Summary Notes on Company Law : Borrowing / Debenture / Charge

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Rezeki for my junior.. I happen to keep my 3rd year note on Company law

-Company Law : Borrowing / Debenture / Charge-

...........................This is d notes guys.........................

CHAPTER 12 : BORROWING, DEBENTURES & CHARGES

è  THE CO. POWER TO BORROW CAPITAL (pinjam modal)

ü S.19 of Co. Act read with para 13 of 3^rd schedule.

Ø  In these provisions, it is stated that the co. has power to raising money by borrowing (which called as loan capital).

Ø  For private co. power to borrow starts when it get certificate of incorp.

Ø  For public co. power to borrow starts when it get certificate of incorp. & certificate of entitlement to commence business.

è  DEBENTURES

ü  S.4 of Co. Act

Ø  Debenture includes debenture stock, bonds, notes and any other securities of the corp. whether it constitutes a charge on assets or not (loan agreement).

Ø  Definition refers to any doct. that contains an acknowledgement of a debt by a co.

Ø  Eg : Bank OO give RM10k to Ali Co., in return, Ali Co. issued a debenture of RM10k to acknowledge the debt it has to the bank.

Ø  Aim : to be an evidence that the co. is liable to pay a specified amount, with interest, the debt owed by co. to other party. It denotes indebtedness that implies a high degree of permanence / long term borrowing.

ü  BENSA v MALAYAN BANKING

·         PRINCIPLE : Debentures include any obligation, covenant / acknowledgement of debt. Thus, it includes a ‘loan agreement’ between parties.

è  DIFFERENCES BETWEEN DEBENTURES & SHARES.

Ø  *Debenture holders are the creditor.

*Shareholders are the members of the co.

Ø  *Creditors received interest on their loan.

*Shareholders receive dividends for their shares.

Ø  *Interest must be paid despite the fact that the co. may not make any profit as it is paid out of the co. capital.

*Dividends depend on profit and cannot be derived from the co. capital.

Ø  *Debentures can be issue at discount.

*Shares can be issued by discount subject to strict procedure as per S.59 of CA.

è  SECURED DEBENTURES : FIXED CHARGE

Ø  Co. can create fixed charge / float charge / combination of fixed & float charge.

Ø  Co. can create fixed charge over its land as per NLC.

Ø  This charge is a specific charge attached over specific prop. of the co.

Ø  The co. will unable to deal with this charged prop. until it get the consent of the debenture holders.

è  SECURED DEBENTURES : FLOATING CHARGE

Ø  Aim : To allow the charge existing without attaching any prop. to that charge until some event occurs (eg : the co. unable to pay, etc.).

Ø  Until such event occurs, charger (the co.) is allowed to deal with the charged prop.

Ø  In another words the asset will only froze in the event of default.

Ø  This enables the co. to borrow on security of a stream of assets flowing into & out of ownership.

è  FLOATING CHARGE vs FIXED CHARGE

Ø  To determine whether the asset belongs to floating charge, Court will usually refer to the degree of control of the debenture holders (the creditor) over the charged prop. rather than looking at literal meaning / intention of the parties also irrelevant.

ü  NATIONAL WESTMINITER BANK v SPECTRUM

·         FOC : In this case, the charge created by the co. to the debenture is fixed charge. However, the co. had deal witht eh charged assets as if it is a floating charged assets.

·         ISSUE : Whether such assets belongs to fixed or floating charge?

·         PRINCIPLE : It belongs to floating charge. This is determine via the significant level of control of the debenture holder over the assets. As the debenture holder permitted the dealing of the assets by the co, then the fixed charge is now known as floating charge. Name is insignificant in this situation.

v  FLOATING CHARGE : CHARATERISTICS

(RE YORKSHIRE  WOOLCOMBERS v YORKSHIRE )

1.       It is a charge over a class of assets present & future.

2.       It usually involves a class of assets in which in it ordinary course of business will constantly change ; eg : raw materials, stock in trade & etc.

