i.e.

raising capital through borrowing

All trading companies have the implied power to borrow for the purpose of business - included in the objects and found in paragraphs of the 12th and 13th schedule of the CA65

Loan Capital

A document which either creates a debt or acknowledges it, and any document which fullls either of these conditions - Levy v Abercorris Slate & Slab Co. Section 4(1) CA65 - debenture includes debenture stock, bonds, notes and any other securities of a corporation whether constituting a charge on the assets of the corporation or not.

Meaning of Debenture

Dierences between Shares and Debentures Debentures

A document issued by a co. containing an acknowledgement of its indebtedness Creditors of the co. therefore, NO voting rights Receive interest on loans Receive interest whether or not the co. is protable

Shares
The interest of a shareholder in a co. measured by a sum of money and is a bundle of rights and obligations Members of the co. therefore, have voting rights Receive dividends if declared Dividends are not xed but will depend on prots and the amount recommended by the directors Must NOT be issued at a discount Receive repayment after creditors but can participate in surplus assets

May be issued at a discount Has priority with respect to repayment

Advantages and Disadvantages of Debentures

Advantages
1. The board does not (usually) need the authority of a GM to issue debentures. 2. As debentures carry no votes, they do not dilute or aect the control of the co. 3. Interest is chargeable against the prot before tax. 4. Debentures may be cheaper to service than shares. 5. There are no restrictions on issuing debentures at a discount.

Disadvantages

1. Interest must be paid out of pre-tax prots, irrespective of the prots of the co. 2. Default may precipitate liquidation and/or administration if the debentures are secured. 3. High gearing will aect the share price.

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Company Charges

Section 4 CA65 - including a mortgage and any agreement to give or execute a charge or mortgage whether upon demand or otherwise. - An encumbrance upon property that gives the holder rights over that property usually as security for a debt owed. - Security means that in the event of a company being wound up, the creditor with a secured debt will have priority of what is owing to him out of the value of the property which is subject to that charge over any unsecured creditor. - Co.s Charges may be Fixed or Floating.

Whats a Charge?

Registration of Charges
(D94 Q11b; J97 Q10a; D99 Q11c)

Fixed Charge and Floating Charge

Fixed Charge - A charge on a specic asset or assets of a co. Such a charge attaches immediately to the asset concerned and a company may not freely dispose of the asset thereafter. A chargor cannot dispose of an asset subject to a xed charge, free of the charge unless he gets the consent of the chargee. Any disposition of such an asset without the consent of the chargee will remain subject to the charge. Land is frequently the subject of xed charges. Floating Charge - A charge which does not immediately attach to the assets concerned and gives the chargor freedom to continue to deal with the assets in the ordinary course of business. - Has 3 characteristics (according to Romer J in Re Yorkshire Woolcombers Association) (i) It is a charge on a class of assets present and future. (ii) The class of assets uctuates in the ordinary course of business. (iii) Until such time that the lender takes steps to enforce his security, the co. is free to deal with the assets in the ordinary course of the business.

Section 108(3) CA65 - Fixed and oating charges must be registered the Registrar of Companies Section 108(1) CA65 - within 30 days of their creation of the charge. - Failure to register a registrable charge will result in the charge becoming void as a security against the liquidator and any creditor of the company. However, under s. 108(2), the charge is still valid against the co. The money borrowed becomes immediately repayable. Section 109(1) CA65 - Documents and particulars required to be lodged for registration may be so lodged by the company concerned or by any person interested in the documents. - However, if default is made by failure to register a charge, the co. and every ocer in default is liable to a ne. Section 111(2) CA65 - Upon registration of a charge, the Registrar will issue a certicate, which is conclusive evidence that the requirements as to registration have been complied with. Section 114 CA65 - Allows for an extension of time for registration, as well as a rectication of the register of charges. - An application would have to be made to the court. - Before the court allows the extension of time, it must be satised that the omission to register on time was:- (i) accidental or due to inadvertence or to some other just cause; or (ii) not of nature to prejudice the position of creditors or members; or (iii) it is just and equitable to grant relief.

Priority among charges over the same property

(Assume properly registered)
Same type of charge (i.e all xed or all oating charges) - Charges take priority according to their date of creation (order may be altered if the charge is not registered within 30 days of the creation - becomes an unsecured creditor) Dierent type of charge

- Fixed charge takes priority (since attaches to assets at time of creation) over a oating charge (as charge only attaches upon
crystallzation - equitable charge) even though it was created after it. - Unless - create a negative pledge clause so co. cannot create a xed charge over the same property and make sure subsequent chargee has actual notice of such prohibition. 17 - 2 Teh Joo Ling All rights reserved

Floating Charges
(D08 Q5)

1. Extends to all property of the company i.e a wider class of assets can be charged. 2. Co. still maintains the freedom to sell the property in the ordinary course of business i.e. the company can deal freely with the assets. (carry on business as normal) 3.Advantageous to a co which has no xed assets but has a lot of stock-in-trade (as no.2)

Advantages

Characteristics
No Particular working is needed to create it. If the company retains the right to deal with the charged asset during the ordinary course of business until that charge crystallizes, then that charge is a oating charge. The nature of a oating charge was summarized as follows in Re Yorkshire Woolcombers Association Ltd (i) It is a charge on a class of assets (present and future) (ii) The class would be changing in the ordinary course of business; and (iii) The company may carry out its business until some future step is taken by the lender to enforce its security In Illingworth v Houldsworth (i) Ambulatory and shifting in nature, hovering over the property (ii) This happens until some event occurs which causes it to settle and fasten on the subject of the charge within its reach and grasp (i.e. crystallization)

Disadvantages
1. The value of the security will be uncertain as the co. is free to deal with the assets in the ordinary course of business. 2. The oating charge ranks lower in priority in comparison with a xed charge over the same assets, even if the oating charge was created before the xed charge, unless the oating charge restricts the creation of subsequent charges ranking in priority to the oating charge and the subsequent xed chargee has notice of it. 3.Assets subject to a oating charge may themselves be subject to a retention of title clause in favour of a seller of goods. In such a case, if the chargor had not paid for the goods, the seller of the goods may be entitled to those goods and the oating chargee would have no claim to them. 4.The assets subject to a oating charge may be lost to judgment creditors, who have levied and completed execution on the goods charged. Prior to crystallization the oating chargee cannot prevent judgment creditors from so levying execution. 5.Prior to crystallization, the assets may be seized and sold by a landlord who has taken distress proceedings for overdue rent. 6.The assets subject to a oating charge may be utilized to pay o certain preferential creditors, if the company does not have sucient funds to pay them. Section 191 and 292(4) CA65. 7.Floating charges created within 6 months of the commencement of a winding up will be invalid except to the amount of cash paid to the co. at the time of, or subsequent to, the creation of the charge, unless the co. was solvent immediately after the creation of the charge. Section 294 CA65.

Crystallization
Upon crystallization, the oating charge becomes a xed equitable charge on the assets owned at the time of crystallization - Re Grin Hotel Co Ltd. Events usually specied in the charge as when crystallization will occur are as follows: 1. Liquidation 2.Cessation of the co.s business
(*Preferential creditors - Wages and salaries (up to 4 months or RM1.5k, whichever is less) - Retrenchments benets - Provident fund contributions (payable during the 12 mths prior to winding up) - Remuneration in respect of vacation leave)

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