UNIT 7: DEBENTURES AND CHARGES

INTRODUCTION

 Debenture generally refers to document issued by a company setting out the terms
of a loan, normally a medium-term or long-term loan.
 In the case of Levy v Albacorris Slate & Slab Co (1887), Chitty J held that a debenture
is “a document which either creates a debt or acknowledges its….”
 It defines debenture so as to include any debenture, stock, bond, notes and other
securities of a corporation… but does not include documents such as bank deposit
slips, bills of exchange and promissory notes.
An overview

 According to Thomas Evelyn ‘a debenture is a document under the company’s seals

which provides for the payment of a principles sum and interest thereon at regular
intervals which acknowledges a loan to the company
 A debenture holder is a creditor of a company.
What requirements apply to the issue of debenture?

 Public listed companies proposing to issue of Debenture?

o Comply with Bursa Securities Listing Requirement, if they are listed on Bursa
Malaysia.
o Enter into a trust deed which contains the contents specified by the
Securities Commission Act (SCA).
o Appoint an eligible trustee: persons who are eligible to be appointed as
trustee are identified in the SCA.
o Comply with other requirements of the SCA and this includes the duty to call
a meeting of debenture holders under sections 86 of the SCA.

SHARES
A shareholder is the owner of the company
Shareholder will get a portion of the profits
called dividend which is dependant on the
profits of the company. It can be declared
by the directors of the company out of
profit only.
Shares cannot be converted into debenture
There can be no mortgage shares. Assets of
the company cannot be mortgaged in
favour of the shareholders.
At the time of liquidation of the company,
share capitals is payable after meeting all
outsider liabilities
DEBENTURES
Whereas debenture holder is a creditor of
the company and cannot take part in the
management of the company
Debentures holders will get interest on
debentures and will be paid in all
circumstances, whether there is profit or
loss will not affect the payment of interest
on the debentures.
Whereas debentures can be converted into
shares
But there can be mortgage debentures i.e.
assets of the company can be mortgaged in
favour of debenture holders.
Debenture are payable in priority over
share capital.
Fixed charge and floating charge

 Where a company creates a security over its assets in favour of the lender, it may
either provides a fixed or floating charge or even both.
What is a fixed charge?

 A charge which is intended by the parties to attach to specific item of property such
as land or a piece of equipment, in such a way that they company cannot dispose of
the property without the consent of the lender.
 A fixed charge creates and immediate interest in the charge since the charge is
attached to the property upon creation
What is a floating charge?

 A floating charge does not attach to the company’s assets until something happens
to cause it to crystallize, turning it into a fixed charge.
 In the case of Re Yorkshire Wool Combers Associations Ltd (1903), it was held that if
a charge has the following characteristics, it will be a floating charge;
i. It is a charge over a class of assets, present and future
ii. The class of assets constantly changes
iii. The company is at the liberty to dispose off the subject matter of the charge
in the ordinary course of its business.
Charges

 Under s.2 (1) of the Companies Act 2016. Charges is defined so as to include a
mortgage and any agreement to give or to execute a charge or mortgage whether
upon demand or otherwise.
 In other words, a charge may include any security for repayment of a debt, thereby
encompassing mortgages, charges and other securities
 Under the law, a company is not required to give security for the money it borrows.
Nonetheless, a prudent creditor may sometimes require some form of security for
the loan given to the borrower.
 A company may give any type of security in the form of charge or mortgage etc. a
charge is different from a mortgage.
 A charge on a property does not involve the transfer of ownership of the property
secured. The charger (i.e. the borrower) retain ownership of the property subject to
certain restrictions, which is intended to protect the security of the lender. However,
a mortgage involves the transfer of legal ownership from the mortgagor (i.e.
borrower) to the mortgagee (i.e. lender) until the sum borrowed has been repaid.