Debentures
“Debentures”
A debenture, in its broadest sense, is a document evidencing a debt. It is used in two senses in the context of company borrowing. In one sense, discussed in the following section a debenture refers to a debt “security” i.e. an interest in a company, which may be transferable.
In another sense, discussed in a later section, a debenture refers to a fixed and/or floating charge over all or most of the assets of the company, granted to a lender. In this sense, it is a security in the sense of a mortgage as opposed to a share or security. Some debentures have both features.
A company may issue debentures, which may or may not be secured by its assets. In this sense, a debenture is a loan to the company by a group of persons, who may transfer and deal in it.
Public companies and DACs may issue debentures (transferable loans/debt) which are traded on stock markets. Companies must keep a register of debentures holders, in much the same way as a register of shareholders. Debentures may be transferred in much the same way as shares. The requirements for prospectuses in relation to the issue of tradable debentures is much the same as in the case of shares.
Private companies may enter a debenture which is not tradable, for example, to a bank. In this sense, the word debenture refers to security, typically secured by a fixed and floating charge over the entire assets of the business.
Debt Security
A series of debentures may be issued on standard / identical terms for different amounts or units to debenture holders. Debenture stock may create a single loan in which certificates are issued which represent a fractional right to it.
There may be multiple debenture holders who are equivalent to shareholders, each holding in effect, transferrable company debt. The trust deed creating the debenture may provide for a register of debenture holders, transferrable debenture stock and may define the financial and voting rights of the debenture holder in the company.
Where a company issues a series of debentures, it is generally provided that they rank equally or “pari passu”. None has priority over the other. Each is entitled to be paid equal proportions of the entire lending if there is a deficiency of assets.
The debenture may be issued as debenture stock so that different amounts are issued to various investors. There may be a series of debentures. A debenture stock may be transferred in a similar manner to shares.
Listed Debentures
Debentures may be listed on an exchange and traded in much the same way as shares and other securities. The considerations which arise on the issue of debentures to the public are broadly similar to those that arise on the issue of shares. Designated Activity Companies and public limited company (but nor private companies / LTDs) may issue and list debentures.
In the case of listed companies, a prospectus may be required. The debentures may be listed on a stock exchange and subject to its rules and conditions which are designed to ensure the integrity of the market.
A debenture may be charged on assets. Even if so charged, it may be made irredeemable under the Companies Act, notwithstanding the general principle that a mortgage must be capable of redemption. A debenture is generally enforced by appointment of a receiver. The general principles of the receivership apply.
A trust deed usually defines the terms and rights of the debenture holders. A trustee is commonly appointed to represent their interests. The company deals with a trustee, who receives payments on behalf of the debenture holders collectively. The trustee may hold legal title to the security on behalf of the debenture holders.
Financing
Investors in private companies may invest and capitalise the company by a combination of debt and equity. On a winding, up, the debt must be paid in full before the shareholders receive any distribution on account of their shares.
There are important differences in taxation treatment between debt and equity. Generally, interest on debt can be deducted in the calculation of tax on profits. In contrast, dividends are not deducted in the calculation of tax on profits.
A debenture is fundamentally a loan instrument. It may be in the nature of a debt security or closer in nature to a loan agreement.
A secured debenture can be issued. The loan obligation in the debenture may be secured over particular assets or over the entire assets of the company, by way of a charge over all of the company’s assets. Where there is one lender, it holds the security. Where there are numerous lenders, the trustee may hold the security on behalf of the debenture holders.
Debt Interest
A debenture holder is not a shareholder in the company. Its rights are defined by the terms of the debenture creating the security. The debenture holder, in contrast to a shareholder, is entitled to a fixed payment of interest and capital, irrespective of whether they company has made a profit.
The debenture trust is similar in many respects to a loan agreement. It will define the circumstances in which there is a default. Where there is a default, a debenture holder may seek judgment or petition for winding up.
The debenture holders may be able to appoint a receiver to enforce the security if there is a default. In contrast, a shareholder will not usually be secured. Its interest is residual. Upon appointment, the receiver may realise the secured assets in order to pay the debt.
Generally, a debenture, like a mortgage, can be redeemed by the company at any time. Companies can issue debentures which are irredeemable.
An Individual debenture holder may be entitled to bring proceedings on behalf all debenture holders. The consent of a specified number or percentage in value of debenture holders may be required.
Exonerating Clauses
The Companies Act limits the ability of companies to excuse and indemnify trustees’ liability where they fail to exercise due care and diligence or are in breach of trust. A three-quarters majority of debenture holders must ratify a release.
A provision contained in a trust deed for securing an issue of debentures, or in any contract with the holders of debentures secured by a trust deed, shall be void in so far as it would have the effect of exempting a trustee from, or indemnifying him against, liability for breach of trust where he or she fails to show the degree of care and diligence required of him or her as trustee, having regard to the provisions of the trust deed and its powers, authorities or discretions.
This does not invalidate—
- any release otherwise validly given in respect of anything done or omitted to be done by a trustee before the giving of the release; or
- any provision enabling such a release to be given on the agreement to the provision by a majority of not less than three-fourths in value of the debenture holders present and voting in person or, where proxies are permitted, by proxy at a meeting summoned for the purpose, and either with respect to specific acts or omissions or on the trustee dying or ceasing to act.
Redemption and Re-Issue
Perpetual, irredeemable debentures may be issued. Debentures may be redeemable only on a remote contingency or on the expiration of a long period, no matter how long.
Where a company has redeemed any debentures then unless there is a provision to the contrary, or the company has shown its intention that the debentures shall be cancelled, then the company has the power to re-issue them either by re-issuing the same debentures or by issuing other debentures in their place.On the re-issue of redeemed debentures, the person entitled to the debentures shall have the same priorities as if the debentures had never been redeemed.
Where a company has deposited any of its debentures to secure advances from time to time on current account or otherwise, the debentures shall not be deemed to have been redeemed by reason only of the account of the company having ceased to be in debit while the debentures have remained so deposited.
A contract with a company to take up and pay for debentures may be enforced by specific performance.
References and Sources
Primary References
Companies Act 2014 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch. 19 Courtney
Keane on Company Law 5th Ed. (2016) Ch. 20 Hutchinson
Other Irish Sources
Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
Pre-2014 Legislation Editions
Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Shorter Guides
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
UK Sources
Companies Act 2006 (UK) (Legilsation.gov.uk)
Statute books Blackstone’s statutes on company law (OUP)
Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam
Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington
UK Practitioners Services
Tolley’s Company Law Handbook
Gore Browne on Companies
Palmer’s Company Law