7. Shares and Debentures

SHARES and DEBENTURES CORPORATE FINANCE A Co. needs financing to carry on its operations – for purchase of raw materials, hiring of staff, plants and factories and for investment. Two main types of corporate finance Equity Debt Co. issues shares to a person who provides consideration; the person becomes a shareholder. The effect of being a S/H is tt the person (generally speaking) owns the Co. In general, a S/H, as residual claimant, also takes more risk than a creditor If the Co. goes bust, they get nothing until ALL the creditors are paid up. But if the Co. does well and is wound up, S/H gets a share of the lucrative profits. Floatation Usually if a Co. does well enough, it can list on the stock exchange – this is generally a cheaper way of getting financing. Bear in mind tt in small Co, issuing shares is not really to raise finance but to offer a stake in ownership for the S/H. Co. is borrowing money from that person/ bank; person/ bank becomes a creditor. Usually in return for some form of security. Compared to shares, a debt bears certainty of repayment (to the extent tt your security is good) - but the potential returns are lower. Credit is an integral part of the modern economy. A reason why the 2008 financial crisis had caused so much damage was because banks refused to extend credit, making it difficult or impossible for companies or individuals to raise the requisite finance to meet their obligations. Total assets of Co. = Equity capital + Debt capital EQUITY FINANANCING Share Capital What is it? Share capital IS NOT a Co’s wealth! How do S/Hs realize their share capital? It is the consideration S/Hs provide to the Co. in return for shares. If one is thinking radically, capital is essentially a perpetual loan with no certainty of return. Do not conflate a Co’s share capital with its wealth/ value. Share capital is merely what the Co. had AT THE START. Eg. Orange Inc. might have had a share capital of US$10 when it started out, but it is well worth US$100m now. Most direct way is to sell the shares. Other than that, there are only 3 other ways to realise their capital: Co. reduces its share capital Co. decides to buy back its own shares Co. is wound up The three meanings of “capital” Authorised capital Issued capital Paid-up capital The maximum no. of shares tt a Co. is authorised to issue. It was expressed as value and not quantity of shares - $10m – 5 million shares of par-value $2. But a Co. does not need to issue all the authorised shares. And a Co. could resolve to incr. its authorised capital. Concept of authorised capital has been abolished by the Amendment to CA (2005) - Lian Hwee Choo (2009, SGCA) – Issue arose whether Art 40 required Dirs (seeking S/H resolution to approve issuing of new shares) had to state the specific no. of shares to be issued – it is a common practice for Dirs to get blanket approval (till next AGM) if they wanted to issue new shares – s.161 does not req Dirs to specify how many shares they wish to issue – CA HELD tt Art 40 was specifically intended for incr. a Co’s authorised capital and ref to “share capital” in tt Art did not refer to Issued Capital as well. Total value of all the shares issued by the Co. These shares may or may not have been paid for, but the S/H issued the share is already entitled to the share. Issued capital = paid-up + uncalled capital Amt tt the S/Hs have paid up on the shares tt have been issued. Uncalled capital = the amt tt the S/H owes the Co. for shares alr issued but not paid for. A Co. may call for the uncalled capital at any time. During liquidation, the S/H MUST repay the uncalled capital – hence, a S/H can never escape paying the uncalled capital. Common practice today is simply for shares to be fully paid-up upon being issued. Shares Definition of Shares Layman and Company’s Act Dictionary defines ‘share’ as having a portion of a thing CA (rather unhelpfully) states tt ‘"share" means share in the share capital of a company’ Borland’s Trustee v Steel Brothers & Co Ltd [1901]: “A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se” Principally, a share is an INTEREST – it denotes a S/H’s liability (for uncalled capital) and then his interest. The Borland def not too accurate bec. if shares are fully paid-up, no issue of liability arise. Also, we oft speak of “owning shares” and so there is a proprietary idea behind it, but Borland does not talk abt shares being property. Cambridge Gas Transportation Corporation [2006, PC] Against Co and other S/Hs – a bundle of rights and obligations Exact rights depend on M&As Against the world – an item of property S/H may do what he likes with it. Not tangible; they are choses in action Shares are movable property (s 121) Rights of Shareholders What are