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INTRODUCTION
Debt capital or loan capital is another important source for a company to operate. It may
may not be able to finance all its activities by the issue of shares. As such, it may need to
borrow additional money from financial institutions, also known as creditors.

Creditors= A creditor is an entity that extends credit by giving another entity permission to
borrow money if it is paid back at a later date.

Under the old CA 1965, a company has an implied power to borrow for purposes incidental
to its business – Section 19 and Third Schedule power. In practice, MOA & AOA are likely
to include in the objects clause an express power to borrow. However, in the Companies
Act 2016, such power to borrow can be reflected in the company’s constitution. See Section
35 (1) & (2).
For a Company Limited by Guarantee (CLBG) that must have a constitution, Clause 4
states that a company may have the power to borrow or to raise fund.

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WHAT IS DEBENTURE AND HOW DOES

IT WORK ACTUALLY?
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•The term debenture is used to denote the document issued by a company setting
out the terms of a loan to it (Levy v Abercorries Slate and Slab Co (1887) 37 Ch D
260)
•However in Malaysia, High Court in Bensa Sdn Bhd v Malayan Banking Bhd [1993]
1 MLJ 119 stated that the definition should be given more liberal intepretation which
include any obligation, undertaking, guarantee to pay or acknowledgement of a debt.
In this case, memorandum of deposit relating to money placed in a fixed deposit
account is also a form of debenture.
•Such loans are usually medium or long-term borrowings. If a debenture is
unsecured, it is an unsecured loan. A debenture secured by a charge on fixed assets
is a mortgage debenture.
•As per Section 2(1) of CA 2016, a debenture includes debenture
stock, bonds, sukuk, notes and any other securities of a corporation whether
constituting a charge on the assets of the corporation or not. i.e. it may be secured or
unsecured.
•Debentures are usually secured by a charge over the borrowing company’s property.
•A debenture may be issued as convertible debenture. A convertible debenture
carries a right at the option of the holder to convert the debenture into shares of the
company on terms fixed in advance.
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DISTINCTION BETWEEN DEBENTURES AND SHARES

DEBENTURES SHARES
• A shareholder is a member of
• A debenture holder is a creditor the company
• A company may freely • cannot purchase its own
purchase its own debentures shares except under several
circumstances.
but
• Dividends for shares
• Interest on debentures is a debt however may only be paid
which may be paid out of out of profit.
capital if there are no profits. • shares may only be issued at
a discount if certain
• Debentures may be issued at a conditions are met.
discount while • A company may only redeem
• Since a debenture represents a its shares if it had issued
redeemable preference
loan, a company may redeem it shares.
by repaying the money owed.
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COMPANY CHARGES
SECTION 4 DEFINES
CHARGE AS INCLUDING A
MORTGAGE OR ANY
AGREEMENT TO GIVE OR
EXECUTE A CHARGE OR
MORTGAGE WHETHER
UPON DEMAND OR
OTHERWISE. A company has the power to charge the company’s assets
or give security for a debt of the company and the power is
usually conferred to the board of directors; Section 211 CA
2016 7

TYPE OF CHARGES

FIXED FLOATING

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FIXED CHARGE
•A fixed charge attaches to specific property
owned by the borrower. The asset is identified
from the time the charge is created.
•If the chargor wants to deal with the asset, it has
to get the consent from the chargee.
•A property or asset which does not need to be
disposed of by the company as part of its ordinary
business can be used as a fixed charge.
•E.g. of fixed charge:
land, factory, machineries, fixed
deposit, shares, bonds.
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FLOATING CHARGE
•Definition – “ A floating security is intended by the parties to cover a class of property but not to attach to
specific items within the class until some future event occurs. Until the event occurs, the chargor is free to
dispose of items within the class in the ordinary course of business. That enables a company to borrow on the
security of a stream of assets flowing into and out of its ownership.”

“A floating charge in contrast to a fixed charge is ambulatory and shifting in nature, hovering over…the property
which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on
the charge within its reach and grasp” per Lord Macnaghten in Illingworth v Houldsworth
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RE YORKSHIRE WOOLCOMBERS ASSOCIATION

[1903] 2 CH 284

CONSTANTLY CHANGE 02 01 CLASS OF ASSET

The class of assets is one that, in the A charge over a class of assets present
ordinary course of business, constantly and future
changes.
FLOATING
CHARGE

LIBERTY TO DISPOSE THE

ASSET 03
The company is at liberty to dispose
charged assets in the ordinary course of
its business

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CREATION OF FLOATING AND

FIXED CHARGE
 There is no particular form of words (in the loan instrument) required to create a floating charge. It is a question
of interpretation of the particular loan instrument to determine whether the security created is a fixed or floating
charge.

