This document discusses share capital and loan capital (borrowing powers) of companies under Indian company law.
It defines various types of share capital including authorized capital, issued capital, subscribed capital, called-up capital, paid-up capital, and reserve capital. It also discusses alteration and reduction of share capital, duties of the court in reduction of capital, and liability of members after reduction.
It then discusses a company's borrowing powers, including implied powers to borrow for trading companies and express powers required for non-trading companies. It discusses limitations on director's borrowing powers and consequences of ultra vires borrowing by a company or directors. Key points covered are rights of lenders in case of ultra vires borrowing, and
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Merger and Amalgamation (M&A) is one of the forms of Corporate Restructuring. M&A transactions are generally done to diversify the business, reduce competition, exercise increased scale of operations, to focus on core businesses to streamline costs and improve profit margins, etc. Provisions for merger and amalgamation under Companies Act, 2013 also includes demerger. The webinar deals with the provisions of merger and amalgamation enshrined in Companies Act, 2013 read with Rules made there under, legal formalities involved and judicial precedents.
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EXTRACT OF THE PRESENTATION - FOR THE CASE LAWS COVERED IN THE SESSION & SEMINARS, FEEL FREE TO EMAIL ME.
SPECIAL THANKS TO CS SHAILASHRI BHASKAR MA'AM, CS PAVAN KUMAR VIJAY SIR FOR THEIR GUIDANCE.
The Insolvency and Bankruptcy Code, 2016 (Code) came into operation w.e.f 28th May, 2016.
It seeks to consolidate the existing framework by by creating a single law for Insolvency and Bankruptcy.
Insolvency is when an individual, corporation, or other organization cannot meet its financial obligations for paying debts as they are due.
Insolvency can occur when certain things happen, some of which may include: poor cash management, increase in cash expenses, or decrease in cash flow.
Financial restructuring is a specialist initiative undertaken to reorganize the financial assets and liabilities of a business enterprise in order to make the most beneficial environment for that entity. Primarily, it comprises of reorganizing share capital and debt.
EXTRACT OF THE PRESENTATION - FOR THE CASE LAWS COVERED IN THE SESSION & SEMINARS, FEEL FREE TO EMAIL ME.
SPECIAL THANKS TO CS SHAILASHRI BHASKAR MA'AM, CS PAVAN KUMAR VIJAY SIR FOR THEIR GUIDANCE.
The Insolvency and Bankruptcy Code, 2016 (Code) came into operation w.e.f 28th May, 2016.
It seeks to consolidate the existing framework by by creating a single law for Insolvency and Bankruptcy.
Insolvency is when an individual, corporation, or other organization cannot meet its financial obligations for paying debts as they are due.
Insolvency can occur when certain things happen, some of which may include: poor cash management, increase in cash expenses, or decrease in cash flow.
Financial restructuring is a specialist initiative undertaken to reorganize the financial assets and liabilities of a business enterprise in order to make the most beneficial environment for that entity. Primarily, it comprises of reorganizing share capital and debt.
A forfeited share is a share in a company that the owner loses (forfeits) by failing to meet the purchase requirements. Requirements may include paying an allotment or call money owed, or avoiding selling or transferring shares during a restricted period.
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online
These lecture notes clearly explain the concept of shares in regards to Company Law. Excellent for revision and study for CPAs, Bcom or any students taking business related courses where business law is a course unit.
Notes on partnership accounting excellent for CPAs, Accounting, Finance and students taking introductory accounting classes. Notes are brief, clear and simple to understand.
Consolidated accounts or Group AcccountsWarui Maina
Lecture notes on Consolidated accounts or Group Accounts. They have illustrations, are brief and simple to understand. Excellent for revision and quick review for CPA, B.Com, Finance and Accounting students.
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What makes Rafah so significant that it captures global attention? The phrase ‘All eyes are on Rafah’ resonates not just with those in the region but with people worldwide who recognize its strategic, humanitarian, and political importance. In this guide, we will delve into the factors that make Rafah a focal point for international interest, examining its historical context, humanitarian challenges, and political dimensions.
