Loan Capital & Charges

Debentures

Fixed charge

Floating charge

Priority of charges

Registration of charges

Borrowing powers

Co may raise finance by borrowing
(eg. issue of debentures)

Trading corporation - Has implied power to borrow
Non-trading corporation - Can only borrow if has an express power

Document issued by corporation containing an acknowledgement of a debt or evidencing the indebtedness of a corporation in respect to any money that is deposited with or lent to the corporation

Debenture holder (Secured by charge) = Secured creditor
All unsecured creditors stands the same position (No ranking)

Differences between
shares & debentures

Shares

Debentures

  1. Member of company
  2. Has interest in co
  3. Has voting rights
  4. Last to get return of capital upon liquidation
  5. Only receive dividend
  6. Restriction on company purchasing own shares
  1. Creditor
  2. Has claim against company
  3. No voting rights
  4. Secured debentures will be repaid first before ordinary trade creditors & shareholders
  5. Interest at agreed rate must be paid to debenture holders
  6. No restriction on company purchasing own debentures

Charge is an interest/rights which a lender/creditor (chargee) obtains in a property of co by way of security that a company (chargor) will pay back the debt

  • A specific/ definite ascertained property
  • Charge attaches immediately to asset
  • Prevents chargor from dealing with asset without chargee's consent
  • Disadvantage: Value of asset may prove to be lesser than debt value
  • Charge on all or class of assets (both present and future)
  • Remains dormant until crystallization (Charge attaches upon crystallization)
  • Chargor can deal will assets w/o chargee's consent
  • Co still have power to do whatever they want
  • Fixed charge & preferred creditors has priority over floating charge
  • Ordinary trade creditors may rank before them if they obtained a judgement order before crystallization

Crystallization

  • Co defaults (Chargee appoints receiver)
  • Co goes into liquidation → all floating charge auto crystallize
  • Auto crystallization clause → Clause stating that charge will crystallize upon breach of certain conditions
  • Co ceases biz
  • Co has allowed value of assets (subj to charge) to decline below certain min amount, as provided in charge instrument
  • At option of chargee

Secured creditors

  1. Fixed Charge
  2. Preferred creditors
  3. Floating Charge
  4. Unsecured creditors

Exception where floating charge
rank before fixed charge

Negative Pledge Clause

  • If NPC is included in "particulars of charge" to be lodged with ROC, subsequent chargees are deemed to have constructive notice of restriction
  • Co can't create subsequent floating charge over SAME ASSETS with previous charge, where both are ranked equally
  • Co can create a subsequent floating charge over PART of the assets of prev charge, where both are ranked equally/ subsequent ranked before prev

Floating charge created within 6 months of winding-up will be void UNLESS co was solvent at time of creation of charge

  1. Cost of winding up
  2. Emee 4 months salary or RM15,000 (whichever loweri)
  3. Retrenchment benefits
  4. EPF to emee (12 months)
  5. Federal tax
  6. Remuneration in respect of vacation leave

Assets may subject to RETENTION OF TITLE CLAUSE - When co haven't paid for the assets in full, seller of asset retains ownership of asset, chargee cannot claim the goods

ALL charges should be reg with ROC within 30 days from date of creation
(Obligation of co, but usually is chargee who deals with it)

Lodge STATEMENT OF PARTICULARS with charge tgt with filling fees of RM300 with ROC

ROC will issue a CERT OF REG OF CHARGE,
which is a conclusive evidence of compliance of requirement

Register of charge & INSTRUMENT OF CHARGE (or a copy of it) shld be kept at registered office

Open for inspection
Creditors & members → RM5/ inspection
Any other person → Not exceeding RM10

  1. Charge becomes void
  2. Chargee becomes unsecured creditors
  3. CO & Officer subject to fine not exceeding RM50,000, RM500/day is continues