Monday, March 31, 2014

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 appealed.

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 instruments.

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