the rights of S/Hs? Are S/Hs really owners? Differentiating S/Hs from creditors (“C”). S/Hs have no rights to the property of the Co., instead they broadly have: Rights to dividends (income rights); Rights to participate in running of Co (voting rights); Rights to the return of capital, in certain circumstances (capital rights). Over e last century, courts have diluted the doctrine of S/H ownership, w power vesting mostly in the Board. Also, in listed Co., shares are merely a form of investment – few even go to vote at AGMs. But, ROSS GRANTHAM argues tt although S/Hs may’ve been displaced as the ctr of e corporate universe, they remain e owners of their shares It is oft said tt while both S/Hs and Cs have rights against the Co, S/Hs additionally have rights in the Co. as well. This concept is useful in so far as it distinguishes a shareholder, an ‘insider’, from a debenture holder, an ‘outsider’. Par-value (and its abolition) What is par value and its purpose? Arguments for its abolition Consequence of abolition Par value is the minimum value at which shares can be issued. Issued =/= sell shares can be traded below par If shares are issued above par (a ‘share premium’), the share capital and share premium must be separately accounted for. Thought to protect creditors – a ‘cushion of solvency’ bec. share capital cannot be returned to S/Hs. Protect S/Hs – reduces possibility of dilution bec. Co. cannot issue shares at a discount. Misleading – unsophisticated investors think tt e share will fetch a ‘minimum of $X’ but the share can well trade below par. Arbitrary – the par value set by a Co. has nothing to do with its real worth or potential – many Co. set very low par values Inconvenient – Co. cannot raise additional capital if its market value falls below par – it will be force to issue above mkt value and no one would buy. 麻烦 – had to ‘split’ into share capital and share premium accts – very unnecessary. - Par value was abolished in the 2006 CA amendment - No need to distinguish btw share capital and share premium Rule against issuing below par is repealed. Risk of Dirs diluting S/Hs interest? – although Dirs need approval to issue new shares, they do not need to state the value tt they intend to do that. No law expressly protects so but Dirs can be in breach of fiduciary duty if they do not issue in the best interest of the Co. Concept of authorised capital (authorised no. of shares x par value) is no longer relevant. Types of Shares The general position is that a Co. is free to issue however many classes of shares and define the rights for each class. Preference share Equity / ordinary share Deferred share THERE IS A LOT OF CONFUSION ABOUT THE DEFINITION OF ‘PREFERENCE SHARE’ IN THE CA! s4 defines ‘preference share’ as shares tt carry no voting power OR a share with fixed returns on dividends or assets of Co. on winding up. However, this def is strictly only when reading ss. 5, 64 and 180. BUT, s.75 also makes mention of ‘preference shares’ and how they cannot be issued unless the M&As set out impt rights pertaining to them – repayment of capital, voting etc. This suggests there is more than one class of ‘preference shares’ (call this Pref Shares Y) from the s.4 definition (call this Pref Shares X). Preference shares in reality: Co usually decides what rights to attach to a preference share, but common features are: Right to receive fixed dividend, and usually on higher priority than ordinary S/Hs Right to be repaid capital upon winding up (and on higher priority) No voting rights No right to a share in surplus after winding up. s4 of CA simply defines ‘equity shares’ as those that are NOT Pref Share X. In a sense, there is no defn for it – any share tt (1) confers voting power; or (2) does not set limits on the entitlement of the share = An equity/ ordinary share. One share one vote [FOR PUBLIC CO. ONLY] – s. 64 CA – each equity share can only carry one vote (except for newspaper Co. – see (4)) N.B. public co. =/= listed Co. Thus, once shares carry votes, it must be one share one vote. BUT for private Co., it is technically possible to have weighted votes – shares with diff no. of votes per share. How then will Cts decide what rights are conferred on tt class of shares? *Re Hume Industries (FE) Ltd [1974, SGHC] – 3 criteria: Firstly, a qn of construction Then, a provision conferring the rights is definitive of the whole of the rights (and no more) Presumption of equality If M&As are silent, it is presumed tt one share = one vote. S/Hs right to dividends or capital is deferred to tt of ordinary S/Hs Golden share More than 1 vote per share s10 of the Newspaper and Printing Presses Act – each of this share has 200 votes. Newspaper Co. is the only public Co. allowed to do this – this special