Issued but unpaid (K2,000,000) A2
4. Through Borrowing
A company can raise capital through borrowing.
63 37. Mortgage and Charges
In terms of section 215(3) of the Act, the directors may exercise the powers of the company to borrow money, to charge any property or business of the company or all or any of its uncalled capital and to issue debentures or give any other security for a debt, liability or obligation of the company or any other person. The power of the company to borrow is also mirrored in Regulation 59 of the Standard Articles in the Act.
In terms of section 86(1) of the Act, a company may raise loans by the issue of a debenture or of a series of debentures. When a company borrows it may be required to provide security for such borrowing. Debentures may either be secured by a charge over property of the company or be unsecured by any charge.
The purpose of the charge is to secure the borrowing in case of a borrower and the lending in case of a lender.
There are many reasons why a lender may require security from a borrower.
i. Insolvency: In terms of insolvency, a secured lender will have advantages by way of accessing their security as opposed to unsecured lenders.
ii. Right of Pursuit: A secured lender has a right of pursuit of the security right up to the proceeds that may have arisen out of the security.
iii. Right of Enforcement: If there is default, the lender will have the right, e.g. to appoint a receiver to enforce the security.
iv. Right of Capital: The lender can follow the borrower’s business to ensure that the borrower conducts prudent business practices such that the repayment of the debt is protected.
(a) The Debenture
The indebtedness of a company to a creditor is generally acknowledged or evidenced by way of a debenture. The term debenture is defined in section 2 of the Companies Act. In simple terms a debenture is a document, which is given by a company as evidence of or to acknowledge a debt to the holder of the debenture.
A debenture would be secured by either a fixed or a floating charge.
(i) Types of Debentures
According to section 86(2) of the Act, debentures may either be secured by a charge on property or they may be unsecured.
(ii) Register of Debenture Holders (sections 92)
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A company is required to maintain a register of debenture holders. The register must be kept at the company’s registered office. The provision relating to prospectus to subscribe for shares also apply to debenture holders in accordance with section 123(1) of the Act.
(b) Company Charges (section 96 to 106)
The Companies Act does not define what a charge is but merely gives examples in section 2 of what constitutes a charge. A charge can take either of the two forms:
i. It may be a specific or fixed charge; or ii. It may be a floating charge.
(i) Fixed Charges
A fixed charge is one which when it is made fixes itself to specific property. For example, a legal mortgage over a piece of land, which also serves as a conveyance in the case of mortgage. Any kind of property whether real or personal can be mortgaged. (Get to know the rights of a mortgage and the types of mortgages).
In order for a debenture to have optimum effect it is important for the lender to secure fixed charges on as many assets as possible so that the lender may have mortgage debentures and leave floating charges to hover on fewer assets. This is because of the weaknesses associated with floating charges as the borrower may dispose of the assets to the detriment of the lender.
(ii) Floating Charges
A floating charge will hover on assets in the varying forms in which the assets exists until an event occur and the charge crystallizes. In A-G v Zambia Sugar Co. Ltd & Nakambala Estate Ltd (1977) ZR 273 (SC), the Supreme Court held that a floating charge operates as an immediate and continuing charge on the property charged and has the effect of charging all the property in the hands of the borrower at the date of the charge.
of the disadvantages of a floating charge relates to preferential creditors. Under section 109 and 110 of the Act, if a company creates a floating charge and a receiver is appointed on behalf of the holder or trustee of any debenture of a company that is secured by a floating charge, or possession is taken by or on behalf of such a person then, if the company is not at the time in the course of being wound-up, the debts which in every winding-up are, under section 346 (relating to preferential payments), to be paid in priority to all other debts shall be paid out of any assets coming to the hands of the receiver or the person taking possession in priority to any claim for principal of interest in respect of the
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debentures. In other words the debenture holder’s interests are subordinated to preferential holders. The only exception is where the company in receivership is also wound-up. If the company in receivership is also in the process of being wound-up the order in section 110 is altered in order to take care of the interests of everyone.
In Amran Ltd & Others v Agriflora (Zambia) Ltd (In Receivership) 2004 /HPC/0268, the High Court held that, a floating charge leaves a company with the freedom to deal with its assets in the normal course of business. However, once it chrysalises into a fixed charge, it reaches and grasps all the assets of the company. Consequent upon this event, a debenture holder’s interest in such property overrides or takes precedence over those of ordinary creditors of the company and this is precisely what transpired in the instant case.
When the floating charge crystallized by the appointment of receivers on 23rd June, 2004 all the property of the defendant inclusive of those subject of an interim attachment order sought by the plaintiff became the property of Barclays Bank Plc, the debenture holder.
A mortgage has five means of enforcing payment, namely:
a) An action for payment of monies due;
b) In default, sale of mortgaged property or foreclosure. The action is commenced by originating summons with affidavit in support thereof. The remedies being sought must be clearly set out in the summons;
c) Appointment of a receiver;
d) Writ of possession; and e) Exercise power of sale.
