CHAPTER 11
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At the end of this chapter, students should be able to:
Explain and examine 1)the borrowing capacity of a company, and 2)Effects on the company assets due to such borrowings
DEFINITION OF DEBENTURE
According to section 2(1) of the Malaysian Companies Act 2016, debenture 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. Â
Bensa Sdn Bhd v Malayan Banking Bhd [1983 ] A debenture includes any obligation, covenant or acknowledgement of debt. It also includes a loan agreement.
A debenture means a document which either creates a debt or acknowledges it, and any document which fulfills either of these conditions is a debenture. It is a document which acknowledges the indebtedness of the company. But not every document which acknowledges indebtedness is a debenture. The term debenture implies a degree of permanent or long term borrowing.
TYPES OF DEBENTURE
DEBENTURE / DEBENTURE HOLDER (DH)
SHARE / SHAREHOLEDR (SH) SH is a member of company. SH has the right to vote. Dividend on share can only be paid if the co has profit & cannot be paid out capital. Share is not secured. Share capital cannot be repaid without legal formalities. Co. cannot purchase its own shares.
DH is an external creditor. DH has no right to vote. Interest on debenture can be paid out capital (whether profit is available or not). V
Debenture is secured by charge. DH is a secured creditor (DH gets priority over SH in winding up) A co. can repay debenture in according with the terms. A co may purchase its own debenture.
CHARGE ď‚šA company may require financial assistance such as a loan to carry out or expand its business. ď‚šA charge is a collateral in return for the financial assistance given by the lender to the borrower. ď‚šA company has the power to charge its assets for the purposes of borrowing.
Definition of charge
Section 2(1) Companies Act 2016 defines a charge to include a mortgage and any agreement to give or execute a charge or mortgage whether upon demand or otherwise.
TYPES OF CHARGE
Illingworth v Houldworth [1904] AC 355
This case explains a floating charge: “…the term floating charge as “ it is a charge which floats like a cloud over the whole asset from time to time falling within generic description”
CHARACTERISTICS OF FLOATING CHARGE
CRYSTALLIZATION OF FLOATING CHARGE
CRYSTALLIZATION OF FLOATING CHARGE CASES
POINTS OF LAW
United Malayan Banking The appointment of a receiver by the Corporation Bhd v Official Receiver court or by creditor under a power contained in the debenture has the effect of crystallizing floating charge. Dresdner Bang AG v Ho Mun Take Don
The charge crystallizes when the bank took steps to take possession of the shares.
Re Woodroffes
A floating charge crystallize upon the cessation of the co.’s business.
Silverstone Marketing Sdn Bhd v Hock Ban Hing Trading Sdn. Bhd. Yang Lain
A floating charge may crystallize automatically upon the happening of specific event.
CRYSTALLIZATION OF CHARGE UPON HAPPENING OF EVENTS:
Priority of charges
ADVANTAGES V DISADVANTAGES OF FLOATING CHARGE ADVANTAGES
DISADVANTAGES
More feasible for co. stocks to be created than fixed charge.
Risk of dissipation
More flexible than fixed charge.
Execution proceedings
Creation of subsequent fixed charge Distress proceedings
REGISTRATION OF CHARGE