1. COMPANY LAW AND
PARTNERSHIP II
Prepared by
1. Kavitharini A/P T Ramesh (A166838)
2. Nur Aliah bt Amran (A166840)
3. Ushageeri a/p Ganasan (A166841)
4. Komathi a/p K.Raman (A163611)
5. Shahmuni a/p T. Ravichandran (A163765)
(Tuesday, 1 - 2 p.m.)
Prepared for
Prof. Dr. Hasani bin Mohd. Ali
Date
June 2020
2. 2
Question 6
CVT Bhd. has been facing financial problems. In October last year, they
borrowed RM 2 million from Bank ABS. This loan was pledged with a fixed
charge on the company's factory building, and a floating charge over the
property of another company. The floating charge also contains a clause that
prevents the company from creating any charge, whether fixed or floating, which
is higher or pari passu with the floating charge unless the authorization is
obtained from the Bank ABS.
In April of this year, companies that still needed additional capital, provided a
fixed charge on the company's debt book of RM1 million. The company however
has been wound up. Advise the liquidator on the status of the above charges
and indicate the payment priority to be made.
3. Introduction
Facts of the case
In October, CVT Bhd created a fixed charge on the company's factory building
and floating charge over the property of another company for a loan agreement
of RM2 million with Bank ABS. The floating charge has a clause that prevents
CVT Bhd from creating any charge whether fixed or floating without
authorization of Bank ABS. 6 months later in April, the company created a fixed
charge over the company's debt book of RM1 million. Since the lender was not
mentioned, we will refer to him as Lender “X” for ease of reference. The
liquidator will be advised regarding the payment priority be made.
4. The creditors in this case have been identified as follow:
a) October: Bank ABS with RM2 million secured by fixed charge on the company's
factory building and floating charge over property of another company.
b) April (interval 6 months): Lender “X” with RM1 million secured by a fixed charge
over the company's debt book.
Identified Parties
5. Issues Identified
(1) Whether the floating charge created for loan
agreement with Bank ABS has crystallized into a fixed
charge due to CVT Bhd’s breach of agreement?
(2) Whether the fixed charge created with Lender
“X” over the company's book debt of RM1 million
is a fixed charge?
(3) What are the status of the charge and the
priority of payment be made to creditors?
6. What is a fixed charge?
A fixed charge is a charge
which attaches to specific
assets owned by the
company. The company
cannot deal with the assets
unless with the prior consent
of the lender. If the company
were to do so, the assets
continue to be subject to the
charge until released by the
lender.
What is a charge?
A charge is defined in section 2(1)
of the CA 2016 to include
mortgage and any agreement to
give or execute a charge or
mortgage whether upon demand
or otherwise. Generally, the
charges can be classified as a
fixed charge or floating charge
What is a floating charge?
A floating charge can be
created by the company
over its assets. The assets
can be specific or a class of
assets. As the charge
“floats” over the assets and
does not attach to the
assets, the company can
continue to deal with
charged assets in the
ordinary course of business.
Before further
discussion it is
important to
understand these
concepts
7. Discussion
Whether the floating charge created for loan agreement with Bank ABS
has crystallized into a fixed charge due to CVT Bhd’s breach of
agreement?
➤ The general principles
- Most lenders will negotiate for the crystallisation of the floating charge upon service of
notice to the company on the occurrence of certain specified events.
- Among the examples is breach of covenants in the charge documents, for example,
breach of restriction to create further encumbrances on the company’s assets.
- Thus, some lenders have included in the charge document an automatic
crystallisation clause. Upon the happening of the event mentioned in the charge
document, the floating charge crystallises immediately. Notice from the lender is not
necessary.
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8. 8
➤ Application
- In the loan agreement between CVT Bhd and Bank ABS, the floating charge
has a clause that prevents CVT Bhd from creating any charge whether fixed
or floating without authorization of Bank ABS. CVT Bhd has breached the
said covenant when they created a new charge over the company’s debt
book with Lender X without authorization from Bank ABS.
- However, it is not mentioned whether the clause has an automatic
crystallisation upon breach. Therefore, it is most likely that a notice from the
lender is necessary in order to crystallise the floating charge. The facts are
also silent as to whether Bank ABS has given a notice or not.
- Therefore, it is assumed that Bank ABS has not given a notice and the
floating charge has not crystallised. It has stayed as a floating charge. This
matter affects the priority of payment which will be discussed later.
- .
12. 2.3 What are the status of the charge and the priority of
payment be made to creditors?
2.3.1 Bank ABS fixed charge vs floating charge
2.3.2 Bank ABS floating charge vs Lender “X” floating
charge
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13. GENERAL PRINCIPLE
1. Generally, restricts the company from dealing with the charged asset without the consent of the charge
holder. It need not necessarily be in existence at the time the charge is given & can also be made over
future property.
2. Malayan International Merchant Bankers Bhd v Highland Chocolate & Confectionery Sdn Bhd
`the relevant property is ascertained / definite / capable of being ascertained in the instrument creating
the charge so that there can be no doubt that the property is caught by the charge. A company charge
his land for loan, the company cannot sell the land until he finishes paying the loan.
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14. 2.3 What are the status of the charge and the
priority of payment be made to creditors?
