COMPANY LAW:

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RAISING CAPITAL:
DEBENTURES

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LEARNING OUTCOMES

• Ability to explain what is meant by the term

debenture
• Describe the nature of fixed and floating charges and
the distinction between them
• Explain what is meant by book debts and outline the
debate surrounding the issues of granting a fixed
charge over them
• Outline the priority of charges and the statutory 3
registration scheme
• Describe and access the proposals for reform
CASE LAWS

• Re Yorkshire Woolcombers Association (1903)

• Siebe Gorman & Co Ltd v Barclays Bank Ltd (1979)
• Chalk v Kahn (2000)
• Re New Bullas Trading Ltd (1994)
• Ashborder BV v Green Gas Power Ltd (2005)
• Queens Moat Houses plc v Capita IRG Trustees Ltd
(2004)
• Agnew v Commissioner of Inland Revenue (2001)
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• National Westminster Bank plc v Spectrum Plus Ltd
(2005)
• Arthur D Little Ltd v Ableco Finance LLC (2002)
• Smith v Bridgend County Borough Council (2002)
• Re Harmony Care Homes Ltd (2009)
INTRODUCTION

• Most companies in the UK are private, hence they

need capital to run their business
• A corporate loan is obtained from the banks
• After financial crisis in 2008 – more stringent
requirement – security is needed to secure a loan
• Besides raising capital in the form of equity –
company can also raise via debenture (i.e. fixed 5
charges and floating charges) as discussed below
DEBENTURES

• What is a debenture? - a document that evidences or acknowledges the

company’s debt – Levy v Abercorris Slate and Slab C0 (1887);

• Knightsbridge Estates Trust v Byre (1940)

Facts
The plaintiff company granted a mortgage to the defendant’s insurance
company. The mortgage deed provided for repayment in eighty instalments
over a period of forty years. The plaintiff sought a declaration that,
notwithstanding the repayment provisions, they were entitled to early redemption 6
of the mortgage upon payment of the principal sum secured thereunder, with
interest to the date of redemption and proper costs.
Held
The Court declined to treat the relevant provisions in the mortgage deed as
unreasonable where the deed was entered into by two parties such as those
involved, who had acted with the assistance of competent advisers
• Also defined under s.738 CA 2006 – debenture includes debenture stock, bonds and
any other securities of a company, whether constituting charge on the assets of the
company or not
 A bond is a fixed income instrument that represents a loan made by an investor to a borrower
(typically corporate or governmental)

• In a recent case - Fons HF v Corporal Ltd (2014), a restrictive view was adopted – i.e:
debenture is referred to as secured loans

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FONS HF V CORPORAL LTD (2014),
 The claimant Fons HF (Fons) purchased shares in the first defendant Corporal Ltd (Corporal). In October 2007
and February 2008 respectively, Fons provided funding to Corporal under two shareholder loan agreements
(SLAs). As at September 2008, Fons owed ISK 2.5 billion to Kaupthing Bank Luxembourg SA (Kaupthing) on
an unsecured basis. By way of security for this debt, Fons gave Kaupthing a first legal charge (the Charge) over
all of the shares it owned in Corporal. Subsequently, both Fons and Kaupthing went into liquidation.
 The benefit of the Charge is now with Pillar Securitisation SARL (Pillar), the second defendant in the
proceedings.
Pillar argued that the benefit of the SLAs fell within the definition of "Shares" in the Charge document as either
"debentures" or "other securities" such that they were subject to the Charge. Fons argued that the definition of
"Shares" did not extend this far. Corporal played no part in the proceedings, being joined as a party to ensure
that it was bound by the decision only.

