Apr 7, 2008

Company Law Tutorial 7&8

Question one


Fixed charge


- a fixed charge is one that is intended by the parties to attach to a specific item of property as the charge is created

- Fixed charge has the priority payment on the same property than floating charge

- Cannot sell property without consent of the debenture holder



Floating charge


- floating charge does not attach to any specific assets until the charge crystallizes, when it becomes a fixed charge

- floating charge is always postponed to a fixed charge

- can sell property without consent of the debenture holder



Fixed charge has better security than floating charge. The charge is fixed to particular asset and the property cannot be sold without the consent of debenture holder.



2(a) According to Section 108(1) Companies Act, 1965, both fixed charge and floating chage must be registered with SSM within 30 days after creation of charge.



2(b) Section 108 (1) Companies Act, 1965 requires the company to register with SSM within 30 days after creation of charge. Section 108(2) Companies Act, 1965 states when the charge becomes void, money secured shall immediately become payable. Any interested part can register under Section 109(1) Companies Act, 1965.



2(c) The charge will be void and money secured shall immediately become payable under Section 108(2) Companies Act, 1965. According to Section 114 Companies Act, 1965, the Court may grant extension provided there must be good reasons and it is up to the Court to decide.



2(d)

Crystallisation occurs:

(i) if the company goes into liquidation

(ii) when the Court or debenture holders appoint a receiver

(iii) if the company ceases to carry on its business

(iv) when there is a clause in the contract says that if such things happen, it will change to fixed charge and the company needs to give notice that the charge is converted into a fixed charge

(v) automatic crystallization clause. The floating charge changes to fixed charge automatically without requiring the company to give notice.



Effect when a floating charge crystallizes:

(1) the creditor becomes a secured creditor

(2) the charge which is created first will be paid first



3. Fixed charge will always be paid first, then followed by preferential creditors and floating charge.



On 20th October 2007, Syarikat Teruk Bhd borrowed RM5million from Lagi Banyak Finance Bhd in return for a fixed charge over the company’s prime land in Cyberjaya. According to Section 108(1) Companies Act, 1965, the company must register with the SSM within 30 days after the creation of charge. In this case, the charge was duly registered. Hence, Lagi Banyak Finance is protected. Lagi Banyak Finance would be the first to be paid because it created fixed charge over the land.



Preferential creditors are the one who to be paid after Lagi Banyak Finance Bhd. Syarikat Teruk Bhd has not paid the employee’s salaries for the last six months. According to Section 191 and Section 292 Companies Act, 1965, the preferential creditors can only ask for unpaid salaries of up to 4 months or not more than RM1500 whichever is lesser. In this case, the company cannot cover the unpaid salaries for 6 months. Syarikat Teruk Bhd can only pay the unpaid salaries for 4 months or RM1500 whichever is lesser.



Next, Syarikat Teruk Bhd will pay to Happy Finance Bhd. On 1st July 2007, the company has borrowed RM1million from Happy Finance Bhd in return for the loan. It is floating charge over all the company’s assets. According Section 108(1) Companies Act, 1965, the company must register with SSM within 30 days after the creation of the charge. In this case, the floating charge is registered, therefore Happy Finance Bhd is secured creditor. Even though the floating charge was created earlier than fixed charge (Lagi Banyak Finance Bhd), but fixed charge has priority to receive the payment before floating charge.



Banyak Finance Bhd is the last one to be paid. On 15th September 2007, the company borrowed RM3million from Banyak Finance Bhd in return for a fixed charge over the company’s prime land in Putrajaya. Section 108(1) Companies Act, 1965 requires the charge to be registered with SSM within 30days after creation of charge. In this case, the fixed charge is not registered and it becomes void. According to Section 108(2) Companies Act, 1965, when the charge becomes void, money secured shall immediately become payable. Therefore, they are unsecured creditor.


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*Thanks for Yet Ling's contribution for this answer!!

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