Wk12 Borrowing

BORROWING

ADM657

COMPANY SECRETARIAL PRACTICE II

PM Alicia Tan & Dr Norziana Lokman

Lecture Outline

1.Introduction

2.Methods of borrowing

3.Debentures

4.Features/ characteristics of debentures

5.Comparison between share and debentures

6.Procedure for issue of debentures

7.Register of debenture holders

9.Charges securing debentures

10.Types of charges

11.Registration of charges

12.Duty to register and consequences for failure to register

charges

13.Repayment of borrowing

14. Priorities of registrable charges

15. Receivers and receivers/managers

Methods of borrowing

A bank loan or overdraft. These methods would not normally meet the companys long-term loan requirements, as banks are usually averse to the making of long-term loans for the purpose of capital developments. Moreover, the banks would almost certainly require some form of security.

An issue of debentures would probably meet requirements more adequately where a large loan is required for an extended period where, for example, it is required for extensive capital development.

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DEBENTURES

DEFINITION

A debenture is a document acknowledging (a trust deed) a

debt i.e. a promise to pay an unsecured and secured by a

mortgage or charge. Debenture includes debenture stock,

bonds, notes and any other securities of a corporation

whether constituting a charge on the assets of the company

or not (sec 4).

the trust deed contain provisions for a trustee (e.g. Bank) acting on behalf of the debenture holder to intercede if the

terms of the trust deed or AOA in relation to the

debentures were breached, e.g. failing to pay the correct

amount of interest or exceeding the pre-arrange

borrowing limit. 4

Debentures may have some or all of the following

features:

Form - e,g, debenture stock, loan stock, bond, notes etc.

Redeemability whether redeemable within a specified period or only upon the occurence of various specified

contingencies.

Security whether secured on the property or undertaking of the company or not and if secured

whether by way of a fixed charge or floating charge.

Interest the interest the debenture yield.

Convertibility whether it can be convertible into ordinary share or preference share.

Debenture stock usually issued by a public company and is secured on the company security.

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COMPARISON OF SHARES WITH DEBENTURES

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Shares Debentures

1.Membership/

Control

Shareholders are members of the

company and have voting power at

general meetings. It may be argued

that the preference shares of many

companies do not carry voting power.

Debenture holders are creditors

of the company. As debenture

holders are merely loan creditors of the company, the raising of funds by way of

debentures does not extend the

membership and therefore the

spread of voting power is not

altered.

2.Redemption Ordinary shares are not redeemable. It

may be argued that preference shares

can be issued as redeemable and a

listed company can purchase its own

shares. However, there are rather

stringent conditions and rules to

regulate their issue and redemption or

purchase of own shares.

Debentures can be issued as

redeemable.


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Shares Debentures

3.Issue at a

discount

Shares cannot be issued at a discount

without obtaining Court sanction and

carrying out the various formalities

required under sec 59.

As debentures do not form part of

a companys capital, they can be issued at a discount without

seeking the sanction of the Court.

This makes debentures more

attractive than shares.

4.Dividend/

Interest

Shareholders will be entitled to receive

dividends on their shares only from the

companys profits. Preference shares may be considered

as an alternative, but the fixed dividend

on such shares is dependent upon the

companys trading results and may be passed over or carried forward. The

company is not required to pay the

fixed dividend on the preference

shares, if it does not have sufficient

distributable profits to cover the

dividend.

Debenture holders will be entitled

to a fixed rate of interest on the

debentures regardless of the size

of profit or loss being made by

the company. Interest on

debentures is a contractual debt,

which must be discharged

whether or not there are available

profits.


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Shares Debentures

5.Security Not applicable Debentures may be made more attractive to

investors by offering adequate security in the

form of charges over assets.

Debenture holders will have the power to

appoint a receiver in certain circumstances,

such as breach of the debenture agreement

and if the company goes into liquidation, and

will be entitled to payment of the debts owed

to them before payments are made to the

shareholders. The consent of debenture

holders will also be required before the

company may deal with certain of its assets

where debenture holders have secured their

debenture by means of a fixed charge over

those assets.

6.Economy Not applicable

Because of the advantages that can be

offered along with debentures, they can

usually be issued at a lower rate of interest as

compared with the rate of dividend offered to

prospective preference shareholders.


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Shares Debentures

7.Convertibility Not applicable

Debentures may be made more

attractive to investors by offering

convertibility of debentures into shares

especially to an investor who is

undecided between debentures and

shares.

8.Taxation Dividend on shares is regarded

as a distribution of profits after

tax.

Debenture interest is a charge

deducted in calculating profits for tax.

Thus there will be a saving in taxation

from debenture interest payment.

9.Fees on

authorised share

capital

The fees payable to CCM is

based on its authorised share

capital. If the company has

already issued the whole of its

authorised capital, an issue of

shares would require the

company to increase its

authorised capital and pay fees

on the increased amount.

