TUTORIAL 8: LOAN CAPITAL, FIXED AND FLOATING CHARGES

1. Megah Perabot Bhd. is a public company limited by shares incorporated in 2009. The
company is a well-known local furniture manufacturer and distributor. The company
has enjoyed an average profit after tax of RM 300 million in the last 5 years. Its profit
after tax in the last financial year was RM30 million. In order to expand the business
even further, the Board of Directors is considering whether to raise additional capital
through share or loan. Advise the Board of Directors.
Issue:
Megah Perabot Bhd. want to expand their business, the Board of Director is considering
whether want to raise additional capital through share or loan.

Through shares
Shareholder will be the owner of the company. Dividend distribution is paid to shareholders
from profits after tax is paid and it is subjective to the company’s solvency. Distributions paid
are not tax deductible. Thus, distribution is paid for profits after tax is paid. The shareholders
cannot compel the company to declare dividends. Shareholders entitled to notices of general
meetings. Shareholders can attend general meetings to appoint directors for the company.
Shareholder is the last to receive payment. Shareholders are entitled to many statutory
protections.

Through loan
Company is a borrower and the one lending is a lender or creditor. Borrowing loans will not
affect the company’s ownership. Lenders are entitled to a fixed rate of interest as agreed in the
loan agreement. Interest must be paid irrespective of whether the company makes profit or not.
Interest paid to the lender is tax deductible from the company’s income. This reduces the
companies’ taxable income. Lender may sue the company if the company defaulted in
repayment. Lender will not be entitled to notice of meeting. Lender cannot attend general
meeting to appoint the directors for the company. Lenders stand in priority to receive payment.
Lenders enjoy limited statutory protection.
 Conclusion:
I will advise the Board of directors to raise capital through share. By issues shares, decision to
distribute or not to distribute dividends is only decide when the company makes profit. It
means that company can chose to not distribute dividends even the company makes profit. On
the contrary, if Board of Directors raise capital through loan, company needs to pay the fixed
rate of interest as agreed in the loan agreement irrespective of whether company makes profit
or not. Besides, when issuing shares, shareholder cannot compel the company to declare
dividends. On the contrary, when borrowing loan, company may be sued by lender if they
defaulted in repayment. In conclusion, raising capital through share is better for Megah
Perabot Bhd.

Share Capital Loan Capital

- Shareholder is the owner - Lender and borrower
- Dividend is paid after tax - Tax Deductible
- Dividend is subject to constitution of - Fixed rate of interest. Must be paid
the company (even if company is irrespective of whether the company
making profit) makes profit or not.
- Notice and entitle to attend meetings - Cannot attend meeting / appoint
(Have voting rights and can appoint directors
director) - Priority in payment
- Last to be paid - Limited statutory protection
- Statutory protections

2. Explain the section(s) under the Companies Act 2016 that confer(s) a company with
borrowing power. (If 4 marks, bring in Section 21 and Section 211(2) enough)
Under S.21(1) CA 2016 provides a company with full capacity to carry on or undertake any
business or activity including to acquire own, hold, develop or dispose of any property.
According to S.21(2) CA 2016 states that: “a company shall have the full rights, powers and
privileges for the purpose mentioned in sub sec (1). With these two sections, company has
power to borrow include acquiring property by borrowing.
A company’s borrowing powers are usually exercised by the board of directors. The power to
borrow is implied on the directors by virtue of S.211 CA 2016. The business and affairs of a
company shall be managed by, or under the direction of the Board under S.211(1) CA 2016.
According to S.211(2) CA 2016 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. This means that the company has borrowing power under S.21 CA 2016. This
allows the board of directors to get loans on behalf of the company.

