The directors of most companies that have borrowed from a bank will be familiar with the term “debenture”, meaning a “document that is executed in favour of a creditor with a covenant to pay the creditor and which grants security over the whole or substantially the whole of a company’s assets”, usually in the form of a fixed and floating charge over the company’s business and assets.
However, as the case of Fons HF v Corporal Limited and another recently highlighted, there is also a more general, wide meaning of the term, which is simply “an instrument acknowledging corporate indebtedness”.
The case of Fons HF v Corporal Limited and another concerned a charge over shares, in which the definition of shares included “all other stocks, shares, debentures, bonds, warrants, coupons or other securities”. The question was whether the word “debentures”, in this context, included all loans that were made by the chargor (i.e. on the second definition referred to above) or whether it only referred to fixed and floating charges that the chargor held the benefit of (i.e. the first definition referred to above, excluding the loans). This was an issue because of the substantial value of the loans made by the chargor.
The Court of Appeal determined that the word should be given the wider meaning of “an instrument acknowledging corporate indebtedness”, in the absence of anything suggesting that the meaning could be limited. The practical effect of this was substantial and all of the loans made by the chargor were ruled to be covered by the charge. This is a surprising result in the context of a document purporting to be charging shares and similar securities.
It is therefore important to bear in mind the possible meanings of the word “debenture” and to clarify which of them is intended, so as to avoid any unintended consequences of an unexpected interpretation later being imposed by the Courts.
Myerson are the premier corporate commercial solicitors in Cheshire and South Manchester.