Debenture Security

Corporate Securities / Debentures

In the widest sense of the word, a “debenture” includes any document which creates or acknowledges a debt. In that sense, debentures may refer to secured or unsecured transferable loan capital.  In the present context, a “debenture” is intended to refer to a charge over all the assets of a corporate borrower or over all the assets of a particular business of the corporate borrower.

Most lenders have their own forms of debenture document.  In more complex and sophisticated transactions, the debenture may be drafted by the bank’s solicitor and may be subject to negotiation.  A debenture will contain most of the clauses that a mortgage deed contains, and more.  This section looks at the certain additional charges and provisions which are characteristic of a mortgage debenture.


Charging Clauses

The charging clause may incorporate a fixed charge over real property together with a range of fixed and floating charges over other classes of asset. The charge over real property must comply with the Registration of Title Act and the Land and Conveyancing Law Reform Act, 2009 requirements and format. In the case of registered title, the charge must be registered in the Land Registry in order to be fully effective.

A charge over real property will cover fixtures which are part of the real property. Goodwill is generally charged by way of fixed charge. It is generally an inseparable part of the undertaking.

The Bill of Sales Act requires that a charge by an individual over movables, including non-fixed assets, movable plant, stock, and machinery, must comply with its strict registration requirements. Detailed particulars must be registered within seven days.

In the case of a corporate debenture, Companies Act registration is required within twenty-one days. It is sufficient to mention the fittings, plant, and machinery of the borrower generally or those situate at a particular business premises or used in a certain business. All plant, machinery, vehicles, computers and other equipment and the full benefits of all rights attaching to them, will generally be charged.


All Asset Charge

A floating charge may be created over stock and other assets used in the borrower’s trade.  The borrower will be free to deal with the stock in the normal course of its trade, unless and until the floating charge crystallises on them.  The debenture may purport to create fixed charges over a certain class of assets but provide a floating charge in respect of other assets, not effectively charged by the fixed charge.

The debenture will generally have a sweep up clause, charging all the undertaking, property and assets of the borrower whatsoever and wheresoever, present and future. The stock in trade of the company and other items ordinarily disposed of in the course of its business will be charged by way of floating charge, insofar as they are not captured by any of the specific charges. This last category is a residual category of present and future assets and charged by way of floating charge.


Intangible Assets

A chose in action is a right or asset, ultimately enforceable by court order. It is typically constituted under a contract. It includes a wide variety of assets such as shares, insurance policies, debts receivable, loan capital, investments and many other rights.  A chose in action may be assigned by notice to the person with the obligations (the obligor). A charge is not perfected until the assignment has been notified and acknowledged by the obligor.

Intangible assets charged may include;

  • shares, stocks, bonds, security, whether marketable or otherwise, and all other rights;
  • book debts, revenues, credit balances and rights, things due to the company or which may become due and the full benefit of rights attaching to them;
  • present and future contracts of insurance;
  • patents, trades, service mark, copyright, inventions, confidential information, intellectual property, intangible property.

Book Debts

“Book debts” refer principally to monies receivable from debtors. It is possible in principle to create a fixed charge over book debts.  However, the degree of control required over both the debts and their proceeds, to achieve a fixed charge, may make it impractical.

If an arrangement which purports to create a fixed charge over debts, in fact, leaves the borrower with a significant degree of control and access, it is likely to be re-categorised as a floating charge. Floating charges are subject to certain vulnerabilities, and in particular, are subordinated to the claims of certain preferential creditors.


Covenants

In addition to the covenants found in a mortgage deed, a debenture deed will contain a number of further covenants, relevant to the wider “all assets” charge that it creates. Because the charged assets comprise the whole (or a substantial part of the) business, undertaking, and goodwill of the company, rather than a collection of individual assets, there will be a covenant to carry on business in a proper and efficient manner and a covenant not to alter the nature or mode of undertaking the business, without consent.

There will be obligations to comply with licences and statutory consents. There will be obligations in relation to compliance with laws and regulations applicable to the business.

The range of “asset protection” covenants will be wider than where real property security only is included. There may be covenants designed to protect assets such as intellectual property, which require registration and renewal on a periodic basis.  The insurance clause will cover a wider range of insurance, as would be prudent for a business of that nature to maintain (e.g. employers and public liability).

There may be a covenant not to depreciate or jeopardise the value of company assets. If there is a charge over book debts, there may be specific covenants in relation to the payment of the proceeds of debts into a blocked account. There will be obligations to furnish accounts and information relating to the borrower and its subsidiaries.


