Debenture and debenture stock
When a lender makes a loan to a company he will obvi-
ously require some evidence of that fact. This is usually
a written document in the form of a deed which is called
a debenture, a term which has its origin in the Latin
word for ‘owing’.
A single debentureevidences a loan from a person
where the lender is in privity of contract with the com-
pany and is a creditor of it. Its modern use is to secure a
loan or overdraft facility from a bank. In this context
it is the document by which the company charges in
favour of the bank all its assets and undertakings, thus
giving the bank the right to appoint an administrator.
The functions of an administrator are contained in the
Insolvency Act 1986, Sch B1, para 3 (as inserted by the
Enterprise Act 2002, Part 10). An administrator has
the function of carrying out statutory purposes in the
following order:
■to rescue the company as a going concern;
■if this is not reasonably practicable, to achieve a better
result for the company’s creditors as a whole than
would be likely if the company were wound up with-
out first being in administration. Thus, an adminis-
trator may manage the company for a period of time
to allow it to complete an order which will provide
income; or
■if neither of the above is reasonably practicable and
the administrator does not harm the interests of the
creditors as a whole, realising (selling) the company’s
property to make a distribution of the proceeds to
one or more secured or preferential creditors.
The only other corporate insolvency practitioner
likely to be met with in the generality of business is a liq-
uidator whose function is to wind up the company. He
is really an undertaker and his job is to sell what assets
the company has to pay the creditors as far as he can and
then see that the company is removed from the Register.
Debenture stockis found where the loan is to come
from the public, those who subscribe for the debenture
stock receiving a stock certificate rather like a share
certificate. The company keeps a register of debenture
holders and the stock certificates can be transferred
from one person to another in a similar way to shares.
However, unlike shares, which cannot be issued at a dis-
count (s 100), debentures can be so issued. It would, for
example, be unlawful to issue, say, a £1 share at 75p, but
this would be legal in the case of a debenture.
When debentures are issued for public subscription,
the company enters into a trust deed with trustees for
the debenture holders. The trustees are often an insur-
ance company. The insurance company has the charge
over the assets and the power to appoint a receiver or an
administrative receiver and the trustees are the creditors
of the company on trust for the individual stock holders
who are not in privity of contract with the company.
From a commercial point of view this is necessary
because the holders of debenture stock are widely dis-
persed and need some central authority, such as the
trustees, to look after their interests with the company.
Our company could not make an issue of debenture
stock since, under s 755 of the CA 2006, a private com-
pany cannot offer its shares or debentures to the public.
We could, however, issue a debenture to a bank for the
purpose of securing an overdraft facility since this would
not be a public issue.Registration of charges
The much revised provisions relating to company
charges contained in the Companies Act 1989 have been
repealed by the CA 2006, which now applies.
Under s 860 particulars of a charge to secure a deben-
ture or an issue of debentures must be registered with
the Registrar of Companies. The object of this is to show
those doing business with the company, who may in-
spect the Register, what charges there are affecting the
company’s property.
In addition, copies of the documents creating charges
are to be kept at the company’s registered office or other
place as appropriate and be available for inspection by
members and creditors without charge (s 876).
The company must also keep a register of charges
affecting its property (s 876). This may also be inspected
by members and creditors without charge (s 877).Failure to register a charge
Failure to register particulars of a charge with the
Registrar within 21 days of its creation means that the
charge will be void if the company is wound up and
a liquidator appointed, or if an administrator is ap-
pointed. The lender would then become an unsecured
creditor and would have no rights over the property
which the company had charged to secure his loan.
Nevertheless, the money intended to be secured, if not
on demand, becomes immediately repayable. In addi-
tion, an unregistered charge is not void while the com-
pany is a going concern.Part 2Business organisations