Based on S.39 CA 2016 no person shall be deemed to have notice or knowledge of the
contents of the Constitution (Constitution: Clause 8: For any loan above RM50k, directors
shall first obtain the shareholders’ approval before accepting the loan) Under Section 39, Bank
(Lender, outsider) no need to have knowledge of the content of constitution (As long as the
shareholders and director (Borrower, insider of the company) is consent about it, the contract
is valid) or any other document relating to a company, due to the fact that the constitution or
document has been registered by the Registrar; or it is available for inspection at the registered
office of the company, with the exception of documents relating to instrument of charges (is
not a contract but only a notice, so if the company only issue instrument of charge, no
contract, not valid). In the constitution, there is an amount of limit for the director to exercise
their borrowing power. If the director wants to get a loan beyond that amount, need get
approval from the shareholders. S.39 CA 2016 (Refer to the constitution concern bot the
relationship of director, shareholders and company, bank (third party) no need to know the
constitution) also means that all third parties dealing with companies do not need to know the
contents of the constitution. However, the third parties can get information for any charge
documents and be deemed to be aware of it. Even though the board of directors have exceeded
the borrowing power restricted by the constitution, but the borrowing contract is still valid.
This is because S.39 CA 2016 is concerned about the constitution is documents between board
of directors, shareholders and company but third party no need knows the constitution.
Therefore, if the director exercise borrowing exceeded the authority, the shareholders can sue
the director for breach of contract.
 According to S.43 CA 2016 only public company may invite the public to lend money to the
company. This means that the public company can get loans from the public through
debenture.

3. What is a debenture?
According to S.2(1) Companies Act 2016 debenture (Contain various investment products,
EXP: shares, bond…) defines to include debenture stocks, bonds (conventional instrument,
provide interest), sukuk (Islamic bond, shariah-compliant), notes and any other securities of a
corporation whether constituting a charge on the assets of the company or not.

In Bensa Sdn. Bhd. v Malayan Banking Berhad (1993) case, it claims that a debenture
includes any obligation, covenant, undertaking, guarantee to pay or acknowledgement of a
debt. Total 4 marks

Debenture can be issued either unsecured or secured. A secured debenture is having higher
security for debenture holder. Besides, a convertible debenture is giving an option for the
holder to convert debenture into shares. And redeemable debentures are the issuing company
may redeem the debenture by repaying the money owed. Redemption may be at the
company’s or the lender’s option or at a fixed date or some determinable future time.

Section 179(1)(C)(i) Companies Act 2016 claims that a person holding not less than 10% of
the issued debentures values may demand for a meeting of the debenture holders to consider
the accounts and balance sheet.

In addition, a receiver or receiver & manager may be appointed when the company has
breached the debenture contract, company is to cease the business, or the company is
continuously having a loss as stated in S. 375(1) CA 2016. In S. 384 (2) CA 2016, when a
receiver or manager has been appointed to enforce any charge for the benefit of the debenture
holder, the holder may apply directions from court on any matter arising in connection with
the performance and functions of the receiver or receiver and manager. (Only write for
 question 6/8 marks)

4. What are the differences between fixed and floating charge?

Fixed charge is attached on specific assets owned by the chargor, such as factory, building or
land, while floating charge is defined as a charge on a class of assets both present and future,
such as stock in trade, receivables, book debts and uncalled capital. *add case (support
definition)

Once created fixed charge, the company is prevented from dealing freely with the asset, such
as the company must not dispose of that asset and cannot created any other charge on that
asset without the consent of the existing holder of the charge (add case). On the other hand,
as long as the charge remains floating, the assets comprised within the charge can be dealt
with by the company freely without the need to obtain consent of the chargee. Thus, the
company can sell its stock in trade, purchase replacements and even re-charge them.
However, once crystallization occurs the company is no longer able to deal with the assets
without the consent of the chargee.

Fixed Floating
- Specific - Class of asset present and future
- Building, land - Stock in trade, receivables
- Cannot dealt it with after creation - Can be dealt with unless
- Attached on the asset immediately crystallization event occurred
upon creation - Does not attached on the asset when
charge is created but later when
crystallization event occurred.

5. Elaborate the term “crystallization of a floating charge”.

Chargor – asset owner, Chargee – creditor / lender
Crystallization of a floating charge is the transformation of the floating charge into a ‘fixed’
 charge over the assets within the class of assets. Before a floating charge crystallizes, the
chargor is at liberty to use the assets charged in the ordinary course of business.

