DEBENTURE AND

CHARGE
Introduction

Sources of capital of a company

Issue of Share Borrowing from Lender

=> Share Capital => Loan Capital

Normal Loan Issue of Debenture

With security Without security

Power to borrow
• S21 – a co has full capacity to carry on or undertake any business or
activity…
• S211(2) -..the board has all the powers necessary to manage, direct
and supervise the management of the company’s business.
• Thus the power to borrow is vested in the Board unless restricted by
the constitution.
• Private company – may start borrow money from the date it is issued
with notice of registration.
• Public Company – may borrow only upon lodgment with the ROC the
statutory declaration of compliance.(s190(3))
What is Debenture?
As Chitty J said in Levy v Abercorris Slate & Slab CO:
“...a debenture means a document which either creates a
debt or acknowledge it, and any document which fulfills either
of these conditions is a debenture...”

it is a document which acknowledge the indebtedness of the

company. Salomon issue debenture Mr.
and Co Salomo
Ltd n
£
10,000
What is Debenture?(cont)

Bensa Sdn. Bhd. v Malayan Banking Bhd.[1993], James

Foong J said:

“...the term ‘debenture’ should also include besides ‘debt’,

any obligation, covenant, undertaking or guarantee to
pay or any acknowledgment thereof.”

A debenture includes any obligation, covenant or

acknowledgment of debt. Thus it include a loan agreement.
What is Debenture?(cont)

• s2(1) CA 2016 - debenture includes any debenture stock,

bonds, sukuk, notes and any other securities of a corporation,
whether constituting a charge on the assets of the corporation
or not.

• Not every document which acknowledges indebtedness is a

debenture. The term ‘debenture’ implies a degree of
permanent or long-term borrowing.
• Public co may invite the public to subscribe shares or to deposit
money with it. Deposit money is a form of borrowing and as
evidence for the loan, debenture is issued.

• If a debenture is secured by charge, the debenture holder is a

secured creditor.
 Kind of
Debenture
Redeemabl
Registered e &
D & Bearer Secured & Perpetual
D Unsecured D
D
Secured & unsecured Debenture

Secured D is a
Unsecured D is a
debenture when the
Debenture which is not
asset or property of
secured by a charge
the company is
over the property of the
charged to the
company. So the holder
debenture holder,
is the unsecured creditor
and its holder is the
of the company.
secured creditor.
 Differences between share/s/holder &
debenture/d/holder.
SHARE/ DEBENTURE/
SHARE HOLDER DEBENTURE
HOLDER
is a member of a is an external creditor.
company.
has the right to vote. has no right to vote.
Dividend on share can Interest on debenture
only be paid if the can be paid regardless
company has profit and of whether profit
cannot be paid out of available or not. It can
capital. be paid out of capital.
SHARE/ DEBENTURE/
SHARE HOLDER DEBENTURE HOLDER
Share is not secured. Debenture, generally, secured by
charge. Debenture holder, being a
secured creditor of the company, is
paid off prior to a shareholder in
the event of winding up of a
company.
Generally share capital A company can repay the
cannot be repaid without debenture in accordance with
legal formalities the term of the issue.
Generally, a company A company may purchase
cannot purchase its own its own debenture.
shares.
Rights of debenture holder
• Right to be sent a copy of its audited account upon request – s257
• Remedy under s 346
• Right to sue for repayment
• Right to take possession of assets charged
• To appoint receiver and/or manager – s374(a) and s375(1)
 Charge?
S2(1) – “charge” includes a mortgage and any agreement
to give or execute a charge or mortgage whether upon
demand or otherwise.
Security created by a company in favour of creditor (the
company pledges or offers something valuable to the
creditor as a guarantee or assurance for the repayment of a
debt or the fulfillment of a financial obligation)
If the company fails to repay the loan which is secured against
the company’s assets, the lender has recourse against the
assets. The assets are sold and the proceeds used to settle
the loan.
13
CHARGE

Advance money
The company/ Mr. X or Bank
Issues debenture
Y
Debtor/ D/holder/creditor
Creates charge of the
Chargor company’s assets as Chargee
security
for the loan