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The process of register multi-state cooperative society in India is governed by the Multi-State Co-operative Societies Act, 2002. This process requires the office bearers to undertake several crucial responsibilities to ensure compliance with legal and regulatory frameworks. The key office bearers typically include the President, Secretary, and Treasurer, along with other elected members of the managing committee. Their responsibilities encompass administrative, legal, and financial duties essential for the successful registration and operation of the society.
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1. CHAPTER V: SHARE CAPITAL AND LOAN CAPITAL
SHARE CAPITAL
Share capital means the capital raised by a company by issue of shares. Shares are indivisible
units of the capital of the company.
Fawell, J in Borlands’ Trustees vs. Steel Bros (1901) 1 Ch. 279 defined a share as the interest of
a shareholder in the company measured by a sum of money for the purpose of liability in the first
place, and of interest in the second place, but also consists of a series of mutual covenants
entered into by the shareholders inter se in accordance with sec.22 of the Act. Shares represent
the equal portions into which capital is divided; each shareholder is entitled to a portion of a
company's profits in proportion to the number of shares held by him. .A shareholder's liability is
usually measured against his indebtedness to the company on the amount unpaid on shares held
by him. Sec.76 requires that each class of shares be distinguished by its appropriate number.
The distinction is not necessary if all shares rank equally.
Types of capital
1. Authorized or nominal capital
This is the nominal value of the shares which a company is authorized to issue by its
Memorandum of Association. It is the maximum amount of capital which the company will have.
This amount can be increased or reduced only if the company changes the memorandum.
Nominal capital is also called registered capital.
2. Issued capital
This is the nominal value of the shares which are offered to the public for subscription. It
represents the portion of the nominal capital that has been given out to be subscribed by the
public or by any persons concerned.
3. Subscribed capital
This is the part of issued capital which has been taken up by the public. When all the issued
capital has been subscribed, then subscribed and issued capital will be equal.
4. Called-up capital
This is part of the issued capital which has been called up on the shares. This is the part of the
issued capital which shareholders are liable to pay as and when called.
2. 5. Paid-up capital
This is part of the issued capital which has been paid up by the shareholders. When calls are
made on the shares and shareholders fail to pay up the amount thus owing they are called calls in
arrears or "calls unpaid".
6. Reserve capital
This is any part of the company's share capital which a company may resolve by a special
resolution not to be called except in the event of a winding up. Section 62 of the Act provides
that a company by special resolution may determine that any portion of its uncalled capital be
reserve capital. Reserve capital can only be turned into uncalled capital by leave of the court.
Reserve capital is different from reserves or reserve fund. Reserve fund or reserves refers to
undistributed profits kept by the companies to cater for emergencies.
1. Uncalled capital
This is the remainder of the issued capital which has not been called. The company may call this
amount any time, but this is subject to the terms of issue of shares and the provisions of the Articles.
SHARE CAPITAL
Share capital means the capital raised by a company by the issue of shares. Capital is a particular
amount of money with which a business is started. For a company, it is usually called the share
capital.
ALTERATION OF CAPITAL (Sec.63)
A limited company with a share capital can alter the capital clause of its Memorandum of
Association in any of the following ways provided authority to alter is given by the Articles.
1) It may increase its capital by issuing new shares.
2) Consolidate and divide the whole or any part of its share capital into shares of larger
amount.
3) Convert fully paid-up shares into stock or vice versa.
4) Sub-divide the whole or any part of its share capital into shares on a smaller amount.
5) Cancel those shares, which have not been taken up and reduce its capital accordingly.
Any of the above things can be done by the company by passing a resolution at a general
meeting –this does not require to be confirmed by the court (sec.65).
Within 30 days of the alteration notice must be given to Registrar who will record it and make
the necessary alteration in the company’s memo and articles.
3. Notice to Registrar has similarly to be given when redeemable preference shares have been
redeemed.
Information is also required to be sent where the capital has been increased beyond the
authorized limit or where a company, being not limited by shares, has increased the number of
its members.
REDUCTION OF CAPITAL
The general principle of law founded on principles of public policy is that no action resulting in
a reduction of capital of a company should be permitted unless the reduction is effected –
1) Under statutory authority or by forfeiture, and
2) In strict accordance with the procedure, if any, laid down in that behalf in the Articles of
Association.
Any reduction of capital contrary to this principle is illegal and ultra vires. Conservation of
capital is one of the main principles of company law.
