CHARGES

CHARGES

A charge is a security created by a company in favour of a creditor. Thus, the company is known as charger and the creditor is known as chargee. Sec 4 CA defines charge as “ includes a mortgage whether upon demand or otherwise”.

In BENSA SDN BHD (IN LIQUIDATION) v MALAYAN BANKING BHD & ANOR [1993] 1 MLJ 119 the High Court held that a memorandum of deposit in respect of money in a fixed deposit was a secured debenture as it contained the elements of obligation, covenant, undertaking or guarantee to pay and it was duly registered as a charge under section 108(3)(a) of the Act. The definition also extends to other securities such as pledges and liens.

There are two types of charges namely, fixed charge and floating charge.

Fixed charge

A fixed charge is attached to a specific property. Thus, the property is identifiable. In such a case, the company cannot dispose-off the property without the creditor’s consent.

The advantages to the creditor are that the property is identifiable and therefore the value of the property can be valued and monitored. Furthermore since the company has no right to dispose-off the assets, the creditor is given immediate security over the property.

The disadvantage to the company is that it must obtain the consent of the creditor if it wishes to dispose-off the property. Essentially, the company loses its rights over the property.

Floating charge

A floating charge is created on assets which are present and future. The assets are changing in its ordinary course of business and the company can dispose off the assets but only until crystallisation – RE YORKSHIRE WOOLCOMBERS ASSOCIATION LTD [1903] 2 Ch 284.

Once the floating charge crystallises, the company loses its right to deal with the assets. Thus, in such a case the creditor becomes the owner of the assets.

The advantage to the company is that it still has the right to deal with the assets. The disadvantage to the chargee is that it does not have immediate rights on the assets.

A floating charge crystallises:

• —  when a company is wound up
• —  when a company ceases its business
• —  when there is a default in paying interest or principal sum
• —  when there is a breach of the charge instrument
• —  when the company has allowed the value of the assets which are subject to the charge to decline below a certain minimum amount as provided in the charge instrument
• —  when the company does not deal with the assets in its ordinary course of business, or
• —  when a liquidator or receiver is appointed – UMBC BHD v OFFICIAL RECEIVER OF SOON HUP SENG [1986] 1 MLJ 75.

A floating charge created within six months of winding up is invalid unless at the time of creation of the charge, the company is solvent: s 294, CA 1965.

Registration of charges

All charges must be registered: s 108, CA 1965. This is to enable other creditors to have knowledge as to whether a particular property to be taken as a security is subject to a charge.

This is based on constructive notice: s 110, CA 1965. This means that it is the creditor’s duty to check whether a particular property to be taken as a security is subject to a charge.

A charge must be registered within 30 days from the date of the creation of the charge and not from the date the loan is granted – ESBERGER & SON LTD V CAPITAL & COUNTIES BANK [1913] 2 Ch 366.

The registration of the charge can be done by the company itself or any interested person, i.e. the creditor.         If the charge is not registered, the charge is void as against the liquidator and other creditors.

A creditor would become unsecured but the loan is still valid. This is because the law does not require the loan to be registered but only the charge. In fact, the loan is immediately repayable. Thus, in most situations, the company will ensure that the charge is registered, otherwise the liability to repay arises immediately.

In the event the charge is not registered, the company may apply to the court for late registration subject to the court’s approval: s 114, CA 1965.

Priority of charges

If there are two fixed charges on the same property, the fixed charge which is created earlier is in priority to the fixed charge which is created later. This is so provided both the fixed charges are registered. This means that the first in creation prevails – RE BENJAMIN COPE & SONS LTD [1914] 1 Ch 800.

If there are two floating charges on the same property, the floating charge which is created earlier is in priority to the floating charge which is created later. This is so provided both the floating charges are registered. This means that the first in creation prevails.

If there are two charges on the same property whereby the charge which is created first is not registered but the charge which is created later is registered, then the charge which is created later is in priority since it has been registered. This is so unless the creditor of the charge which is created later but registered has actual or constructive notice of the charge which is created earlier.

If there are two charges on the same property whereby they are both not registered then the charge which is created first is in priority since it has been created first.

If there is a fixed charge and a floating charge on the same property, the fixed charge is in priority. This is so even if the floating charge was created and registered first and the creditor who has a fixed charge has knowledge of the floating charge – UNITED MALAYAN BANKING CORPORATION BHD V ALUMINEX (M) SDN BHD [1993] 3 MLJ 587.

This is because when a fixed charge is created, the company has no right to deal with the assets which are subject to the charge. This is to be compared with a floating charge whereby a company can still deal with the assets which are subject to the floating charge. Thus,

—  a creditor who has a fixed charge has immediate security over the assets as compared to a creditor who has a floating charge

—  a creditor with the fixed charge has priority over the creditor who has a floating charge – RE HAMILTON’S WINDSOR IRONWORKS (1993).

However, if the floating charge is supported by a negative pledge clause – RE VALLETORT SANITARY STEAM LAUNDRY CO LTD [1903] 2 Ch 654 and it is registered – SIEBE GORMAN & CO LTD V BARCLAYS BANK (1979) 2 Lloyd’s Rep 142, then the floating charge is in priority to the fixed charge.

A negative pledge clause means that the company has given a promise to the creditor who has a floating charge that it will not create a subsequent charge to be in priority to the floating charge.