Secure
d
credito
r
 Specific or
Char fixed
ge charge
Floating
charge
17
Specific or fixed charge
is one that attaches to a specific asset/property of the
company.
the company is prevented from dealing with the asset
without the lender’s consent.
In company’s winding up, a debenture holder
secured by a fixed charge is in the highest ranking class of
creditors.
it attaches from the moment of creation to the property in
question and (subject to registration) give the holder of
the charge an immediate security over the property in
priority to subsequent claimants.
Floating charge
Is a charge that does not attach to any fixed asset, until it is crystallized.
Charge over its current assets.

It floats above specific categories of asset such as its inventory, trading

stock, book debts, uncalled capital etc.

While the charge remain uncrystallized the company is free to deal with or
to dispose of these assets in the normal course of business and to replace
them by acquiring the same category of asset in future. The consent of the
lender is not necessary to deal with such asset.

When the floating charge crystallizes, the company losses its right to deal
with the assets. The creditor becomes the owner of the assets.

Crystallisation – conversion of floating charge into a fixed charge – to

protect the lender upon default by the company in the repayment of the
loan or upon breach of the covenant in the loan agreement.
Re Yorkshire Woolcombers Association Ltd [1903],
per Romer J:

A floating charge has been defined as having 3 characteristics:

If it is a charge on a class of asset of a company present or future,

Eg. Stock in trade, book debt, raw material, goods to be sold or any
other asset which the company has at the time of crystalization.

If that class is one which, in the ordinary course of business of the

company, would be changing from time to time, and,

If its 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 as concerns the particular class of
asset in question.
Crystalization of Floating Charge
This may occur in one of the several ways:

▪ If the company goes into liquidation.

▪ Upon the appointment of a receiver by the court or by a creditor
under a power contained in the debenture.(United malayan Banking
Corporation Bhd v Official Receiver).
▪ Upon steps taken by the creditor to enforce or take possession of the
security.
(Dresdner Bank AG v Ho Mun-Tuke Don)
LP Thean J held that the charge crystallizes when the banks took
steps to take possession of the shares (property charged).
They had thereby terminated the license given to City
Security to deal with the shares.
Crystalization of Floating Charge(cont)
▪ Upon the cessation of the company’s business. ( Re
Woodroffes (musical Instrument) Ltd [1985])
▪ At the option of the creditor (if so provided in the instrument
creating the charge), by giving notice to the company. ( Griffith
v Yorkshire bank plc[1994])
▪ Upon the happening of a specified event. (Re Brightlife Ltd
[1987]. Was held to be valid in the local case of Silverstone
marketing Sdn. Bhd. v Hock Ban Hin Trading Sdn. Bhd & Yang
Lain [1988] 2 MLJ 695.
Crystallise ❖ Default in the repayment of the loan;
s only ❖ Breach of covenants in the charged document e.g.
upon breach of restriction to create further encumbrances on
notice the company’ s asset, breach of restriction on
from the borrowings;
lender to
the ❖ The value of asset have declined to a certain amount ; or
company ❖ Other creditors have instituted proceeding against the
company.
Effect of Crystallization

LP Thean J in Dresdner Bank AG v Ho Mun-Tuke Don said:

“Upon crystallization, the floating charge fastens on the assets

subject to the charge, and thenceforth the company is not at
liberty to deal with the assets, whether in the course of
business or otherwise. It is true that at that stage the charge
has become a fixed charge, but the resulting fixed charge
arose from the original floating charge and is in effect the same
security affecting the same assets. There is no new charge
created on those assets”
Effect of Crystallization (cont)

Floating charge becomes A fixed charge

Charge and Priorities

1. Fixed charge vs fixed charge

Generally, fixed charge takes priority over any
subsequent fixed charge of the same property.
Mr. A
January

XYZ Bhd. Mr. B

February

Mr. C
March
Charge and Priorities (cont)
2. Floating charge vs fixed charge.
Generally, fixed charge takes priority over a
floating charge created at any time.
Re Hamilton’s Windso Ironworks
United Malayan banking Corporation Bhd v Aluminex

