Fixed and Floating Charges: Secured and Unsecured Debenture
Fixed and Floating Charges
In the event where the borrower is a company a debenture will be issued. Under Section 4(1) of Companies Act (CA) 1965, debenture is the document that proves a company is actually borrowing money from the bank but it is not a charge. It can be divided into two types namely secured debenture and unsecured debenture. An unsecured debenture simply means that there is no security being used. It is similar to IOU as it is merely telling that the borrower (company) is borrowing from the lender but it did not tell how the borrower is going to repay. In this case, if the borrower has many creditors and those creditors had charge with the borrower, the lender who with only a debenture may be at a disadvantage as the borrower may first repay the other creditors who have charge first. By this, the lender with no charge or with only the debenture will be pay at last and if the borrower left nothing after he paid the other creditors, the lender may suffer a loss. In contrast, a secured debenture means that there is property being charged for the loan. With this, the bank’s interest and right may be protected.
For secured debenture, a fixed charge or a floating charge can also be used to charge assets of the company to the lender. Under fixed charge, the assets cannot be change and must be specific and also identifiable. It may not be only one asset but if the lender takes few assets as security, lender must states clearly the details of each asset. For example, property A of the company that located at Jalan Alphabet in Taman ABC. Next, since the chargee is still retains certain control over the assets, chargor must first get consent of chargee if he want to deal with the charged assets. Moreover, fixed charge has priority against the floating charge if deal with the same assets only. This mean that the fixed chargee will get the compensation first if the charged assets are being sold.
In contrast, the assets for a floating charge are not fixed and
In the event where the borrower is a company a debenture will be issued. Under Section 4(1) of Companies Act (CA) 1965, debenture is the document that proves a company is actually borrowing money from the bank but it is not a charge. It can be divided into two types namely secured debenture and unsecured debenture. An unsecured debenture simply means that there is no security being used. It is similar to IOU as it is merely telling that the borrower (company) is borrowing from the lender but it did not tell how the borrower is going to repay. In this case, if the borrower has many creditors and those creditors had charge with the borrower, the lender who with only a debenture may be at a disadvantage as the borrower may first repay the other creditors who have charge first. By this, the lender with no charge or with only the debenture will be pay at last and if the borrower left nothing after he paid the other creditors, the lender may suffer a loss. In contrast, a secured debenture means that there is property being charged for the loan. With this, the bank’s interest and right may be protected.
For secured debenture, a fixed charge or a floating charge can also be used to charge assets of the company to the lender. Under fixed charge, the assets cannot be change and must be specific and also identifiable. It may not be only one asset but if the lender takes few assets as security, lender must states clearly the details of each asset. For example, property A of the company that located at Jalan Alphabet in Taman ABC. Next, since the chargee is still retains certain control over the assets, chargor must first get consent of chargee if he want to deal with the charged assets. Moreover, fixed charge has priority against the floating charge if deal with the same assets only. This mean that the fixed chargee will get the compensation first if the charged assets are being sold.
In contrast, the assets for a floating charge are not fixed and