4 things you need to know about loans and charges

Applying for a loan from bankers to finance your growing business in Singapore? Along with getting that loan sanctioned, there are a few legal matters to be aware of.

Here are 4 pointers to help you understand all about securing your loan and creating and registering a ‘Charge’.

1. Financing your company - loan from a bank

You may need to apply for a loan from a bank to fund your growing business. What do you need before applying for one?

Bankers ask for a ‘security’ (usually an asset of the company) based on which any loan may be granted. It is a form of surety you give to a banker for repaying the loan. In case a default is made for repayment of the loan, the banker will dispose this ‘security’ (asset of the company) in such manner so as to recover their loan amount. This concept is exactly like having a loan on your house and we all know about house mortgages.

Have these details ready before applying for a loan:

-       Type of company’s asset to be used as ‘security’ – whether cash, fixed assets, or inventory.

-       Value of the asset.

-       Documents pertaining to the asset that shows the valuation provided clearly. E.g – invoices for fixed assets and independent valuation certificates for larger assets like buildings, land, etc.

2. Creating a charge over assets of the company

What is a 'charge’?

A ‘Charge’ simply means the extent of rights a lender have on the company’s assets. It is security given (usually in writing) to the lender for the loan amount secured. Typically, a loan agreement will detail the extent of rights the lender will have over the asset of the company. The value of the charge is derived from this document.

When does a charge get created?

Once the loan agreement is signed and loan amount is released, the charge is created on the assets of the company. There may be different kinds of charges, which will be clearly indicated in the loan agreement.

3. Registering a charge

Do you have to register charges with ACRA?

The Companies Act requires the charges to be registered with ACRA as and when a charge is created. The return needs to be filed within 30 days from the date of creation of the charge (usually 30 days from the date of the loan agreement). No extension is allowed from this date currently unless the company has very compelling reasons why it could be done.                                                                

Why should we register a charge with ACRA?

When a loan is secure and the related charge is registered with ACRA, it automatically gains the status of ‘Secured Charge (loan)’. This means that the lender will have the right over the assets of the company first, before disposing and utilising the proceeds towards any other claimant.

Hence it is a mandatory requirement under law that this information should be made public. Once the company registers the charge, it will appear on the company’s business profile. This document is a publicly available document.  

Let’s look at an example.

There is a loan agreement executed between the company XYZ Pte. Ltd. and the bank ABC with a charge over the fixed assets of the company. The loan agreement was executed on May 30, 2014.

There is an additional unsecured loan over debtors created for one of the suppliers of the company. No separate loan agreement is executed in this case

(i)     When the charge is registered:

The charge would have to be registered with ACRA within 30 days of the loan agreement (i.e by June 30, 2014). Here, the loan amount with bank will be treated as ‘Secured Loan’ for the lender.

That is, if the company makes any default in repaying the loan, bank ABC will have first right over the fixed assets of the company to recover the loan amount. They can sell the fixed asset and utilise the proceeds towards settlement of the loan.

Only after the loan amount from ABC Bank has been satisfied, the unsecured creditor will stand to claim his portion of the loan (from the proceeds of realising the book debts of the company).

(ii)    When the charge is not registered:

In case the charge is not registered, the loan from bank ABC will stand as unsecured loan and will rank equally with the unsecured creditor.

In the case of scenario II, the supplier can insist on a “loan agreement” and make his claim legally a “secured loan” just like the bank did. This is an option available for all who lend money to a company whether a supplier, an associate, or even an employee. All executed agreements of such nature make it mandatory for a company to register the charge/claim on assets on ACRA.

Even when such a document does not exist, as per ACRA Guide on “Registering a Charge for a Company” all claims on debtors of a company should be mandatorily recorded on ACRA by creating a “charge”.

Moreover, the following are the consequences for not registering the charge:

-     The bank may revoke the loan or make it immediately repayable based on the clauses provided in the loan agreement. Most Singapore banks make it compulsory to legalise all matters pertaining to a loan and the company may end up losing the financial help in case of non-compliance.

-     The officers of the company will be liable for not filing the charge details with ACRA and may be fined up to SGD 1000 for the offense.

4. Documents/registers to be maintained when a charge is created

When a loan agreement is executed, ensure you have done the following:

-       Prepared a Directors’ resolution to record the loan agreement and to authorise the company’s directors to sign the loan agreement on behalf of the company,

-       Kept a copy of the signed loan agreement,

-       Register the charge with ACRA within 30 days of loan agreement.

-       Maintain a ‘Register of Charges’ to include the following details:

(i)             Name of the bank (lender),

(ii)            Amount and currency of the loan obtained,

(iii)           Terms of repayment,

(iv)          Type of assets secured,

(v)           Details of the charge created,

(vi)           Date of satisfaction of charge.

Under what all circumstances a charge should be created

ACRA has mentioned that charges need to be created under the following circumstances:

·         a charge to secure any issue of debentures,

·         a charge on uncalled share capital of a company,

·         a charge on shares of a subsidiary of a company which are owned by the company,

·         a charge or an assignment created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale,

·         a charge on land wherever situated or any interest therein,

·         a charge on debtors of the company,

·         a floating charge on the undertaking or property of a company,

·         a charge on a ship or aircraft or any share in a ship or aircraft,

·         a charge on goodwill, on a patent or license under a patent, on a trade mark, or on a copyright or a license under a copyright.

Charges are an additional way to guarantee lenders that their loans are secured. That's why having charges registered correctly can help businesses to secure future loans.