property
comparison  with  a  fixed  charge  over  the  same  assets,   (ii)  This  happens  until  some  event  occurs  which  causes  it  to  
even  if  the  floating  charge  was  created  before  the   settle  and  fasten  on  the  subject  of  the  charge  within  its  
fixed  charge,  unless  the  floating  charge  restricts  the   reach  and  grasp  (i.e.  crystallization)
creation  of  subsequent  charges  ranking  in  priority  to  
the  floating  charge  and  the  subsequent  fixed  chargee   Crystallization
has  notice  of  it. Upon  crystallization,  the  floating  charge  becomes  a  fixed  
equitable  charge  on  the  assets  owned  at  the  time  of  
crystallization  -­‐  Re  Griffin  Hotel  Co  Ltd.  Events  usually  
3.Assets  subject  to  a  floating  charge  may  themselves   specified  in  the  charge  as  when  crystallization  will  occur  are  
be  subject  to  a  retention  of  title  clause  in  favour  of  a   as  follows:
seller  of  goods.  In  such  a  case,  if  the  chargor  had  not   1. Liquidation
paid  for  the  goods,  the  seller  of  the  goods  may  be   2.Cessation  of  the  co.’s  business
entitled  to  those  goods  and  the  floating  chargee  
(*Preferential  creditors
would  have  no  claim  to  them. -­‐ Wages  and  salaries  (up  to  4  months  or  RM1.5k,  whichever  is  less)
-­‐ Retrenchments  benefits
4.The  assets  subject  to  a  floating  charge  may  be  lost  to   -­‐ Provident  fund  contributions  (payable  during  the  12  mths  prior  to  
winding  up)
judgment  creditors,  who  have  levied  and  completed   -­‐ Remuneration  in  respect  of  vacation  leave)
execution  on  the  goods  charged.  Prior  to  
crystallization  the  floating  chargee  cannot  prevent  
judgment  creditors  from  so  levying  execution.

5.Prior  to  crystallization,  the  assets  may  be  seized  and  

sold  by  a  landlord  who  has  taken  distress  proceedings  
for  overdue  rent.

6.The  assets  subject  to  a  floating  charge  may  be  utilized  

to  pay  off  certain  preferential  creditors,  if  the  
company  does  not  have  sufficient  funds  to  pay  them.  
Section  191  and  292(4)  CA’65.

7.Floating  charges  created  within  6  months  of  the  

commencement  of  a  winding  up  will  be  invalid  except  
to  the  amount  of  cash  paid  to  the  co.  at  the  time  of,  
or  subsequent  to,  the  creation  of  the  charge,  unless  
the  co.  was  solvent  immediately  after  the  creation  of  
the  charge.  Section  294  CA’65.  

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