case is due to political reasons. Some private Co. do so too (usually privatised former state companies) Ownership of Shares Two types of ownership Legal Ownership Equitable Ownership The legal owner of the shares is whoever who is reflected in the Co’s Register of Members. (s. 190) However, the legal owner may not be the true owner – eg. A provided purchase money but puts B (his nominee) on the register (quite common for rich to conceal their true net worth). A S/H who bought the shares but is not registered is the equitable owner. The problem is tt equitable interests cannot be reflected in the Co’s Register. The implication is tt a S/H who bought but did not register would not get dividends – instead, dividends would go to the former owner whose name is still on the Register. Exceptions: A is trustee/ executor of a deceased’s estate; or share is under the Central Depository Pte Ltd (“CDP”) CDP = For listed Co. – scripless trading – all shares are legally held by CDP on trust for purchaser – beneficial interests are recorded – Co. will pay dividends to the name in the CDP. Resolving competing claims Nemo dat rule – only the legal owner can transfer ownership – so if B is e trustee of A, A cannot do anything but compel B to transfer shares to new buyer. If the equities are equal, the first in time prevails * Hawks v McArthur [1951] M, sold shares to P - P failed to register themselves as members – In a separate matter, H was judgment creditor of M – H had charging order over shares – HELD tt P were beneficial owners of shares – bec. charging order =/= legal ownership, so btw both parties, they had equal equitable interests – but P’s interest arose first – so first in time prevails. He who comes to equity must come with clean hands Suntoso Jacob v Kong Miao Ming [1986, SGCA] SJ. (Indon tycoon) made K (S’porean) hold the Co.’s shares on trust – did so bec. SJ wanted to use the Co. to purchase a tugboat (and law states that tugboat can only be registered by a Co. owned by a S’porean) – SJ. later challenged K’s ownership of shares – HELD tt no remedy for SJ. – he practised a deception on the public administration – did not come with clean hands. Bona fide purchaser of a legal estate for value without notice (“BFP”) A BFP can defeat an equitable interest even if the equitable interest arose earlier. Conditions for BFP: Innocent party must – Innocent purchaser must: (i) be a purchaser; (ii) of a legal estate; (iii) act bona fide. EG Tan & Co (Pte) v Lim & Tan (Pte) [1986, SGHC] Pf = equitable owner of shares – Rogue stole his share cert - R transferred the share certificate to Df, in return for Df writing off R’s gambling debt (an illegal debt) – Df could not get himself registered as new owner – he argued tt he was a BFP – Ct rejected that, HELD tt (i) Df had not given consideration The gambling debt, being illegal, could not be recognized as legal consideration. (hence he was not a ‘purchaser’) and (ii) Df did not have a legal estate bec. Df had failed to register himself R never had a legal estate (nemo dat ) , but it is plausible tt if R had managed to get himself registered, he would have been the legal owner and hence capable of passing on a legal estate to Df. But alas, R did not bother to register himself as well. . Transfer of Shares Two Different Regimes - s. 130 Directly-held Shares Scripless trading For shares not on stock exchange, share transfers are effected by the passing of share certificates. Procedure Transferor (must be legal owner) executes the transfer form. Transfer form + share cert must be lodged w the Co (s 126) (If there are share restrictions, they must be complied with) If restrictions are satisfied, the Co. must issue a new share cert within one month of lodgement If there are no share transfer restrictions, the Dirs have no discretion to refuse registration (Sheffield Corp v. Barclay [1905, HL]) (s 130) If Dirs. have discretion to refuse (provided M&A says so), they must provide notice of rejection + statement of facts to transferor and transferee within one month of lodgement. Who may execute transfer? Strictly only the legal owner (ie. person registered as the holder) OR someone he appoints to exercise power of attorney Attorney here refers not to a lawyer but a specialised agent who has certain powers to execute legal formalities. * Xiamen International Bank v Sing Eng (Pte) Ltd [’93, SGHC] XIB took a mortgage of shares from 2 borrowers – XIB only managed to have an equitable mortgage and hence could not act as transferor – XIB finally succeeded on 7th try by activating its power of attorney under the mortgage – XIB effectively became agent of the 2 borrowers (who had legal ownership) to transfer the shares. A party presenting transfers for registration warrants them