DEBENTURES AND CHARGES

1. DEBENTURES AND CHARGES PART IV ;COMPANIES ACT 1965 DR. ZAHIRA MOHD ISHAN

2. DEBENTURES Concept – definition Types Transfer Redemption Rights & Remedies

3. Debenture (‘dbt’) • Co’s borrowing power: usually included among objects of companies. • If not included as object clause, Art. 13 & 15 of the Third Schedule includes power of companies to borrow. • Usually, the power is exercised by BoD. • No special rules for company borrows from private individuals / financial institutions. Use the general law of debt. • Company may finance operations by the issue of debt securities in the form of dbt.

4. Definition of dbt: statutory • No precise legal meaning. • s.4 : “includes debenture stock, bonds, notes and any other securities of a corporation whether constituting a charge on the assets of the corporation or not” According to Woon (p.524): ~ Tend to be a medium to long debt securities created by a company. ~ expressly excludes a cheque, letter of credit, order for the the payment of $ / bill of exchange. ~ not essential for dbt to be secured by a charge or at all.

5. Definition of dbt: judicial • Levy v Abercorris Slate & Slab Co. (1887) “it is not either in law / commerce / strictly a technical term, or what is called a term of art”. • Bensa Sdn Bhd v Malayan Banking Bhd (1993): using a more liberal approach by including ‘any obligation, covenant, undertaking or guarantee to pay or any acknowledgment thereof.

6. Types of dbt • A long list of terms used by businessmen. Differences between the instruments used are merely a matter of business practice. • ‘loan stock’ & ‘debenture’ denote unsecured borrowings by the company on a long term basis. • ‘debenture’ is a discrete unit; ‘debenture stock’ is a fund that does not exist as discrete units. • ‘notes’ traditionally are short/medium-term loan agreements, usually unsecured. • ‘convertible bond’ or ‘convertible loan stock’ is a debt security; holder has option of converting it into equity shares upon the stipulated terms.

7. Transfer of dbts: • Issuance of dbt by a company: • By bearer debentures (title to the dbt will pass by delivery). In Edelstein v Schuler & Co: bearer debenture is recognized as a negotiable instrument. Problem: theft/loss, but can arrange to place it at central depository. • In a form that only allows transfer by registration (refer to s. 70(1)). Company shall keep a register of holders of the dbts at the registered office of the company or at some other place in Malaysia. This transfer is similar to transfer of shares.

8. Redemption of dbts: • By company repaying the money owed. • At company’s /lender’s option; at fixed date/ determinable future time. • S. 73(1): co may be reissue redeemed dbt (r.d)/issue other dbts in their place: not considered issue of new dbt. S.73(2):Holder of dbts have same priorities as if dbt never been redeemed. ~ Can’t reissue r.d if there’s contrary provision (express/implied) in the articles/contract/co has manifested intention that dbt be cancelled.

9. Redemption of dbts (cont’d) • S.72: perpetual dbt: a dbt that will not be redeemed/ redeemed only on occurrence of a remote contingency / at the expiry of a period however long. ~ security for his dbt may be enforced by order of court according to s.77(1).

10. Dbt Holders’ Rights & Remedies 1. Trustee for dbt holders: ~eg: land vested in dozens/hundreds of mortgagees. Here, it’ll be > convenient for 1 person/ small group of person to be appointed as trustees for dbt holders. • A must in Malaysia: s.74(1) & has to be a trustee corporation. ~S. 4(1) : borrowing corporation & trustee corporation. • The trustees are the one who will pursue the remedies on behalf of the debenture holders.

11. Trustee for dbt holders: • Conditions to appoint trustee corporation: s.74(3) [i.e. unrelated & without interest to the borrowing company but subject to s.74(4)(b) i.e trustee corp is creditor to borrowing co.]. • Retirement of trustees: s.75. Continuous existence of trustee corporation despite cessation of existence or qualification/ retirement. • Duties of trustees: s.78

12. Dbt Holders’ Rights & Remedies 2. Rights of dbt holders: ~ dbt holder, technically, is a creditor & not a member of the company. No rights as members but occupy a position mid-way between the members & ordinary creditors. So, has more rights than ordinary secured or unsecured creditors. Company Members Dbt holder Ord creditors

13. 2. Rights of dbt holders: Holder (or trustee)of dbt .. • secured by floating charge has the same right as member of company (s. 20(2)(a)) to restrain an act that is beyond the co’s capacity/power: vs unauthorised disposition of co’s assets. • are entitled to notice of any meeting where it proposed to alter the object clauses in the MoA (s.28(3)). Holders of not less than 10% in nominal value of co’s dbt may apply to Court to cancel the proposed alteration to co’s objects (s.28(5)). Here, unlike #1, dbts need not be secured.

