Corporate Finance -

Debentures
• Companies raise long-term finance mainly
through the issue of debentures.

• Debentures create debt, the company is

indebted to its debentureholders.

• Debenture’s form part of a company’s loan

capital.

• The Act defines debentures as a written

acknowledgement of a company’s indebtedness
setting out the terms and conditions of the loan.
Debentures are usually referred to as bonds.
• A company may issue single debentures to individual holders or
it may also create a debenture stock by deed under which
several debentures may be issued (represented by a debenture
stock certificate).
• The debenture stock is a block of debenture out of which single
debentures may be issued.

• Thus, debenture stock has the ff features:

1. There is a block loan of prescribed amount;
2. The block loan is created by deed
3. The block loan is divided into parts; the different parts may be issued to separate holders; and the parts are
represented by debenture stock certificates

• The advantage of a debenture stock is that the company

can obtain one vast loan of a prescribed amount with
different contributors advancing smaller and more
affordable funds.
• Also, whereas in the case of a debenture only the whole
debenture can be transferred, in the case of debenture
stock (subject to the terms of issue) subscriptions for and
transfer of them can be made for any amount.

• The debenture i.e. the written acknowledgment for the

debt, sets out the following particulars:
1. The amount of money lent;
2. The rate of interest
3. The amount of periodic payment by the company to the
debentureholders.

• Note that whereas shares are not to be issued at a discount, this

prohibition does not apply to debentures.
Differences between debentures and shares
1. First debenture holders are creditors of the company and not
members and therefore do not have membership rights;

2. Second whereas shares must not generally be issued at a discount,

this prohibition does not apply to debentures;

3. Third, whereas a company is prohibited from purchasing its own

shares, there is no such prohibition iro debentures;

4. Fourth, interest on debentures must be paid by all means when they

fall due. Thus the company may meet its obligations to pay interest
out of profits or out of capital. Dividends, however, can only be paid
out of profits and not capital;
5. In calculating a company’s returns, interest on debentures is charged
(deducted) before determining profit. Taxes are then paid. However,
dividends are paid out of corporate profit which have already been
taxed or which are liable to tax.
Types of debentures
1. Perpetual or redeemable;
2. Convertible or non-convertible;
3. Naked or secured

Perpetual or redeemable
• A perpetual debenture is one which is not redeemable by
the company or are only redeemable on the occurrence of a
specified event.
• On the other hand, a redeemable debenture is one that the
company may redeem;
• A company that has redeemed debentures previously
issued may reissue them unless the company has intended
that the debenture should be cancelled or if the re-issuance
is forbidden by the company’s Regulations, the debenture,
trust deed or other contract entered into by the company.
Convertible or non-convertible
• A convertible debenture is one that, in lieu of redemption or
repayment, may at the option of the holder or the company be
converted into shares in the company on such terms as are
stated in the debentures.
• A non-convertible debenture cannot be converted into shares.

secured or unsecured (naked) debentures

• If a debenture is unsecured, it means the holder has no legal
interest over the assets of the borrower.

• Thus, unsecured debenture does NOT create a charge over the

company’s property to secure the loan.

• A receiver or manager shall not be appointed as a means of

enforcing debentures not secured by any charge
• A secured debenture creates a charge/security.
• A security is a collateral provided by an obligor (here the company)
to secure the performance of an obligation.

• In a loan agreement, security may take several forms. The 2

most popular forms are:
1. fixed charges and;
2. floating charges.

1. Fixed charges
• A fixed charge is a form of security, which is usually created over
specific assets and places restrictions on the rights of the chargor
to use the assets in the ordinary course of business.

• A debenture secured by a fixed charge is therefore a loan to the

company for which a specific property of the company is used
as a security to ensure repayment of the loan.
Floating Charge
• A floating charge is an equitable charge over the whole or a specified
part of the company’s undertaking and assets both present and future.
• In Yorkshire v. Woolcombers Association, the court set out 3
characteristics of a floating charge:
i. It is a charge on a class of assets of the company, both present and
future
ii. The charge is over a class of assets, which in the ordinary course of
business will be changing from time to time.
iii. Until some future step is taken on the charge, the company can carry on
its business with those assets in the ordinary course of business.

• A key characteristic of a floating charge is that it does not preclude the

company from dealing with the charged asset until:
i. The security becomes enforceable and the holder appoints a receiver or
manager or enters into possession of the asset pursuant to a power in
the security instrument
ii. The High Court appoints a receiver or manager on the application of the
holder;
iii. The company goes into liquidation
• On the occurrence of any of the above listed events, the floating
charge becomes a fixed charge and the company’s rights to deal
with the charged asset in the ordinary course of business will be
curtailed. And is referred to as crystallization.

• Consequently, for a debenture secured by a floating charge, the

general assets of the company and not any specific asset of the
company is used to secure repayment of the loan.

