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SHARES

ORDINARY SHARES

PREFERENCE SHARES

1. Definition: Section 4 of CA
1. Ordinary shares or sometimes referred to
2. Preference shareholder does not entitle to
as equity shares are shares which are not
the right to vote at a GM or to any right to
given any special rights.
participate beyond a specified amount in
2. It carries all the rights of the ordinary
any distribution whether by way of
member, namely:
dividend, or on redemption, in a winding
up, or otherwise.
Unlimited voting rights in GM, which
give the power to influence the policies 3. Section 66 of CA if the company issues
preference shares, the rights attaching to
of the company.
the shares must be mentioned in either
Entitlement to any surplus assets of the
MOA or AOA.
company in winding up
4. The rights of preference shares are:
Right of return of capital of winding up
Right to fixed dividend (must be stated
Not entitled to a fixed rate of dividend
on MOA or AOA)
3. In a financial year, rights to dividend come
Right to return of capital upon winding
after the preference shareholder.
up in priority.
4. If the company has a poor financial year,

Not entitled to any surplus assets of the


the ordinary shareholder will receive very
company in the event of winding up.
little or nothing.
No right to vote at GM.
VARIATION OF CLASS RIGHTS
Definition
Class rights are the rights which are attached to a class of shares.
Variation of class right is the alteration or amendment or change or deletion of the rights which
are already given to the preference shareholder.
Procedure
The class right can be found either in the companys AOA, MOA or shareholders agreement.
A company may vary or change any of the class rights attaching to any class of its
shares. Such rights may be varied in accordance with the procedure sets out in the MOA or
AOA. In the event where the companys MOA or AOA does not set out the procedure, the rights
may be varied depending on where the class rights are stated.
If the class rights are stated in the MOA, such rights can be altered in accordance with
section 21(1A) where the company needs to pass special resolution to insert the procedure to
vary class rights. However, section 21(1B) states that no alteration or deletion is allowed where
the provisions relates to certain rights which only members in a particular class are entitled.
If the class rights are stated in the AOA, the procedure may be inserted by altering the
AOA under section 31 where the company needs to pass a special resolution. Most companies

adopted Table A of Fourth Schedule, where Article 4 provides that class rights may be varied
by a written consent of the holders of three quarter of the issued shares of that class and special
resolution passed at a separate meeting of that class of shareholders.
What amount to variation of class rights?
Apart from cancellation of class right, issue of new shares can also amounted to variation.
The corporate actions that affect the value of shares in a particular class or the enjoyment of
rights attaching to shares in that class is not sufficient to constitute a variation of class right.
This was illustrated in White v Bristol Aeroplane where a bonus issue of shares to ordinary
shareholders, that greatly diluted the voting rights of preference shareholders, was held not to
amount to a variation of class rights attaching to preference shareholders.
In Greenhalgh v Ardene Cinemas, the company had issued preference shares and
ordinary shares each carrying one vote. It then issued shares to Mr. Greenhalgh that carries
with him sufficient votes to block a special resolution. The other members proposed to the
company to subdivide their shares, greatly increasing the number of votes they held. The effect
was to diminish the proportions MR. Greenhalgh had. This was held not to be the variation of
class rights attaching to Mr. Greenhalghs shares, because he still retains the same voting
rights.
However, Section 65(6) of CA provides that the issue of new preference shares ranking in
pari passu with the existing preference shares amount to variation of the existing preference
shareholders rights.
Members right to oppose the variation.
Section 65 of CA provides that holders of not less than 10% of the issued shares of the
class, whose rights have been varied may within one month after the variation, apply to court to
set aside the variation.
The court may make the order if it is satisfied that the variation would unfairly prejudice
the members of the class.

FORGED TRANSFER
Definition
A forged transfer is a total nullity and the true owners name must be restored back to
the register of members.
The innocent purchaser who is without knowledge, in good faith and has provided
valuable consideration cannot acquire better title than the defective title of person who commits
forgery.
This was illustrated in the case of Re Bahia v San Francisco Rail Company where the
court held that;
i.

The true owners name must be restored back to the register of member. Forged
transfer is a total nullity.

ii.

