Loan Capital

Introduction

• A business cannot run without capital.

• Section 21(1) (c ) provides that a company shall be capable to exercise all
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
enter into transaction.
• Section 22 provides that a company have full rights, powers and privileges
like natural person and this impliedly shown that a company will also have a
power to borrow money.
 Sources of capital

Loan capital
Share capital
(borrowing
(issue of shares)
from lender)

Issue of
Normal loan
debenture

Without
With security
security
 Debenture
• Section 2(1) interpret ‘debenture’ to 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.
• When a company issued a debenture, a company is said to borrow money.
• Hence, a debenture is a document which acknowledges the indebtedness of a
company. The debt is often secured by a charge over the property of the
company but this is not necessary.
 Types of debenture
• 1. Debenture payable to a registered holder and debenture payable to a
bearer (registered debenture and bearer debenture)
• Registered debenture is debenture which is registered in the name of the holder in the
company book.
• It can be transferred in the same manner as that of shares.
• Bearer debenture is a negotiable instrument and its title therefore can be transferred
only by deliver it to the transferee, The company does not register the name of the
holder.
• 2. Secured and Unsecured Debenture
• Secured debenture is asset or property of the company charged to the debenture holder
(secured creditor)
• Unsecured debenture is a debenture which is not secured by a charge over the property
of the company
• 3. Redeemable and Perpetual Debenture
• Redeemable Debenture- principle money repaid to the holder at the end of a specified
period. A company may redeem several debenture every year or option may be given to
the company to redeem all debenture at a certain date. Redeemable debenture may be
reissued. Redemption may be made at the issued price or higher price.
• Perpetual debenture- perpetual debenture is also known as irredeemable debenture.
Debenture issued without a fixed date for redemption. Can only be repaid in company’s
winding up or where there is a serious default by the company or payable or payable at
a remote period such as 50 or 10 years.
 Distinction between debenture and share
Share Debenture
Not secure Generally secured by charge
Share capital cannot be repaid without legal Can repay the debenture in accordance with the
formalities term of the issue
The holder of the share is a member of the The holder of the debenture is an external creditor
company
The holder of the share has the right to vote The holder of the debenture has no right to vote

Dividend on share can only be paid if the company Interest on debenture can be paid regardless
has profit and cannot be paid out of capital whether profit is available or not. It can be paid out
of capital
 COMPANY CHARGES
• Section 2(1) defines a charge to include a mortgage or any agreement to give
or execute a charge or mortgage whether upon demand or otherwise.
• A charge does not involve the transfer of ownership of secured property.
• A borrower (charger) retains ownership of the property subject to certain
restrictions to deal with that property.
• Charge can be either fixed charge or a floating charge
 Fixed Charge
• A fixed charge is one that attaches to a specified assets owned by the
company.
• The company is prevented from dealing with the asset owned by the
company. The company is prevented from dealing with the asset without the
holder’s consent.
• In a company’s winding up, a debenture holder secured by a fixed charge is in
the highest ranking class of creditors.
 Floating Charge
• A floating charge is one that is not attach to any fixed asset until it is
‘crystallized’.
• The charge floats above specific assets such as inventory, or book debt, or
etc.
• A company is free to dispose the assets in the normal course of business and
to replace them by acquiring the same category of assets in the future.
• The act of disposing the assets does not requires the consent of the holder.
• Upon default, the charge crystallised and ceases to float and drop down to
attach itself to a specified categories of assets owned by the company, and
becomes in effect, a fixed charge over the assets of the company held at the
time of crystallisation or acquired afterwards.
• A floating charge enables a company to dispose of the trading stock in the
ordinary course of business, while still giving the debenture holders a good
security by floating over any trading stock which may be acquired.
Disadvantageous of floating charge as a security

• 1. The value of the security will be uncertain as the company is free to deal
with the assets in the ordinary course of business.
• 2. The floating charge ranks lower in priority in comparison with a fixed
charge over the same assets, even if the floating charge was created before
the fixed charge, unless the floating charge restrict the creation of
subsequent charges ranking in priority to the floating charge and the
subsequent fixed charge has notice of it.
• 3. Assets subject to a floating charge may themselves be subject to a
retention of title clause in favour of a seller of goods. In such a case, if the
charger had not paid for the goods, the seller of the goods may be entitled to
those goods and the floating charge would have no claim to them.
• 4. The assets subject to a floating charge may be lost to judgement creditors,
who have levied and completed execution on the good charged. Prior to
crystallisation the floating charge cannot prevent judgment creditors from
levying execution.
• 5. Prior to crystallisation, the assets may be seized and sold by a landlord
who has taken distress proceedings for overdue rent.
• 6. The assets subject to a floating charge may be utilised to pay off certain
preferential creditors, if the company does not have sufficient fund to pay
them.
Crystallisation of floating charge

• Crystallisation is a process of converting a floating charge into a fixed

charge when certain event occur. Example of events are:
• If a company goes into liquidation, all floating charge will automatically crystallise
• The appointment of receiver by the court or by a creditor under a power contained in
the debenture has the effect of crystallising floating charge.
• If a creditor takes steps to enforce or take possession of the security, the charge will
crystallise.
• A floating will crystallise upon cessation of the company’s business
• A creditor might use an instrument which was meant to crystallise a floating
charge
• A floating charge may crystallise automatically upon the happening of a
specified event
 Priority of debt
• Below are the general principle. They may be superseded by agreements
between charges.
• Fixed charge v Fixed charge
• There are two fixed charges created over the same assets. The first charge in time of
creation will have priority
• Floating charge v Floating charge
• Where there are two floating charges created over the same assets. The first charge in
time of creation will have priority.
• Fixed charge v Floating charge
• There are two charges created over the same assets. The first charge is a fixed charge,
followed by a floating charge. The fixed charge which is also the first in time of
creation will have priority.
• Floating charge v Fixed charge
• There are two charges created over the same assets. The first charge is a floating
charge, followed by the fixed charge.
• The general principle is that the fixed charge, even though it is second in time, will have
priority.
• However, the outcome may be different where there is negative pledge clause in the
floating document; the company having given an undertaking to the lender holding the
floating charge that it will not create another charge over the same assets ranking in
priority over the floating charge.
 Registration of charges
• Section 352 provides for the registration of charges.
• Section 352(1) provides that a company that creates a charge over it property
or any of its undertakings shall lodge within 30 days from the creation of the
charge together with the prescribe fee with the Registrar fro registration.
• The registration of charges is to enable a potential creditor of the company
who propose to lend money on security of particular assets, to ascertain
whether the company has already given a charge over those assets.