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DR. MD.

ABDUL JALIL, COMPANY LAW, 2013

CHAPTER EIGHT:DEBENTURES AND CHARGES WTHAT IS DEBENTURE? Debenture is a document that acknowledges indebtedness to the lender (usually a bank). The borrower of money issues debenture to the lender. There are two parties in the debenture: i. the borrower of money; and ii) the lender of money. S 2(1) of CA (Malaysia) provides that debenture includes debenture stock, bonds, notes and any other document evidencing indebtedness. However, cheque, bankers draft, bank note, bill of exchange, letter of credit, insurance policy etc are not considered as debentures. DEBENTURES HOLDER The person or institute that holds debentures is known as debenture holder. In other words, the lender of money is the debenture holder and the lender is usually a bank or a financial company. FUNCTIONS OF DEBENTURE The main function of a debenture is that it acts as a documentary evidence for loan. It indicates that the borrower is indebted to the lender for a specific sum of money that should be paid back on certain date or by installments within a specific time frame. SECURED ABD UNSECURED DEBENTURES A debenture is secured when the debenture is issued to the lender of money together with a charge or a mortgage on certain property of the borrower as a security for the loan given. When a debenture issued without securing the loan by a charge or a mortgage, it is called unsecured debenture. For example, X Company borrows RM 200,000 from Maybank and charges its real estate property to the bank as security for the loan. This debenture is known as secured debenture. Unsecured debenture is risky for the lender in the sense that it does not guarantee the payment of loan in case the borrower is bankrupt or the borrowing company is wound up. On the other hand, for secured debenture, if the borrowing company is wound up, the chargee can claim from the charge property by selling it. DUTIES OF THE BORROWER The borrower has a duty to issue debenture to the lender within two weeks from the date in which received the money. The borrower should use his best endeavour to carry on and conduct business properly and effectively, so that it can earn enough profit to pay installments regularly to the bank. CHARGES When a company borrows money from a bank it charges of its assets to the bank to secure the loan. So, charge is a security interest on certain property of the borrower. If the borrower fails to pay the loan, the chargee can sell the charge property after obtaining permission from the court. There are two parties in charge: i. Chargor ii. Chargee The borrower is the chargor and the money lender is the chargee. The chargee does neither become owner nor gets possession of the charged property. The chargor remains as owner and in possession of the property during the loan period. The chargee gets only a security interest in the property. However, some restrictions are imposed on the charger with regard to the dealing in the charged property. The chargor usually cannot sell the property and cannot make second charge on the property or cannot mortgage the property without permission from the chargee. The chargee also can keep the title of deed of the charged property as security for the loan. The chargee can sell the property when the charger fails to pay installments regularly. Before selling the property, the chargee must take permission from the court. The court gives permission to sell the property by issuing a sale order. TYPES OF CHARGES Charges are of two types: i. Fixed charge ii. Floating charge FIXED CHARGE Fixed charge is made on certain specific property of the company. For example, on real property, such as building, factory, freehold land etc. It is always fixed with the property and the charger cannot deal with the property without consent from the chargee. So, some restriction is imposed on the charger while he intends

2 to deal in the property on which fixed charge is made. If the charger fails to pay the installments of loan, the chargee can sell the charged property after obtaining court order and can get back his money. However, if there are extra money after satisfying his loan and interest on it, the chargee must return the balance to the charger. FLOATING CHARGE Floating charge floats over the charged goods. It is not a fixed charge. Floating charge is usually made on movable property such as stock in trade, book debt etc. The chargor is given considerable freedom to deal in the goods on which floating charge is made in the regular course of business. He does not need to have prior consent from the chargee while dealing in the fixed charged property. So, floating charge is not fixed charge. However, floating charge may be crystallized on certain occasion and it becomes fixed charge for example when the chargor fails to pay loan installments or he becomes bankrupt. This is known as crystallization of charge and the floating charge becomes fixed charge. When the floating charge becomes crystallized and converted to fixed charge, the charger cannot deal in the goods without permission from the chargee. In fact, the chargee take over the goods when the floating charge becomes fixed charge and he can sell the good by auction after obtaining order from the court or in case of raw material can sell first and then can obtain court order considering the fragile nature of the raw materials. FUNCTIONS OF CHARGES Charge provides security of the loan and metal peace of the lender of money. So, the function of charge is to secure the loan given to the borrower. In case the borrower fails to pay the installments of loan, the chargee has right to sell the charged property and can get back his unpaid amount of loan plus interest on it. REGISTRATION OF CHARGE A company can effect more than one charge on the same property unless the first charge prohibits second charge. Division 7, part 4 of Companies Act 1965 and section 108(1) of Companies Act 1965 require that all charges must be registered within 30 days of creating the charge documents. If a charge is not registered, the charge will be void against the liquidator and the creditors. PROCEDURE OF REGISTRATION OF CHARGE Section 108(1) of the Companies Act 1965 provides procedures for the registration of charge. Three documents should be submitted to the Registrar of Companies for the registration of a charge: a notice in Form 34 which provided in the Second Schedule of Companies Regulation 1966; a copy of the document evidencing the charge and a copy of the debenture. These documents should be submitted to the Registrar of Companies for registration together with the required fees. These documents must be submitted within 30 days of creating the charge. The question may arise what will happen if the chargee fails to register within 30 days of creating the charge? In the case, the chargee has to submit a written reason for the delay plus fine for late registration. PRIORITY OF CHARGES Even if charge is created on a property, the title to the property does not pass to the chargee, the chargor remains the owner of the property. He may effect second and third charge on the same property unless prohibited by the first and second charge. When two or three charges are effected on the same property, problem may arise on priority of charges in case the borrower is bankrupt. In that situation it is difficult to determine which charge will take priority over the other for the benefit of the chargees to realize the property and to get back his unpaid loan plus interest. So, solve this problem, section 108(1) of the Companies Act 1965 requires that all charges must be registered with the Registrar of Companies within 30 days of creating the charge. When the charges are registered, each charge has specific dae of registration. These registration dates will be considered to determine priority of charges. The charge which has been registered first will get priority over the second charge and third charge. Therefore, it is very important to register charge immediately after it has been created.

DR. MD. ABDUL JALIL, COMPANY LAW, 2013

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