The share capital of company is the only security on which the creditor can rely on. Any
reduction of capital therefore diminishes the fund out of which they are to be paid. It is for this
reason that companies limited by shares are not allowed to purchase their own shares because
the capital is thereby reduced.
For the same reason, the power to forfeit and to accept a surrender of shares is strictly guarded,
but sometimes there may be a genuine necessity for the reduction of capital; closely fenced
powers are therefore given by sec 68.
Hence, a company limited by shares or a guarantee company having a share capital may reduce
its capital in any way. It may e.g.
1) Extinguish or reduce the liability of any of its shares.
2) Cancel any paid up capital, which is lost or is unrepresentative by any available assets.
3) Pay off any paid up share capital which is in excess of the wants the company.
Complete details of procedure to be followed for effecting a reduction are given in the Act.
However, authority to reduce the capital must be present in the articles. In pursuance of that
authority a special resolution must be passed which should authorize the contemplation of
reduction of capital. There should be a valid meeting and resolution for this purpose. The next
stage is to apply by a petition to court for an order confirming the reduction.
4. DUTIES OF COURT
The basic function of the court is to look after the interest of the creditors and different classes of
shareholders.
1. Interest of Creditors
Creditors are likely to be hit only when the reduction diminishes the liability of shareholders to
pay the uncalled capital or where the proposed reduction involved payment to any shareholder of
any paid up share capital. In other cases creditors are not entitled to object only those creditors
where the company owes a debt which would have been payable in the winding up of the
company will be entitled to object (sec 69).
Of such creditors who are entitled to object the court must settle the list. Should all the cases not
consent to the reduction, the court may dispense with the consent of creditors provided their
debts are secured to the satisfaction of the court. Court also has discretionally power of
dispensing all together; with consent of creditors, but this court will do only when it is convinced
that they are in no way affected.
In Meux’s Breweries Company Ltd
A company had issued shares and debentures in equal amount. It lost the bigger part of its
capital and part of lost capital was recovered out of the subsequent profits. The rest was
proposed to be written off. The debenture holders were not allowed to raise any objection
because their position remained the same with or without reduction.
2. Interest of Shareholders.
The second duty of the court is to look after interests of shareholders. The proposed scheme of
reduction must be reasonable and fair between all classes of shareholders in the company.
If the capital of a company consists only of one class of shares and all of them are to bear the
reduction proportionately, the scheme is obviously fair and must be confirmed.
In Pool vs National Bank of China Ltd
The company may reduce capital of all its shareholders pro rata or may reduce shares of any
individual or any class of shareholders wholly or in part. Although the court must see that the
interests of the minority have been protected and there is no unfairness shown to them but in
doing so it shall keep in mind the consideration hat the decision has been arrived at by
businessmen who are fully cognizant of their necessities and are the best custodians of their
interest. Moreover, lost capital can be written off where it is still represented by available
assets. The court’s job is difficult when there are two classes of shareholder enjoying different
rights and the proposed resolution for reduction affects them differently. In such a situation the
5. court, has to see that the scheme of reduction should be fair and equitable as between different
classes of shareholders but what is fair and equitable must depend upon the circumstances of
each case.
Scottish Insurance Corp Ltd v. Wilson and Clyde Coal Co Ltd [1949] AC 462, under an Act
the colliery assets of a coal mining company were acquired. The company intended, after
receiving the compensation, to go into voluntary liquidation. Meanwhile, it proposed to reduce
its capital by paying back the preference stock which would have thereby extinguished the power
to pay off the preference stock was there in the articles. It was also provided that in event of
winding up, the Preference stock ranked before the ordinary to the extent of amount paid there
on. The reduction was opposed by some shareholders on the ground that it deprived them of the
advantages of their investment rather prematurely and therefore the proposed reduction was
unfair.
Held: Proposed reduction was not unfair or inequitable because even without it the preference
shareholders would not be entitled to anything more than the return of their paid up capital.
Where reduction involves paying back capital to share holders priority be entitled to prior
refund of capital in the winding up where it involves variation of class rights the procedure
provided by court and company’s articles must be complied with.
If the court is satisfied in all respects, it may make order-confirming reduction on terms and
conditions it thinks fit.