3.       The co. is allowed to dispose such assets in the ordinary course of business.

4.       If the charger (the co.) commits any act of default, such floating charge will freeze / crystallizes.

z  CRYTALLIZATION OF THE FLOATING CHARGE

Ø  Def. : It’s a transformation of a floating charge into a fixed charge over the assets within the class of assets, the subject of the charge and owned by the co. at the time the event, triggering crystallization occurs (eg : fail to pay the loan / in the winding up process / etc).

z  Disadvantages :

1)    The co. / chargor is allowed to deal with the charged assest, enable it to use up / create lien / equitable interest / new charge over the same assets.

ü  GEORGE BARKER v EYNON.

·         FOC : P has lien (right to hold the prop. until certain payment were made), over the goods produce by the co.  After payment had been done to P, a receiver had been appointed by the debenture holders under a floating charge. P claimed for the possession of goods after they realized the appointment.

·         PRINCIPLE : In this case, the court had held that lien take priority over the floating charged entered by the co. as the contract containing lien is exercisable as soon the contract start, not at the time when P took the possession of goods that let the lien beat the crystallization of the floating charge.

2)    If co. creates a fixed charge over the floating charge, generally that fixed charge will takes priority.

ü  RE COLONIAL TRUST

·         PRINCIPLE : The debenture holders have a security upon the prop. is without priority. If the subsequent charge is a fixed charge, the subsequent charge may have priority over the floating charge.

3)    Assets in the floating charge may be seized in acc. with the law concerning distress.

4)    Others gen. disadv. can be referred from S.191 – (priority of payment), S.292(4) – (priorities if insufficient payment).

v  EVENTS THAT TRIGGER CRYTALLIZATION

Ø  Implied Crytallizes :

·         Appointing a liquidator / receiver – implied event that make the floating charge to be froze.

ü  (UMBC v OR OF SOON HUP SENG)

·         PRINCIPLE : As the receiver had been appointed in this case, the charge was said to impliedly crystallize. This enable the person related to demand on the related payment.

·         Ceasation of the co.’s business.

ü  (RE WOODROFFES)

·         PRINCIPLE : The 1^st floating charge was said not to crystallise automatically as the result of the crystallization of the 2^nd floating charge. but it become so after the cessation of the co.’s business.

Ø  Semi Crytallizes :

·         In the event of default, the rd party enforcing a judgment on the charge created by the co. upon him.

Ø  Automatic Crytallizes Clause :

·         For this clause, the crystallization will occurs immediately due to the existence of the clause.

·         With the existence of this clause, there is no need for notice as the co. need to aware that the existence of this clause is equivalent to the existence of automatic crystallization in the event of default. – MIMB v HIGHLAND CHOCOLATE

·         The words used are : ‘loan becomes “immediately due & payable”’ .. or .. ‘floating charge “immediately attaches & becomes fixed”’.

ü  RE MANUWERA

·         PRINCIPLE : If the above clause exist in the agreement, the crytallization will automatically executed in the exent of any default by the co.

ü  GOVT. STOCK v MANILA RLY CO.

·         PRINCIPLE : In order for the for this clause to be valid, an explicit & very clear language will be required for such clause.

Ø  Negative Pledge Clause :

·         Aim : To restrict the chargor from freely creating more encumbrances on the assets covered by the debenture prior to crystallization.

·         How It Work : This clause will put a barrier for the chargor to grant any charge to the 3^rd party without the consent of the charge who owned the floating charge. This indirect way avoids any impact of allowing the 3^rd party charge from having priority in ranking / in pari passu (same rank) with the chargee’s floating charge.

·         It is not a security but a contractual promise between the chargor and chargee, which entitle the charge to immediately recall the loan upon the breach of the clause.

·         In Exam : To determine the ranking of debenture holder, see who create the 1^st debenture & see whether there is negative pledge clause in the agreement. This is very familiar in the situation where the co. is winding up.

è  REGISTRATION OF CHARGE

Ø  OLD PRINCIPLE (BEFORE FORM 34 IS AMENDED) :

ü  UMBC v ALUMINEX

·         PRINCIPLE : The registration of charge does not give absolute / constructive notice of the contents of the loan contract including the negative pledge clause. Thus, the party still have duty to make other party who bound for such clause to have notice on such clause.

