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Loan Capital
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Debentures
• Companies can issue debentures.
• Defined in s.2(1) – includes any debenture stock,
bonds, notes and other securities of a
corporation whether constituting a charge on the
assets of the corporation or not.
• Debentures – implies a degree of permanence or
long-term borrowing.
• Common law definition: any document which
evidences a debt. Includes a loan agreement.
• Secured or unsecured.
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Company charges
• Charge – used to describe a security given by
a company over some or all of its assets in
favour of a creditor.
• Charge is a security interest in property that is
created by contract and it transfer neither title
nor possession.
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• 2 types of charges:
• Fixed charges
• Floating charges
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Fixed charges (FC)

• Attaches to a specific assets of a company.
• Most common property: land
• Possible to create FC over variable assets such as
book debts (debt owing to the co which arises
out of the normal carrying on of its business and
is properly kept in the books of the co).
• UMBC Bhd v Aluminex [1993].
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• As the FC is attached to the assets, the co cannot

deal with the assets unless with prior consent of
the lender. The assets continue to be subject to
the charge until they are released by the lender.
• If borrower sells the assets, Lender can still trace
the asssts and exercise its powers under the
charge instrument and sell it.
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Floating charges
• Intended by the parties to cover a class of property but
not to attach to specific items within the class until some
future event occurs.
• Re Yorkshire Woolcombers Association Ltd
[1903], it was held that a FLC has 3 characteristics:
• 1) charge on a class of assets of a company present and
future;
• 2) class of assets charged is one which, in the ordinary
course of business of the company would be changing
from time to time; and
• 3) charge 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 ordinary
way as far as concerns the particular class of assets.
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Floating charges
• A charge which has the 3 characteristics is a FLC
though the charge may use a different term.
• Most common property: raw materials, stock in
trade, inventory and book debts.
• Benefit: Allows a company to dispose of property
the subject of the charge in its ordinary course of
business, until the occurrence of some
particular event (crystallises) specified in the
charged or implied by law.
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Floating charge
• At that point the FLC crystallises into a FC over
all the property currently within the class over
which the charge applies.

• Disposal in the ordinary course of

business
• Any transactions made for the purpose of
carrying on the business.
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Floating charge
• Crystallisation events (CE) are usually set out
in the charge document. Usually the charge
document will state that notice must be given by
the chargee (creditor) to the chargor (company).
• Some CE can be implied:
• 1) if a company is wound up
• 2) of a receiver is appointed by the court or by
the lender or creditor under a power contained
in the instrument creating the FLC
• 3) company ceases to carry on business
• 4) creditor takes possession of the assets subject
to charge.
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• Once crystallisation takes place, the

company is unable to dispose of the assets
without the consent of the creditor. FLC
becomes converted into a FC (no need to
re-register with ROC).
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• But it is possible for a FLC to crystallise without

the need to give notice. The charge document
will state that upon such event, the charge will
automatically crystallise. This is known as the
‘automatic crystallisation clause’.
• Eg: ‘if the company mortgages charges or
encumbers or attempts to mortgage charge or
encumber any of its property or assets contrary
to the provisions hereof without the prior
written consent of the lender’.
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Floating charge
• Automatic crystallisation clause (ACC) is
accepted in Malaysia in Malaysian International
Merchant Bankers Bhd v Highland Chocolate &
Confectionery Sdn Bhd (No 2) [1998] and
affirmed that upon the occurrence of the event,
the FLC will automatically crystallise without the
need for a notice to be issued to the chargor.
• For more on FLC, read Baljit Singh Sidhu,
“Floating Charges and its Vulnerability” [2002] 1
MLJ xlix.
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Registration of charges
• According to CA 2016, where a company creates
a registrable charge, it must provide certain
information to the ROC about the charge. The
ROC enters that information on its register of
charges.
• Two functions of Register of Company
Charges:
• 1) notice to people dealing with the company
• 2) establishes the order of priority of charges
and the validity of registrable charges as against
a liquidator or an administrator of the company.
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Registration of charges
• S.352(1) – company must register any
registrable charge created within 30 days after
the creation of the charge.
• Registration is effected by lodging a notice in the
prescribed form and providing a copy to the
ROC notwithstanding the fact that the certificate
of the ROC is issued at a date after the time for
registration has expired.
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• Once the instrument has been registered with