to be genuine. Yeung Kai Yung v HSBC Corp [1981, PC] – W had forged transfer forms – he approached stockbroker Y to have it registered by Bank – Y did as instructed and B registered it – B (was found liable to the original owner) and sought indemnity against Y – PC HELD tt a person presenting transfer warrants tt the transfer is genuine – Y made to indemnify B. For listed companies, trading has gone scripless. Under the regime of scripless trading, the regime of share certificates is no longer in use. Record is by book-entry in the Depositary Register. All shares purchased are legally held by Central Depository Pte Ltd (CDP), but it will note who has the interest in those shares. More importantly, whoever is reflected on the CDP is statutorily deemed a member of the Co. (s. 130D(1)(b)(i)) Transfers to and from the depository will still require transfer forms (share certs are done away with, but not transfer forms). Blank transfer forms It is common practice for the buyer of shares to not place his name in the transfer form, esp. if he intends to sell the shares quickly. Eg. A (seller) will sign and give B1 (buyer) a blank transfer form. When B1 wants to on-sell his shares to Buyer 2 (B2), he just needs to put B2’s name in the transfer form. Of course, having your name on the transfer form does not effect any legal ownership, it is only upon registration with the Co. (in the case of non-CDP system) or registration with the CDP (tt does not confer ownership but notes interest in shares). Share Transfer Restrictions Basic principles + types of restrictions Types of restrictions Directors’ discretion to refuse registration Default position is that share are freely transferable unless restrictions are imposed When there is a restriction clause, it will be construed strictly in favour of the party seeking to transfer See Pacrim Investments Source of restrictions Co’s M&As By agreement (it would seem tt agreement need not include ALL S/Hs) Public vs. Private Co. A private Co. must have some share transfer restriction (s.18(1)) A public Co. can do so (even a listed Co.) but not compulsory. Most listed Co. will not be allowed to have any restrictions cause it will defeat the very purpose of a stock exchange. The two most common types of restrictions: Directors have discretion to refuse transfer Pre-emptive rights – a S/H must offer to sell it to an existing S/H first before a 3rd P. Moratorium on transfer: *Pacrim Investments v. Tan Mui Keow Claire [’08 SGCA] DP had shares in MSL – shares were issued subject to a moratorium tt they cannot be sold in the open mkt without MSL’s written consent for 1 yr – purpose was to prevent depression of MSL’s share value if sold en masse – DP pledged shares to Pacrim – P sought to get its shares registered – MSL refused bec. it had not given approval for the transfer to P. HELD tt (1) a strict reading of moratorium did not prohibit using shares as security and (2) purpose of moratorium is to prevent selling of shares on mkt and P was not seeking to sell it (in any case, P is bound bec. it has notice of the moratorium). Unless articles prescribe otherwise, Dirs have no discretion to refuse registration. In a case where the Arts do grant discretion, the Dirs. have to exercise this discretion bona fide in the interests of the Co (Re Smith & Fawcett Ltd [1942]) Presumption will be tt Dirs had exercised it bona fide and it is for the party alleging otherwise to prove it. S. 128 CA – states tt Dirs must provide a written notice stating the facts tt justify refusal. This allows courts to examine whether Dirs had valid reasons in rejecting registration. This is an improvement from the common law position where Dirs need not give reasons. HSBC (Malaysia) Trustee Bhd v Soon Cheong Pte Ltd [2006, SGHC] – Dir refused to register bec. he did not want no of members > 50 in order to preserve it as a private family biz – HELD tt it was a legitimate concern. DEBT FINANCING We will first examine “Debentures” – how a debt is created. Then we will examine “Security: Charges” – how companies secure their debts. Debentures No precise definition for a ‘debenture’, but commonly followed one is Levy v Abercorris Slate and Slab Co.: “a document which either creates a debt or acknowledges it…” Transfer of debentures Bearer Debentures Registered-form Debentures Bearer debentures will simply pass by delivery. It does not name the holder. Whoever has possession of the doc has title to it. Some debentures are issued subject to registration – Co. will keep a Register of Debentures (s.93) Transfer will be the same as shares (transfer form + debenture) is lodged. Redemption of debentures Can it be redeemed? Irredeemable/ perpetual debentures Reissue of redeemed debentures Debentures can be redeemed