Innocent purchasers name should be removed from the register.

iii.

The company is liable to pay damages because it was stopped from denying that the
person who forged the signature is the true owner.

iv.

The company must demand indemnity from the immediate purchaser.

v.

Immediate purchaser then may sue the forger of the owners signature.

RESTRICTIONS ON TRANSFER OF SHARES


Section 15 of CA provides that a private company must restrict the right to transfer its
shares. As regards to public company, normal restrictions found in the public company are preemption right and discretionary rights.
Pre-emption right
Pre-emption right is the right of the first refusal, where a member who wishes to transfer
their shares must first offer it to the existing members who are willing to purchase the shares. If
there are no members willing to purchase the shares, then transfer can be made to the
outsiders.
Discretionary rights
Article 32 Table A provides that the AOA of the company may provide that directors
may, in their absolute and unrestricted discretions, refuse to register shares.
Where there is such discretion, it must be exercised bona fide for the interest of the
company as a whole. If the directors give reasons for the refusal, then the reasons may be
challenged for unreasonableness but issue always arises when the directors do not provide
reasons for refusal to register a transfer of shares.
In Re Smith & Fawcett, the company had Smith and Fawcett as two shareholders
holding equally 4001 shares each. Both are directors. One of them died and the son of the
deceased apply to the company to transfer 4001 shares of his father to him. The director, having
discretion said that 2000 shares must be transferred to somebody else and the balance
transferred to the son. The court held that the son was not able to proof that the director did not
exercise the discretion in bona fide for the benefit of the company. The discretion stands.
Therefore, the directors can refuse to register a transfer without giving any reason. The
transferee can only compel registration if he can show lack of bona fide. The court will presume
that the directors exercise their powers honestly, unless it appears otherwise on the face of the
document or in the confession of the directors.

SHARE CAPITAL

PROHIBITION UNDER SECTION 67 OF CA


At common law a company is totally prohibited from purchasing its own shares.
The simple rational behind it is that, if the company purchases its own share, capital will
be reduced mush to the detriment of creditors whom the doctrine of maintenance of capital
protects. It amounts to return of capital to members which would the end jeopardize the
creditors protection.
The prohibition was first expressed in the Trevor v Whitworth. In this case, the executor
of W, a deceased shareholder of the company sold his shares in the company to it. The
payment was to be made in two installments. Prior to the payment of the second installment, the
company went into liquidation. The executor claimed the balance from the companys liquidator,
T. The companys MOA did not authorize the company to purchase its own shares even if its
AOA permits.
However, there are exceptions to the rule.
Firstly, section 61 of CA provides that a company may issue redeemable preference
shares at the option of the company or the shareholders provided that requirement under
Section 61 is followed. However, such issuance must be authorized by the AOA & redemption
shall be affected only on such terms and in the manner provided by AOA.
Secondly, section 67A of CA allows a public company with a share capital to purchase
its own shares if it is so authorized by its articles. The purchase can only be made with the
conditions under section 67A(2) which are:
(a) the company is solvent at the date of the purchase and will not become insolvent by
reason of the purchase,
(b) the purchase is made through Stock Exchange; and
(c) the purchase is made in good faith and in the interest of the company.
Thirdly, section 181(2)(c) of CA provides that a company by the court order, provide for
the purchase of the shares or debentures of the company by other members or holders of
debentures of the company or the company itself.