In the context of the power of legal mortgage, the mortgagee may proceed to sale the property without first seeking court action as the nature of the mortgage is that it is an enforceable contract. An equitable mortgage arises by mere deposit of titles. Equitable mortgages are not a good form of security because the mortgagor may seek a duplicate mortgage certificate of title, which they may then use to dispose of the property. As for equitable mortgage, it is inevitable that the mortgage seeks a court order despite the fact that under the provisions of an equitable mortgage, the particulars thereof must be registered with the Registrar of Lands and Deeds Registry.
In Daka v Patel & ZSIC Ltd (1995 – 1997) ZR 108 (SC), it was held that, as to the question whether notice was required to be given when the mortgage was in arrears and unpaid for two months after becoming due, it was clear that the wording of the mortgage agreement did not allow for unpaid interest to be added to the principal sum. The mortgage deed provided for the repayment of the money lent on September 1, 1986 with a proviso that if the money was not paid interest would continue to be payable. The power of sale under section 19(1) of the Conveyancing Act, 1881, came into effect after the date for repayment and thereafter the only restraint on such sale as provided for by
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section 20 of the Act. On the evidence in the pleadings, it was clear that before the property was sold, interest was unpaid for at least two months. It followed that there was no requirement for any notice under section 20(1) of the Act.
The better view however, is that as a mortgage is a contract, the mortgagee has a right to appoint a receiver and even to sale the mortgaged property.
(c) When is the power of the mortgagee exercisable?
The power would not be exercisable until certain things occurred. When that happens, the mortgagee must write a letter of demand requiring the mortgagor to pay. This means the mortgagor must first be served with notice requiring him to pay the mortgage. The power of the mortgagee becomes exercisable when the mortgagor falls into arrears or fails to pay interest; or if there is a breach of covenants as contained in the mortgage deed, e.g. covenant to repair or to insecure.
(d) Registration and other formalities
There are registration requirements for debentures and floating charges. Section 99(2) the Act requires that any company creating a charge must within 21 days after the date of creation of the charge, or after the acquisition of the property, as the case may be, lodge with the Registrar in the prescribed form the particulars of the charge. These particulars are set out in subsection 3. Section 99(1) of the act identifies the types of charges in respect of which registration is required.
(e) Why should particulars be lodged?
Registration serves two important purposes:
1. Without registration the charger can fraudulently charge the assets to more than one creditor.
2. Registration serves the important purpose of giving notice of the existence of the charge holders. This is important because of the rules which give priority of charges under section 101 of the Act. Under the rule of priorities, charges required by Part V of the Act to be registered shall have priority in relation to one another in accordance with the times at which they were lodged.
The assets shall have been the subject of different charges meaning the borrower would have sought permission from the chargee to charge the same assets with a second lender.
In the instrument there will be a clause stating that the charger will not be at liberty to have the later charge rank pari passu to the first charge. Therefore, when the issue of realizing the security arises, the first charger does not lose out.
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The responsibility to register the charge lies with the lender to ensure that his interest is secured.
(f) Effect of non-registration
Failure to lodge the particulars in the register is spelt out in section 99(11) of the Act as follows:
1. The charge will be void against the liquidator and any creditor of the company, i.e. the liquidator will be entitled to ignore such unregistered charge.
2. The full debt secured by such a charge will become immediately payable by the company. If it happens that a company, which is supposed to pay defaults, failure to pay, becomes a crystallizing event of the charge. The personal entity in whose favour the charge would have been created would be entitled to appoint a receiver and manager. One of the remedies available to a chargee is to appoint a receiver and manager. In Zambia, it is not uncommon to have different people to act as receiver and manager respectively. Once a receiver is appointed, he and the manager step in the shoes of the company. They will proceed to sale the company assets. Such powers ought not to be taken away by the owner of an asset.
38. Type of Receivers
The Companies Act deals with two types of receivers, namely:
1. A receiver who is also a manager (receiver and manager);
2. A receiver who is not a manager.
The Act does not define the difference between these two types of receivers.
However, common law does define the meaning of the two:
a) A receiver who is also a manager is actually someone who moves in the operations of the company and begins to be involved in the actual management of the company. The effect here is to supplant the management and begin to run the company. There is a further classification of (a) in that the receiver may be appointed by law or by some instrument or the debenture deed itself. Most of these receivers would be appointed by way of debenture outside court pursuant to the instrument. A receiver can sometimes be appointed pursuant to an application by a charge holder in court by way of an equitable remedy possibly out of fear that the owner may dispose off the assets (section 108).
b) A receiver who is not a manager is one whose task is restricted to the responsibility of receiving income arising from the charged assets or is a receiver appointed to receive rentals.