unless they are irredeemable/ perpetual debentures. This can happen (i) at the Co’s option; (ii) at the lender’s option; or (iii) at a fixed date. These do not allow redemption unless there is a remote contingency or after a very long period. However, notwithstanding anything in the debenture, a lender may apply to court to seek court-ordered redemption – s. 100(1) After a debenture is redeemed, a Co may still reissue it (if Arts permit). However, the rights cannot be varied upon reissue bec. the intention is to only allow a revival of the original transaction. Rights and remedies of debenture holders Half a member? Remedies upon default A debenture holder is somewhere in btw an ordinary creditor and a member of the Co. Some rights conferred upon debenture holders tt ordinary creditors lack: s.25 right to restrain ultra vires acts of a Co. (only for holders of floating charge) s. 33(3) right to be notified of any meeting where it is proposed to alter the objects clauses of the M&A s.216 debenture holders may sue for oppression, but this is very rare. Usual remedy for a secured debenture upon default is the power to appoint a receiver. This power could be conferred by: Statute – eg. s.24(1) CLPA grants all mortgagees over land the power to appoint a receiver. The debenture – this would be a matter of contract The court – if holder applies for it (s.2266(5)(d) Securities and Futures Act) If security extends over substantially all the Co’s assets, the holder may appoint a receiver and manager (the diff being tt he can actually run the Co. and realise it as a going concern). Security: Charges Unless the firm is extremely credit-worthy, few banks would lend the Co. without demanding some kind of security. Here we see the most common form – Charges. Consensual real security English law only recognises 4 forms of real security: Possessory transfer - Only for tangible property Title transfer – only for intangible property Pledge – possession is given to pledgee - eg. pawn Mortgage – transfer of ownership/ title A Lien - Same as in pledge, except that possession is not given initially for purpose of security Charge – a security interest created in property, but does not involve transfer of title Quasi Security Eng law only recognises 4 forms of security but businessmen have demanded more flexibility in securing their debts. Hence, over time, they came up with more ways tt we term “quasi-security”. Eg. Hire-purchase when you buy cars, you usually borrow from a Finance company – Dealer gives Buyer possession of the car, but in effect, he is selling the title of the car to the F. F has ownership but B has possession -B is actually hiring the car from F and the installments are characterised as ‘hiring charges’ and at the end of the installment period, you are given the option to buy the title (at a nominal fee) and you own the car through and through. English law, unlike American law, draws a sharp distinction between security and quasi-security. Quasi-security not recognised as real security. Task of courts is to discern what is a real security and what is thought to be, but is actually not real security. Implication can be enormous – bec. prob usually arises when Liquidator of a Co. is seeking to “downgrade” a bank to tt of an unsecured creditor. * Thai Chee Ken v Banque Paribas [1993 SGCA] PE sold shares to bank BP, but promised to buy back the shares at a higher price – ie. a sale and buyback agreement – (they had to do this to go round the negative pledge An undertaking given to other existing credtiors that it would not create additional security over those shares. PE had over those shares) – PE went bust – Liquidator of PE argued tt PE had in effect created a charge, which is now unsecured for want of registration. HELD tt this was a genuine sale and buyback agreement (and PE won)– firstly, transaction was not a sham, hence court will determine nature of transaction from the documents themselves – secondly, the object of a transaction is distinct from its nature at law The court opined tt courts should not be too quick to presume an evasion of the law has occurred. Instead, it is possible to characterize this not as “going against the law” but as a lacuna in the statute, and the job to closing tt lacuna falls to Parliament. Another argument proffered was tt the internal documentation of PB had always characterized it as a loan, but that is irrelevant. If the courts have determined tt this was a sale, the fact that it kept its books in a particular way would not prevent it from being a sale. Furthermore, it is not surprising for business people to think of it as a loan, but it does not mean tt at law it shd be deemed a loan as well bec. what is a loan and what is a charge is really legal terms of