RAVINDEJIT KAUR

TOPIC 6 – LOAN AND  For borrowings, the

DEBENTURES company is usually
required to pay interest
 A company is usually
on the loan; the rate is
incorporated to conduct
not dependent on the
business, which requires
profits earned by the
funding. There are two
company but on the loan
sources of funding: 
contract. Interest must be
i. Issuance of shares paid even if the company
ii. Borrowings does not make any profit.
It can be paid from the
 Rules governing share company’s capital.
capital do not apply to loan
As security for the loan, the
capital 
lender will usually require the
 Differences: company to create charges
over its assets in favour of the
 A person who contributes
lender. The charge can be fixed
towards the capital of the
or floating. 
company is known as a
member, whereas a POWER TO BORROW
person who lends money
S.21 CA 2016 – Companies have
to the company is known
unlimited capacity
as a lender or creditor
A company has the full capacity
 A shareholder is a to carry on or to undertake any
member and a Creditor is business or activity, to do any act
a lender which it may do or to enter into
 A loan capital, unlike transactions. It has full rights,
share capital, requires powers, and privileges for those
repayment of the loan; a purposes. Thus, it follows that a
company is prohibited company has the power to
from returning share borrow money for its business
capital to the members. or activity.

 As a return for S.211(2) – The Board has all

investment, the company the powers necessary to
may distribute its manage, direct and supervise
prohibits, not its capital, the management of the
as dividends to its company’s business. This can
members.   be modified by the company’s
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constitution. Unless restricted by public company can only

the constitution, the power to borrow money upon
borrow is vested with the lodging with the
Board. Registrar of
Companies (ROC) the
S.190(3) – A public company
statutory declaration
shall lodge with the Registrar a
of compliance.
statutory declaration by the
secretary or one of the directors  S.190 :Restrictions on
of the company verifying that commencement of
conditions have been complied business in certain
with, and the company shall circumstances
become entitles to commence
(3)A company referred to in
business or exercise any
subsection (1) or (2) shall
borrowing powers from and after
lodge with the Registrar a
the lodgement of the statutory
statutory declaration by
declaration.
the secretary or one of
 WHEN CAN THE the directors of the
COMPANY BORROW ? company verifying that
paragraphs (1)(a) and (b)
(i) Private Company :
May borrow money once or 2(a) and (b), as the case
may be, have been
it is issued with the
notice of registration. complied with, and the
company shall become
 S.18, Effect of entitled to commence
incorporation business or exercise any
(1)Upon the date of borrowing powers from
incorporation specified in and after the lodgment of
the notice of registration the statutory declaration.
issued under section 15, (4)COMPANY CHARGES
there shall be a company (5)Charge is one type of
by the name and securities created by the
registration number as company to secure
stated in the principal repayment of the loan.
register kept by the (6)In the event that the
Registrar for this purpose. company fails to repay
the loan, the lender
(charge) has recourse
(ii) Public Company : against the assets.
S.190 (3) Provides
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(7)A trading company has otherwise. A charge therefore,

implied power not only to may be legal or equitable, and
borrow but to charge its it covers the other securities
assets as securities such as liens and pledges.
(8)In the event that the (10) The company
company fails to repay creating the charge is
the loan which is secured known as the chargor and
against the company’s the lender in whose favour
assets, the lender has the charge is created is
recourse against the known as the chargee.
assets. The assets are (11) Bensa Sdn Bhd (In
sold and the proceeds Liquidation) v Malayan
used to settle the loan. Banking Bhd & Anor
(9)However, not all loans are [1993] 1 MLJ 119, High
secured against the Court held that a
company’s assets. Much memorandum of deposit in
depends on the respect of money in a fixed
bargaining power of the deposit was a secured
company and the lender. debenture as it contained
Similarly, the types of the elements of obligation,
securities given are covenant, undertaking or
different. Some lenders guarantee to pay and it
are satisfied with was duly registered as a
guarantees from the charge under section
company’s director; 108(3)(a) of the Act. The
some require a charge definition also extends to
over the company’s other securities such as
assets including the pledges and liens.
company’s undertakings
and goodwill; and some (12) Definition of charge
will even include charge also extends to other
over the uncalled capital securities such as liens
of the company which is and pledges. The inclusion
also an asset of the of the latter is particular
company. importance with the advent
Definition of charge S.2(1) – of scripless trading of
‘charge’ include a mortgage securities in Malaysia.
and any agreement to give or
2 TYPES OF CHARGES
execute a charge or mortgage
whether upon demand or
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1) Fixed charge/specific anyone else. So there was a