 At first instance, Cawson J found in favour of Fons and held that the definition of "Shares" did not extend
to the SLAs (see the September 2013 Litigation Review). This decision was appealed by Pillar.
 the Court of Appeal has overruled the first instance decision and held that the true construction of the
definition of shares in a charge document extended to rights under shareholder loan agreements.
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 DEBENTURE STOCK

• What is a debenture stock” – where money is borrowed from a few

different lenders and they form a “class of creditors”
• Their rights is spelled out in a trust deed whereby trustees is appointed to
act on their behalf and the money is disbursed by the trustees
• So the contract is between the company and trustees
• The deed contains following terms:
i. to pay the principal sum + interest
ii. the security (if any) given for the loan 9
iii. the events that will trigger the enforcing of the
security
 COMPANY CHARGES

• The borrower requires some form of security before lending money so

that in event of liquidation, they can enforce the security interest
• Eg: If security is over a property - that does not mean the legal title is
transferred to the borrower.
• It is only an “encumbrances” on the property, to which a court order is
needed to enforce the security in the event of failure to pay back the
borrower
• The principal in National Provincial Bank v Charnley (1924)
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• The most common form of charges, i.e. Fixed Charge & Floating
Charge
NATIONAL PROVINCIAL BANK V CHARNLEY
(1924)

 Facts
 Two creditors of the Fylde Bacon Curing Co were in dispute over who could seize the
company’s property. The National Provincial Bank had a contract on 16 July 1921 that said it
had a lease ‘demised’ for 996 years over ‘plant used in or about the premises’ in return for a
loan. Charnley, an unsecured creditor who had already got judgment, argued that this did not
include some company vans, because the word ‘demise’ suggested things concerning land.
The bank claimed the vans should belong to it, because its charge was first, and its
charge was duly registered under the Companies Act 1908, section 93 (now
Companies Act 2006, s 860).
 The Court of Appeal held, that the substance of the documents was that a charge was to be
created, and the charge had been properly registered.

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FIXED CHARGES

• It is created by placing an interest over a property

belonging to the company, eg: house/assets
• The borrower/creditor (bank) agrees to lend the money +
interest, security is given over the company property, the
debtor/company agrees not to sell the property
without permission from borrower/creditor
• So, in the event of default in payment – banks can sell the 12
property and recover the money
• It gives the borrower/creditor a proprietary interest in the
property - Agnew v Commissioner of Inland Revenue
(2001)
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AGNEW V COMMISSIONER OF INLAND
REVENUE (2001)

 Fact:
 Brumark Investments Ltd gave security over debts to its bank, Westpac. The terms were that
its security was a fixed charge, but a floating charge when proceeds were collected. Brumark
was free to collect debts for its own account and to use proceeds in its business. Brumark went
into receivership. The receivers collected the outstanding debts.
 Held:
 The Privy Council advised that it was indeed a floating charge.

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 FLOATING CHARGES

• Some companies do not have fixed assets, but valuable moveable

assets eg: stocks, shares, machinery etc
• This “class of assets” can be used to obtain a loan and secured by a
charge over all its stock
• Why is it referred to as “class of assets” not a “specific asset”?
• Unlike fixed charge, the debtor/company can sell the assets
anytime and don’t need any permission from creditor (i.e: they
can deal in the ordinary course of business)
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• The charge will be crystalize if there is breach of debenture & now
debtor/company will not be able to sell the assets
• This type of charge is less secured for borrower/creditor. Why?
• Case: Ashborder BV v Green Gas Power Ltd (2005);
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CRYSTALLISATION

1. It occurs in the event of winding up – irrespective winding up by

courts/members – NW Robbie & Co Ltd v Witney Warehouse Co Ltd
(1963)
2. It occurs when a receiver is appointed to realise the security due to
default in payment – Re Panama, New Zealand and Australian Royal
mail Co. (1870)
• Facts: The company had charged its ‘undertaking and all sums of money
arising therefrom’.
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Held: ‘undertaking’ meant ‘all the property of the company, not only
which existed at the date of the debenture, but which might afterwards
become the property of the company.’ and the word ‘undertaking’
‘necessarily infers that the company will go on, and that the debenture
holder could not interfere until either the interest which was due was
unpaid, or until the period had arrived for the payment of his principal,
and that principal was unpaid’
 It occurs during cessation of business – Re Woodroffes (Musical Instruments) Ltd (1986)
 It converts the floating charge to fixed charge
 The debtor/company loses its rights to deal with the assets in the ordinary course of business
 It is up to the parties to decide - in what circumstances crystallization will take effect?