art tt a layperson has no reason to be concerned about. – notwithstanding tt there were words used in the agreement that are not usually found in a buyback, this was a valid sale and buyback – hence BP was entitled to have PE buy back the shares. Equitable charge B - Sometimes, whether a charge has been created is no simple matter. See 3.2.7 A legal charge is one created by statute – eg.?? For all intents and purposes, we are concerned with consensual equitable charges. It is so called bec. common-law does not recognise such a security, only equity does. What is it? It does not involve transfer of possession or ownership, instead it Confers rights over property – property to be “specially appropriated, to the discharge of a debt...and confers a right of realisation by judicial process” It is proprietary in nature bec. it binds 3rd Ps – the charge can point to a piece of prop and say “I have an interest in this”. Types of charges – Fixed or Floating Fixed Charge Floating Charge A fixed charge attaches itself to specific property and follows the property wherever it goes. Prohibits dealing with charged assets without consent of charge; it binds 3rd Ps. Fixed charge only suitable for fixed assets (eg. plant, building, property) – item of “ascertained and definite” property When specific assets are named, more likely to be fixed rather than floating charge. Non-fixed assets (eg. inventory and book debts) not suitable to be a fixed charge bec. they need be consumed in the life of the Co. Over time, there was demand for security to be created on non-fixed assets as well (to allow Co. with no fixed assets to get financing as well). The solution came in the form of the floating charge = floats over the charged assets (and Co. is free to transact with them) until it “crystallises”, after which the Co. is not allowed to deal in those assets. Charge will crystallise upon the occurrence of a pre-determined event (usually default). Examining the Floating Charge in detail… Characteristics of a floating charge The approach for determining floating charge Importance of distinguishing the two There is no one set of formalities to create a floating charge. Courts have held a floating charge usually has 3 elements: *Re Yorkshire Woolcombers Association Ltd [1904]: If it is a charge on a class of assets of a company present and future; If that class is one which, in the ordinary course of business of the company, would be changing from time to time; and If it is contemplated that, until some future step is taken by 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. The elements in Yorkshire received an impt gloss by HL in *In re Spectrum: Until it is crystallized, a charge does not have interest in the asset. Instead, his interest is in a fund of circulating capital “Circulating” because the contents of the fund follows the trading cycle of the firm – stock used to produce finished pdts – pdts sold off to become book debts – debts collected to become funds – funds used to buy stock – and the cycle continues. ie. the constituents of the charged fund are in a state of flux (per Lord Walker at [138]) Agnew v CIR [2001, PC] Firstly, look at the agreement to piece tgt the precise rights intended to be created. Then, see if those rights fit under the characteristics of a fixed or floating charge. Further, it was opined tt the touchstone of a floating charge is whether the debtor Co. has control over the asset and whether it was free to withdraw the asset from security. When deciding if Co. had freedom, Co will look beyond the doc and at the actual situation btw the parties *Dresdner Bank v Ho Mun-Tuke [’92, SGCA]– Pal-El scandal – “daily certificates”-type cases – in this case, notwithstanding tt docs strictly said tt Co had to get bank’s approval before dealing in e shares – it was found tt Co. had freedom to alter the pool of shares tt constituted the security + Co. never sought nor did bank demand such approval – HELD to be floating charge. Policy considerations in approaching the issue: Pref creditors must be afforded the protection tt Parliament intended them to have; and Documents will be construed in their commercial contexts. (In re Spectrum) The advent of floating charge placed them ahead of preferential creditors Preferential creditors = unsecured creditors who had priority over other ordinary unsecured creditors. Eg. employees and govt (when it comes to unpaid taxes). See s. 328 of CA. in the order of priorities. Parliament intervened to protect pref creditors: Pref creditors were given priority over floating charges; and All floating charges must be registered Fixed or floating – a world of difference The classic paradigm is a bank that has not registered its charge + seeking to make it a fixed charge. If