The issue of debentures as an

alternative to an issue of shares,

would save the company the trouble

and expense of increasing its

authorised capital and paying fees on

the increased amount.


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Shares Debentures

10.Repayment of

capital

In liquidation, all debts take

priority over repayment of

share capital. Preferences

shares carry a priority

entitlement over shares.

In liquidation, debentures must be repaid in full

before any distribution to shareholders.

PROCEDURE FOR ISSUE OF DEBENTURES

1) Prepare and issue a prospectus (according to the requirements of the SCA 1993 and the SCs Prospectus Guidelines).

2) File a copy of the prospectus with the CCM.

3) Proceed to application and allotment of debentures.

4) File with the CCM particulars of any charge created on Form 34 within 30 days after the creation of the charge.

5) Enter the charge in the companys register of charges. 6) Keep the instrument or copies of the instrument creating

the charge, a copy of one debenture in a series (if applicable) and a copy of the trust deed at the registered office.

7) Make the appropriate entries in the register of debenture holders (if any).

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Register of Debenture Holders-S70

Every company which issue debenture must keep a register of holder of debentures at the registered office

of the company or at some other place in Malaysia.

Where it is not kept at the RO, the company must within 7 days after the register is first kept at a place other than

the RO, lodge with the ROC a Form 30. Any change

must be notified to the ROC by Form 30 within seven

days after such change.

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CHARGES SECURING DEBENTURES

Debentures are usually secured by a mortgage or a charge over the borrowing companys property.

A company has the power to grant floating charges over its property: s19(1)(c) and para 13 of the Third Schedule

(pg. 317), which includes the right to give security by

charging its reserve capital.

The power to charge the companys assets or give security for a debt of the company is usually conferred

on the board of directors: Table A, Art 74. A charge does

not involve the transfer of ownership of the secured

property. The borrower (chargor) retains ownership of

the property subject to certain restrictions on his powers

to deal with that property.

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CHARGES SECURING DEBENTURES

The term charge is defined in sec 4(1) of the CA 1965 as including a mortgage and any agreement to give or execute

a charge or mortgage whether upon demand or otherwise.

In view of this broad definition, a charge may be legal or equitable and includes any security for repayment of a debt,

thereby encompassing mortgages, charges and other

securities such as pledges and liens.

A borrowing company can grant a fixed or floating charge as security to debenture holders.

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A fixed charge is one which creates a charge over a specified, identifiable asset (or assets) such as leasehold or a freehold property. The company cannot dispose of that asset without the consent of the debenture holders, nor may it create a prior charge (one which would rank above the existing fixed charge).

A floating charge is one which creates a charge over certain (unspecified) assets or on the entire undertaking. This has the advantage to the company that the assets may be sold or changed without sanction but usually consent would be required to create a prior charge. Often the terms of issue will contain a provision that a floating charge may crystallise if (for example) the company defaults in payment of interest or goes into liquidation. The effect of this is to turn the floating charge into a fixed charge on certain specified assets.

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REGISTRATION OF CHARGES (SEC 108-118)

Section 108 (3) - requires a company to register with CCM within 30 days of the creation of the following types of charges:

a charge securing an issue of debentures. a charge on uncalled share capital. a charge on shares of a subsidiary of the company which are

owned by the company.

a charge by an instrument which, if executed by an individual, within West Malaysia property and affecting property within West

Malaysia would be invalid or of limited effect if not filed or

registered under the Bills of Sale Ordinance, 1950.

a charge on land. a charge on book debts. a floating charge on the companys undertaking or property. a charge on calls made but not paid. a charge on a ship or aircraft or any share in a ship or aircraft. a charge on goodwill, patents or trademarks, etc. a charge on the credit balance of the company in any deposit

amount. 16

Procedure for registration of a charge - s109

The charges to which section 108 applies must be registered with CCM within 30 days of its creation by lodging Form 34 (Statement of particulars to be lodged with charge) together with a filling fee of RM300 by the company concerned or by anyone interested in the document.

The CCM will issue a certificate of registration of charge i.e. Form 40, which is a conclusive evidence of compliance with the requirement.

The instrument creating the charge or a copy must be kept at the registered office of the company and must be open for the inspection of any member or creditor of the company free of charge or any other person on payment of RM2.

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Failure to register the charge has the following

effects:

the charge is void against the liquidator and any creditor of the company, i.e. the holder ranks as an unsecured

creditor. The debt does not become void i.e. the obligation

to repay is not prejudiced and the money lent and secured

by the charge becomes immediately repayable.

the company and every officer of the company who is in default will be liable to a fine RM1000 and default penalty

(sec 109(1).

