A company traditionally has the power to borrow money for the purposes of its business. When a company acquires money from external source for its business, it is raised either by equity financing or debt financing. Equity financing involves the issue of shares with the shareholders. Debt financing involves raising loans or money from the general public in the form of debenture issues. The various methods and loan capital arrangements are:
- Unsecured loans;
- Guaranteed loans
- Real property mortgages
- Bank overdrafts
- Floating charges
- Both public and private loan agreements
Debenture describes any document given by a company which creates or acknowledges a debt. Any invitation to the public to deposit or lend money with a company is deemed an invitation of subscription of debenture to the company. It includes debenture stock, bonds, sukuk notes and any other securities whether constituting a charge on assets or not.
A public company must issue a prospectus if it wishes to raise money from the public. The issuance of debentures by a listed company to the public is regulated by the Capital Markets and Services Act 2007. Every company which offers debentures to the public must appoint a trustee for the protection of its debenture holder.
The new CA provides that where a corporation offers debentures to the public for subscription in Malaysia, the debentures or the relevant trust deed shall contain a limitation on the amount that the borrowing corporation may borrow and shall contain covenants by the borrowing corporation.
The limitations imposed by the new CA in relation to public offerings of debentures do not apply to private offerings of debentures. A private company limited by shares shall not offer any shares or debentures of the company to the public. The document that secures a private loan may create a floating charge over the undertaking of the borrowing company or a fixed charge or both.
An arrangement where a company borrows money on the security of a specific asset is known as a fixed charge. A floating charge is not secured on specific ascertainable assets but upon a pool of assets that are being used for a company’s business operation.
Registration with the Registrar
The company has to register a charge with the Registrar within (30) days after its creation. The registration is to protect the secured creditor and to notify those doing business with the company on the amount of the company’s debts.
The Registrar shall keep and maintain a register of all charges lodged for registration. A certificate of registration of charge issued by the Registrar shall be conclusive evidence of the registration.
Assignment, Variation and Satisfaction of Charges
Where a charge is assigned to a new holder or the terms of the charge is varied, the new holder must give notice to the Registrar of the assignment and variation within thirty (30) days from the date of change.
If a charge has been paid or satisfied in whole or in part, or the property or undertaking charged has been released or has ceased to form part of the company’s property or undertaking, the company shall lodge with the Registrar within fourteen (14) days from such satisfaction with sufficient evidence.
Every company must keep at its registered office, a register of charges containing details of all charges affecting specific property of the company and all floating charges on the undertaking of the company. A company must also keep the instruments creating registrable charges or copies thereof.
Where a company fails to pay its debts or fails to meet any obligations to the debenture holder, or any principal money borrowed by the company, the appointment of a receiver is necessary to safeguards the interest of debenture holders in the enforcement of the security for their loan. The receiver can be appointed by the court or under any instrument that confers a debenture holder or charge holder to appoint a receiver or receiver and manager.
The role of the receiver is:
- to stop the operation of the company’s business
- to take possession and protect the property over which he is appointed.
- to get in the assets charged
- to collect debts, rents, profits and other income; and
- to exercise any power of sale over the property of the company given under the charge.
A receiver is only obliged to realise the property of the company which the debenture covers for the benefit of the debenture holders. To prevent the complete termination of the company’s business as a going concern, the receiver must also be appointed a manager.
The new CA states that an approved liquidator shall qualify to be appointed as a receiver or receiver and manager of the property of a company.
Any person who obtains an order for the appointment of or appoints a receiver or receiver shall lodge with the Registrar, a notice of appointment within seven (7) days from the date he obtained the order or made the appointment.
A person who ceases to act a receiver or receiver and manager shall lodge a notice of cessation with the Registrar within fourteen (14) days after the cessation.