By virtue of sec 72 (3) court may e.g. Require company to add to its name as the last word “and
reduced” during such period as the court thinks proper. The co may also be directed to publish
the reason for reduction for public information it is necessary that the company should get the
reduction registered with registrar. The detailed procedure of register is explained in company
Act.
LIABILITY OF MEMBERS AFTER REDUCTION
Liability in respect of reduced shares is explained in sec 72 of Companies Act
A member shall be liable to pay the amount deemed to have been unpaid on his shares.
His liability is to pay the difference between amount deemed to have been paid on his shares and
the nominal value of reduced shares.
However, members’ liability to pay the original nominal value of shares can be restored in one
case:
Sometimes a creditor, having right to object to a reduction may have been left out of the list of
creditors because of his ignorance of proceeding or their effect on his interest and subsequently
the company has become unable to pay its debts. Court may, to meet the claim of such creditor
order members to pay that amount on their shares which they would have been liable to pay
before the reduction.
6. Shareholders’ pre-emptive right or right issue
If a company limited by shares proposes to increase its subscribed share capital by allotment of
further shares after the expiry of 2 years from the formation of the company or after the expiry of
1 year from the first allotment of shares, whichever is earlier, it must offer these new shares to
the existing equity shareholders in the ratio of shares held by them. This right of shareholders to
be offered new shares to them before they are offered to the public is known as shareholders’
right of pre-emption.
Test questions
1. Explain the concept of ‘capital’ in relation to a limited company and state the various
sense in which the term ‘capital’ is used in company law.
2. How can a share capital of a company be reduced?
3. How and in what circumstances can a company reduce its share capital? Describe the
formalities to be complied with and the procedure to be followed.
4. What are preference shares? Explain what is meant by (i) cumulative and non-cumulative
preference shares; and (ii) participating and non-participating preference shares.
5. In what circumstances and subject to what restrictions may a company issues redeemable
preference shares?
BORROWING POWERS
A company needs money to finance its activities. A part of this requirement is met by issue of shares; for the rest
the company has to resort to public borrowing.
Borrowing is incidental to trading. Every trading company, unless prohibited by the Memorandum, has implied
power to borrow money for the purpose of its business. It has also the power to give security for the loan by
creating a mortgage or charge on its property. A non-trading company requires express power to borrow. This
power, in case ofsuch acompany, must betaken in the Memorandum or the Articles.
A public company having a share capital cannot exercise borrowing power unless certificate of commencement
of business is obtained byit.
The power of a company to borrow is exercised by the directors. This power may be unrestricted, but usually
the authority ofthe directors, acting as agents of the company is subject totwo limitations, namely –
a) Statutory limitation the Act prohibits the directors from borrowing money beyond the aggregate of the
paid-up capital of the company and its free reserves (i.e., reserves not set apart for any specific purpose)
unless they have first obtained the sanction ofthe company in general meeting; and
7. b) Limitation contained in the Memorandum or the Articles.
ULTA VIRES BORROWING
Borrowing of acompany may beaborrowing which is –
1. ultra viresthecompany, or
2. intra viresthecompany but ultravires thedirectors.
1. Borrowing ultrviresthe company
If acompany borrows money beyond its powers, the borrowing is ultra viresthe company and is void.
Lender’s rights. Where the borrowing is ultra vires the company, the lender of money has no legal or equitable
debt against the company. As such he can have no rights against the company for the recovery of the loan. He
has, however, in equity, the following rights:
a) Injunction. If the money lent to the company has not been spent, the lender may get injunction
to restrain the company from parting with the money.
b) Subrogation. If the money borrowed has been used by the company in paying off its lawful
debts, the lender will rank as a creditor up to the amount so used, and can recover from the
company.
Neath Building Society v Luce (1889) 43 Ch. D. 158. A building society borrowed money, ultra vires, to pay off
principal and interest due on a mortgage. Held, the lenders were subrogated to the rights of the creditors who
were paid off.
c) Identification and tracing. If the lender can identify his money (this will be the case when the
money is still in the hands of the company in its original form), or any property purchased with
it, he can obtain a tracing order and follow the property, i.e., he can claim the money or the
property purchased with the money borrowed. The company in such a case is regarded as
holding the money lent ontrust for the lender.
d) Recovery and damages. The lender under a transaction ultra vires the directors may recover
damages from the directors for breach of their warranty of authority. He cannot recover if the
fact that the borrower was ultra vires could have been discovered from the Memorandum and
Articles.