PROHIBIT A COMPANY FROM GIVING FINANCIAL ASSISTANCE FOR THE PURCHASED


OF ITS OWN SHARE
The company is prohibited from giving financial assistance to any person directly or
indirectly for the acquisition of its own shares/shares in its holding company except as is
otherwise expressly provided.
This is to ensure that the rights of creditors, who ultimately look to be the issued capital
of the company, are not prejudiced. A guarantee or security given by the company for a loan
made to a person in order to enable him to acquire the companys share can constitute a
financial assistance.
This was illustrated in the case of Chung Khiaw Bank Ltd v Hotel Rasa Sayang, the
plaintiff gave loan to a company named Syarikat Johor Tenggara. The company used the fund to
purchase shares in the defendants company. The loan was secured by the company by
creating a charge over its property and assets. When the company defaulted in payment, the
plaintiff wanted to enforce the security. The court held that the hotel had given financial
assistance contrary to Section 67.
Apart of that, the release of a debt or obligation can also be regarded as a financial
assistance if the effect of the release is to reduce the price payable for the shares.
This can be seen in Eh Dey Property Ltd v Dey where the defendant was a
shareholder of plaintiff (the company). He owed a sum of money to the company for the shares
he had taken but not fully paid. Mr. and Mrs Paul wanted to buy these shares. The company
passed a resolution reducing the amount owed by defendant to the company. Mr. and Mrs Paul
then acquired shares at a lower price. The court held that this was amounted to financial
assistance because the reduction of the amount owed was in connection with the share transfer
between the defendant and Mr. & Mrs Paul.
However, there are statutory exceptions to financial assistance provided under section
67(2) of CA.
Firstly, Section 67(2)(a) provides that financial assistance is permitted where the lending
of money is part of the ordinary business of a company, and done in the ordinary course of
business.
Secondly, Section 67(2)(b) allows the company to give financial assistance to trustees,
as they do not give directly to the employees.
Thirdly, Section 67(2)(c) permitted the company to give financial assistance to persons
other than the directors in the employment of the company or of a subsidiary of the company in
order to enable those person to purchase the shares in the company.

REDUCTION OF SHARE CAPITAL


Generally, a company is prohibited from reducing its issued capital unless in accordance
with the Act.
So the company is prohibited to return its assets to the companys members since the
effects of such a return of capital would be to reduce the assets that are available for
distributions to the creditors should the company goes into liquidation.
However a company may reduce its capital only by complying with the procedure set out
in section 64 of CA.
Firstly, section 64(1)(a) provides that a company may extinguished or reduce the liability
on any of its shares in respect of share capital not paid up.
In Re Doloswella Rubber & Tea Estate Ltd, the company was incorporated with the
object of developing a rubber estate in Ceylon of about 8000 acres. After its incorporation the
company decided to limit the area of cultivation to 4000 acres and consequently did not require
the whole of its issued capital. Therefore, the earlier 500 shares each was later converted into
a 300 shares and the amount paid up was apportioned accordingly.
Secondly, Section 64(1)(b) allows the company to cancel any paid up share that is lost
or is not represented by available assets.
This was illustrated in Re Rodhesian Manufacturing Co Ltd where the companys
issued share capital comprised of 44,360 of A shares and 19,000 of B shares. All issued shares
are fully paid. The company had made losses such that its net assets only amounted to
12,555. The company reduced the nominal value of A shares to 0.75 each. This reduction
resulted in bringing the issued capital in line with the net value of its assets.
Thirdly, a company may pay off any paid-up share capital that is in excess of its needs.
In Re Fowlers Vacola Manufacturing Co Ltd, because of intense competition in its
food canning business, the company abandoned this activity and consequently had capital in
excess of its needs. It resolved to reduce its capital and return the excess to its ordinary
shareholders. This was done by reducing the nominal value of ordinary shares from 10s each to
2/9 and returning 7/6 on respect of each share.