14. 2. Rights of dbt holders: Holder (or trustee)of dbt .. • are entitled to remedies under s.181 (unfair treatment & oppression). A statutory recognition that dbt holders (esp those secured by floating charge) have a keen interest in the way a co is run.

15. CHARGES Concept Fixed & Floating Crystallization

16. Concept of Charges • No rule of law that co must give security for money it borrows. Depends on co’s creditworthiness. • ‘Security over property’: Electro Magnetic (S) Ltd v Dvlpm Bank of S’pore Ltd [1994]: “ some real or proprietary interest, legal or equitable, in the property as distinguished from a personal right or claim thereon”. • Types of security:

17. Concept of Charges • S.4(1) inexhaustively defines a charge: including mortgage & any agreement to give / execute a mortgage or charge whether on demand or otherwise. • Pledge & lien: there’s possession of the assets in question being granted to security holder. • Mortgage & charge allow security over intangible assets (shares, book debts) & tangible asstes where possesion may not be practical (eg machinery that has to be operated by the party giving security)

18. Concept of Charges • ‘Charge’: a security interest in property created by contract; does not transfer title. • ‘Legal mortgage’: a conveyance/ assignment of legal title in property subject to equity of redemption. • ‘Equitable mortgage’: the assignment of equitable title as security.

19. Generally, security is created by consent of the parties. Certain lien & charges are created by operation of law. • Yet, retention of title clauses also confer advantages on certain creditors without amounting to security. This arrangement is ‘quasi-security’.

20. Types of Charges: 1)Fixed/specific charge :one that attaches to a specified asset whether presently in existence / acquired in future (Holroyd v Marshall (1892)). eg: land or machinery currently owned / subsequently acquired by the chargor / book debt. ~ the company cannot dispose of the property without lender’s consent. ~If the asset is transferred, the charge generally follows it but may be defeated by the bona fide purchaser of the asset without notice of the existence of the charge.

21. 2) Floating charge (s.108(3)(g)): • Illingsworth v Houldsworth (1904): is ambulatory and shifting in nature, hovering over… the property which it is intended to affect until some event occurs/ some act is done which causes it to settle & fasten on the subject of the charge within its reach & grasp”. i.e it will not attach to any specific assets until it is “crystallised” (becomes fixed charge). ~ as long as it is floating, the assets may be dealt with in the ordinary course of business as if they were unencumbered (Re Colonial Trusts Corp, ex parte Bradshaw)

22. Floating charge: • A charge on a class of assets rather than on a specific asset. Eg: co may charge its stock in trade, present & future. While the charge remains uncrystallised, the co may sell part of its stock in trade & purchase replacements. • Floating charge does not affect goods once they are disposed of. • Crystallisation affects all the goods within the class at the time; these goods are subject to fixed charge.

23. Fixed or Floating charge? • Need to interpret the particular loan instrument to determine whether it’s fixed / floating charge. • Generally, it’s a floating charge if has following characteristics:Re Yorkshire Woolcombers Assoc. Ltd (1903): i- charge on a class of assets present / future; ii- a constantly change class of asset in the ordinary course of business; & iii- until & unless crystallisation occurs, co can carry on its business in the usual way in relation to the particular class of assets.

24. Fixed or Floating charge? • Dresdner Bank AG v Ho Mun-Tuke Don [1993]: the alleged Letter of Hypothetication(LOH) executed in favour of various banks were held as floating charges because the court found the security created was ambulatory and shifting in its nature. • Re Bonds Ltd (1921): the letter of lien here created floating charge on Bond Ltd’s property. • Zeno Ltd v Prefabricated Construction Co (Malaya) Ltd: “it remains dormant until the u’taking charged ceases to be a going concern or until the person in whose favour the charge is created intervenes…”.

25. Crystallisation • No re-registration with Registrar needed as no new security interest is created. • If original floating charge were void for non-registration (required under s 108), it remains void after crystallization (Re J & D Contracting Pte Ltd). • Forms of crystallisation: i- implied ii- semi-automatic; & iii- automatic

28. Registration of charges: s.108(1). • Priorities of Charges: - Fixed charges rank ahead of floating charges. - equitable charge rank ahead than legal charge if it is created earlier & its existence is known by legal charge holder. -registered charged generally have priority in order of time and date of registration.First time rule apply where two equities are equal.