The Act provides that debenture includes stock, bonds and any other securities

COMPANY LAW of a company whether constituting a charge on the assets of the company or
DEBT CAPITAL not”.
______________________________________________________________ Generally, a debenture refers to a document containing an acknowledgement
_____________________ of indebtedness and it's issued by the company under its common seal giving
Every trading company is deemed to have borrowing powers even if these are an undertaking to repay the debt at a specified date or at the option of the
not expressly specified in the MOA. company and in the meantime to pay interest thereon (on it) at a fixed rate or
There is no such implied power for a non-trading company and its MOA must at intervals stated in the debenture.
lay down such powers to enable it to borrow. A company having power to All companies public or private can issue debentures. They may be issued at
borrow may do so to any extent within the limitations laid down by the MOA par, premium or discount either privately or through a prospectus. The legal
and AOA. requirements of issuing and allotting debentures are the same as those of
shares except that the following conditions do not apply to debentures.
Ultra vires borrowing ● No 5% of the nominal value in cash is required
If a company borrows beyond the powers specified in the MOA, the ● No minimum subscription is required before allotment
borrowing is ultra vires and therefore void. In such a case, no debt is created ● No legal restrictions are imposed e.g. issuing at a discount.
and any security which may have been given in respect of the borrowing is
inoperative. A company has no power to ratify a void contract even if every Types of debentures
member purports to do so. In this case the lender cannot sue the company for ● Secured debentures
the repayment of the loan. These are secured by some charge on the property of the company.The charge
may be fixed or floating hence there may be fixed or floating charge
Remedies available to the ultra vires lender debentures.
a) If the money has not been spent by the company, the lender can obtain ● Unsecured(naked) debentures
an injunction to prevent the company from parting with it. They are not secured by any charge on the assets of the company. The holders
b) If he can identify the property purchased with the money, he is entitled of such debentures are like ordinary unsecured creditors of the company.
to a tracing order and can recover it. ● Registered debentures
c) If the money has been used to pay off legitimate debts of the company, These are debentures that are payable to the registered holder. A registered
the lender may sue the company as he steps into the shoes of the holder is one whose name appears both on the debenture certificate and in the
creditors who have been paid off by virtue of the principle of company’s register of debenture holders. The holders of such debentures can
subrogation. Similarly, the lender can retain the securities given to him transfer them like shares but such transfer must be registered. A registered
for such part of the money lent that is equivalent to the legitimate debenture contains the following clauses: -
debts paid. a) A covenant to pay the principal sum
b) A covenant to pay interest
c) A description of the charge on the company’s undertaking or assets.
d) A statement that it is issued subject to the conditions endorsed on it
Debentures
Lecture Notes by Soita JL Page 1
 ● Redeemable debentures d) A company may purchase its own debentures but it is not open to it to
These provides for the repayment of the principal sum on a specified date or purchase its shares.
on demand. e) In case of liquidation, debenture holders rank first for repayment
● Irredeemable (perpetual) debentures whereas shareholders can only obtain anything after all the outside
In this case, the issuing company does not fix a date by which they should be creditors have been paid.
redeemed and the holder of such debentures cannot demand payment from the f) Debentures may be issued at a discount but shares cannot be issued at
company so long as it is a going concern. They are normally payable during a discount.
liquidation or in case of some serious default by the company. g) Interest is paid on debentures while dividends are paid on shares.
● Convertible debentures
They contain an option entitling the holder to convert his debt at times stated Debenture Stock
in the debenture to ordinary or preference shares of the company at a stated It refers to the borrowed capital consolidated into one mass The difference
rate of exchange. If the holder exercises this right, he ceases to be a lender of between debenture & debenture stock is that a debenture is usually for a fixed
the company and becomes a member. sum & is transferable in its entirety (complete units) whereas debenture stock
can be transferred in fractions. Similarly, a debenture may be issued with or
Characteristics (features) of a debenture without a security whereas debenture stock is generally created by a trust
1) It is issued by company and is usually in the form of a certificate deed.
acknowledging indebtedness of the company
2) It usually specifies a particular period as the date of repayment unless it is Debenture Trust Deed
irredeemable. This is a document by which a trustee for debenture holders secured by a
3) It generally creates a charge on the undertaking of the company or on its floating charge is appointed. Such debenture holders may not have time to
property although some are without charge. look after their interests in the property charged. They therefore appoint some
4) A debenture holder does not have a right to vote in the general meetings of persons among themselves as trustees for purposes of protecting their
a company. interests.
5) It attracts a fixed rate of interest. By the terms of the deed the company undertakes to pay the debenture holders
the principal sum & interest and normally charges its property to the trustees
Distinction between debentures & shares as security. The trustees must act diligently in the discharge of their duties and
a) A shareholder is a part owner of the company but a debenture holder is any clause in the trust deed which exempts them from liability for breach of
only a creditor. their duty is void.
b) Income on debentures is fixed & certain whether or not a company
makes profits whereas income on shares is uncertain and depends the Contents of Debenture Trust Deed
on the availability of profits & the discretion of directors. ● The fact of the appointment of a trustee for debenture stock holders.
c) A shareholder has normal rights of a member e.g. right to receive ● The nominal amount of the debenture stock
notices of general meeting, to vote etc. whereas a debenture holder is ● The date or period of repayment of the principal amount.
not a member & hence not entitled to some of these rights. ● The rate of interest or interest payment date.