BREACHES OF DIRECTORS DUTIES

Fiduciary Duties
The fiduciary duty of the director is owed to the company and not to individual
shareholder.
Section 132(1) of CA provides that a director of a company shall at all times exercise
his power for a proper purpose and in good faith in the best interest of the company.
This was illustrated in the case of Mills v Mills where the court held that what is in the
best interest of the company in fact what is fair among all the shareholders. If a decision treats
all the shareholders equally does not discriminate between one group of shareholder and
another, then it will be in the best interest of the company.
Apart of that, directors also owed fiduciary duty to avoid conflict of interest. Director
should not enter into engagement in which there is a possibility that the directors personal
interest could conflict with those of the company which they were bound to protect.
Section 131(1) of CA states that a director of a company who has a material interest
whether direct or indirect in a contract or proposed contract with the company must disclose his
interest at a meeting of directors of the company.
In Aberdeen Railway Co, the plaintiff entered into a contract with the defendant for the
supply of a large quantity of iron seats. At the time the contract was entered into, one of the
partners of defendants was a director of plaintiffs company. Upon discovering this, the plaintiff
sought to avoid the contract even though the terms were fair. It was held that the duty should be
strictly applied even though the contract was fair.
At common law, a person can be a director of several companies provided the person
does not breach any of the directors duties. However, directors may breach his duties if he
becomes directors of rival companies.
Section 132(2)(e) of CA states that a director shall not engage in business which is in
competition with the company unless consent or ratification of general meeting is obtained.
Further, section 131(5) of CA requires directors of the company to disclose any office where
duties or interest might be created that conflict with duties and interest as directors.
This was illustrated in the case of Kea Holdings Pte Ltd, the defendant was a director
in plaintiffs company which main business is selling and purchasing ships. The defendant was
also a shareholder and director of another company named Sinindo.

The plaintiff placed orders for several vessels but the defendant advised the plaintiff to
cancel the order to avoid payment of export duty. The defendant also alleged that there were no
buyers for the vessels. The plaintiff cancelled the orders and had to loss its deposit.
The plaintiff sued the defendant because the defendant knew that Sinindo is looking for
vessel to purchase and rather than ensuring Sinindo purchased from plaintiff, Sinindo bought
from another company and he received commission for such purchase.
The court held that although the defendant was not prohibited to hold directorship in
another company, he owed a duty not to place himself in a position where his duty to plaintiffs
company and his own interests are in conflict.
Section 132(2)(c) of CA provides that director must not use his position as directors.
This was illustrated in the Mahesan v Government of Malaysia where the plaintiff was
a director and employee of the society. Its object was to provide housing for government
employees. In connection with a transaction involving the purchase of land, Mahesan received a
bribe from one purchaser who purchased the land for a lesser value. The purchaser later sold it
to the society for a very high value where one quarter of the profit was later paid to Mahesan as
a bribe. The court held that the society was entitled to recover the amount of the bribe or
alternatively damages for Mahesan's breach of duty.
In Cook v Deeks, the directors of a company carrying on the business of railway
construction contractor obtained a contract in their own name. On an action brought by
shareholders to the Privy Council, it was held that there was a breach of trust on the part of the
director and that the benefit of the contract belonged to the company and they were bound to
account to the company for it.
A director might be acting honestly in what he considers to be the company's interest
and yet still be in breach of his fiduciary duties. This would occur if he misapplies the companys
assets or if he uses the powers he is delegated for the wrong purpose. It does not matter
whether he is acting honestly, or in what he considers the interest of the company.
This was illustrated in Bishopsgate Investment Management Ltd v Maxwell, a
director was held to have used his powers as a director for an improper purpose where he gave
away the companys assets to a family company for no consideration.

Duties of Skill, Care & Diligence


Section 132(1A) of CA provides that directors shall exercise reasonable care, skill and
diligence.
A director owes duty of care to the company of which he is a director. The standard is
that of reasonable care in that he must take care in the affairs of the company as he would
reasonably take in his own affairs.
In Re Brazilian Rubber Plantation & Estate Ltd, it was ruled that such reasonable care
must be measured by the care an ordinary man might be expected to take in the same
circumstances on his own behalf.
With regards to the duty to be skillful, the rule is that a director does not have to possess
any skill for the job and the fact that he is unskillful is not a breach of his duty to the company.
The director is under duty to exercise the power using the level of skill that he has. If he uses
less than the level of skill that he has, he is in breach of this duty.
In Re City Equitable Fire Insurance Co Ltd, the court ruled that a director need not
show in the performance of his duties a greater degree of skill than may be reasonably be
expected from a person of his knowledge and experience.
Lastly, as regards to duty to be diligent, the court in Re Forest of Dean Coal Mining Co
ruled that a director are bound to use reasonable diligence having regard to their position,
though probably an ordinary director cannot be expected to devote as much time and attention
to the business as the sole managing partner of an ordinary partnership, but they are bound to
use fair and reasonable diligence in the management of companys affairs and to act honestly.

