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    LOAN CAPITAL Part III

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    legallymoon
    Upon winding up of a company, secured creditors have priority over the assets secured by their charges. Fixed charges have priority over floating charges regardless of when they were created, unless the floating charge contained a negative pledge clause. Preferential creditors, such as those owed EPF contributions, have priority over floating charges. Unsecured creditors are last in priority order.

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    LOAN CAPITAL Part III

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    legallymoon
    14 views17 pages
    Upon winding up of a company, secured creditors have priority over the assets secured by their charges. Fixed charges have priority over floating charges regardless of when they were created, unless the floating charge contained a negative pledge clause. Preferential creditors, such as those owed EPF contributions, have priority over floating charges. Unsecured creditors are last in priority order.

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    4. LOAN CAPITAL Part III

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    Upon winding up of a company, secured creditors have priority over the assets secured by their charges. Fixed charges have priority over floating charges regardless of when they were created, unless the floating charge contained a negative pledge clause. Preferential creditors, such as those owed EPF contributions, have priority over floating charges. Unsecured creditors are last in priority order.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    14 views17 pages

    LOAN CAPITAL Part III

    Uploaded by

    legallymoon
    Upon winding up of a company, secured creditors have priority over the assets secured by their charges. Fixed charges have priority over floating charges regardless of when they were created, unless the floating charge contained a negative pledge clause. Preferential creditors, such as those owed EPF contributions, have priority over floating charges. Unsecured creditors are last in priority order.

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    LOAN CAPITAL &

    DEBENTURES
    PART III
    Priority of Creditors

     Upon winding up, priority of company’s creditors/debts


    arises.
     The assets used as security for the company’s secured
    creditors can only be used to pay off the debts owed by
    the company to these creditors ( by liquidate/sell off)
     General assets of the company that are to be used to
    settle the unsecured creditors will exclude assets charged
    to secured creditors.
     It would be necessary to determine the priority when the
    company’s assets are insufficient to pay all the company
    creditors
    Fixed Charges

     When the company had created few fixed charges:


    Ranking in order of creation/registration except when the
    later charge ranking parri passu or in priority of the earlier
    charge.
    (Note: A company may create several charges on the
    same asset)
    1st 2nd 3rd
    Fixed I Fixed II Fixed III
    Floating Charges

     When the company had created few floating charges.


    Ranking in order of creation/registration except when the
    later charge ranking parri passu or in priority of the earlier
    charge

     Re Automatic Bottle Makers : First floating charge


    authorises the creation of second floating charge in
    priority

    1st 2nd 3rd


    Floating I Floating II Floating III
    IMPORTANT NOTE

     When floating charges crystallise upon winding up - The


    crystallization does not affect its nature (as floating charge
    ) for the purpose of registration nor does it improves its
    priority over other charges existing at the time of
    crystallization. i.e. the charges are still considered as
    floating charges.
    Fixed and Floating Charges

     Fixed charges have the priority over floating charges,


    irrespective of time created/registered, provided the fixed
    charge is registered (refer illustration A)

     Except where a negative pledge clause existed in the


    instrument of the floating charge and later fixed chargee
    have knowledge of the negative pledge clause
    (refer illustration B)
     Illustration A
    Company created Fixed I, then Floating I and later Fixed II

    1st 3rd 2nd


    Fixed I Floating I Fixed II

     Illustration B
    If the Floating I have negative pledge/restrictive clause and Fixed II have
    knowledge of the clause

    1st 2nd 3rd


    Fixed I Floating Fixed II
    Negative Pledge/Restrictive Clause

     When company created floating charge, it may still sell or


    charge the assets (subjected to a floating charge) in the
    ordinary course of business.
     To avoid that a negative pledge is included into a floating
    charge
     When there is a negative pledge, the effect is - floating
    charge would have priority over a later fixed charge
    Negative Pledge/Restrictive
    Clause
     A clause which stipulate that the company is prohibited
    from creating subsequent charges without the consent of
    the chargee
     It is a contractual promise given by a borrowing company
    that it will not grant further charges without the prior
    consent of the creditor
     However if the borrowing company grant further charges
    without consent of the creditor, subsequent charges are
    still valid.
     Negative pledge only affect priority
     The negative pledge clause will only take effect (i.e affect priority) if
    the subsequent fixed chargee has notice and knowledge about it.

    Companies Act 2016


     Sec 352(1) - …a statement of particulars of the charge in the manner
    prescribed by the Registrar (refer item 7)
     If the form has been properly filled out indicating that there is a
    negative pledge/restrictive clause, then constructive notice doctrine
    applies.
     However if item 7 is left blank(the form improperly filled) then the
    constructive notice doctrine would not apply.(actual notice)
    (Refer case : Tan See King – Part II Effect of registration)
     Kay Hian & Co(Pte) Ltd [1989] 1MLJ 284
    F: A contest between prior floating charge and subsequent
    fixed charge
    H: Person asserting priority over a registered floating charge
    had to prove that they had no knowledge of the
    negative pledge.
    In this case such had been lodged with the Registry of
    Companies and the defendants failed to do so.
     Affin Bank Bhd v Malayan Banking Bhd [2009] 3 CLJ 320 –
    Court of Appeal
    F: Wembley created a charge in favour of Maybank – all
    assets & undertaking; there is a negative pledge(1st
    charge)
    - 2nd charge created over 8 million shares of Wembley in
    favour of Affin
    - Affin knows about the 1st charge & negative pledge;
    through form 34 (CA 1965)
    - Later when Wembley defaulted, Affin sold the shares
    - Maybank claimed that the shares are part of its charge
    and it has priority over Affin’s charge
    Held :
     The shares are part of the first charge. Maybank’s charge
    over the shares had priority over Affin’s charge
    Preferential Creditors

    Preferential creditors may affect the priority of floating charge.


    They are actually unsecured creditors who must be paid in priority
    to other unsecured creditors.
     Who are preferential creditors;
    Sec 527(4) : those identified in sec 527(1)(b),(d),(e) AND
    Sec 527(3) -Money borrowed to pay employee’s salary or
    vacation leave.

     Sec 527(4) : The preferential creditors are entitled to be paid in


    priority to the company’s debenture holders of a floating
    charge
     Kenneth Teh Ah Kim & Anor [1998] I MLJ 289
    H : EPF contribution payable by the company has priority
    under secs 191(1) & 292(1)(e) over any claim of the
    debenture holders in the floating charge

    NOTE: Payment to the preferential creditors can only be


    made out of the assets secured by floating charge and not
    those secured by fixed charges
    Unsecured creditors

     The unsecured creditors would be last in priority.


     Unsecured creditor’s claim would be settled only after the
    claims of secured creditor are met; unless the unsecured
    creditor had obtained judgment( judgment debt)

     Unsecured creditor would have priority over the floating


    charge when obtained judgment against the company
    before the floating charge crystallize.
     Eg: Trade creditors- provide goods/services,
    Rental (landlord)

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