Ø  NEW PRINCIPLE (AFTER FORM 34 IS AMENDED – ITEM 7) :

Ø  Here, it required the parties to fill up the form to state whether or not the creation of the subsequent charges is restricted / prohibited.

ü  MIMB v HIGHLAND CHOCOLATE

·         PRINCIPLE : The burden to prove that the party is unaware about the negative pledge clause even after they had made some formal research procedure, is on the party alleging such contention.

ü  KL ENGINEERING CASE

·         PRINCIPLE : As per Form 49 of CA, the party is bound to have a constructive notice on the public document relating to the co. which may include the registered charge. So no excuse of not knowing the existence of the charge and negative pledge clause. Although this case was on Form 49, but it can be used for Form 34 also.

Ø  MATTERS RELATED - REGISTRATION OF CHARGE

Ø  S.108(1) of CA – Both fixed & floating charge have to be registered with the Co. Registry within 30 days after the creation of the charge.

Ø  The effect of not registering such charge is that it become void and ineffective vs the creditors & liquidators of the co, thus making it loses priority in ranking.

Ø  S.108(2) of CA – Although such charge is void & effective vs the liquidator & creditor, such charge still valid vs co., thus making the money secured in the co, to be payable.

Ø  S.109 of CA - It is the co. duty to register such charge, but still any person who have interests in the charge can register it.

Ø  S.111(2) of CA - If the Co. Registry issue the certificate after such registration, such certificate is a conclusive evidence that a requirement to register such charge had been fulfilled.

ü  (MIMB v HIGHLAND CHOCOLATE)

·         PRINCIPLE : Uphold S.111(2) and court held that the certificate however cannot validate the invalid charge. It only govern the procedural aspect of registration of charge.

Ø  S.114 of CA – Court may extend the time of registering such charge for certain situations.

ü  ZENO LTD v PREFABRICATED CONSTRUCTION CO

·         PRINCIPLE :

               i.            Charge is considered created over the land on the day it is registered not when it is executed to the court.

             ii.            If there is any incompliance to S.108, the co. and every officers will be bear the offence.

            iii.            If the registration is out of time, exceeding 30 days, application to the court via S.114 can be done so as it does not cause any prejudice to the creditors & the shareholders. (Eg : If clerk forgot to register the charge on behalf on the co., the lawyer or co. can apply to court using S.114 of CA)

è  PRIORITY OF CHARGES

Ø  The CA is silent on this issue, thus the gen. rule of law of prop. is applied.

z  FIXED CHARGE vs FLOATING CHARGE

Ø  Generally, the fixed charge (either legal / equitable) has priority over the floating charge. This because floating charge does not create any encumbrance (barrier) until crystallization take place.

z  EQUITABLE CHARGE vs LEGAL CHARGE

Ø  The E. charge has no priority over L. charge unless such E. charge had been created earlier and its existence is known by the holder of the L. charge.

z  REGISTERED CHARGE vs REGISTERED CHARGE / EQUITABLE CHARGE vs EQUIATABLE CHARGE

Ø  For R. charge, the priority follows upon the time & date when they entered into the Register of Co. Charges.

Ø  For E. charge, the rule of first in time prevails.

è  2^ND FLOATING CHARGE

ü  WALTER WOON

·         PRINCIPLE : The co. is allowed to create the 2^nd floating charge as it is allowed to deal with the charge assets of the 1^st floating charge.

ü  BENJAMIN COPE

·         PRINCIPLE : The 2^nd floating charge is permissible, and such charge will rank in pari passu (same rank) with the 1^st floating charge. The 2^nd floating charge also can rank at 1^st if it gets the chargee’s permission. If there is any negative pledge clause, it cannot rank 1^st without the chargee’s consent.

è  RIGHTS OF DEBENTURE HOLDERS

Ø  S.20(2) of CA – The right to restrain the co. from committing any ultra vires acts. (Debentures holders are allowed to file proceeding vs the co. to stop Co. from disposing any of the related prop.)

Ø  S.28(3) of CA – The debenture holders is allowed to have a notice on the meeting of the alteration of the co.’s memorandum. They also possess right to apply to court to cancel such alterations if they hold at least 10% of the co.’s nominal value of debentures.

Ø  S.181 0f CA - Entitle to obtain remedies in cases of oppression.