LOANS TO DIRECTORS
Section 133 of CA prohibits a company from granting loan to a director of the company
or enters into any guarantee or provides security in connection with the loan to such director.
However, this section does not apply to exempt private company.
The aim of this section is to prevent directors from improperly using the companys funds
especially when the directors are also the shareholders.
Further, section 133A of CA prohibits a company from giving loan or provides security
or guarantee to any person connected with a director. This section also does not apply to
exempt private company. Section 122A provides that a person is deemed to be connected with
a director if he or she is a family member of that director; a body corporate which is associated
with the director or a trustee of a trust where the director or his family member is a beneficiary.

DEFECTIVE APPOINTMENT OF DIRECTOR


The question of validity in respect of an act carried out by a director whose appointment
was defective is important in practice.
Section 127 of CA provides that the acts of directors shall be valid notwithstanding any
defect that may afterwards be discovered in his appointment or qualification. This provision will
assist third party when the contract is made by a person who actually has no authority because
the appointment is not validly made.
In Dawson v African Consolidated Land & Trading Company, the companys AOA
requires that a director must obtain a certain amount of companys shares before being
appointed or within reasonable time after the appointment. A director acquired the shares but
later sold them and subsequently entered into contract with third party. The court held that the
contract was enforceable despite the fact that the director lost his share qualification. The
company was liable to honour the contract.
However, the court in Re Staffordshire Gas & Coke Co Ltd ruled that outsider having
notice that there is irregularity in the appointment of a director cannot invoke Section 127 to his
advantage.

REMOVAL OF DIRECTORS
Section 128(1) of CA provides for the removal of directors for public companies. A
director of a public company even before the expiration of his term may be removed from his
office by a simple resolution, notwithstanding anything in its memorandum or articles or any
agreement between it and him. The office of director then becomes vacant on the passing of the
resolution.
Section 128 (2) and (3) of CA state that if the statutory power is to be exercised, special
notice of 28 days must be given and the director has the right to make representation in writing
and send to every member of the company. If the representation in writing is received too late
and no time to send a copy to every member before the resolution, then the director may
request that the representation be read out at the meeting or he can request right to be heard at
the meeting orally.
In Soliappan V Lim Yoke Fan, the company's AOA provided that a director might be
removed with the service of 7 days' notice in any general meeting. The plaintiffs wanted to
remove all the directors of the company and sent the notice of resolution for removal of the
directors 3 days before the meeting. At the meeting, the plaintiffs were purportedly elected as
directors after the defendant had been removed. The court held that Section128 was not
mandatory. Therefore, the removal could be affected in accordance with the AOA, which provide
for shorter notice. However, since the proper notice required under the AOA had not been given

either, the defendant had not been properly removed as director and consequently the plaintiff
was not properly appointed as director of the company.

MAJORITY RULE & MINORITY PROTECTION


RULE IN FOSS V HARBOTTLE
The law provides that in order to redress a wrong done to the company, the action
should prima facie be brought by the company itself.
This cardinal principle has been laid down in the case of Foss v. Harbottle. In this case,
two minority shareholders of Victoria Park Co on behalf of themselves and all other
shareholders attempted to sue the directors who were alleged to have mismanaged the
company and defrauded it of its property. The court ruled that the corporation should sue in its
own name and in its corporate character, or in the name of someone whom the law has
appointed to be its representative.
The action was dismissed on procedural grounds and two propositions were laid down,
namely; the proper plaintiff rule and the majority rule.
The proper plaintiff rule lay down that any wrong done to the company is suffered by the
company. The company must be the proper plaintiff to seek legal remedy against the
wrongdoers. On the other hand the majority rule states that the company must be run in
accordance with the wishes of the majority.
Advantages of rules
(i) As the action would be taken by the company, it can avoid multiple suits by the members.
(ii) Since the majority can pass a resolution to ratify the matter, it would be wasting the courts
time to hear the case.
(iii) An action by the company will be able to eliminate vexatious actions by troublesome
minority shareholders who may try to harass the company.
The effect of the rule
The adoption of such rule raised the issue of unfairness to the minority of the
shareholders as the directors of the company may not allow them to take any legal action since
the directors themselves may be the wrongdoers. The minority would then be at the mercy of
the majority who may go unpunished.
Common law exceptions
As a result of the unsatisfactory effect of the rule, there are several common law
exceptions to the rule in Foss v Harbottle. A minority member can bring an action against the
company or its controllers where it falls in either of the following instances.