Lecture Notes by Soita JL Page 2

 ● The authority of a trustee to enforce the security in case of default e.g. NB// if the number exceeds 50 debenture holders, an index must also be
to appoint a receiver with suitable powers of management. prepared unless the register is maintained in the form of an index.
● Covenants between the company and trustee e.g. to keep the assets
fully insured or to limit total borrowing. Charges
● A prohibition of issuing another charge ranking ahead or equal to the A charge is a claim by a creditor on the property & assets of the company
floating charge. as security for repayment of a loan. The charge on the assets may either be
● Details of the issue & conversion rights if any. fixed or floating.
Advantages of a Trust Deed
1. A trustee with appropriate powers can intervene by appointing a Fixed (Specific) Charge
receiver or take possession of the property of the company and carry A fixed charge is one which is created on some definite or specific
on the business in case of need. property of a permanent nature e.g. a building, land or heavy machinery.
2. Security for the debenture stock can be given to a single trustee unlike Where the property of the company is specifically charged, the company
ordinary debentures on which the security can be given to a numerous cannot sell it without the consent of the holder of the charge.
and changing body of debenture holders.
3. A company can consult the trustee of debenture holders with whom it Floating Charge
can negotiate e.g. on the consent to sell an obsolete security & replace A floating charge is defined as one which attaches on the general assets
it with another. but not to a specific asset.
4. By calling a meeting of debenture holders the trustee can consult them
and obtain a decision binding on all of them. Rules Relating to Floating Charges
5. Persons who subsequently lend money to the company cannot gain a) It leaves the company with the power to deal with the property in the
priority over the debenture holders. ordinary course of business and sell the assets.
6. The trustee acts as a watchdog in ensuring that the company’s b) A floating charge unless otherwise agreed leaves the company at liberty to
obligations under the trust deed are carried out properly e.g. property create fixed charges ranking in priority to the floating charge.
being kept insured & well maintained. c) Notice of the floating charge does not stop subsequent fixed charges.
d) A landlord can levy distress for rent before the appointment of a receiver
Register and Index of Debenture Holders but where a receiver has already been appointed by court, the landlord
The register of debenture holders must be kept at the company’s registered must apply for permission from the court before levying distress for rent.
office and must contain the following particulars. e) Where chattels are in the company’s possession under a hire purchase
● Name and address of each debenture holder agreement, the right of the owner prevails over floating charges created by
● Debentures held by each holder distinguished by their numbers and the the company.
amount paid or considered as paid.
● The date each person was entered in the register as a debenture holder. Disadvantages of floating charges
● The date when each holder ceased to be a debenture holder. a) Reduction in the value of assets- the company is free to deal with
the assets in the ordinary course of business and may even sell

Lecture Notes by Soita JL Page 3

 them so that when the lender appoints a receiver, the value of the
remaining assets may be very small. Debentures with a pari passu clause
b) Priority of preferential creditors-certain classes of creditors e.g. It is a clause that places all debentures of the same series equal as regards
taxes due to the government are treated as preferential by law charge and repayment with others of the same series. The objective of the
either in the event of the company being liquidated or in the event clause is to place all the debentures on the same level as to security so that
of a receiver being appointed. if the security is to be enforced, whatever is realised from it shall be
c) Priority of other creditors-if a lender is relying on a floating divided among the debenture holders on a pro rata basis.
charge, there is a risk that certain creditors may obtain priority In the absence of such a clause, the legal position will be that the
over the lender e.g. a landlord levying distress for rent before a debentures will be payable according to the days of issue and if all of them
receiver is appointed. were issued on the same date, then according to their consecutive
d) The Act provides that a floating charge created 6 months before numbers.
commencement of liquidation is void unless the charge was
created when the company was solvent. Negative pledge clause
e) Possible priority of subsequent fixed charges-a company which has It is a prohibition against the company creating a fixed charge ranking in
created a floating charge may at a later date execute a subsequent priority over the same property secured by a floating charge. If the
fixed charge on some of the assets comprised under the floating company breaks the prohibition the creditor to whom the charge is given
charge unless proper precautions are taken by the holders of the still obtains priority unless at the time when the charge was created, he
floating charge. had actual knowledge of the prohibition imposed by the floating charge.

