LAW 485

LOAN CAPITAL
(DEBENTURE)

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 LEARNING OBJECTIVES

After the completion of this chapter, the students should be able to:
• Understand what is a debenture and the rights of a debenture
holder
• Distinguish between a fixed charge and a floating charge
• Discuss the importance of registration of charges with the
Registrar of Companies
• Explain the priority of charges

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 INTRODUCTION
• The capital of a company may not only be provided by members
who contribute to the share capital. It can also be borrowed
from creditors, thus forming the loan capital. A company’s
power to borrow is normally provided for in the objects clause.
• The characteristics of a loan capital that distinguishes it from the
share capital are:
• i. A loan capital represents a set of rights against the company,
and not rights in the company.
• ii. The rights arise out of a relationship of debtor and creditor,
and
• iii. Although debt is common with natural persons, there are
certain legal practices that are only utilized by companies.
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 DEFINITION

• Sec 2(1) of CA 2016 - include debenture

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

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 DEFINITION

• In Bensa Sdn Bhd v Malayan Banking

Berhad(1993)
“A debenture includes any obligation,
covenant or acknowledgement of debt.Thus,
it includes a loan agreement”

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 Share/shareholder vs Debenture/debenture holder

SHARE / SHARE HOLDER DEBENTURE / DEBENTURE HOLDER

1. Is a member of a company Is an external creditor

2. Has the right to vote Has no right to vote

3. Dividend on share can only be Interest on debenture can be

paid if the company has profit paid regardless or whether profit
and cannot be paid out of available or not. It can be paid
capital out of capital

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 Share/shareholder vs Debenture/debenture holder

SHARE / SHARE HOLDER DEBENTURE / DEBENTURE HOLDER

4. 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

5. Generally share capital cannot be A company can repay the debenture in

repaid without legal formalities accordance with the term of use

6. Generally, a company cannot A company may purchase its own

purchase its own shares debenture

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wansal/law485/uitms
 CHARGES
 2 methods of
securing debentures
over the company's
assets are:

d Ch a rg e s Floating
Fixe Charges

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 DEFINITION:CHARGE

• Generally, the charges created by a company may be

classified as a fixed charge or a floating charge
• Sec 2(1) of the CA 2016 - charge include mortgage or
any agreement to give or execute a charge or
mortgage whether upon demand or otherwise
• Thus, the charger may be legal or equitable and it
covers other securities such as liens and pledges

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 DEFINITION:CHARGE

• The company creating the charge is known as

the CHARGOR and the lender in whose favour
the charge is created is known as the
CHARGEE

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 1) Fixed Charges
 A fixed charges or specific charge is one that attaches to a
specified assets.
 It has all the features of a normal domestic mortgage property of
the type in question.
 Obvious advantage is it attaches to the specific property at the
time it is created and therefore gives the holder an immediate
security over that property in priority to any subsequent claimant.
 The company cannot dispose of the property without the consent
of charger holder.

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 2) Floating Charges

 Ambulatory and shifting in its nature.

 The assets of the company are charged with the payment of
the debt, but the company may deal with any of its assets in
the ordinary course of business, until the charge become a
fixed charges.
 This happen when the money becomes payable under
condition in the debenture and debenture-holder takes some
steps to enforce his security.
 The charge is then said to crystallise.

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 Characteristics of a Floating
Charges by Romer, L.J. in Re
Yorkshire

It is a charge on all the assets of the company present and

future.

The class was one which in the ordinary course of

business, would be changing from time to time.

It was contemplated that until some steps were taken, the

company should carry on its business in the usual way.

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In Re Bonds Ltd
 A charge over stock given in two Letters of Lien was held to be
a floating charge.

In Re Lin Securities (Pte)

 The fact that an instrument does not purport to create a floating
charge is irrelevant.
 If there is a charge and that charge has the characteristics of a
floating charge, it matters not what the drafter of the instrument
chose to call it.
 It is the essence and nature of the security and not the label
placed upon it that matter.
 In this case the letters of hypothecian was held to be a floating
charge.

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 CRYSTALLIZATION OF FLOATING
CHARGE

 The essence of a floating charge is that it does not

relate to any specific assets until it is crystallizatized
when it becomes a fix charge.
 The charger only becomes fixed when an event which
crystallized it
`

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 CRYSTALLIZATION OF FLOATING
CHARGE

 This may occur in one several ways:

a)` When a company is wound-up, a floating charge will

crystallize. (Note: The purpose of borrowing will be defeated.
The loan, in the first place, was taken to enable the company
to carry on its business.) Re Panama, New Zealand and
Australian Royal Mail Co (1870) 5 Ch App 318.

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 CRYSTALLIZATION OF FLOATING
CHARGE

b) Where a receiver is appointed by the court, or by the creditor

under a power given in the debenture. It is not enough that steps
are taken to appoint a receiver. Some positive steps must be taken
by the creditor for the charge to crystallize.

c) Where a company ceases to carry on its business (Note: Same

reason as the first event mentioned above). Re Woodroffes
(Musical Instruments) Ltd (1986) Ch 366.