Once crystallization occurs, the company is no longer able to deal with or dispose of the
assets without the consent of the creditor. The charge document will specify what are the
events or occurrences that would cause the charge to crystallize.

Events that result to crystallization:

1. When the company goes into liquidation (RE Panama, New Zealand & Australia Mail
Co.)
2. When a receiver or receiver and manager is appointed (UMBC Bhd. v Official Receiver
& Liquidators of Soon Hup Seng Sdn. Bhd.)
3. When the company ceases to carry on its business.
4. An event of default specified in the charge document where notice is required to be
served to the chargee (company) to convert to a fixed charge (RE BRIGHTLIFE Ltd).
5. Automatic crystallization clause in the charge document where the charge is to crystallize
when a specific event occurs (Fire Nymph Products Ltd.).

Example of Automatic crystallization clause

Events or occurrences that may be included in the charge document:
1. Defaults in payment of interest for a period of time
2. Breach any restrictions on future borrowings (negative pledge clause)
3. Breach any restrictions on creating subsequent charge (negative pledge clause)
4. Allows the value of the charged assets to decline below an agreed minimum account
5. Ceases to deal with the charged assets in the ordinary course of business
6. Other creditors have instituted proceedings against the company

6. Benboy Bakery Sdn. Bhd. was incorporated under the Companies Act 2016 on 31 st
January 2017. The shoplot which BB operates its business is worth RM 2 million. In
April 2019, BB agreed to charge the shoplot to ABC Bank Bhd to secure a loan sum of
RM 1 million. The charge over the shoplot is not registered. In June 2019, a fixed charge
was registered in favour of XYZ Bank Bhd over the shoplot to secure a loan amount of
RM 1.5mil.

Consider the above scenario and advise XYZ Bank Bhd.

In 31st January 2017, Benboy Bakery Sdn. Bhd. was incorporated under the Companies Act
2016. And the shoplot where Benboy Bakery Sdn. Bhd. does its business is valued RM 2
million.

In April 2019, Benboy Bakery Sdn. Bhd. agreed to charge the shoplot to ABC Bank Bhd. to
secure a loan sum of RM 1 million but the charge is not registered.

In June 2019, a fixed charge was registered in favour of XYZ Bank Bhd. over the shoplot to
secure a loan amount of RM 1.5mil.

Advise to the XYZ Bank Bhd., XYZ Bank Bhd. has the priority even is Benboy Bakery Sdn.
Bhd. agreed to charge the shoplot to ABC Bank Bhd. to secure a loan sum of RM 1 million in
April 2019. Based on the section 352(1) Company Act 2016, a company is required to
registered the charge with the ROC within 30 days after its creation. And the section 352(2)
Company Act 2016, failure to register would cause the charge to become void against the
liquidator and any creditor of the company, so far as any security in the company’s property to
undertaking is conferred. Example case, Dresdner Bank AG v Ho Mun Toke Don (1993),
failure to register would cause the charge to lose its priority over the charged property against
later charges. Add on [section352(3)]

So, in 30 days ABC Bank Bhd. failure register a charge for Benboy Bakery Sdn. Bhd., the
contract between them is void. And ABC Bank Bhd. lose its priority over the charged property
against later charges. After the 30 days, Benboy Bakery Sdn. Bhd. could register a charge with
XYZ Bank Bhd. Therefore, the ABC Bank Bhd. could not have a charge to the shop lot.

Teacher’s Answer:
April 2019 – ABC Bank > Fixed charge > Not registered
June 2019 – XYZ Bank (Alr check on SSM does not have info of ABC as it does not register)
> Fixed charge > Registered

Issue: Whether XYZ Bank’s charge is secured / good?

Law: Section 352(1)
Section 352(2) (To protect the creditor) <In the eye of XYZ Bank, the charge to ABC
Bank is void>
Section 352(3)
Dresdner Bank v Ho Mun Toke Don (HM7D) – Based on Dresdner case, ABC Bank has
last its priority in claiming the shop lot
Conclusion: The shop lot is charge to XYZ Bank, only the charge to XYZ is recognized, but
charge to ABC is not recognized