Crystallisation of a Floating Charge Registration of charges

This is the occurrence of an event which gives the floating charge debenture The Act provides for the registration of the following charges (Registrable
holders the right to claim their money from the company. A floating charge charges) of the company together with the instrument creating them within
crystallises on the occurrence of the following events: - 30 days of their creation-
i. When a company goes into liquidation-in this case, the charge a) A charge for the purpose of securing any issue of debentures
automatically crystallises whether or not the company is in default. b) A charge on uncalled share capital of the company
ii. Appointment of a receiver-where the company is in default, the lender c) A charge on any immovable property wherever situated or any
may take some steps for redress by appointing a receiver in which case the interest there in
charge crystallises. d) A charge on any book debts of the company. A book debt is any
iii. When the company ceases to carry on business or ceases to be a going debt occurring in the ordinary course of business as is usually
concern. entered in the trade books.
iv. Where a creditor takes possession of the assets subject to the charge under e) A floating charge on the undertaking or on any property of the
the power of seizure. company including stock in trade.
v. Where the charge is converted into a fixed charge in which case it will f) A charge on calls made but not paid.
concern specific property. g) A charge on a ship or any share in the ship

Lecture Notes by Soita JL Page 4

 h) A charge on the goodwill, patent or license under a patent, register the charge within 21 days of that date and the certificate of
trademark or on a copyright. registration was issued. The company went into liquidation and the
Particulars to be registered liquidator challenged the validity of the charge.
i. The total amount secured by the series of debentures Held: it was held that the charge was valid and enforceable as the
ii. The date of the resolution authorising the issue registration certificate was conclusive evidence that the charge had been
iii. The date of the trust deed, if any, which creates or defines the security. registered within the time stipulated by the statute.
iv. A general description of the property charged
v. The amount or rate of commission paid or discount allowed in the case of Rights and remedies of debenture holders
subscription of debentures. These depend on whether the debenture holder is secured or unsecured.
In case of unsecured debentures
Effect of non-registration of charges a) The debenture holder can bring an action to enforce the debenture and
If a charge is not registered with the registrar within 30 days, then obtain judgement to levy execution on the property of the company.
a) it is void against the subsequent creditors. b) He may present a petition for liquidation of the company by the court
In Monolithic Building Society, M ltd mortgaged land to T to secure a loan c) If liquidation is in progress, he can prove during liquidation for the
of £500. The charge was not registered. Later the company issued amount due to him for which no security was given.
debentures secured by a floating charge on all the company’s assets to J d) He may rank with the ordinary creditors although he will be treated as a
who knew of the charge in favour of T to secure £500. This debenture was special creditor.
registered. Held: It was held that J had priority over the claim of T.
b) Money secured becomes immediately repayable. In case of secured debentures
c) The charge is void against the liquidator in the event of liquidation but the a) Sale of property-in case of a fixed charge over property, a debenture
debt in respect of which the charge was given remains valid but as holder has implied power of sale under the law of property.
unsecured debt. b) Taking possession of the property and recovering the principal sum and
d) Every person in default is liable to a default fine. interest from the investment or rental income from the property
c) Liquidation of the company- a secured creditor can petition for the
Conclusiveness of the certificate of registration of a charge liquidation of the company where the debenture gives him express power
Once the registrar issues the certificate of registration of a charge this to do so.
gives conclusive evidence that all the requirements of the companies Act d) Appointment of a Receiver (in case of a floating charge)
in relation to registration of charges have been duly complied with. Thus, The receiver may sell the assets and use the proceeds to repay the
if after the certificate is issued, some irregularities are discovered, these debenture holders.
will not nullify or invalidate the charge.

In Re:CL Nye Ltd 1969, a company created a charge in favour of a lender

in February. The necessary documents were executed but left undated and
the lawyer acting for the company did not register them. In June, he
realised his mistake, wrote a June date on the documents and proceeded to
Lecture Notes by Soita JL Page 5