CA 2016: DEBENTURE AND CHARGE

DEBENTURE

DEBENTURE is defined in CA2016

In the CA2016 debenture is defined as:

"debenture" includes debenture stock, bonds, sukuk, notes and any other securities of a corporation whether constituting a charge on the assets of the corporation or not;

DEBENTURE is also defined in the CMSA which is similar to the CA definition but it excludes certain categories

In the CMSA debenture is defined as follows:

“debenture” includes debenture stock, bonds, notes and any other evidence of indebtedness of a corporation for borrowed monies, whether or not constituting a charge on the assets of the corporation, but shall not be construed as applying to any of the following:

(a) any instrument acknowledging or creating indebtedness for, or for money borrowed to defray the consideration payable under, a contract for sale or supply of goods, property or services or any contract of hire in the ordinary course of business;

(b) a cheque, banker’s draft or any other bill of exchange or a letter of credit; 

(c) a banknote, guarantee or an insurance policy; 

(d) a statement, passbook or other document showing any balance in a current, deposit or savings account; 

(e) any agreement for a loan where the lender and borrower are signatories to the agreement and where the lending of money is in the ordinary course of business of the lender, and any promissory note issued under the terms of such an agreement; or 

(f) any instrument or product or class of instruments or products as the Minister may, on the recommendation of the Commission, prescribed by order published in the Gazette;

Let us now look again at the definition in the CA2016:

"....includes debenture stock, bonds, sukuk, notes and any other securities of a corporation whether constituting a charge on the assets of the corporation or not;"

Now to analyse each and every instruent mentioned  the definition:

• "... debenture stock"  is an equity type of security. it carries payment of dividends.

• "..bonds.." is an instrument evidencing a promise to pay the debt of the loan that the bond represents.

• "sukuk" is an instrument evidencing an Islamic financial transaction

["According to Securities Commission Malaysia (SC), sukuk refers to certificates of equal value which evidence undivided ownership or investment in the assets using Shariah principles and concepts endorsed by the Shariah Advisory Council Malaysia (SAC). Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) described sukuk as securities of equal denomination representing individual ownership interests in a portfolio of eligible existing or future assets. "]

• "notes"  are like bonds, except market usage of the term normally indicate the tenor of notes to be shorter i.e. medium term compared to bonds that are usually associated to a longer term or tenor paper.

• It is interesting to note that the definition in the CA 2016 further includes   ".. and any other securities of a corporation..", thus the definition is intended to capture such similar type of securities notwithstanding not expressly named in the definition.

• "..whether constituting a charge on the assets of the corporation or not;" means the instruments that come within the definition of debenture is irrespective if they are secured against the assets of the company.

MAIN DIFFERENCES IN THE DEFINITION OF DEBENTURE BETWEEN CA2016 VS CMSA

CMSA DEFINITION IS NARROWER AS IT IS RESTRICTED TO DEBENTURES :
1. THAT ARE FOR BORROWED MONIES; AND 
2. EXCLUDES CERTAIN TYPES OF INSTRUMENTS



WHAT IS A CHARGE UNDER CA2016?

Under CA2016, "charge is defined as:

"charge" includes a mortgage and any agreement to give or execute a charge or mortgage whether upon demand or otherwise;

Let us look at the definition again.

• "includes a mortgage" : a mortgage is a security for an obligation to pay a debt. It is a security where title is passed to the hands of the lender/creditor as security, with the right to get the title back [redeem the title] if the debt is repaid. this right to get back title on repayment of debt is called the right of redemption.

• "and any agreement to give or execute a charge or mortgage whether upon demand or otherwise"  :  the definition is not confined to only when a charge or mortgage is already created. it also includes an agreement to create one.  For example if the security is land for a financing and a NLC charge form is already executed but has yet to be registered, is this a charge within the definition of the CA2016? Yes it is. It is because of this definition that the registration of charge with the Companies Commission is possible even before the charge is perfected.  In the case of the example of the land charge above, although the duly completed NLC charge form is yet to be registered at the land office/registry, the registration of the charge at the Companies Commission  can already be made.      

But the definition is also circular. What is a charge? A charge is a charge.  :)