 In order to determine whether the charge is a fixed or floating, consideration must be given to the characteristic
and nature of the charge. The term used do label the security instrument is helpful but it may not be conclusive
evidence.
 Normally, if a charge has the following characteristics, it will be a floating charge:
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 business of the company, would be changing from time to
time, and
3. If 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 usual way as far interested in the charge, the company may carry on
its business in the usual way far as concerns the particular class of assets in question.
It is often a matter of difficulty to determine whether or not a particular instrument creates a fixed or floating
charge.
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RE COSSLETT (CONTRACTORS) LTD

[1998] CH 495
Whether the asset subject to charge is under the control of the charge/creditor and
whether the asset is of a type that is constantly changing and needs to be disposed
in the company’s ordinary course of business.?
In this case the judge highlighted the distinction between these two; floating
charge: that is a charge not on any particular asset but on a fluctuating body
of assets which remain under the control of the chargor (the
company)…..meanwhile, the essence of a fixed charge is that the charge that
the chargor cannot deal with free from the charge without the consent of the
charge.

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CASE: RE BOND WORDTH LTD [1980] CH

228
The company arranged an overdraft with a bank, secured by a charge
over part of their stock. The goods remained on the company’s premises
and were dealt in the ordinary course of the company’s business. The
company undertook to maintain the value of the goods at not less than
twice the sum outstanding to the bank at any given time. The company
went into liquidation and the bank claimed that the overdraft was a fixed
charge.
Held: It was a floating charge because the essence of the whole
transaction was that the stock might be sold and replaced, a factor which
negative the inference that a fixed charge in specific goods had been
created. However, the floating charge was void for non-registration under
Section 108.
The fact that an instrument does not purport to create a floating charge is
irrelevant. If there is a charge and that charge has the characteristics of a
floating charge, it does not matter what the drafter of the instrument chose
to call it. It is the essence and nature of the security and not the label
placed upon it that matters.

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CRYSTALLISATION
•TRANSFORM FLOATING CHARGE TO FIXED CHARGE.
UNTIL A FLOATING CHARGE CRYSTALLIZES, IT REMAINS FLOATING
AND SHIFTING, AND THE CHARGOR IS AT LIBERTY TO USE THE
ASSETS CHARGED IN THE ORDINARY COURSE OF BUSINESS.

•THE CHARGE ONLY BECOMES FIXED WHEN AN EVENT OCCURS

WHICH CRYSTALLIZES IT.

IT MAY OCCUR IN……

WINDING UP OF A COMPANY
ANY WINDING UP PETITION WILL CAUSE
THE FLOATING CHARGE TO CRYSTALLISE .
SEE SECTION 467 CA 2016 – DATE OF
COMMENCEMENT 01 02
CESSATION OF THE COMPANY’’S
BUSINESS
RE WEOODROFFES (MUSICAL
INSTRUMENT) LTD [1985] 2 ALL ER
908

AUTOMATIC CRYSTALLIZATION APPOINTMENT OF A LIQUIDATOR OR

CLAUSE 03 04 A RECEIVER
SILVERSTONE MARKETING SDN UMBC BHD V OFFICIAL RECEIVER
BHD V HOCK BANK HIN TRADING OF SOON HUP SENG [1986] CH
[1998] 2 MLJ 695
366

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AUTOMATIC
CRYSTALLISATION CLAUSE
“Notwithstanding Clause 3.4 (Conversion of Floating Charge to
Fixed Charge) and without prejudice to any rule of law which may
have a similar effect, the floating charge under Clause 3.3
(Floating Charge) shall automatically be converted with
immediate effect into a fixed charge as regards all the property
and assets subject to the floating charge and without notice from
the Security Agent to the Chargor upon presentation of a winding
up by any creditors or charges, pledges or otherwise encumber in
favour of any third party without the prior consent of the bank…”
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NEGATIVE PLEDGE CLAUSE

A company is allowed to create subsequent fixed charge over assets subject to an earlier
floating charge with priority given to the fixed charge.

However, this right may be restricted by the presence of a negative pledge clause in the
debenture or charge documents of the earlier floating charge.

A negative pledge clause is a clause which prohibits the company granting the security from
creating any other security interest over the same property which might be compete with the
existing charge or also known as rank pari passu.

Example of such clause:

“The Borrower shall not, without Lender's prior written consent, which consent may be withheld
or granted in Lender's sole and absolute discretion, sell (except inventory in the ordinary
course of business), purchase and/or lease any real or personal property, or other assets or
equipment.”
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REGISTRATION OF
CHARGES
• Section 352 states that a company that creates
charges over its property or any of its undertakings
shall register with the ROC within 30 days after the
creation of the charge. If it is not registered, it is void
against the liquidator and any creditor of the company.
• See sec 353 for the type of charge require registration.
• Void against liquidator means the chargee will lose
priority in the priority of debts and become unsecured
creditor.
• By virtue of section 357(3), certificate of registration is
a conclusive evidence that all requirement for
registration has been complied with. This certificate is
known as Form 34.

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PRIORITY OF DEBTS

 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 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:

• 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. – Section 353

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Sometimes, company will create subsequent floating

charge which expressly give priority over the earlier
floating charge despite the prohibition clause
(crystallization occurs at this instances).

 In this situation, it was held in Re Benjamin Cope &

Sons Ltd 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, 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.

Section 528 (Undue preference) – any transfer, charge (fixed or

floating) or payment created within 6 months prior to the
commencement of winding up shall be void.