charge – fixed asset prohibition on dealing with the
book debts before collection of
 Malayan International
them. The court held that it was a
Merchant Bankers Bhd v
fixed charge. The restrictions on
Highland Chocolate &
chargor’s company must be
Confectionery Sdn Bhd (No 2)
complied with, that is to deal with
– define fixed asset
the assets under fixed charge,
It would suffice that the relevant the chargor must obtain prior
property is ascertained / definite / consent of the chargee, Barclays
capable of being ascertained / Bank Ltd first.
defined in the instrument creating
• The property is ascertained
the charge so that there can be
or definite or capable of being
no doubt that the property is
ascertained or defined in the
caught by the charge.
charge instrument unlike floating
• Attached to a fixed or charge.
specific assets of a company.
• Eg : Book Debt as in the
(we know the value of the
case above and affirmed by the
assets)
case below.
Siebe Gorman & Co Ltd v
 UMBC Bhd v Aluminex
Barclays Bank Ltd
(M) Sdn Bhd
The company (chargor) cannot
The Supreme Court affirmed the
deal with the assets without
creation of a fixed charge on a
consent of lender
company’s book debts.
(chargee).Siebe Gorman, a
diving equipment company,
granted a debenture in favour of
2) floating charge --- current
Barclays Bank to secure a loan.
asset
The document was expressed to
create a ‘first fixed charge’ over • It is not a specific charge
all present and future book debts. on the assets of a company.
It required Siebe Gorman to pay • It can be created against all
the proceeds of its book debts the property of the company,
into a Barclays Bank account, whether present or future.
and prohibited Siebe Gorman
from creating any other charges  Re Yorkshire
on those book debts, or Woolcombers Association Ltd
assigning the book debts to [1903] 2 Ch 284 – characteristic
of floating charges
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If a charge has the following business of the company shall

three characteristics, it is a continue to be carried out in the
floating charge: ordinary way but the company
would have no right to touch
i. It is a charge on a class of
the fixed property. Unlike fixed
assets of a company present
charge, a floating charge is a
and future;
specific charge is one that is
ii. That class is one which, in the not ascertained and definite
ordinary course of the property as it is ambulatory and
business of the company, would shifting in its nature which it is
be changing from time to time; intended to affect until some
and event occurs or some act is done
iii. It is contemplated that, until which causes it to settle and
some future steps are taken by fasten on the subject of the
or on behalf of those interested in charge within its reach and grasp
the charge, the company may such as via crystallization
carry on its business in the  5.0 ) CRYSTILLISATION
ordinary way.
• DEFINITION by legal
 Evans v Rival Granite English dictionary :
Quarries Ltd (define floating
the conversion of a floating
charge)
charge into a fixed charge
A floating security is not a future over any assets given as
security; it is a present security pledged to secure
security, which presently affects performance of an agreement
all the assets of the company or payment of a debt, on the
expressed to be included in. It is occurrence of certain events.
not a specific security; the
 A fixed charge is
holder of charges
fundamentally different from a
(chargee/creditor), cannot affirm
floating charge in terms of the
that the assets are specifically
rights and powers of the chargee:
mortgaged to him.
(i) Fixed charge : When there is
 Illingworth v Houldsworth
default in payment by chargee,
(define floating charge )
automatic exercise of rights.
The court stated that a clause in
(ii) Floating charge : When there
a floating charge allowing a
is crystallisation then the
company to continue to trade in
chargee may exercise of rights.
the assets charged shows the
intention of the parties that the
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AUTOMATIC every item comprised in the

CRYSTALLISATION - FIXED security, but not specifically
CHARGES affecting any item until some
event occurs or some act on the
 There are 2 positions :
part of the mortgagee is done
- Common law which causes it to crystallise
Re Manurewa Transport Ltd- into a fixed security
deal with property without  7.0) Negative Pledge
consent of lender (chargee) = Clause
automatic crystallization
 Prior to crystallisation, a
Re Brightlife Ltd Fire Nymph chargor of a floating charge
Products Ltd v The Heating retains the power and
Centre Pty Ltd -- (fixed charge autonomy to charge or deal
will take priority over floating with the assets subject to the
charge) charge.
(ii) Malaysian Position  A negative pledge clause
 Silverstone Marketing or restrictive clause is normally
Sdn Bhd lwn Hock Ban Hin incorporated into a floating
Trading Sdn Bhd, The court charge to avoid the chargor
decided in favour of the claimant. from doing the above.
The clause of automatic (prevent chargor from dealing
crystallization which allows a with assets subject to the
floating charge to automatically charge to 3rd party).
become fixed if an event
 “The chargor undertakes
occurred was valid and is
that it will not, without the
enforceable in Malaysia.
prior written consent of the
chargee, grant any subsequent
Malaysian International security ranking in priority to or
Merchant Bankers Bhd v pari passu with the floating
Highland Chocolate & charge.”
Confectionary Sdn Bhd, A  The clause thus binds the
floating security is not a company as the chargor.
specific mortgage of the assets,
 The breach of such a
plus a license to the mortgagor to
pledge is a breach of covenant
dispose of them in the course of
which allows the chargee to
his business, but is a
enforce the charge.
floating mortgage applying to
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 8.0 ) Negative Pledge  S.39 : Non-application of