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 THE IMPACT OF LIQUIDATION

• During liquidation, when the creditors come forward to make a

claim, courts need to categorize the assets based on fixed or floating
charge
• Characteristics of floating charge as laid in Re Yorkshire
Woolcombers Association (1903)
• ‘A charge on all book debts which may now be, or at any time
hereafter become charged or assigned, leaving the mortgagor or
assignor free to deal with them as he pleases until the mortgagee
or assignee intervenes, is not a specific charge, and cannot be.
The very essence of a specific charge is that the assignee takes 19
possession, and is the person entitled to receive the book debts at
once. So long as he licenses the mortgagor to go on receiving the
book debts and carry on the business, it is within the exact
definition of a floating security.’
• It can’t just be determined based on creditors description, but the
courts have to look into “substance” of the matter - Agnew v
Commissioner of Inland Revenue (2001)
• Case law: National Westminster Bank plc v Spectrum Plus Ltd
(2005); Re Cimex Tissues Ltd (1994)

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ARTHUR D LITTLE LTD V ABLECO FINANCE
LLC (2002)

 The chargor, Arthur D Little Ltd, guaranteed the liabilities of its two parent companies to
Ableco by creating a charge, described as a first fixed charge, over its shareholding in a
subsidiary company, CCL. The chargor company retained both its voting and dividend rights
with respect to the shares until default. The company’s administrator argued that it was a
floating charge.
 It was held, that whether or not the charge was fixed or floating is a question of law and the
particular charge in issue was fixed. It could not deal with the asset in the ordinary course of
business: the company could not dispose of, or otherwise deal with, the shares. The asset was
therefore under the control of the chargee.

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QUEENS MOAT HOUSES PLC V CAPITA
IRG TRUSTEES LTD (2004)
 it was held that the existence of a right unilaterally to require a chargee to release property
from a charge did not render what is otherwise a fixed charge a floating charge. (FIXED
CHARGE)

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 BOOK DEBTS

• It is common for companies to have debts owed by customers for

goods and services rendered by the company
• At times, the customer delays in payment – i.e. between the time
the invoice is issued and the time payment is made
• To overcome that, a company can borrow money from creditors to
clear the unpaid debts

• Definition: Official Receiver v Tailby (1886) – “debts arising in a

business in which it is the proper and usual course to keep books, 23
and which ought to be entered in such books”
• Q: Can a fixed charge be created for book debts?
• Agnew v Commissioner of Inland Revenue (2001) and National
Westminster Bank plc v Spectrum Plus Ltd (2005) have provide
guidance on this and will be examined below
AGNEW V COMMISSIONER OF INLAND
REVENUE (2001)
 the debenture was so drafted as to mirror that in New Bullas but the Privy Council held that
where the chargor company is free to deal with the charged asset(s) in the ordinary course of
business it must be construed as a floating charge. However, where the charge retains control
over the debts and their proceeds so as to severely restrict the company’s freedom to deal with
them, as in Siebe Gorman, it will be a fixed charge. The notion of a combined charge was
rejected by the Privy Council.

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NATIONAL WESTMINSTER BANK PLC V
SPECTRUM PLUS LTD (2005)
 the chargor, Spectrum, granted a fixed (specific) charge to the bank over its book debts to secure an
overdraft of £250,000. The debenture stated that the security was a specific charge over all present
and future book debts and other debts. It also prohibited Spectrum from charging or assigning debts
and the company was required to pay the proceeds of collection into an account held with the
bank. The debenture did not specify any restrictions on the company’s operation of the account.
 Spectrum’s account was always overdrawn and the proceeds from its book debts were paid into the
account which Spectrum drew on as and when necessary. When Spectrum went into liquidation the
bank sought a declaration that the debenture created a fixed charge over the company’s book debts
and their proceeds. The Crown, however, argued that the debenture merely created a floating charge
so that its claims in respect of tax owed by the company took priority over the bank.
 Held that the charge over Spectrum Plus Ltd's book debts was floating, because the hallmark
of a floating charge is that the business is free to deal with the assets in business as usual