Negative Pledge

A negative pledge is a covenant restricting or prohibiting the creation of further security over the borrower’s assets, without the lender’s prior consent. The negative pledge will not bind subsequent mortgagees unless they have actual notice of it.

Lenders used to register the negative pledge clause in the Companies Registration Office. It is no longer possible to register a negative pledge following the Companies Act 2014.


Crystallisation

“Crystallisation” refers to a floating charge becoming a fixed charge. The crystallisation of the floating charge will facilitate the appointment of an “all assets” receiver.  The debenture/floating charge document will have a mechanism by which the floating charge is converted to a fixed charge on assets within its scope.  The effect is that the borrower’s freedom to deal with the assets concerned is removed.

Mortgage debentures may vary in terms of the sensitivity of the trigger for crystallisation.  There are a number of events and circumstances in which a floating charge will be specified to crystallise automatically.  They will usually include the following: –

  • a winding up order;
  • a voluntary winding up;
  • cessation of business for any reason including disposal of significant assets;
  • liquidation;
  • appointment of a receiver over other assets.

The lender may wish to crystallise the charge by notice at critical points in time.  The right to do this will usually be linked to some breach of covenant on the borrower’s part. The lender may wish to have the right to crystallise the charge in a wider set of circumstances, such as where there has been a material adverse change in the business of the borrower or where that the charged assets are in jeopardy. The lender will wish to have the sole right to determine this matter.  The borrower will wish to limit it, to when the lender “is acting reasonably.”


Receiver’s Contrual Powers

An “all assets” corporate debenture will require a wider range of receiver powers than those required for a real property security only.   They will facilitate the maintenance of the business and its goodwill, pending sale as a going concern.  The powers may include:

  • power to make demands and take such legal proceedings as are required to take possession;
  • power to carry on, manage, develop, reconstruct any business;
  • power to appoint advisers and agents on such terms as it sees fit;
  • power to raise and borrow money either unsecured or on the security of the secured assets on such terms as the receiver determines;
  • power to enforce calls on shares;
  • power to sell book debts;
  • power to exercise voting rights;
  • power to settle, compromise or agree on any claim or dispute with any creditor of the mortgagor or relating to the secured property;
  • power to bring, defend or cease any legal proceedings in its own name or in the name of the mortgagor in relation to the property;
  • power to form a subsidiary of the mortgagor and arrange for such subsidiary to trade or cease to trade and power to transfer any asset to that subsidiary;
  • power to delegate its powers;
  • power to appoint managers, officers, and employees;
  • power to substitute or improve plant and machinery;
  • power to elect for VAT purposes;
  • power to run the tax affairs of the mortgagor in such manner as it sees fit;
  • power to insure;
  • power to register, maintain and protect intellectual property;
  • power to redeem any prior mortgage and settle accounts in relation to it;
  • power to effect any repair or insurance or otherwise which the mortgagor might do in the course of its business;
  • power to provide or arrange for any service for the efficient use and management of the assets;
  • power to do all things desirable and necessary for realising the asset or incidental or conducive to such rights, powers, and discretion;
  • power to exercise all powers in relation to the asset as if it was the owner;
  • power to use the name of the mortgagor when exercising any of the rights;
  • power to do all things and to execute in the name of and on behalf of the mortgagor any deed, receipt or other documents and to make any payment necessary or incidental to its functions;
  • power to claim in the bankruptcy of any debtor of the mortgagor;

Statutory Powers of Receivers I

The powers of receivers over the assets of a company are set out in detail in the Companies Act, 2014.   Receivers are declared to have the power to do in the State and elsewhere, everything necessary and convenient to be done in connection with, or incidental to the attainment of the objectives for which the receiver has been appointed.

The powers of the receiver may be limited in the case of a court appointed a receiver, by the court, or by the terms of the instrument of under which the receiver is appointed.

The Companies Act 2014 provides general powers for a corporate receiver  to do, in the State and elsewhere, all things necessary or convenient to be done for or in connection with or incidental to the attainment of the objectives for which the receiver has been appointed.  This is intended to assist receivers in poorly drafted corporate debentures.  The listing of powers is without prejudice to this general power.

The receiver’s powers may be limited by the instrument under which he is appointed or by the terms of the court order which appoints him (where applicable).


