CHARGES

LEE JIA CHERN

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 Introduction

• A company, as a going concern, requires fund to run its business.

• Various ways for the company to raise fund; externally or internally.
One of them is by issuing shares.
• This topic is concerned with the company’s power to borrow
externally.

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 Share Capital vs. Loan Capital

Share Capital Loan Capital

Provider of fund Member Creditor
Payback of capital Prohibited to return the Company must pay the loan
capital to the members
Return Dividends – Profit Interests – Loan agreement

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 A Company’s Power to Borrow

• S21(1)(c) – ‘a company shall be capable of exercising all the functions of a body

corporate and have the full capacity to carry on or undertake any business or
activity including to do any act which it may do or to enter into transactions’.
• S21(2) – a company shall have the full rights, powers and privileges for those
purposes.
• Consequently, a company is empowered to borrow money for the purposes of
its business or activity.
• S211(2) – ‘the Board has all the powers necessary for managing and for
directing and supervising the management of the business and affairs of the
company subject to any modification, exception or limitation contained in this
Act or in the constitution of the company.’

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 Charges

• The company has to charge its assets as securities for the loan.
• In default, the lender has recourse against the assets charged; the assets may be
sold and the proceeds will be used to settle the loan.
• S2(1) – a charge includes ‘a mortgage and any agreement to give or execute a
charge or mortgage whether upon demand or otherwise’.
• Fixed charge and floating charge.

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 Fixed Charge

• Attached to a fixed or specified property of a company.

• Illingworth v Houldsworth [1904] AC 355
• It is not necessary that the property charged should exist at the time when
the charge is created or that the company should own the property.
• What is more important is that the relevant property is ascertained or definite
or capable of being ascertained or defined in the charge instrument.
• To avoid doubt as to which property is to be caught by the charge.
• As the fixed charge is attached to the assets, the company cannot deal with the
assets unless with the prior consent of the lender.
• Hence, it is impossible to create a fixed charge over all the properties and
assets of a company, especially its current assets.
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 Floating Charge

• It is not a specific charge on the assets of a company.

• It can be created against all the property of the company, whether present or
future.
• Re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284
 If a charge has the following three characteristics, it is a floating charge:
i. It is a charge on a class of assets of a company present and future;
ii. That class is one which, in the ordinary course of the business of the company, would
be changing from time to time; and
iii. It is contemplated that, until some future steps are taken by or on behalf of those
interested in the charge, the company may carry on its business in the ordinary way.
• Evans v Rival Granite Quarries Ltd [1910] 2 KB 979
• Illingworth v Houldsworth [1904] AC 355

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 Cr ystallisation of Charge

• A fixed charge is fundamentally different from a floating charge in terms of the

rights and powers of the chargee:
• Fixed charge – default – automatic exercise of rights
• Floating charge – crystallisation – exercise of rights
• Crystallisation deprives the chargor of the autonomy to deal with the property
charged in the floating charge.
• A floating charge crystallises by intervention.
• The company is wound up – Re Colonial Trust Corp (1879) 15 Ch D 465
• The chargor ceases to carry on business – Government Stock Investment and Other
Securities Co v Manila Railway Co [1897] AC 81

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 Automatic Cr ystallisation of Charge –
Common Law

• No action on the part of the floating charge is needed.

• Re Manurewa Transport Ltd [1971] NZLR 909
• The money secured should ‘immediately become due and payable’ and the charge
thereby created should ‘immediately attach and become affixed’ if
‘the company mortgages charges or encumbers or attempts to mortgage charge
or encumber any of its property or assets contrary to the provisions
hereof without the prior written consent of the lender”.
• Re Brightlife Ltd [1986] 3 All ER 673
• Fire Nymph Products Ltd v The Heating Centre Pty Ltd (1989) 7 ACLC 90

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 Automatic Cr ystallisation of Charge –
Malaysia

• Silverstone Marketing Sdn Bhd lwn Hock Ban Hin Trading Sdn Bhd [1998] 2 MLJ
695
• Malaysian International Merchant Bankers Bhd v Highland Chocolate &
Confectionary Sdn Bhd (No.2) [1998] 4 CLJ Supp 32
“if the Company charges pledges or otherwise encumbers (whether by way of
fixed or floating security) any of the charged assets described in section 5.1
hereof or attempts so to do without the prior written consent of the Bank or if
any distress, attachment or legal process is levied, enforced or issued against
any of the lands or assets of the Company or if any of the events specified in
section 9.1 hereof occurs, the floating charge hereby created over the assets the
subject thereof shall automatically without notice operate as fixed
charge immediately upon the occurrence of such an event”.