it is found to be a floating charge, lack of registration = void! Fixed charge will also place them ahead of pref creditors. Battle over book debts Difficult to create fixed charge over book debts Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979, EWHC] Re New Bullas [1994, ECA] C Book debts (ie. debts owed TO the Co. eg. by customer) offer good security. Crucial issue is how to create a fixed charge over them. Only way is to make Co. deposit proceeds into blocked accts – ie. Co. cannot withdraw. But this is not feasible bec. Co. will need the book debts for its working capital. The fight in these cases was on how much restriction on use of book debts would = fixed charge? Co purported to create a fixed charge over its book debts in favour of Bank – Co assigned the book debts to B but Co had freedom deal w it with the provisio tt B had the right to terminate Co’s freedom to deal in e book debts by serving Co notice – Slade J. HELD tt a floating charge was one where debtor had unrestricted right to deal – in this case, Co “could not dispose of an unencumbered title to the book debts” – hence it was a fixed charge. What he was essentially saying was tt since there was some restriction on Co’s freedom, it was fixed charge. Plus, he analogized it to an equitable mortgage. This decision was overruled in *Re Spectrum: bec. until the B terminated the right to deal, it was clear tt Co. had freedom to deal w proceeds it must be a floating charge. Co tried something new – sort of a halfway house measure – uncollected book debts subj to fixed charge but proceeds from collected debts were subj to floating charge – Nourse LJ. upheld this arrangement in favour of freedom of contract. But this decision was severely criticized by Lord Millet sitting on the PC in Agnew – firstly, if this was supposed to be a charge, it must be a floating charge bec. Co. had freedom to deal w the proceeds – secondly, this was an internal contradiction in the formulation of the charge – the security of the debts and tt of the proceeds are inseparable bec. the whole pt of having claim over the debts is tt they yield proceeds. In re Spectrum – officially overruled this case. Crystallisation of floating charge Events tt trigger crystallisation Effect of crystallisation Unless parties name a certain contingency, the charge will not usually crystallise automatically. Examples of events of crystallisation: However, if Co goes into liquidation, all floating charges automatically crystallise. Appointment of receiver (by charge). Mere fact of default not sufficient to crystallise, charge must take step of appointing receiver. Cessation of Co’s business (not liquidation) – since purpose of floating charge is to allow Co to use assets in course of business, that purpose is gone if Co is no longer in that business. If debenture is silent as to what would crystallise, the mere taking of steps to enforce security would crystallise it (see box on the right) As mentioned earlier, the clearest diff is tt upon crystallisation, the Co. loses the freedom to deal in the assets. For the chargee, a fixed charge fastens on whatever assets there are in the class of assets within the ambit of the charge. *Dresdner Bank: Debenture did not make mention of any crystallisation event bec. it was never meant to be a floating charge – HELD tt banks by taking court action to enforce, had crystallised the charge. B sought to argue tt since crystallisation created a fixed charge, it was OK even though the charge was not registered SGCA said NO; crystallisation did not create a new charge – if original floating charge was void for want of registration, the fixed charge was void too. Priorities and the Negative Pledge Vulnerabilities of Floating Charges Dissipation of security Co has freedom to remove assets from the class of assets Co can create subsequent charges on same assets Priority issues General rules: Btw equal floating charges, the first in time prevails. But, Subsequent fixed charge will rank ahead of earlier floating charge Pref creditors rank ahead of floating chargee in event of liquidation Registration All floating charges require registration, whilst only some fixed charges so require. Failure to register renders the charge void against the liquidator. Negative Pledges Bec floating charges are susceptible to debtor creating a subsequent charge and displacing its priority, it is very common for charges to stipulate that the Co. undertakes a negative pledge – ie. not to create a subsequent charge which will (i) rank pari passu (equally) or (ii) have priority over the floating charge. No case law on the juridical nature of a negative pledge. Generally accepted that it does not create a security interest, but is an equitable restriction on the