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 CRYSTALLIZATION OF FLOATING
CHARGE

d) Where the instrument creating the charge provides for

crystallization at the option of the creditor. The debenture holder
is normally required to give notice to the company to convert the
floating charge into a specific charge.
e) Where the charge instrument contains an automatic
crystallization clause, expressly mentioning events that could
cause crystallization as in Re Manurewa Transport Ltd (1971)
NZLR 909. These events may include where the company
defaults in payment of interest for a specified period; breaches
restrictions on future borrowing; allow the value of the charged
assets to fall below a minimum amount; or ceases to deal with the
charged assets in the ordinary course of its business.
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PRIORITIES AMONG CHARGES

GENERAL RULE
The fixed chargee has priority unless the chargee
has actual notice of the negative pledge clause in
the floating charge instrument

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 PRIORITIES AMONG CHARGES

GENERAL RULE
A legal charge has priority over an equitable
charge

• If the equitable charge was created first, and the

legal chargee knows this, then the equitable
charge takes priority
• If both of charges are equitable, the maxim ‘first
in time prevails’ applies, it means the one created
first has priority over the later charge
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 PRIORITIES AMONG CHARGES

Fixed Charge v Fixed Charge

 the first charge in time of creation will have priority

Floating charge v Floating Charge

 The first charge in time of creation will have priority

Fixed Charge v Floating Charge

 The fixed charge which have the first time in creation
will have priority
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 PRIORITIES AMONG CHARGES

Floating Charge v Fixed Charge

If there are 2 charges created over the same assets.The

first are floating charge followed by fixed charge:

 The general rule : fixed charge even though created

second in time will have priority

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 PRIORITIES AMONG CHARGES
Floating Charge v Fixed Charge
If there are 2 charges created over the same assets.
The first are floating charge followed by fixed charge:

• The general rule : fixed charge even though created second in

time will have priority
• This problem arises because of the very nature of the floating
charge, which allows the company to deal with the property
charged in the ordinary course of business
• Some of the assets within the class of assets charged may be
taken out as security for another loan

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 PRIORITIES AMONG CHARGES

Floating Charge v Fixed Charge

However, if there is a negative pledge clause in the
floating charge document i.e the comp having given an
undertaking to the floating charge holder that it will not
create another charge over the same assets ranking in
priority over the floating charge.

 Its breach entitled the holder of floating charge to

recall the loan and the charge can become crystallized

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 PRIORITIES AMONG CHARGES

Floating Charge v Fixed Charge

In the case of Limited Malayan Banking Corp Bhd v
Alumines(M) Sdn Bhd(1993)
the court held that in contest between a floating charge
and a fixed charge, the floating charge will have priority
over if the following conditions are fulfilled:
• The floating charge document contains a negative
pledge clause and
• The holder of the fixed charge has actual notice of the
negative pledge
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 PRIORITIES AMONG CHARGES

Floating Charge v Fixed Charge

CASE: Re Hamilton’s Windsor Ironwork
• Even if the later charge had noticed of the earlier
floating charge, he would still have priority.
• The floating charge would have some protection only if
the charge instruments contain a ‘negative pledge’.
• This would be the condition in the charge instrument
that prohibits the company from creating subsequent
charges that rank pari passu(the same rank/equal) or
in the priority to the floating charge.
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A special aspect of floating charge is that it allows a company to
create more than one floating charge over the company’s assets.

• This would mean that the company would

have the freedom to create a second charge
that would rank equally with or have priority
over the earlier charge.
• However, if charges are created over the same
assets there are restictions.

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 Re Benjamin Cope & Sons Ltd
Held: the court held that where the company has
charged the same assets, the later charge may not
have higher or equal priority over the earlier charge
if it is not allowed by the earlier charge.

Re Automatic Bottle Makers Ltd

Held: the court held that a later floating charge over
part of the assets could rank in priority to or equally
to an earlier floating charge had made provision for
it.

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 REGISTRATION OF CHARGES

Section 352(1)
Charges that a created by a company over its property
are required to be registered with ROC within 30 days
of creation.

• It must also be entered into the company Registered

of Charges.
• By having the charge registered, any interested
party may be able to find out whether the company
has already given a charge over their assets.
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• The time of registration is important as
determines priorities among the different
registered charges over the same property.
• A charge that is registered within the time
allowed take priority.
• If there are two registered charges over the
same assets, the instrument creating the
charge and the normal rules of priority
charges will be looked at determine priority.

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 CERTIFICATE OF REGISTRATION

• Upon the registration of the details of the charge

with the ROC, the ROC will issue the certificate of
registration
• Sec 357(3) provides that the COR shall be the
conclusive evidence that the requirements of of the
registration have been complied with

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 EFFECT OF FAILURE TO REGISTER A CHARGE:
The charge will become void as against the
company 's liquidator and other creditors (the
creditor loses whatever priority he has and becomes
an unsecured creditors)
• If the company goes into liquidation, the
holder of an unregistered charge rank as an
unsecured creditors
• The holder of an unregistered charge may still
enforce it against the company before the
company goes into liquidation

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 It has provided that if a charge become
void for non registration, the money
Section 352(3) secured becomes immediately payable.

It allows the courts to permit registration

after the expiry of the 30 days if an
acceptable explanation is given. However,
Section 361 the omission must not be deliberate act of
concealment, it must be due to some
other sufficient cause or it does not
prejudice the position of the creditors of
the members.

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