Scope of a “Debenture”

The England and Wales Court of Appeal recently had occasion
to consider the meaning and scope of the expression “debenture” in the context
of a charge document. Consistent with some previous rulings of English Courts,
the Court of Appeal provided a somewhat expansive definition of the expression
“debenture” so as include within its fold a shareholder loan agreement.
In Fons Hf v.
Corporate Ltd & Anor
, the claimant Fons Hf had granted a charge in
favour of Kaupthing Bank Luxembourg S.A. over, among other things, Shares. The expression “Shares” was
defined in the charge document to mean:
“all shares (if any) specified in
Schedule 1 (Shares), and also all
other stocks, shares, debentures, bonds, warrants, coupons or other securities
now or in the future owned by the Chargor in Corporal from time to time or any
in which it has an interest.”
Under two separate shareholder loan agreements (SLAs), Fons
Hf had made unsecured loans to a company, Corporal Limited, in which it held
both ordinary and preference shares. Kaupthing contended that the rights of
Fons Hf under the SLAs were covered within the charge in its favour either as “debentures”
or “other securities” within the meaning of the definition set out above. The
court of first instance rejected this contention, against which Kaupthing
Speaking through the lead judgment of Patten LJ, the Court
of Appeal considered the principles applicable to interpretation of such a
charge document, including that the “task of the court is to determine what the
parties meant by the language which they used. Consistently with that
objective, the court will seek to give the words their natural and ordinary
meaning derived from the context of the agreement and all other relevant facts
indicating the nature and purpose of the transaction.” (at para. 14).
More specifically, the Court of Appeal examined the scope of
“debentures” and “other securities” as used in the charge document. A review of
previous case law (in paras. 26 to 35) suggested that courts were willing to
provide a wide definition of the term “debentures”, based on which Patten LJ expressed
the following opinion:
36. One can see from those
authorities … that “debenture” had a wider and less specific meaning that “bonds, warrants and coupons” and,
context apart, was not limited to an instrument which was transmissible or of a
bearer nature. As a matter of language, the term can apply to any document
which creates or acknowledges a debt; does not have to include some form of
charge; and can be a single instrument rather than one in a series. …
37. On this basis, the SLAs are
debentures. They comprise in each case a written instrument (albeit not under
seal) which creates and thereby acknowledges the relevant debts owed by
Corporal. …
The general approach of the Court of Appeal has been to
continue the position that the meaning of the expression “debentures” is wide
in nature, and thereby must be strong reasons on the facts and circumstances of
a given case to warrant a narrower interpretation.
Applying this to the Indian context, section 2(30) of the
Companies Act, 2013 defines debentures to “[include] debenture stock, bonds or
any other instrument of a company evidencing a debt, whether constituting a
charge on the assets of the company or not”. Even this statutory definition is
expressed in wide terms. Not only is the definition inclusive in nature, but it
also encompasses “any other instrument of a company evidencing a debt”, which
is expansive in its terms. The previous provisions of section 2(12) of the
Companies Act, 1956 have also received wide interpretation by the courts,
somewhat consistent with the English approach.

The recent Court of Appeal decision in Fons Hf
is a reminder that parties drafting and structuring debt instruments must be conscious
of the fact that such interpretation could lead to such instruments being
treated as debentures either for statutory purposes under companies’
legislation or for interpretation of contracts which may have an impact on such

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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