• Note, however, that a floating charge can crystallize into a fixed

charge.

• Crystallization refers to the events which trigger a floating

charge to become fixed and enforceable. When crystallization
occurs, the company cannot deal with the property comprised
in the security without the consent of the debenture holder.
• Section 87 of the Act defines floating charge and crystallization as
follows:
• A floating charge is an equitable charge over the whole or a specific
part of the company’s undertaking and assets both present and
future. The charge does not preclude the company from dealing in
the charged assets until:
1. The security becomes enforceable and the holder appoints a receiver
or manager or enters into possession of such assets; or
2. The court appoints a receiver or manager of such assets on the
application of the holder; or
3. The company goes into liquidation

• On the occurrence of any of the above events, the charge shall be

deemed to crystallize and to become a fixed equitable charge on the
subject assets.
Priority of charges
• Where there is both a fixed and floating charge over the same
asset, the fixed charge takes priority.

• However, there is an exception.

• A floating charge will have priority over a fixed charge affecting the
same property, where the terms under which the floating charge
was created prohibited the company from granting any later charge
having priority over the floating charge and the person in whose
favour that later charge was granted had actual notice of the said
prohibition at the time when the charge was granted to him.
Registration of particulars of charge
• Charges created over the assets of a company are required to be
registered within 28 days of their creation.

• An unregistered charge is void as security and all moneys

secured by the charge become immediately payable.

• Charges created over the assets of a company also subject to

registration at the Collateral Registry under section 25 of the
Borrowers and Lenders Act, 2008.

• Registration of a charge at the Companies Registry constitutes

actual notice of the charge to all persons having dealings with the
company
Receivers and Managers
• A receiver and manager maybe appointed by the holder of a charge or
the court when the charge has become enforceable.

• In the case of a floating charge, the charge may appoint a receiver and
manager when the charge becomes enforceable pursuant to a power
of appointment contained in the charge instrument.

• The court may also appoint a receiver and manager upon the
application of the charge. In the case of a fixed charge, the court will
appoint a receiver.

• In the case of a floating charge, the court has the power to appoint a
receiver even when the charge has not become enforceable. The court
will exercise such a power if it comes to the conclusion that the
security is in jeopardy.
• The security is deemed to be in jeopardy if the Court is satisfied that
events have occurred or are about to occur which render it unreasonable
in the interests of the debentureholders that the company should retain
power to dispose of its assets.
• Subject to the rights of any prior charges over the assets of the company, a
receiver is required to take possession of and protect the property, receive
the rents and profits and discharge the outgoings in respect of the property
and realise the security of those on whose behalf that person is appointed.

• He can only manage the business or undertaking if he is also appointed as

manager. If appointed as manager, he shall manage the undertaking with a
view to the beneficial realisation of the security of those on whose behalf the
appointment is made.

• A receiver or manager of a property or an undertaking of a company

appointed by the Court shall be deemed to be an officer of the Court and not
of the company and shall act in accordance with the directions and
instructions of the Court.

• Where he is appointed out of Court under a power contained in an

instrument he is deemed to be an agent of the person or persons on whose
behalf the appointment is made. In such a case if he is appointed manager of
the whole or a part of the undertaking of a company the receiver or manager
shall also be deemed to be an officer of the company and to stand in a
fiduciary relationship to it. Such 203 of the Code will apply to such a receiver.
Selected documents relating to debentures
• Debenture and Debenture Stock Certificate
• Within 2 months after the allotment of debentures or the registration of the transfer of debentures, a
company must deliver to the registered holder a debenture stock certificate under the common seal of the
company.

• A company may also issue a new certificate copy of a defaced, lost or destroyed debenture stock
certificate upon the payment by the debenture holder or the debenture stockholder of the expenses for
investigating the reported defacement, loss or destruction of the alleged document and also pay a
nominal fee for the replacement document.

• Statements made on the debenture certificate have two effects:

• First, they constitute prim facie evidence of the title of the persons named on the certificate.
• Second, the company is bound by the accuracy of those statements such that if any person puts reliance in good faith
on the continued accuracy of the statements made in the debenture or debenture stock certificate, the company
shall compensate such person for any loss suffered by him in reliance on the accuracy of the statements contained in
the said documents.
• The loss entitling the person to compensation from the company has to be such that the person would not have suffered the loss
had the statement been or continued to be accurate

Register of Debenture holders

• A company which issues or has issued debentures shall keep a debenture holders register.
• All the provisions applying to Register of Members apply also to the register of debenture
holders i.e. contents of the register, when the entry should be made in the register, an
index to the register if there are more than 50 debentureholders, notice to the registrar of
where the register is kept if other than the company’s registered office, inspection of the
register of debenture holders, power to close the register, rectification of the register