DEBENTURE AND CHARGE

By
Salmiah Salleh
UiTM Cawangan Melaka
Kampus Alor Gajah

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 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

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 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 lodgement with the ROC the statutory
declaration of compliance.(s190(3))

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 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 Mr.
and Co Ltd Salomon

£ 10,000

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 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.”

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 What is Debenture?(cont)
 s2(1) - 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.
 Bensa Sdn Bhd v Malayan Banking
Bhd(1993)
 A debenture includes any obligation,
covenant or acknowledgment of debt. Thus it
include a loan agreement.
 Not every document which acknowledges
indebtedness is a debenture. The term
‘debenture’ implies a degree of permanent
or long-term borrowing.
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  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,

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 Kind of Debenture

Redeemable
Registered & Perpetual
D & Bearer Secured & D
D Unsecured
D

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 1. Registered & Bearer Debenture
 Registered Debenture is  Bearer Debenture is a
a D which is registered negotiable instrument and
in the name of the its title therefore can be
holder in the company transferred only by deliver
book. It can be it to the transferee. The
transferred in the same company does not
manner as that of register the name of the
shares. holder.


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 2. Secured & unsecured Debenture

Secured D is a  Unsecured D is a
debenture when the Debenture which is not
asset or property of the secured by a charge
company is charged to over the property of the
the debenture holder, company. So the holder
and its holder is the is the unsecured
secured creditor. creditor of the company.

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 3. Redeemable & Perpetual
Debenture
 A redeemable debenture  Perpetual D is also known
is where the principle as irredeemable D. It is a
money is repaid to the D which is issued without
holder at the end of a a fixed date for
specified period. redemption. Debenture of
this kind can only be
repaid in company’s
winding up or where there
is a serious default by the
company or payable at a
remote period such as
100 years after issue.

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 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.
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 Differences between share/s/holder & debenture/d/holder.

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 its
cannot purchase its own own debenture.
shares.
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 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)

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 Charge?
 S2(1) – “charge” includes a mortgage and any
agreement to give or execute a charge or mortgage
whether upon demand or otherwise.
 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.

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 CHARGE

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

Secured
creditor

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 Specific or
fixed charge
Charge
Floating
charge

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 Specific or fixed charge

 is one that attaches to a specified asset 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.

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 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 charge crystallizes, it ceases to float and drop
down to attach itself to the specified class or categories of
asset then owned by the company.
 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.

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 Illingworth v Houldworth [1904]
Lord Machathen said:
 “a specific charge is one that fasten on ascertained and
definite property or property capable of being ascertained and
defined, a floating charge on the other hand is ambulatory and
shifting in its nature, hovering over and so to speak floating
with 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 subject of the charge within its reach and grasp”.

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 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.

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 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)

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 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.

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 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.
Crystallises ❖ Default in the repayment of the loan;
only upon ❖ Breach of covenants in the charged document e.g. breach
notice of restriction to create further encumbrances on the
from the company’ s asset, breach of restriction on borrowings;
lender to
the ❖ The value of asset have declined to a certain amount ; or
company ❖ Other creditors have instituted proceeding against the
company.
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 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”

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 Effect of Crystallization (cont)

Floating charge becomes A fixed charge

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 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

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 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
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 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 and the ‘Negative pledge’.
To be
• S 39 – any subsequent chargee will be deemed to have seen
constructive notice. whether
Wilson vs Kelland the
chargee
United Malayan banking Corp Bhd v Aluminex Sdn Bhd (1993)
must
Kay Hian & Co v Jon Phua Ooi Yong
have
actual
Mr. A (Floating chargee) notice
or not
January
XYZ Bhd on the
negative
Mr. B (fixed chargee) pledge
February
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 Negative pledge clause
 Purpose - To protect the floating charge
 The lender /charge may require the company to give an
undertaking not to create any further charge, fixed or
floating, over the same assets in favour of another lender
raking 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.
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 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.

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 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
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 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
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 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.

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 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)

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 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.
 S352(2) – if not registration – the charge shall be void.

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 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
debenturechargesalmiahsalleh201819
37 company for a period of 5 years.
 Weaknesses of floating charge
 A floating charge, although useful, is peculiarly
vulnerable as a security. Less secured.
 The company may dispose of the assets that are subject
to f/charge without replacing them.
 The company can create subsequent charge over the
charged assets.
 Floating charged assets may be subject to a judgment
creditor unless if it is crystallised first.
 A floating charge is postponed to a later fixed charge
unless if there is a negative pledge and the later
chargee took notice of the rejection.
 Certain preferred creditors have priority in a winding
up over floating chargee.
 S529 – a floating charge created within 6 months of the
presentation of the winding up petition or the passing of the
resolution in the case of voluntary winding up, is void. The
38 lender becomes unsecured creditor.
debenturechargesalmiahsalleh201819
 Advantages of floating charge

 Floating chargee is a secured creditor. Get priority over

unsecured creditor during winding up.
 Has opportunity to get priority over fixed charge if created
earlier and has ‘negative pledge’ or if it is crystallized before
fixed charge created.
 It allows a company to give security or to secure debt where a
sole trader or partnership could not.

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 Santapan Minda dan Rohani

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 Santapan Minda dan Rohani

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 Santapan Minda dan Rohani

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