Topic 5 - Company Borrowing Ca2016
Topic 5 - Company Borrowing Ca2016
Topic 5 - Company Borrowing Ca2016
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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•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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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
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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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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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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.
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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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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.
“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
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iv. The transaction took place at the time the company was
insolvent;
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They are:
RECEIVERSHIP
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.
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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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DUTIES OF A best market price for the sale of the charged properties – Malaysian
Industrial Development Finance v Eureka Alloy Sdn Bhd.
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.
Sec 393 states any receiver or receiver and manager who has
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END OF
LECTURE.
THANK YOU
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