UCL 2022-23 Lecture notes on debentures, covering: the definition and context of debentures, role of debentures in corporate finance, fixed and floating charges and their role in debentures, priority and registration of charges in a company law context, book debts in relation to floating charges
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Debentures – definition and overview
Fixed and floating charges
Priority and registration
The ‘book debt saga’
1. DEFINITION
Context
Debt v share capital: funding operations
● 99.9% of businesses are SMEs
● 74% of business do not have employees (other than owner)
● Not going to be readily able to rely on share capital - lot of these small companies need
to look to debt finance to raise capital
○ Raising finance: 49% using it for day to day operations
○ Debt not an extraordinary source of funding! V common way of helping finance a
business
Need for secured lending
● Banks are naturally risk-averse, are going to need some sort of security
● Personal guarantees from directors
○ But can be a limited comfort: looking to an individual and their own assets
● Secured debt
○ Lender is more likely to want security of some type
○ If a company defaults on repayment, lender can come in and acquire the asset
Defining debenture
● Debenture: Instrument (indenture) that creates or acknowledges a debt
● Challenges of definition across sectors/jurisdictions
● 2 specific types of secured lending (note: debenture doesn’t need security attached to it)
Defining debenture
Diff meaning in financial services vs. CA, diff meaning in the US vs. UK
s 738, CA 2006
● Meaning of “debenture” - in the Companies Act 2006 “debenture” includes debenture
stock, bonds and any other securities of a company, whether or not constituting a charge
on the assets of the company.
Debenture in the US is often long-term loan, unsecured, issued on the basis of good faith
(interest rates etc.)
Debenture in the UK is v much asset-backed securities
, ● Debenture does not have to involve security
British India Steam Navigation Co v IRC (1881)
● There has kind of always been uncertainty re: what “debenture” is
○ Now, what the correct meaning of ‘debenture’ is I do not know. I do not find
anywhere any precise definition of it. We know that there are various kinds of
instruments commonly called debentures. You may have mortgage debentures,
which are charges of some kind on property. You may have debentures which
are bonds; and, if this instrument were under seal, it would be a debenture of that
kind. You may have a debenture which is nothing more than an
acknowledgement of indebtedness ... I think any of these things which I have
referred to may be debentures within the Act.
○ Debenture doens’t need to be anything more than a record of indebtedness: no
requirement for security to be attached
Levy v Abercorris Slate and Slab Co (1887)
● Echoes British India Steam Navigation
○ a debenture means a document which either creates a debt or acknowledges it,
and any document which fulfils either of these conditions is a “debenture”
○ Chitty J: no precise legal definition, in law no strict technical definition
Fons HF (in Liquidation) v Corporal Ltd [2013]
● A precise definition of debenture was not possible
● Often diversely defined depending on context
● Facts: F granted security to its lender amongst other things: included shares,
debentures, bonds and other securities (catch-all phrasing)
○ When there was a default on the loans, court needed to decide what a debenture
meant to see which assets were covered by the sec
● HC: no ordinary businessperson or company lawyer would consider debentures to not
refer to “secured” loans
○ People expect debenture to include some kind of security
○ The commercial world understands debentures to refer to ‘secured’ loans
■ Note distinction between technical legal definition vs. commercial reason
of the term
● CA Held: On appeal – security was not a necessary feature of a debenture (recall
Levy v Abercorris – a document creating or acknowledging a debt).
○ May incldue a simple loan agreement: all required is that it acknowledges a debt
When security is given: title does not pass
● I think there can be no doubt that where in a transaction for value both parties evince an
intention that property, existing or future, shall be made available as security for the
payment of a debt, and that the creditor shall have a present right to have it made
available, there is a charge, even though the present legal right which is contemplated
can only be enforced at some future date (ie. when there is a default), and though the
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