co’s power to create subsequent charges. It is effective only against a subsequent chargee who takes with notice of the restriction. Registration of charges Registration of charges What must be registered and how? Failure to register Effects of registration ALL floating charges must be registered. Only certain fixed charges (as listed in s.131(3)) Purpose of registration Serves as constructive notice to the world so tt subsequent creditors know whether tt asset has alr been burdened But some criticise this on the ground tt since not ALL charges are to be registered, it is possible for assets to have hidden burdens. Procedure – s. 131 Within 30 days of creation, must register. Once it has been registered, can request for a certificate of registration. Failure to register renders the charge void against the liquidator and any creditor of the co: s 131(1). Charge remains valid between co and chargee. Registration is a perfection requirement (unregistered charge = inchoate interest) tt can be asserted against 3rd Ps. If charge is void, the chargee is downgraded to an unsecured creditor quite disastrous outcome. Registration does not confer priority Priority depends on the common law rules that govern priorities of competing claims. Issuance of Certificate is conclusive evidence tt charge has been registered (whether it was validly created is another matter: Asiatic Enterprises). Implication is tt Co. cannot later seek to void registration for late registration. Registration serves notice of the existence of the charge but not of its terms (Wilson v Kelland) Problem usually arise when prior charge has a negative pledge and subsequent chargee did not know. Academics qn whether this rule is applicable here considering tt in our form for creating charge there is a section allowing restrictions to be noted. *Kay Hian v. Jon Phua Ooi Yong (’89, SGHC) – Chan J. chose not to decide issue – case was decided on burden of proof – burden on subsequent chargee to show it had no knowledge of negative pledge – failed in light tt a negative pledge is very commonplace. Creation of charges: The difficult case of Asiatic Because there are no formalities attached to creating a charge, it is up to the court’s construction each time to determine whether in effect, there has really been a charge. *Asiatic Enterprises (Pte) Ltd v UOB [1999] SGCA 85 Facts + Decision Reasoning Significance + Evaluation Bank extended banking facilities to A. Std terms stated tt upon default, B was “entitled (as equitable chargee), to attach the outstanding debts to any property belonging to A”. Further, B had power to lodge a caveat against any real property that may now or later be registered in A’s name. Charge was registered. A went bust – B went to court to enforce its charge against the said properties – it also lodged caveats over A’s property – Liquidator challenged it. SGCA gave judgment for A. Clause 10 does not create a security interest All the clause said was tt B was “entitled to attach” this in effect gives B the option to take a charge over A’s property. ie. it was a promise to grant a charge and in the eye of the court, this did not confer any security interest Court gave the clause its ordinary and natural construction (we see tt courts are not willing to bend too far in realising the commercial realities of the parties). Did the events of default create security interest? B sought to argue tt Clause worked in effect to give B an option to take the property, which was duly exercised by the lodgement of the caveats. SGCA considered the case of Murphy v. Wright (NSW CA) in detail. In tt case it was held tt lodging of caveat could crystallise the security interest. SGCA disagrees. All the Clause gave was an entitlement to, by unilateral action, create a charge upon default. ie. A defaults – B entitled to create a charge (at this stage B can begin to create a charge, but there is no charge yet). SGCA HELD tt there was no mechanism provided for the creation of the charge – in tt case, B had to use “such mechanism as the law provides”. In this case, B was seeking to argue tt the lodging of caveat was tt mechanism. CA disagreed bec. “we do not find it conceptually possible to treat the act of lodging a caveat as an appropriate mechanism for creating a charge on the land” Simple reason is tt under our system, a caveat can only be created if there was a pre-existing valid interest in the land. It would be circular to allow a caveat to create an interest that is required to create the caveat in the first place. A promise to grant a charge contains no security interest The promise should be accompanied by some mechanism providing for the creation of the charge. Lodging of caveats is not an appropriate mechanism. More info in Tutorial 10