Firstly, a minority member can take legal action against the company for acting ultra
vires or illegal to the object of the company. The court in Ashbury Railway Carriage & Iron Co
v Riche ruled that such an act is wholly void and is not capable of being ratified even by all the
members of the company subsequently.
In Malaysia, this exception is no longer of much significant because of section 20 of CA
which preserves the validity of ultra vires act. Companys incapacity may only be raised in
proceeding against the company to restrain an ultra vires transaction as in accordance with
section 20(2)(a) but the power to restrain is lost if the transaction is wholly executed by virtue of
Section 20(2)(b).
Secondly, where an individual members right have been infringed they may bring an
action against the company. These membership rights arise from the Act, articles or separate
shareholders agreement.
This was illustrated in Wood v Odessa Waterworks, the court ruled that it was the right
of the members to have dividends paid in cash as the articles so specify.
Thirdly, the minority may also bring a legal action against the company in the event
where a special resolution was needed but the company acted in breach of it.
This was shown in Edward v Halliwell where the constitution of a trade union provided
that alteration of the contributions of employed members could only be made by a ballot vote of
the members and three quarter majority must be obtained. However, during the second world
war, a meeting of the union was made and a resolution increasing the amount of contributions
was passed without taking a ballot and without obtaining three quarter majority. The court held
that the resolution was invalid.
Lastly, the company can also be sued where there is fraud on minority. Two elements
must be satisfied before a member can bring an action to enforce the companys rights. He
must establish, that is, fraud on the minority and the wrongdoer is in control.
Fraud on the minority includes abuse or misuse of power whereby the majority obtains
an unfair gain at the expense of the minority. Wrongdoer control may exist if the wrongdoer has
a majority of the votes, or the majority has approved a fraud on the minorities where they obtain
some benefit.
In Cook v Deeks, the directors of a company carrying on the business of railway
construction contractor obtained a contract in their own name. On an action brought by
shareholders to the Privy Council, it was held that there was a breach of trust on the part of the
director and that the benefit of the contract belonged to the company and they were bound to
account to the company for it.

REMEDIES UNDER SECTION 180 FOR OPPRESSION


Sec 181(1)(a) of CA allows the court to provide a remedy to a member where the court
finds that the affairs of the company are being conducted or the powers of the directors are
being exercised either in an oppressive manner to one of the members including the petitioner
or in disregard of the members interest.
Sec 181(1)(b) allows the court to provide a remedy to one of the members where the
court finds that an actual or proposed act by or on behalf of the company or resolution or
proposed resolution of members, debenture holders or a class of members of the company is
either unfairly discriminatory to a member or members, shareholders or debenture holders
including the petitioner or prejudicial to members, shareholder or debenture holders including
the petitioner.
What amounts to oppressive or discriminatory was not defined in the statute, but in can
be interpreted from case to case basis.
In the case of Re HR Harmer Ltd, Mr Harmer was a founder and the director of the
company. One of his sons was also the director of the company. Even though the son is one of
the directors, Mr Harmer did control the company as his. He used the money of company and
he neglects his son. The son could not stand anymore then he petition the court for relieve. The
court held that the conduct was burdensome and it amounts to oppression.
The test for oppression is illustrated in the case of Re Khong Thai Sawmill Sdn Bhd
where there has been a conduct inconsistent with standards of fair dealing in which it was
burdensome, harsh and wrongful. The court ruled that there is no need to prove dishonest
intention as the effects of the actions of directors are far more important.
In such cases, the court will provide the remedy for oppression such as directing or
prohibiting any act or cancelling or varying any transaction or resolution. If the company is in
proceeding to purchase its shares then the court may order a reduction of capital. The court
may order the company to be wound up for just and equitable ground under section 218(1)(i).