Liquidator need to satisfy several conditions to prove undue

preference. The conditions was stated in the case of Sime
Diamond Leasing (Malaysia) Sdn Bhd v JB Precision Moulding
Industries Sdn Bhd. They are:

UNDUE i. Transaction took place within six months prior to the

commencement of winding up;

PREFERENCE ii. It is type of transaction mentioned in Section 53(1) of the

Bankruptcy Act 1957;

iii. The person in whose favour the transaction was effected is a

creditor of the company;

iv. The transaction took place at the time the company was
insolvent;

v. Effect of the transaction was to confer preference, priority or

advantage over other creditor in winding up.

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 Section 392(1) – among preferential creditors, they

will rank in order specified in sub-section (1), but as
between debts of the same class, it shall rank
equally between themselves.

 They are:

 Costs and expenses of winding up;

 Wages or salary of employees of the company not

exceeding RM15000 for the service of the company

PREFERENTIAL within 4 months before the commencement of the

winding up;

CREDITORS  Worker’s compensation;

 Remuneration in respect of employees’ vacation

leave;

 Contributions of all amount for the payment of

wages and salaries or employees superannuation
or provident funds within the period of twelve
months before the commencement of the winding
up and all amount of all federal tax assessed before
the date of the commencement of winding up.

RECEIVERSHIP

Receivership is a method of enforcing a debenture in the event of default by the company.

A company is said to enter into receivership when a receiver or receiver and manager is appointed in respect of some or all of its property, under the
terms of charge.

The appointment may be made pursuant to a term stipulated in the charge instrument or through an application to court.

Section 182 – 192 deals with provisions relating to receivers

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 The term receiver is not defined in the Act but

generally a receiver is a person appointed to take
possession of the property of the company which is
the subject of the charge and to deal with it primarily
for the benefit of the holder of the charge.

WHO IS A  The term receiver and receiver and manager must be

distinguished.

RECEIVER?  The principal difference between receiver and

receiver and manager is that the former is only
authorised to get in and realised the secured assets
with no power to run the business while the latter is
expressly empowered to do so, usually as agent of
the company which granted the debenture, with the
objective of realising the assets on the basis of a
going concern – Re Victoria Steamboats Ltd

The appointment of a receiver and manager

is most appropriate where the primary
purpose is the preservation of assets of the
company as a going concern.

The power to appoint a receiver and manager

must be expressly provided and may only be
exercised if the company gives the charge
over its business and undertakings rather
than specified assets.

Receiver and manager appointed under a

power contained in any instrument is officer of
the company as per Section 2 but receiver or
receiver and manager appointed by court is
not included in the definition of ‘officer’ of
company.

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Section 373 lists down categories of

persons who are not qualified to be
QUALIFICATION appointed as receivers.

AND A receiver may be appointed by:

a. The High Court (Sec 376);

APPOINTMENT b. A secured creditor who wishes to

OF RECEIVER enforce their security (the

instrument of charge gives power
to the secured creditor the power to
appoint a receiver) (Sec 375)

 The source of a receiver’s powers is the instrument of

charge (or the court order) under which the receiver
has been appointed.
 See section 383 for the statutory powers of receivers.
Furthermore, common law principles may be referred
to.
 Accordingly, the powers include:

POWERS OF a.
b.
Power to commence legal proceedings;
Power to take possession of the company’s

RECEIVERS c.
assets;
Power to make compromise or arrangements in
the interest of the debenture holders;
d. Power to carry on business of the company (if
the receiver is also a manager);
e. Power to sell the company’s assets;
f. Power to call up any uncalled capital of the
company

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 Under common law, a receiver owes a duty to the secured creditor

who appointed them. These duties arises under contract, tort and
fiduciary principles.

 A receiver is also in a fiduciary relationship with the company.

 In relation to the sale of company’s assets, the common law imposes

a duty on a receiver to act in good faith. The Malaysian courts have
adopted the principle that a receiver has a duty of care to obtain the

DUTIES OF A best market price for the sale of the charged properties – Malaysian
Industrial Development Finance v Eureka Alloy Sdn Bhd.

 The duty of receiver and manager appointed on behalf of debenture

RECEIVER holder is to realized the secured assets of the company and

distribute it to the debenture holder. However, certain debts have
priority and have to be paid ahead of the claims of the debenture
holder.

 Section392 states that where a receiver has been appointed on

behalf of the debenture holder secured by floating charge, debts
which is preferential debts under Section 392(1)(b)(c)(d)(e), Section
392(3) and Section 392(5) shall have priority over the claim of
debenture holder.

 If the common law duty to obtain the market price for the assets
sold is breached, the company whose assets the receiver sold
may apply to court for an order setting aside the sale. If it is not
possible to set aside the sale, the court may order the receiver

WHAT IF THE
to pay compensation to the company.

 If the receiver breached his duties to pay preferential debts, he

will be personally liable for breach of statutory duty and be liable

DUTY IS in tort – Westminster Corporation v Haste

 Sec 393 states any receiver or receiver and manager who has

BREACHED? defaulted the section, he is personally liable to bmake good the

default within 14 days from the date of a notice.

 See also sec 389

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END OF
LECTURE.
THANK YOU

Credit photos: Google Images

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