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 Negative Pledge Clause

• Prior to crystallisation, a chargor of a floating charge retains the power and

autonomy to charge or deal with the assets subject to the charge.
• A negative pledge clause or restrictive clause is normally incorporated into a
floating charge to avoid the chargor from doing the above.
• “The chargor undertakes that it will not, without the prior written consent of the chargee,
grant any subsequent security ranking in priority to or pari passu with the floating charge.”
• The clause thus binds the company as the chargor.
• The breach of such a pledge is a breach of covenant which allows the chargee
to enforce the charge.

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 Negative Pledge Clause –
Doctrine of Constructive Notice

 English position – Wilson v Kelland [1910] 2 Ch 306

• subsequent charge of a fixed charge who has no knowledge of a restrictive
clause in a prior floating charge is not bound by the restrictive clause and
may take priority over the chargee of that prior floating charge.
 Malaysian position
• Prior to the Companies Act 2016 – United Malayan Banking Corp Bhd v
Aluminex (M) Sdn Bhd [1993] 3 MLJ 587
• Under the Companies Act 2016 – s39

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 Registration of Charges

 Why shall register?

• To provide protection to both the creditors and anyone dealing with the
company.
• Re Jackson & Bassford Ltd [1906] 2 Ch 467
• ReYolland, Husson & Birkett Ltd [1908] 1 Ch 152
 Who may register?
• S352(1) – “a company that creates a charge over its property or any of its
undertaking”
• S352(8) – “any person interested in the charge”

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 Registration of Charges

 When shall register?

• S352(1) – within 30 days from the date of the creation of the charge
• Usually the date of execution of the charge document; but may differ if the
charge is required to be registered with other authority.
• Johore Para Rubber Co Ltd v Registrar of Companies, Malayan Union [1948] MLJ
135
• Zeno Ltd v Prefabricated Construction Co (Malaya) Ltd [1967] 2 MLJ 104

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 Extension of time and rectification – s361
• The Court, on being satisfied that the omission to register a charge, whether under this
Act or any corresponding previous written law, within the time required or that the omission
or misstatement of any particular with respect to any such charge or in a memorandum
of satisfaction was accidental or due to inadvertence or to some other sufficient cause or is
not of a nature to prejudice the position of creditors or shareholders or that on other grounds
it is just and equitable to grant relief, may, on the application of the company or any
person interested and on such terms and conditions as seem to the Court just and
expedient, including a term or condition that the extension or rectification is to be without
prejudice to any liability already incurred by the company or any of its officers in respect of
the default, order that the time for registration be extended or that the omission or
misstatement be rectified.S361 – the Court’s discretion to extend the time for registration;
and to rectify any omission or misstatement in the register.

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  The application may be made by the company or any person interested.
 Omission to register or omission or misstatement of any particular of charge:
i. Was accidental; Fenton J Thorley & Co Ltd [1903] AC 443
ii. Was due to inadvertence;
iii. Was due to some other sufficient cause; Re Tingri Tea Co ltd [1901] WN 165
iv. Is not of a nature to prejudice the position of creditors or shareholders; or
v. That on other ground it is just and equitable to grant relief.

• Re Public Bank Bhd [2001] 6 MLJ 330

• In making the order to allow for extension or rectification, the Court may
impose terms and conditions which it deems just and expedient.

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 Non-Registration of Charge

Effect on the Chargee (the Lender)

S352(2): if a company contravenes with subsection (1), the charge shall be
void against the liquidator and any creditor of the company…
1. Charge becomes void against the liquidator and any creditor of the company
– s352(2)
• The chargee becomes an unsecured creditor.
• Has no priority over the proceeds from the sale of the charged assets.
• Re Monolithic Building Co [1915] 1 Ch 643
 It seems that if the company is not in liquidation and no other creditor claims
priority, the unregistered charge remains effective and may be enforced against the
company.

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Effect on the Chargor (the Borrower)
s352(3): … when a charge becomes void under this section, the money
secured shall immediately become payable.
1. Although a charge becomes void due to its non-registration, the contract or
obligation for repayment of the loan is still valid and enforceable.
2. The repayment of the money secured by the charge becomes immediately
payable.
3. If that (unregistered) charge instrument allows for the loan to be repaid in
instalments, this will no longer be allowed as the loan has to be paid
immediately.
4. The chargor might face financial difficulty in repaying the loan at once.
5. Besides, failure to register a charge is an offence under s352(10) - ≤RM50k +
≤RM500 per day for a continuing offence.

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 Priority of Charges

General rule:
 Fixed charge > floating charge
 A charge created earlier in time will have priority

1. Fixed charge vs fixed charge

2. Fixed charge vs floating charge
3. Floating charge vs floating charge
4. Floating charge vs fixed charge
• Negative pledge clause
• United Malayan Banking Corp Bhd v Aluminex (M) Sdn Bhd & Anor [1993] 3 MLJ 587
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