COMPANY BORROWING
FLOATING CHARGE
Definition
A floating charge is intended by the parties to cover a class of property but not to attach
to specific items within the class until some future event occurs. The company has freedom to
continue to deal with the asset charged in the ordinary course of its business.
Characteristics
A floating charge has been defined as having 3 characteristics as laid down in the case
of Re Yorkshire Woolcombers Association Ltd.
Firstly, it is a charge on a class of assets present and future. For instance, if it applies to
stock in trade or book debts, it comprises whatever assets of that class the company may own
at the moment of crystallization.
Secondly, the class of assets will change from time to time in the ordinary course of the
companys business.
Thirdly, the company may carry on its business and dispose of the assets in the course
of the business until the charge crystallizes. The existence of the floating charge does not affect
the goods once they are disposed of. When the charge crystallizes, however, it affects all the
goods within the class at the same time. These goods are then subject to a fixed charge.
Creation of floating charge
There is no particular form of words required to create a floating charge. It is a question
of interpretation of the particular loan instrument whether the security created is a fixed or
floating charge.
However, the court in Re Bright Life ruled that it is possible to provide in the instrument
that creates the charge that it will crystallize at the option of the creditor. For instance, the
debenture may be so drafted as to give the holder the option to convert the floating charge into
a fixed charge by giving notice to the company.
Advantages and disadvantages of floating charge
The benefit of floating charge is that it enables the company to give security over the
property such as raw materials, stock in trade and inventory that are constantly flowing in and
flowing out of its ownership in the course of carrying on its business.
However, the floating charge is considered to be a weak form of security because it has
several disadvantages as compared to fixed charge as the general rule the fixed charge has a

priority over a floating charge. Apart of that, the value of the security is uncertain. A floating
charge may also lose to judgment creditor who levies execution on the goods.
Crystallisation of Floating Charge
Sometime, lenders will further protect themselves by inserting a clause for automatic
crystallisation. The major difference between the right and powers of the chargee under a fixed
charge and floating charge is that the crystallisation of the floating charge must occur before the
chargee may exercise the rights, whereas a holder of a fixed charge may automatically exercise
them if there is a default under the charge.
A floating charge allows a company to dispose of property the subject of the charge, in
the ordinary course of business, until the occurrence of some particular event specified in the
instrument creating the charge or implied by law. At this point the charge crystallise into a fixed
charge over all the property currently within the class over which the charge applies.
These events usually set out in the charge document. The events that trigger
crystallisation may include an appointment of liquidator or receiver, cessation of companys
business or an event of default specified in the instrument creating the charge
In Malaysia, the application of the automatic crystallisation clause has been approved in
Silverstone Marketing Sdn Bhd where the court rejected the contention that the enforcement
of automatic crystallisation would cause injustice to bona fide third party on the ground that the
third party should conducted an official search on the company before hand in order to find out
the existence of any floating charge.
The court in Malaysia International Merchant Bankers Bhd v Highland Chocolate &
Confectionery Sdn Bhd affirms that crystallisation occurs automatically on the occurrence of a
specified event in the floating charge and without need for a notice to be issued to the floating
chargor.
REGISTRATION AND NON-REGISTRATION OF CHARGE
Where a company creates a registrable charge, it must provide certain information to the
CCM. The information will be entered in the register of charges maintained under section 111,
Part VI of CA.
Functions to register the charge are to inform a person dealing with the company that
there is a creditor who has rights in respect of the companys property. Secondly, it establishes
the order of priority among registrable charge and the validity of registrable charges as against
the liquidator or administrator of the co.
Section 108(1) of CA provides the registration shall be lodge within 30 days after the
creation of the charge. Section 108(3) lists the charges which are registrable under the Act.
Charges over the land are also registrable under NLC 1965.