Firbank v Humphreys & Others (1816) 18 Q.B.D. 54. F did construction work for a company and agreed to
accept debentures in payment instead of cash. F did not know that all the debentures which the directors could
issue were already issued. As the company had no assets to satisfy F’s claim on the debentures, he sued the
8. directors. Held, the issues of debentures was ultra vires and void and the directors were liable for the breach of
implied authority. They were ordered to pay Fthe par value of the debentures he ought to have received.
2. Borrowing intraviresthe company but ultraviresthe directors
If the borrowing is in excess merely of the powers of the directors but not of the company, it can be ratified and
rendered valid by the company. The company has the power to borrow but it has restricted the authority of the
directors to borrow up to a certain amount. The company may, if it wishes, ratify the directors’ act, in which case
the loan binds both the lender and the company as if it had been made with the company’s authority in the first
place. If the company refuses to ratify the directors’ act,the normal principles ofagency apply.
Rule in Royal British Bank v Turquand, (1856) 6 E. & B. 327. Where a borrowing is intra vires the company
but is ultra vires the directors, and it is not ratified by the company, and the excess consists of non-compliance
with some internal regulation of the company, the lender may rely on the rule in Royal British Bank v Turquand,
and recover the amount ofthe loan from the company.
DEBENTURES
The usual form ofborrowing byacompany is by issue of debentures.
Section 2 of the Act defines debentures as including debentures stock, bonds and any other
securities of a company, whether consisting a charge on the assets of the company or not. The
section does not actually describe what a debenture really is.
In Levy v Abercorris Slate and Slab Co (1887) 37 Ch D 260, debenture was defined as a
document, which either creates a debt or acknowledges it.
In Edmonds v Blaina Co. (1887) 36 Ch.D 215, Chitty J, defined debenture as. "The term itself
imports a debt an acknowledgement of a debt an obligation or covenant to pay. This obligation
or covenant is in most cases accompanied by some charge or security".
A debenture is thus an acknowledgement in writing of a debt by a company to some persons and
it is issued to the public by means of a prospectus. The prospectus has provisions for interest
payment and repayment of loans. Lenders are usually given a security against the non-repayment
of their loan, by a charge against the assets of the company.
Characteristic features of a debenture
9. In Lemon v Austin Friars Investment Trust Ltd [1926] 1 Ch. 1 debenture was defined as follows
"a debenture is a document containing an acknowledgement of indebtedness which need not be,
although it usually is, under seal, which need not give, although it is usually does give a charge
on the assets of the company by way of security and which may or may not be one of the
services".
The following are characteristics of a debenture:
1. It is used by a company and is usually in the form of a certificate.
2. It is issued under the company's seal.
3. It is one of a series issued to a number of lenders although there can be a single debenture, for
example a mortgage of a company's property to a single individual.
4. It specifies the period and date of repayment.
5. It creates a charge on the undertaking of the company or parts of the company property, but
this is not always necessary.
6. Debenture holders do not vote in company meetings.
Debenture stock
A debenture stock is borrowed capital consolidated into a unit with each lender having a
certificate entitling him to a certain sum being a portion of one large loan. The debenture
stock is usually secured by a trust deed and in case there is no charge, the stock is called
unsecured loan stock.
Debenture stock can be issued directly as such it is not necessary for an issue of debentures to be
fully paid and then turned into stock.
Classes of debentures
Debentures are classified according to the following characteristics: -
1. Negotiability
2. Security
3. Convertibility
4. Priority
1. Classification according to negotiability
a) Bearer debentures
10. These are also known as “unregistered debentures” and are payable to the bearer. These are
negotiable instruments and are transferable by delivery and a bona fide transferee for value
is not affected by the defect in the title of the prior holder.
In Bechuanaland Exploration Company vs. London Trading Bank Ltd (1898) 2 QB 648, Co. held
debentures of an English company, payable to bearer. It kept them in a safe of which the
secretary had the key. The secretary pledged the debentures with a bank security for a loan taken
by him. The bank took the debenture's bona fide. It was held that the bank was entitled to the
debentures as against the company.
b) Registered debentures
These are debentures payable to registered holders. A holder is one whose name is on the
certificate and in the company's register of debentures. A registered debenture is issued under
the seal of the company and contains the following clauses: -
(i) A covenant to pay the principal sum.