2.3.1 Bank ABS fixed charge vs floating charge
2.3.2 Bank ABS floating charge vs Lender “X”
floating charge
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15. • It need not necessarily be in existence at the time the charge is given & can also be made
over future property.
• Malayan International Merchant Bankers Bhd v Highland Chocolate & Confectionery
Sdn Bhd - it would suffice that the relevant property is capable of being ascertained in the
instrument creating the charge so that there can be no doubt that the property is caught by
the charge.
• If the company were to deal with the assets without prior consent of the lender, the assets
continue to be subject to the charge until they are released by the lender.
• Siebe Gorman & Co Ltd v Barclays Bank Ltd - The company was unable to dispose of
the charged assets without the lender’s consent and had to pay the proceeds into an
account with the chargee bank. The lender had the right to obtain absolute control by
giving notice.
• MBC Bhd Aluminex (M) Sdn Bhd - The Supreme Court affirmed the creation of a fixed
charge on a company’s book debts. Usually fixed charge covers only the fixed assets of
the company.
GENERAL PRINCIPLES
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16. FLOATING CHARGE
•Illingworth v Houldsworth - a floating charge is ambulatory and shifting in its nature, hovering over the
property which it is intended to affect until some event occurs or some act is done which causes it to
settle and fasten on the subject of the charge within its reach and grasp.
•The essence of a floating charge is that it does not relate to any specific assets until it is 'crystallised',
when it becomes a fixed charge. Characteristics of floating charge as in Re Yorkshire Woolcombers
Association Ltd:
i. Floating charge is a charge over a class of assets of a company present and future.
ii. The assets may change from time to time in the company's ordinary course of business.
iii. The company can deal with the assets in the ordinary course of its business until the charge
crystallizes.
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17. Fixed charge vs Floating charge
❖ If there are two charges created over the same assets. The first charge is a fixed charge followed by the floating charge.
❖ The fixed charge which is also the first in time of creation will have priority. The general principle is that the fixed charge
even though it is second in time, will have priority. However, the outcome may be different where there is a negative pledge
clause in the floating charge document.
❖ In United Overseas Bank Ltd v Forward Overseas Credit Ltd, generally a legal charge prevails over an equitable charge
unless the equitable charge was first and the legal chargee knew of the prior charge.
❖ Floating charge will have priority if the floating charge document contains a negative pledge clause and the holder of the
fixed charge has actual notice of the negative pledge clause.
18. APPLICATION
▪Hence in this current case the fixed
charge between CVT Bank and ABS
Bank which was first in time of
creation will have priority.
▪The general principle is that the fixed
charge even though it is second in
time, will have priority.
▪However, outcome may be different where there
is a negative pledge clause in the floating charge
document.
▪In this current dispute CVT Bank who borrowed
RM 2 million from ABS Bank where the loan
was pledged with a fixed charge on the
company's factory building was given priority
over the floating charge with negative pledge
clause because the floating charge was not
created over the same assets of the fixed charge.
19. Bank ABS floating charge vs Lender X floating
charge
• Negative Pledge can also be known as Restrictive Covenant is one of the ways of more secured floating charge. It is a
contractual promise given by a borrowing company that it will not grant charges in favour of other creditors without the prior
consent of a lender.
• However, it is only binding between the company and the debenture-holder as contractual covenants; not binding on the
subsequent third party. The usual terms such as repayment of principal and other enforcement procedures if the negative pledge
is breached.
• Breach of the pledge is a breach of covenant in the charge document which may allow the lender to enforce the charge.
• Section 39 of Company Act 2016 expressly made an exception to documents relating to instrument of charges. Thus, it can be
argued that the subsequent lender had constructive notice of the negative pledge clause and did not take its charge in good faith
if the prior approval from the existing floating charge was not obtained.
• If a registered floating charge includes a negative pledge, the public which includes any subsequent charge, will be deemed to
have constructive notice. The later or subsequent chargee will be subjected to the priority of the original charge who gives
notice of negative pledge in the register.
20. APPLICATION
• The floating charge has a clause that prevents CVT Bhd from creating any charge whether fixed
or floating without authorization of Bank ABS.
• CVT Bhd as a borrowing company has given contractual promise to ABS Bank where the
borrowing company will not grant charges in favour of other creditors without the prior consent
of a lender.
• However, CVT Bhd has breached the said covenant when they created a new charge over the
company’s debt book with Lender X without authorization from Bank ABS.
As set out in Section 39 of Company Act 2016 , it can be argued that the Lender X had constructive
notice of the negative pledge clause and did not take its charge in good faith if the prior approval from
the existing floating charge was not obtained.Wilson v Kelland, notice of prior floating charge is not
sufficient, there must be notice of clause itself. Thus, the Lender X who included subsequent charge, is
deemed to have constructive notice of the registered negative pledge in the floating charge between ABS
Bank and CVT Bank.
21. As held in UMBC Bhd v Aluminex Sdn Bhd, it was held the time of registration is
important because it determines priorities among different registered charges over the
same property.
In the case of Bank Utama Bhd v Voon Ming Seng Sdn Bhd, the time that a charge is
made shall be the element to decide the priority of the charges.
• Therefore, floating charge created between ABS Bank and CVT Bank
should be given priority over the fixed charge which was created later with
Lender X as the floating charge was made earlier in time and the existence
of negative pledge clause.