Registration is affected by lodging a notice in the prescribed form and providing a copy
of the charge to the CCM as provided in section 108(5). If the charge is not registered under
Sec 108(1), the charge will be void against the liquidator or any creditor of the company.
Section 108(2) provides if the charge become void because of non-registration under
section 108(1), money secured become immediately recoverable. For instance the bank may
claim back the money despite the term of agreement.
Section 109 provides a charge may be registered by company or by any person
interested in the document. If the charge is not registered, the charge may lose its priority as
against later charges, or finds its charge unenforceable as against the liquidator or
administrator.
PRIORITY OF CHARGES
Generally, a fixed charge takes priority over any subsequent fixed charge of the same
property and a floating charge takes priority over a subsequent floating charge by order of
creation.
Fixed charge will take priority over a floating charge created at any time even though the
fixed charge created after the floating charge, as long as it was given before the floating charge
crystallized.
However, floating charge will take priority over later fixed charge in two instances.
Firstly, if a debenture creating floating charge inserted negative pledge clause that
restricts the power of the company to grant later fixed charged ranking pari passu with or in
priority to the floating charge.
Secondly, the later chargee has notice of the earlier floating charge and the restriction
contained in it. However, the court in Siebe Gorman v Barclays Bank ruled that the mere
notice of the existence of a floating charge is in itself insufficient to constitute the requisite
knowledge of the restrictive clause contained in the charge so as to subject the later charge to
such restrictions. This is because when a floating charge is registered, it gives a constructive
notice of its existence but not give notice of its terms.
Thirdly, floating charge also can get priority if it is registered first and becomes
crystallized before fixed charge is created.
Once a floating charge crystallized, the chargee is entitled to rank as a secured creditor
and will therefore be paid before the unsecured creditor in any liquidation.
Until that time, however, the holder of floating charge cannot prevent the company from
paying off its unsecured creditors in the normal course of business. This is because where the
company is wound up, certain preferred creditors are entitled to be paid in priority to the holder
of the floating charge, even if crystallization has occurred before liquidation as provided in
section 292 of CA

MEETING & RESOLUTION


A resolution is a motion or proposal that has been accepted or passed by the necessary
majority at a meeting duly convened and held. For a resolution to be validly passed or adopted,
there are several aspects need to be considered.
Firstly, the contents and duration of any notice required to be given. A meeting of a
company other than for the passing of a special resolution shall be called by notice in writing of
not less than 14 days or such longer period as is provided in the AOA by virtue of section
145(2) of CA. In the case of a meeting called for the passing of a special resolution, notice of 21
days is required as provided under section 152. However, a meeting may be called by notice
shorter than is required if it falls under circumstances laid down in section 145(3).
Secondly, the majority is required for adopting the motion as a resolution. Ordinary
resolutions are passed by a simple majority of those present and voting. Special resolutions on
the other hand require approval of a majority of three quarter of such members of the company
present at the meeting and voting in person or by proxy as provided under section 152.
Thirdly, the presence of a quorum can also be considered to determine the validity of
resolution passed. Section 147(1) of CA provides that a quorum is two members personally
present unless the AOA provide otherwise.
In United Investment & Finance Ltd v Tee Chin Yong, the court ruled that in the
absence of authorization in the AOA, a meeting cannot be constituted by one member and any
resolution purported to be passed at such a meeting are invalid.
Where a person is present at the commencement of meeting but leaves before the
business is conducted, leaving the meeting with less than the required quorum, it is a matter of
construction of the AOA as to the validity of the meeting.
In Tan Guan Eng v BH Low Holdings Sdn Bhd, it was held that since the AOA
provided that a quorum is only required at the time when the meeting proceeded to business,
the continued meeting with the presence of only the holder of a valid proxy was regarded as a
valid meeting. Therefore the resolution passed was a valid resolution.
If a quorum is not present within half an hour after the appointed time of a requisitioned
meeting, the meeting is dissolved and adjourned to the time and place determined by the
directors. If no determination, the meeting is adjourned to the following week at the same time
and place. Section 150 (1) provides that the court may order that a meeting be convened and it
may direct that one member present be deemed to constitute a quorum.
Fourthly, the proper person having been in the chair may also be considered. Section
147(1) of CA provides that any member present at the meeting may be elected to chair the
meeting. The chairmans duty is to direct the meeting and to preserve order and ensure that the
proceeding is conducted in a proper manner.

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