Clause –Doctrine of Constructive doctrine of constructive notice
Notice
Registration of Charges
 There are 2 positions :
Purpose of Registration
(i) Common Law position
• To provide protection to both
(doctrine does not apply)
the creditors and anyone
Wilson v Kelland, subsequent dealing with the company.
charge of a fixed charge who has
 Re Jackson & Bassford Ltd
no knowledge of a restrictive-
clause in a prior floating charge Who may register?
is not bound by the restrictive  S.352 : Registration of
clause and- may take priority charges
over the chargee of that prior
floating charge – even if there is When must register ? S.352(1) :
a negative pledge clause if you Registration of charges,a
know or don’t know you still have company that creates a
priority charge over its property or any
of its undertakings to which this
(ii) Malaysian position section applies shall lodge
• Prior to the Companies Act within thirty days from the
2016 - Doctrine of constructive creation of the charge,
notice applies. together with the prescribed
fee with the Registrar for
United Malayan Banking Corp
registration, a statement of
Bhd v Aluminex (M) Sdn Bhd,
particulars of the charge in the
The court held in the contest
form and manner as may be
between a floating charge and a
determined by the Registrar.
fixed charge, the floating charge
will have the priority if the Extension of time and
conditions are fulfilled which is rectification – s361
the floating charge document  S.361 : Extension of time
contains a negative pledge and rectification of register of
clause and the holder of the fixed charges– the Court’s discretion
charge has an actual notice of to extend the time for registration
the negative pledge clause. and to rectify any omission or
Current CA 2016 - s.39 : Doctrine misstatement in the register.
of constructive notice does not (i) Accidental
applies
 Fenton J Thorley & Co Ltd
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(ii) Was due to inadvertence

 Re Ace Funding Ltd
(iii) Was due to some other
sufficient cause;
 Re Tingri Tea Co ltd
1. Fixed charge vs fixed charge -
(iv) Is not of a nature to prejudice Rule 2
the position of creditors or
shareholders; or 2. Fixed charge vs floating
charge - Rule 1 & 2
(v) That on other ground it is just
and equitable to grant relief. 3. Floating charge vs floating
charge - Rule 2
 Re Public Bank Bhd
 GENERAL RULE : is that
Effect of Non-Registration of the fixed charge, even though it
Charge is second in time, will have
(i) Effect on the Chargee (the priority. This is due to the nature
Lender) of the first charge, it is a floating
charge which allows the
S352(2): If a company company to deal with the
contravenes with subsection (1), charged assets in its ordinary
the charge shall be void against course of business to maintain
the liquidator and any creditor of itself as a going concern. This
the company, so far as any includes the right to charge its
security on the company’s assets as securities for loans in
property or undertaking is the form of fixed charges.
conferred.
 EXCEPTION : However,
• The chargee becomes an the outcome may be different
unsecured creditor. where there is a NEGATIVE
 Re Monolithic Building Co PLEDGE CLAUSE in the floating
[1915] 1 Ch 643 charge document. (It is an
undertaking by the company,
PRIORITY OF CHARGES
and its breach may entitle the
 General rule: lender holding the floating
charge to recall the loan).
 United Malayan Banking
Corp Bhd v Aluminex (M) Sdn
Bhd & Anor
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In the event where a floating Rights and Liabilities of

charge was created first in time Debenture Holders
then the fixed charge, the floating
 When a company invites
charge will have priority if there
the public to deposit money
was negative pledge clause in
with the company, it is a form of
the document creating the
borrowing.
floating charge.
 The company may issue
PART 2 : DEBENTURES
debenture as evidence
 1.0) DEFINITION OF
 S257: Duty to circulate
DEBENTURES
copies of financial statements
 S2(1): “debenture” and reports (S.257 (1) (d))
includes debenture stock, bonds,
sukuk, notes and any other
securities of a corporation
whether constituting a charge on
the assets of the corporation or
not;
 Levy v Abercorris Slate &
Slab Co
The term debenture was define
to mean a document which
creates / acknowledges a debt.
 Bensa Sdn Bhd v
Malayan Banking Bhd
The meaning of debentures
imports a debt. This instrument
generally imposes an
obligation or covenant to pay.
This obligation or covenant is in
most cases at the present day
accompanied by some charges /
security as such. Besides that,
the term debenture should
include any obligation,
covenant, undertaking /
guarantee to pay / any
acknowledgement there of.