The fourth issue is which secured creditors will be given priority on payment of debts due

to (name of company) being winding up.

The most fundamental principles of insolvency law is that of pari passu distribution, all
creditors participating in the common pool are equal proportionate to the size of their admitted
claims. The pari passu principle ensures an equitable distribution of the company’s estate among
its creditors. In the case of voluntary winding up, this principle is expressed in  Section 452 of
Companies Act 2016 which states “ Subject to the provisions of this act as to preferential
payments the property of a company shall on its winding up, be applied equally in satisfaction of
the company’s liabilities…..”. In the case of compulsory winding up, this principle is expressed
in Section 527(2) of Companies Act. The general rule is that the rationale for the rule is that all
creditors, particularly unsecured creditors, have to be treated equally. Claims which by statute
are given priority fall into 2 groups which are all the expenses of the liquidation which come
ahead of all other claims and the preferential debts. 

First of all, in order to determine the priority on payment of debts, the creditors must
prove their debts in order to have any entitlement. This is provided under Section 523 of the
Companies Act 2016. According to Section 523 (1) of CA 2016, demands in the nature of
unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust
shall not be provable in winding up. Section 523 (3) further provides that all debts and liabilities
present or future, certain or contingent, to which the company is subject at the date of the
winding up order or the resolution, or to which the company may become subject before
dissolution by reason of any obligation incurred before the date of the winding up order shall be
deemed to be debts provable in winding up. Thus, only where the company being wound up is
solvent, can a creditor prove as yet undetermined damages arising from claims in Tort.
Unprovable debt includes debt which is not enforceable because based on illegal transactions or
statute barred. 

The procedure for proving debt is governed by the Rule 78 to Rule 100 of Companies
(Winding Up) Rules 1972. Under Rule 82 of the Winding Up Rule 1972, an affidavit proving
a debt shall state whether the creditor is or is not a secured creditor. This is to determine which of
the creditors will rank ahead.
 In very broad terms, those with fixed charge security over assets get paid first from the
net proceeds of fixed charge recoveries. Any surplus will fall into the category of floating
charge or non-charged assets, from which preferential creditors are paid first. Thereafter
those with floating charge security will be paid from net floating charge recoveries leaving any
residual balance to be paid over to unsecured creditors who only stand ahead of shareholders in
the pecking order.

A secured creditor need not prove his debt in a winding up and wait for payment with
other unsecured creditors. Instead, on default, a secured creditor has the right to realise the
secured assets. A secured creditor includes debenture holders who have fixed or floating charge
over particular assets.

Under the Companies Act 2016, where a company creates a registrable charge, it must
provide certain information to the Registrar of Company (ROC) about the charge. Where a
company creates a registrable charge, it must be registered under Section 352 of the CA 2016.
However, the operation of Section 352(1) of CA and Section 352(2) of CA means that the
failure to register a charge does not automatically render the charge void against the liquidator or
any creditor of the company. The agreement is still valid and the money still needs to be paid.
However, the effect of failure to register is that the creditor will lose priority. A charge on the
property is not invalid by reason only of failure to register the charge with the Registrar.
However, the system of priority of charges provides incentive to chargee to ensure that charges
are lodged and registered. Registration of a charge protects the chargee’s priority over later,
registrable charges. It means that a charge that is registered earlier than another charge will have
priority over it, even if the second mentioned charge was created before it. The Companies Act
does not have any provisions on the priority of charges. Thus, Common Law principles on the
priorities of competing charges is applicable in Malaysia.

The following factors should be considered in order to determine the priority of charges
which are whether the charge was registered, whether the charge is fixed or floating, where the
charge is floating, whether it is crystallized on commencement of winding up or prior to that and
whether there are any preferential creditors.
 As referred to the general rule, secured creditors will have priority over unsecured
creditors. Among secured creditors, the fixed charge holder will have priority over floating
charge holder. Therefore, generally fixed charge would have priority over floating charge even
though it is created later. Among unsecured creditors, preference creditors mentioned in Section
392 (1) of Companies Act 2016 will get priority over others. Among secured creditors, the first
in time will prevail. However this order of priority may be disturbed due to certain circumstances
which was mentioned under Section 353 of Companies Act 2016, where an earlier secured
creditor has failed to register his charge, he will loss priority to the later registered charge - Both
fixed charge and floating charge must be registered within 30 days from the creation of the
charge. Failure to register will result in the charge becoming void against the liquidator and any
creditor of the company.

Sometimes, company will create subsequent floating charge which expressly give priority
over the earlier floating charge despite the prohibition clause whereby crystallization occurs at
this instances. In this situation, it was held in Re Benjamin Cope & Sons Ltd [1914] 1 Ch 800
that a company cannot create a subsequent floating charge ranking in pari passu with or in
priority to the earlier floating charge unless the earlier floating charge holder expressly permits
it. However, in the case of Re Automatic Bottlemakers Ltd [1926] Ch 412, the decision in Re
Benjamin will only apply where the assets comprised in both the charges are the same. However,
if the assets comprised in the subsequent charge only forms a smaller part of the assets
comprised in the earlier charge, than the subsequent charge can have priority.