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 BOOK DEBTS

• Additional cases: Siebe Gorman & Co Ltd v Barclays Bank Ltd

(1979); Re Keenan Bros Ltd (1986); Re Brightlife Ltd (1987); Chalk v
Kahn (2000); Re New Bullas Trading Ltd (1994); Re Harmony Care
Homes Ltd (2010); Re Lehman Brothers International (Europe) (in
administration) (2012)

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SIEBE GORMAN & CO LTD V BARCLAYS
BANK LTD (1979)
 the company granted a debenture in favour of Barclay’s Bank. The security was expressed to
be a ‘first fixed charge’ over all of its present and future book debts. The debenture required
the company to pay the proceeds of all book debts into its Barclays account and it prohibited
the company from charging or assigning its book debts without first obtaining the bank’s
consent.
 It was held that the company’s charge over its receivables was fixed. The judge reasoned that
taking the restrictions placed on the company’s power to deal with the proceeds of the debts,
together with the bank’s right to prevent the company making withdrawals from the account
even when it was in credit, gave the bank a degree of control that was inconsistent with a
floating charge.

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CHALK V KAHN (2000)
 under the terms of the charge, described as a fixed charge, the chargor was required to pay the
proceeds into a specified account not held with the chargee bank but with another bank. Since
the chargee had no control over the account it was held that the charge was a floating charge.

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RE NEW BULLAS TRADING LTD (1994);

 it was held that it was possible to create a combined fixed and floating charge over book
debts. Here a fixed charge was created over uncollected book debts but as soon as the
proceeds of the debts were credited to a specified bank account a floating charge took effect
over them.

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 PRIORITY OF CHARGES

• During liquidation, when the creditors come forward to make a claim, courts
need to categorize the assets based on fixed or floating charge
• Gen rule: Whichever charge that is created first, that will be given priority
• Because the nature of floating charge allows debtor to deal with the assets in
normal course of business, the creditor feels insecure – debtor can always create
a fixed charge and will rank in priority over floating charge - Re Castell and
Brown Ltd (1898)
• As a safeguard, creditor can include “negative pledge clause” in the agreement
• As long as the other creditor has “notice of the negative pledge” belonging to
the earlier creditor, it will not lose its priority 30
• Wilson v Kelland (1910) – mere notices is not sufficient
• Re Benjamin Cope & Sons Ltd (1914) – If there are 2 competing floating
charge, the one created earlier will take priority or rank pari passu
1. FIXED V FIXED= WHICHEVER CREATED FIRST

2. FLOATING V FLOATING= WHICHEVER CREATED FIRS

3. FIXED V FLOATING= FIXED

4. FIXED V FLOATING (+ NEGATIVE PLEDGE CLAUSE)=

FLOATING
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REGISTRATION

• Any creditor who wishes to lend money will

want to know to what extent is the company
indebted?
• The debtor/companies are required to register
their charge + security under Part 25 CA 2006
and provided for under s.859 A-Q 32
• Failure to register will make the charge void
against liquidator/creditor – they will rank as
unsecured creditor
• Once registered, the charge is valid from date of creation.
However, the charge + security can only be seen on the register
after 21 days
• A certificate must be issued by registrar as a proof that registration
requirements are complete and complied with
• The charge cannot be set aside if the particulars are incorrect.
“Rectification” is possible if the courts is satisfied there is
omission/misstatement in registration process/ failure to register
within specific period (s..859M)
• Re Eric Holmes (Property) Ltd (1965); Re CL Nye Ltd [1971
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AVOIDANCE OF FLOATING CHARGE

• In commercial lending, the insolvency officer

can set aside a security that was entered
between the company and creditor especially
when the company is nearing to liquidation
• The most common way is to set aside a floating
charge
• s.245 Insolvency Act 1986 is to prevent an 34
unsecured creditor to obtain a floating charge
to secure his existing debt
• If the floating charge is created by a company
within 12 months (not connected person)/ 2 years
(for connected persons) before the start of the
company’s insolvency – the charge is automatically
invalid
• “Connected person” refers to directors of company
- defined in s.249 CA 2006
• Case: Unidare plc v Cohen (2005)
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THANK YOU

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