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If the charge is to secure a series of debentures:

Form 35 (Statement containing particulars of a series of debentures) must be lodged with CCM within 30 days after the execution of the instrument containing the charge, or after the execution of the first debenture of the series if there is no such instrument.

Where more than one issue is made of debentures in the series, Form 36 (Particulars where more than one issue is made of debentures in the series) shall be lodged with CCM within 30 days after each issue.

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Where a company acquires any property which is

subject to a charge which would have be required to

be registered:

the company is required to register the charge with CCM within 30 days after the date on which the acquisition is

completed by lodging Form 34 (Statement of Particulars to

be lodged with charge) together with a filling fee of RM300.

If the charge is not registered, the company and every officer of the company who is in default will be liable to a

fine of RM1000 and default penalty (sec 110).

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Certificate of registration of charge

The CCM will issue a certification of registration (Form 40 - Certificate of registration of charge) which shall be conclusive

evidence that the registration requirements have been

complied with-sec 111(2).

A copy of which must be endorsed on every debenture certificate issued by the company after the charge is created-

sec 112(1).

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Register of Charges kept by company s115

Every company must keep at the registered office of the company a Register of Charges together with the instrument

creating the charge and must be open for the inspection of

any member or creditor of the company free of charge or

any other person on payment of RM2.

Copy of the instrument shall be furnished within 3 days on application and at a fee of RM1 per page.

Penalty: RM2000 with default penalty on the copany and every officer in default.

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REPAYMENT OF BORROWING s113

On the satisfaction of a charge:

(I) Lodge with the CCM within 14 days: Form 41 - Memorandum of satisfaction of registered charge

or

Form 42 Memorandum where property or undertaking is released from registered charge or has ceased to form part of companys property or undertaking

and

Form 43 Statutory Declaration Verifying Memorandum

and supported by Form42B Evidence of Satisfaction of Charge/Release of

Property

Registration fee of RM50

(II) The CCM shall issue a Form 42A Certificate of Registration of Satisfaction of/Release from Charge to the company

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Priorities of registrable charges

Registered charges generally have priority in order of the time and date when they were entered in the register of company

charges.

A prior registered charge loses priority over a subsequently registered charge where the subsequently registered charge was

created before the prior registered charge and the holder is

proved to have had actual or constructive notice of the

subsequently registered charge at the time the prior registered

charge was created.

A registered charge has priority over an unregistered charge unless the unregistered charge was created first and the holder of

the registered charge can be proven to have had actual or

constructive notice at the time of the creation of the registered

charge

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Non-registration

Unregistered charges take priority according to their time of creation.

Non-registration also has some effect on the rank in priority, in relation to competing charges. A registered charge has priority

over a charge that was created earlier and is registrable but

has not been registered (unless the chargor of the registered

charge had notice of the earlier charge).

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Extension of time for lodgement - s 114

The court may on application of the company or person interested, on being satisfied that the omission to

register a charge within the time required or that the

omission or mis-statement of any particulars was

accidental or due to inadvertence or some other

sufficient cause or is not of a nature to prejudice the

position of creditors or shareholders or any person

interested, and on such terms and conditions as seem to

the court just and expedient order that the time for

registration be extended or that omission or mis-

statement be rectified.

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RECEIVERS

Any debenture holder is a creditor of the company with the usual remedies of an unsecured creditor. To reclaim his investment where the company is in default he could:

sue the company for debt. If he gets judgement for the debt, under the courts direction, he may apply to seize the companys property to enforce the courts judgement;

present a petition to the court for the compulsory liquidation of the company;

present a petition to the court for an administration order

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A secured debenture holder (or the trustee of a debenture trust deed on behalf of secured debenture holders) may enforce the security. He may take the following actions:

take possession of the asset subject to the charge if he has a legal charge (if he has an equitable charge he may only take possession if the contract allows);

sell it (provided the debenture is executed as a deed);

apply to the court for its transfer to his ownership by a foreclosure order (rarely used); and

appoint a receiver.

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The appointment of a receiver is usually the first step. The secured creditor may need an order of the court in

some circumstances to enforce these remedies. A

receiver takes possession of the property or forecloses

the security over which he is appointed and realises it for

the benefit of the debenture holders.

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RECEIVERS

Receiver/Manager

In the case where the debentures give a charge over the companys business or undertaking and property, a receiver is usually also appointed manager to continue the business

for the benefit of the debenture holders. The manager is

appointed to carry on the business with the object of

preserving goodwill and selling it as a going concern

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A receivers function is merely to get in the assets of the company charged and subject only to prior charges,

realising them for the benefit of the creditors appointing

him; he has no power to run the business of the company.

A receiver and manager is entitled to continue the business of the company so long as he can do so without

incurring a loss. The provisions concerning receivers and

managers are contained in sec 182-192 of the CA 1965.

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Copyright Alicia Tan and Norziana Lokman

Documents

Wk12 Borrowing