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(a) Formalities Relating to the Appointment of a Receiver (section 109)
A person who appoints a receiver or who causes a receiver to be appointed by a Court order must within 7 days of being granted the order lodge a notice (Companies Form 39) with the Registrar of Companies. The person who will be appointed receiver must lodge a notice of physical and postal address in the Registrar of Companies and when ceasing should lodge a notice of so ceasing.
(b) Eligibility for Appointment as Receiver
Section 111(1) disqualifies corporate bodies from being appointed as receiver.
Section 111(2) enumerates people who cannot be appointed, act or continue to act as receivers. Why should a corporate body not be appointed as receiver manager?
Upon being appointed as receiver, you are entrusted with fiduciary duties. A receiver may be appointed by court or appointed pursuant to an instrument (sections 112 and 113). The difference is that where the receiver is appointed by court he is deemed officer of the court in relation with the charged property. He is required to act according to directions given to him by the court. If you are interfering with a court appointed receiver, you will find yourself to be in contempt of the court.
As regards a receiver appointed pursuant to an instrument, he is deemed to be an officer of the company and not an officer of the person who has appointed him. The instrument will specifically say you are designated to be an officer of the court and you are not expected to do the bidding of the appointer.
(c) Liability of a Receiver
Section 114(1) of the Act provides that a receiver of any property or undertaking of a company shall be personally liable on any contract entered into by him as receiver except insofar as the contract expressly provides otherwise. In Avlon Motors Ltd v Bernard Gadson Ltd (1998) ZR 41 (SC), the company borrowed money from a bank and upon defaulting, the bank appointed the first respondent to be the receiver. There were allegations to the effect that the receivership was being conducted in a delinquent fashion to the serious disadvantage of the company, the shareholders and all concerned. As a result a new receiver was appointed. Meanwhile, an action was commenced against the former receiver who was the first respondent and also against the second respondent who sold the company’s properties and assets allegedly at a grossly undervalued or give-away price. Such action was commenced in the company’s name and a preliminary objection was taken by the defendants that the director and shareholder was not entitled to sue in the name of the company; only the new receiver could do so.
The objection was sustained. On appeal;
Held: (1) Receivers as well as liquidators occupy a fiduciary relationship and are liable for their wrongdoing in relation to the mortgaged property.
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(2) Whenever a current receiver is the wrongdoer (as where he acts in breach of his fiduciary duty or with gross negligence) or where the directors wish to litigate the validity of the security under which the appointment has taken place or in any other case where the vital interests of the company are at risk from the receiver himself or from elsewhere but the receiver neglects or declines to act, the directors should be entitled to use the name of the company to litigate. The Supreme Court observed that a former receiver can be sued for a variety of breaches including fraud.
In an earlier case of Magnum (Z) Ltd v Quadri (As Receiver and Manager) & Grindlays Bank (1981) ZR 141 (HC), a preliminary issue was raised as to whether it would be in order for the Court to allow the proceedings to continue on the basis that the plaintiff should be Magnum (Zambia) Limited when in fact this company was already under receivership and the receiver/manager appointed under a debenture was the first defendant.
Held: (1) A receiver who is an agent of the company under receivership is there to secure the interest of the debenture holder and in those circumstances the company concerned is debarred from instituting legal proceedings against its receiver/manager.
(2) A company under receivership has no locus standi independent of its receiver. As long as a company continues to be subjected to receivership, it is the receiver alone who can sue or defend in the name of the company.
(d) Procedural Requirements
Section 115(1) of the Act provides that where a receiver has been appointed, every document including invoices show clearly that a receiver has been appointed (the statutory charges). Any document on which a company appears must disclose that a receiver has been appointed in that company. An appointed receiver must ensure that he meets the requirements set out in sections 116 to 118 as regards submission of periodic accounts.
(e) Payments of Receiver after Realization of the Assets
Once appointed as receiver and manager, such an appointment is a grave responsibility and the receiver and manager must follow the law.
(f) The way to apply the procedures of realization
The law defines a pecking order of which the receiver and manager must follow.
The order of payment is important because each liability has an important place in the order.
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i. The first will be the cost of realizing the security, i.e. the costs of advertising, debt collection, (if the company had claims to enforce against third parties).
ii. The second will be all proper expenses of the receiver and remuneration.
This is an issue, which is not regulated because there is nothing to regulate this area.
iii. The third will be preferential payments as defined in section 110 of the Act as read with section 346. According to section 110, in relation to payment of preferential creditors, if the company is not at the time of appointment of a receiver in the course of being wound-up, the debts which in every winding-up are, under section 346 (relating to preferential payments), to be paid in priority to all other debts shall be paid out of any assets coming to the hands of the receiver or the receiver or the person taking possession in priority to any claim for principal or interest in respect of the debentures. Section 346(1) of the Act provides that winding-up preferential debts shall be paid in priority to all to other unsecured debts.