(ii) Covenant to pay interest.
(iii) A description of the charge on the company's undertaking property.
(iv) A statement that it is issued subject to the conditions endorsed thereon.
2. Classification according to security
a) Secured debentures
These debentures create a charge on the property of the company. The charge may be fixed or
floating.
b) Unsecured or naked debentures
These do not create any charge on the assets of the company.
3. Classification according to permanence
a) Redeemable debentures
These are issued on condition that they shall be redeemed after a given period.
b) Irredeemable or perpetual debentures
These are debentures with no fixed period for repayment of the principal amount or repayment of
it is made conditional on the happening of an event which may not happen or may happen is
specified events like winding up.
c) Debentures with a Pari Passu clause
11. These are debentures payable ratably, though issued at different and varying times. When assets
are insufficient to pay all debts the debentures rank proportionately. If there is no pari passu
change in the terms of issue, debentures are payable according to the date of issue.
A company cannot however issue a new batch of debentures to rank pari passu with another
batch.
Trust Deed
Debenture holders may appoint persons as their trustees. When the trustees are appointed a
trust deed is executed conveying the property of the company to the trustees. Under the
terms of the deed the company commits itself to pay the debenture-holder their principle and
interest and charges its property to the trustees as security.
The trust deed contains the terms and conditions endorsed on the debentures and define the
rights of debenture-holder and the company. It empowers the trustees to appoint a receiver to
protect the interest of debenture holders. Other contents of debentures are provisions concerning
meetings of the debenture-holders, supervisions of the assets charged and the keeping of a
register of debenture holders.
Incase of default by the company the trustees take action on behalf of the debenture holders.
Advantages of the trust deed
1. it gives trustees a legal mortgage over the company's property.
2. Trustees Act are at better position of safeguarding the interests of the debenture-holders.
3. it specifies the events upon which principal and interest are payable and trustees ensure that
the money is paid.
4. The company is given power to deal with its own property advantageously for the purpose of
its business without prejudicing the interests of debenture holders.
5. The trustees act as watchdogs for the debenture holders.
6. The trustees have power to appoint a receiver to run the company.
7. In case of doubt or contingency the trustees can call a meeting of debenture holders to make a
decision.
8. In case of default by the company the company can act to protect debenture holders.
Liability of trustees
12. A trustee is liable for any breach of trust where he fails to show the degree of care and diligence
required of him as trustees.
Any clause in the trust deed releasing the trustee exempting him from liability for breach of trust
or indemnifying him against liability for breach of trust is void except in the following cases.
1. Where the trustee can show that he took such care and diligence as is required of him as
trustee.
2. Where the trustee acted honestly and reasonably, section 402.
3. Where a majority of not less than 3/4 in value of the debenture holders present and voting in
person or where proxies are permitted by proxy at a meeting summoned for the purpose, agree
and the voting relates to specific Acts or omissions or to a trustee who is dead or has ceased to
act.
Rights to copy the trust deed
A registered debenture holder is entitled to require a copy of a printed trust deed section 89 (2).
FIXED AND FLOATING CHARGES
The power of a company to borrow includes the power to create a charge upon its assets. The
charge that may be created on the assets of a company may be a fixed (specific) charge or a
floating charge.
Fixed charge
A fixed charge is one which is created on some ascertained and definite property of the company,
e.g., a charge on land and building. It prevents the company from dealing in that property without
the consent of the holder of the charge.
Floating charge
The ability to create a floating charge is one of the advantages of incorporation. The floating
charge enables a company to raise finance by mortgaging its entire assets and undertaking back
to the provider of the finance and yet continue to trade. A floating charge does not attach to the
property which is the subject of the charge until the charge crystallizes.
Until this time, the company is free to carry on trading with the property that is the subject of the
charge.
The characteristics of the floating charge are set out in Re Yorkshire Woolcombers
Association Ltd (Illingworth v Houldsworth and Another) (1904).