Statutory Powers of Receivers II

The powers set out in the Companies Act supplement those in the instrument and in other legislation.  There are the following statutory powers;

  • to enter into possession and take control of property of the company by the terms of the order or instrument;
  • to lease, let on hire or dispose of property of the company;
  • to grant options over the property of the company on such conditions as the receiver thinks fit;
  • to borrow money on the security of the property of the company;
  • to insure the property of the company;
  • to repair, renew or enlarge property of the company;
  • to convert the property of the company into money;
  • to carry on any business of the company;
  • to take on lease or on hire, or to acquire, any property necessary or convenient in connection with the carrying on of a business of the company;
  • to execute any document, bring or defend any proceedings or do any other act or thing in the name of and on behalf of the company;
  • to draw, accept, make and endorse a bill of exchange or promissory note;
  •  to use a seal of the company;
  • to engage or discharge employees on behalf of the company;
  • to appoint a solicitor, accountant or other professionally qualified person to assist the receiver;
  • to appoint an agent to do any business that the receiver is unable to do, or that it is unreasonable to expect the receiver to do, in person;
  • where a debt or liability is owed to the company, to prove the debt or liability in bankruptcy, insolvency or winding up and, in connection therewith, to receive dividends and to assent to a proposal for a composition or a scheme of arrangement;
  • if the receiver was appointed under an instrument that created a charge on uncalled share capital of the company to make a call in the name of the company for the payment of money unpaid on the company’s shares, or on giving a proper indemnity to a liquidator of the company, to make a call in the liquidator’s name for the payment of money unpaid on the company’s shares;
  • to enforce payment of any call that is due and unpaid, whether the receiver made the calls or otherwise;
  • to make or defend an application for the winding up of the company;
  • to refer to arbitration or mediation, any question affecting the company.
  • to bring legal proceedings, to borrow money, to carry on the business of the company, to engage or discharge employees of the company.

The receiver may apply to the court for directions about the exercise of the additional statutory powers.


References and Sources

Irish Texts

Breslin Banking law + Supplement     3rd Ed  2013

Mortgages Law & Practice     Maddox 2nd Ed            2017

NAMA Act 2009: A Reference Guide Raghallaigh, Kennedy, Whelan

Money Laundering & Anti-Terrorist Financing Act 2010

Financial & Emergency Provision Legislation Annotated      2011

Shelley & McGrath     National Asset Management Agency Act Annotated 2011

Dodd & Carroll            Law Relating to NAMA 2012  0

Ashe & Reid    Anti-Money Laundering: Risks, Governance & Compliance             2013

Johnston & Ors           Arthur Cox Banking Law Handbook               2007

Dr Mary Donnelly  The Law of Credit and Security, 2nd Ed, 2015

UK Texts

A Hudson The Law of Finance 2nd Ed (Sweet and Maxwell 2013)

Veil (Ed) European capital markets law (Hart Publishing 2013)

IG MacNeil An Introduction to the Law on Financial Investment 2nd Ed ( Hart Publishing 2012)

E Ferran Principles of Corporate Finance 2nd Ed ( OUP 2014)

Gullifer (ed) Goode and Gullifer on legal problems of credit and security (6th edn Sweet and Maxwell London 2017).

MA Clarke et al (eds) Commercial Law: Text, Cases and Materials (5th edn OUP Oxford 2017)

McKendrick (ed) Goode on commercial law (5th edn Penguin London 2017)

G McCormack Secured credit under English and American law (CUP Cambridge 2004)

L Gullifer and J Payne Corporate Finance (2nd edn Hart Oxford 2015)

D Sheehan The Principles of Personal Property Law (2nd edn Hart Oxford 2017)

Ross Cranston, Emilios Avgouleas, Kristin van Zwieten, Christopher Hare, and Theodor van Sante Principles of Banking Law 3rd Ed 2018

E.P. Ellinger, E. Lomnicka, and C. Hare Ellinger’s Modern Banking Law 5th Ed 2011

Andrew Haynes The Law Relating to International Banking  Bloomsbury Professional 2009

Charles Proctor Mann on the Legal Aspect of Money 7th Ed 2012

Charles Proctor The Law and Practice of International Banking 2nd Ed  2015

Sheelagh McCracken The Banker’s Remedy of Set-Off   2010 Bloomsbury Professional

Louise Gullifer, Jennifer Payne Banking & Financial Law 2018

Hubert Picarda QC The Law Relating to Receivers, Managers and Administrators 4th Ed  2006 5th Ed 2019

Lightman & Moss on the Law of Administrators and Receivers of Companies 6th Ed  Sweet & Maxwell 2017

Timothy N Parsons  Lingard’s Bank Security Documents 6th Ed 2015