Mr. A (Floating charge)

January

Mr. B (fixed charge)

XYZ Bhd. February

Mr. C (floating
charge)
March
Charge and Priorities
(cont)Exception 1
Floating charge will takes priority over later fixed charge
if:
• There is a ‘Negative pledge’, and
• The later chargee have actual notice of the earlier
floating charge. To be
• S 39 – any subsequent chargee will be deemed to have seen
constructive notice. whether
the
Wilson vs Kelland
chargee
United Malayan banking Corp Bhd v Aluminex Sdn Bhd must
(1993) Kay Hian & Co v Jon Phua Ooi Yong have
Mr. A (Floating actual
chargee) notice
XYZ Bhd or not
January on the
negative
February
Mr. B (fixed chargee) pledge
Negative pledge clause
• Purpose - To protect the floating chargee
• The lender /chargee may require the company to give an undertaking
(promise) not to create any further charge, fixed or floating, over the
same assets in favour of another lender ranking in priority over the
floating charge unless the company has obtained the prior consent of the
lender/floating chargee.
• It is binding on the company.
• S 352 – a statement on the particulars of the charge must be lodged with
the ROC within 30 days.
• S 362 – company must keep a copy of the instrument.
• creating the charge at the company’s registered office.
Charge and Priorities (cont)
Exception 2

Floating charge also can get priority if it is

registered first and become crystallized before
fixed charge is created.
Charge and Priorities (cont)
3. Floating charge vs floating charge.

Generally, floating charge takes priority by order of

creation over a subsequent floating charge.

Unless the term of the prior charge allowed the company

to create subsequent charge with an equal or higher
priority.
Re Benjamin Cope & Sons Ltd.
Mr. A (Floating chargee)
January
XYZ Bhd.
Mr. B (Floating chargee)
February
Charge and Priorities
(cont)
4. Floating charge vs unsecured creditor

During liquidation, the floating chargee is entitled to

rank as a secured creditor. Therefore he will be paid
before the unsecured creditor.
Until liquidation, however, the floating chargee cannot
prevent the company paying off its unsecured creditors in
the normal course of business.

Floating chargee
XYZ Bhd.
Unsecured creditors
Charge and Priorities (cont)

5. Floating charge vs preferred creditor

Where a receiver is appointed on behalf of the

debenture holder or possession is taken of the
property subject to floating charge, the if the company
is not wound up at the time, certain preferred creditor
are entitled to be paid in priority to the holder of the
floating charge, even if crystallization has occurred
before liquidation or receivership.
S392(1)– the following shall have priority over
claims of the floating chargee:

• Receiver for his remuneration and cost;

• Employee (up to 4 months salary before the appointment of
receiver or before the floating charge takes possession of the
assets, subject to a maximum of RM15000);
• Employee (remuneration in lieu of leave)
• EPF and SOCSO (12 months before the appointment of receiver or
before the floating charge takes possession of the assets); and
• Floating charge. (only paid later)
Registration of charge
• S 352(1) – a company must register a charge created with ROC within 30 days
from the creation. The detail of the charge required:
❑ When the charge was created
❑ What assets are charged
❑ Fixed or floating
❑ Who is the charge
❑ What is the liability secured by the charge
❑ Whether there is any prohibition or restriction on the creation of subsequent
charge: and other term and condition in the charge instrument.
• Registration can be done by the company itself or any interested person, i.e the
creditor - S.352(8)
• S352(2) – if not registration – the charge shall be void.
Effects of non-registration
– Lender
• Become unsecure creditor. No priority
• The money secured under unregistered charge shall immediately become payable
• The lender cannot enforce the charge.
– Chargor
• The charge is void and the money secured under the charge shall immediately
become payable.
• The company has committed an offence.
– Chargor’s officers
• S352(10) -Every officer who is default shall also be guilty of an offence against this
Act.
• The officers shall be barred from being a director in another company for a period of
5 years.
Thank you.
Re-cap
Any Quest?
Santapan Minda dan Rohani