These are:
1. that the floating charge is over a class of assets present and future;
2. that the company can continue to do business and to dispose of the assets in the course of
that business; and
13. 3. that the assets within the class of assets subject to the floating charge will fluctuate and
change as the company trades.
Generally, if the company is able to deal with the charged property in the normal course of
business the charge is a floating charge but, in Re Cimex
Tissues (1994), although the company had a limited power to deal with the charged machines,
the charge was still held to be a fixed one.
A floating charge will crystallize in certain circumstances:
a) if the company goes into liquidation;
b) if a receiver is appointed either by the court or under the terms of the debenture;
c) if there is cessation of the company’s trade or business: Re Woodroffes (Musical
Instruments) Ltd (1986);
d) if there is a default in the payment of the principal or interest and the holder of the charge
brings an action to enforce his security.
The charges that require registration are set out in s 96 of the Companies Act
Cap 486. They are:
a) a charge for the purpose of securing any issue of debentures;
b) a charge on uncalled share capital of the company;
c) a charge created or evidenced by an instrument which, if executed by an individual, would
require registration as an instrument under the Chattels Transfer Act;
d) a charge on immovable property, wherever situate, or any interest therein;
e) a charge on book debts of the company;
f) a floating charge on the undertaking or property of the company;
g) a charge on calls made but not paid;
h) a charge on a ship or any share in a ship;
i) a charge on goodwill, on a patent or a license under a patent, on a trade mark or on a
copyright or a license under a copyright.
The prescribed particulars of the charge, together with the instrument, if any, by which the
charge is created or evidenced, or a copy thereof, must be filed with the Registrar within 42
days after the date of creation of the charge.
Effects of non-registration of a charge
1. The charge is void. If any charge required to be registered is not so registered, it shall be
void as against the encumbrance as well as against the liquidator or the creditors.
2. The money secured becomes immediately payable. When a charge becomes void, the
money secured thereby shall become immediately payable
3. No right of lien on the documents of title. When a charge becomes void for non-
registration, no right of lien can be claimed on the documents of title as they are only
ancillary to, and were delivered pursuant to, the charge
4. Penalties. If default is made in filing with the Registrar for registration the particulars (a)
of any charge created by the company, or (b) of the payment or satisfaction of a debt in
respect of which a charge has been registered, or (c) of the issue of debentures of a
series, requiring registration with the Registrar, then, unless the registration has been
effected on the application of some other person, the company and every officer of the
14. company or other person who is in default, are punishable with fine which may extend to
Kshs.1,000 for every day during which the default continues. If a company makes
default in complying with any other requirements as to registration with the Registrar of
any charge created by the company or of any fact connected therewith, the company and
every officer of the company who is in default, is punishable with fine which may
extend to Kshs.1,000.
Company’s register of charges (Sec.105)
Every company shall keep at its registered office a register of charges. It shall enter therein all
charges specifically affecting property of the company and all floating charges on the
undertaking or any property of the company. It shall give therein –
a) a short description of the property charged;
b) the amount of the charge; and
c) the names of the persons entitled to the charge.
If any officer of the company knowingly omits or willfully authorizes or permits the omission of
the entry required to be made in the company’s register of charges, he is punishable with fine
which may extend to Kshs.1,000.
Certificate of registration (Sec.99)
On registration of a charge, the Registrar gives a certificate of registration of the charge stating
the amount secured by the charge. The certificate is conclusive evidence that the requirements of
the Act as to registration have been complied with (Sec.99). the certificate is also a conclusive
evidence that the Registrar has entered the particulars in the register and that the prescribed
particulars have been presented to him. It is also conclusive even though some particulars of the
property charged as entered in the register are discovered to be incorrect.
Test Questions
1. Write a note on the borrowing powers of a company.
2. What is the position of a person who has lent money to a company where the borrowing is
ultra vires the company?
3. What is a debenture? What is meant by a debenture payable pari passu?
4. What are the different kinds of debentures? What remedies are available to debenture-
holders for realization of their security?
5. What charges must be registered with the Registrar? State the effect of non-registration.
6. What particulars must be entered in a company’s register of charges, and the Registrar’s
register of charges?
7. What is a floating charge? When does it crystallize?
8. What is the nature of a floating charge? Distinguish it from a fixed charge. What is meant
by crystallization?