In: Finance
QUESTION 3
In January 2017, Moverna Bhd. (Moverna) borrowed RM2 million from IM Bank and created a floating charge over all its assets and undertakings in favour of the latter as a security for the loan. The instrument creating the floating charge expressly stated that Moverna was not allowed to create any other charges upon its assets in priority to or in pari passu with the floating charge. The floating was duly registered. A year later, Moverna critically needed more money to complete its mega project in Alor Setar. Moverna received an emergency funding of RM4 million from Tolong Finance. The loan was secured against the company’s office premises and warehouse by a fixed charge. Recently, there were rumours of Moverna facing liquidation. Upon inquiry, Tolong Finance discovered that the fixed charge executed in its favour was not registered. Along Finance also found out that Moverna had created another fixed charge over the same office premises and warehouse, which was duly registered last year in favour of Tijar Bank as security for RM2 million loan from the bank. Tijar Bank apparently knew about the floating charge but did not know about the negative pledge in it. Advise IM Bank, Tolong Finance, and Tijar Bank as to their respective rights in the event the assets of Moverna are insufficient to pay all parties in full in the event of winding up.
Here its important to know the concept of fixed charge and floating charge:
Fixed Charge: A fixed charge is on identifiable assets such as land, property, machinery and so on. The business can't sell these fixed assets without lender's permission as its for protecting the repayment of company debt. The lender has the full control of the company assets on which fixed charge is created.
Floating Charge: Its a charge that floats as per changing assets. Fixed charge protects the lender and floating charge gives more scope and freedom to the company to sell or transfer their assets without any prior approval of lendor.
IM Bank: Moverna borrowed RM2 million and created floating charge over its assets. It was agreed that Moverna will not create any other charges upon its assets. In case of winding up of company, IM Bank can recover loan amount by selling or transferring assets on which floating charge was created.
Tolong Finance: Moverna borrowed emergency fund of RM4 million against fixed charge on company's assets and warehouses. As per definition, company can't sell assets on which fixed charge is created without prior permission from lender. In case of winding up of company, Tolong Finance can sell these assets. But there is controversy that company has also created fixed charge with other lendor for RM2 million. So this lendor has to wait till resoluion from court or mutual understanding.
Tijar Bank: Moverna borrowed RM2 million from Tijar Bank and created fixed charge on same assets which was done with Tolong Finance. In this case, both lendors have to sell assets as per mutual agreement.