the ROC, the position of the lender is secured.
• Tan See King v Anata Knitting Sdn Bhd
• S.353– list of registrable charges. Eg: charge of
land, charge to secure debenture, book debts,
undertaking or property of the company, credit
balance in any account.
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Registration of charges
• Duty to register charges: company creating the
charge (chargor)
• Failure of the company to register the charge, the
company and any officer in default shall be guilty
of an offence;s.352(10).
• Any person interested in the charges (chargees)
may register the charge; s.352(8)
• Where registration is effected by someone other
than the company, he can recover the cost of
registration from the company; s.352(9).
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Extension of time for registration &

and rectification
• S.361 – the courts have powers to extend the
time for registration if it is satisfied that the
omission to register in time was accidental or
due to inadvertence or to some other sufficient
cause or is not of a nature to prejudice the
position of creditors or shareholders or than on
other grounds it is just and equitable to grant
relief. The courts also have the power to order a
rectification of any omission or misstatement of
any particulars of the charge.
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• Application may be made by the company or any

person interested.
• Courts may be reluctant to interfere with the
respective rights of creditors after the winding
up of the company has commenced.
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• Court must be satisfied that the omission to register

the charge within the prescribed time or the
omission or misstatement of any particular with
respect to any charge or in a memorandum of
satisfaction:
• 1) accidental
• 2) due to inadvertence (eg ignorance of the
provisions requiring registration)
• 3)due to some other sufficient cause (difficulties
arising through the property charged being property
abroad)
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• 4) not of a nature to prejudice the position of

creditors or SHs; or
• 5) on other grounds it is just and equitable to
grant relief.

• Eg: misunderstanding between the company

secretary who thought the chargee would
register the charge.
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Consequences of non-registration
• In relation to the liquidator and the creditors of
the company, the charge is VOID if it is not
registered within 30 days after its creation;
s.352(2)
• This means that if subsequently, the company
goes into liquidation, the chargee becomes an
unsecured creditor; Dresdner Bank AG v Ho
Mun Tuke Don (1993).
• S.352(2) – non-registration does not affect the
obligation to repay the money. When a charge
comes void under this section, the money
secured shall immediately become payable.
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Consequences of non-registration
• Because the chargee loses the security interest in the
company’s property or undertaking conferred by the
charge, the chargee becomes an unsecured creditor and
ranks pari passu with them for the payment of its debt if
the chargor goes into liquidation.
• As non-registration will render a charge void against
‘liquidator and any creditor’ of the company, it seems
that if the company is not in liquidation and no other
creditor claims priority, the unregistered charge remains
effective and may be enforced against the company.
• Priorities of charges is affected. Re Monolithic Building
Co [1915] – subsequent FLC had priority over a holder of
a legal mortgage created first but not registered,
notwithstanding that the holder of the FLC had actual
notice of the legal mortgage.
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Priority of charges
• Once a company has borrowed from 2 or more
lenders and purports to give each of them
security over the same assets, the question of
priority of charges will arise. If the company
then defaults in payment to the lenders, the
question arises as to which lender has priority in
enforcing the security.
• CA 2016 does not provide for priority of charges.
Priorities between holders of competing charges
are determined according to the general law of
property.
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Priority of charges
• Same assets are subject to two different charges
in favour of different lenders. Which one has
priority if the proceeds of sale is insufficient?
• FC v FC = the first in time created would have
priority
• FLC v FLC = the first in time created would have
priority
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Negative pledge clause

• GR: FC ranks ahead of FLC unless (i) FLC is
created earlier, (ii) FLC has a clause prohibiting
creation of subsequent charges (NPC) without
the holder of the FLC’s consent and (iii) FC has
notice of NPC.
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Negative pledge clause

• However, the details of the charged required to
be lodged with SSM includes an item which
requires the company to state whether the FLC
contains a NPC.
• Thus, is a FLC has a NPC, registration of the
charge will provide constructive notice to the
public of the NPC. See s.39.
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Preferential creditors
• Actually unsecured creditors.
• GR: in a winding-up, unsecured creditors are
paid after the secured creditors are paid.
However, if the company has preferential
creditors, they have priority over the holders of
debentures of the company secured by a FLC;
s.191(1).
• Who are preferential creditors? See s.527(4).
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Avoidance of security
• Avoidance of FLC
• S.529 – a FLC created within 6 months of the
presentation of the winding up petition or
the passing or resolution for voluntary
winding up shall, unless it is proved that the
company immediately after the creation of the
charge was solvent, be INVALID.
• Burden of proving that the company was solvent
immediately after the FLC was created rests upon
the chargor.
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• Undue preference – s.528