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LA426 - Advanced Pacific Commercial Transactions - Module 5

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Module Five

DEBENTURES

Learning Objectives 

The learning objectives for this unit are to understand:

1. the nature of debentures;

2. debenture regulation under the Corporations Law;

3. the different types of debentures;

4. the investor protection provisions relating to debentures and the respective roles of the trustee and the guarantor corporation;

5. the nature of fixed and floating charges and the priorities between them;

6. the registration system applicable to charges;

7. debenture holders’ rights

 

 Introduction

 The term ‘debenture’ is a term with a variety of meanings. Probably the original meaning is that of a written bond to secure borrowings by a company. However there are a number of different meanings adopted under the Corporations Law.

You should note at this point that there are provisions which deal with investor protection of debenture holders or person subscribing for debentures provided by Pt. 7.12 Div. 5 of the Corporations Law. Scan through these provisions now. In some ways these are similar to the prescribed interest provisions under Pt. 7.12 Div. 5 which we will deal with elsewhere in this course although the latter are much more of a catch-all nature. They express at least a similar approach to investor protection by putting in place a particular management structure to handle the interests of debenture holders or subscribers.

When we deal now with debentures we are concerned with raising corporate finance by way of loan; ie with loan or debt financing as opposed to equity finance. You will recall that the offering of debentures is caught by the prospectus provisions. If you refer to the definition of debenture in section 9 of the Law you will see that the term securities includes debentures and this is important in bringing into play the general securities regulations. Note that debenture is deemed to be a security by section 92. However debenture is omitted from the definition of a participation interest under section 9. The latter is of significance in relation to prescribed interests. Can you ascertain at this point why this is so? If not, wait until the next Topic which should clarify the issue.

At this point, note that there are different definitions of the term ‘debenture’ adopted by sections 9, 1047 and 1048. What is the significance of these different definitions? Note the exceptions to the statutory definitions. Why are these particular exceptions mentioned; ie. What justifies the exceptions? How do the statutory definitions differ from the general law understanding of debentures? On the general nature of debentures. READ Re Bauer Securiites Pty. Ltd. Australian Mining Construction Pty. Ltd. v NZI Capital Corporation Ltd. (1990) ACSR 328.

You should review the debenture provisions from one of the standard texts. Note that there are different types of debentures. For example what are bearer debentures and redeemable debentures? How does this effect the manner in which they are dealt with? What are convertible debentures? READ Mosely v Koffontein Mines Ltd. [1904] 2 Ch. 108

What are the legal differences between debenture, mortgage, charge lien and pledge? So far as the debenture provisions of the Law are concerned are these conceptual differences of any significance? What is the meaning of a negative pledge. On this READ Pullen v Abalcheck Pty. Ltd. (1990) 8 ACLC 1087. Try to understand the concept of an ancillary negative pledge. READ Re Bunbury Foods Ltd. (1984) 2 ACLC 639.

Note that the debenture holder is a creditor of the company and not a member. What significance does this have generally? What does it mean scppecifically to be a debenture holder for the purposes of the Corporations Law? Is this a term of special significance? Does it mean registered holder as is generally the case with respect to share holders under the Law. Is a scheme of registration of debenture holding significant for the purposes of the Law?

Is a debenture holder deprived of many of the rights which a shareholder has to enforce claims against the company? Are some rights conceded to debenture holders by the statute for example in relation to initiating winding up proceedings?

Can debentures be redeemed and if so under what circumstances or conditions imposed on reissue. READ Knightsbridge Estates Trust Ltd. v Byrne [1940] AC 613 and Kreglinger v New Patgonia Meat and Cold Storage Co Ltd. [1914] AC 25.

Note the difference between fixed and floating charges. The difference will be of particular importance in the context of the law relating to legal and equitable priorities between competing interests. If you do not recall the relevant rules in operation here, which are set out in the standard text discussions perhaps you should review your equity notes or texts.The questions here are somewhat complicated particularly when some charges are also accompanied by the presence of a negative pledge. The question of notice by a person acquiring under a subsequent charge will be of some significance in the application of the legal rules relating to charges. The two significant rules in relation to legal and equitable priorities are Where the equities are equal the first in time prevails (which is significant for competing equitable interests or competing legal interests) and where the equities are equal the law prevails (for competition between an equitable and a legal interest) Note the effect of the doctrine of a bona fide purchaser for value without notice. On equitable priorities generally see Latec Investments v Hotel Terrigal Pty. Ltd. (1965) 113 CLR 265

On the position generally the following cases will be of significance :

Holroyd v Marshall (1862) 10 HLC 191; 11 ER 999

Re Wallyna Industries Pty. Ltd. (1983) 7 ACLR 661

FCT v Lai Corpn Pty. Ltd. [1987] WAR 15; 83 FLR 63

United Builders Pty. Ltd. v Mututal Acceptance Ltd. (1980) 33 ALR 1

Stein v Saywell (1969) 121 CLR 529

As to the effect of chrystallisation of a floating charge in this context see :

Re Obie Pty Ltd. (1983) 8 ACLR 574

Norgard v DFCT (1986) 5 ACLc 527

Re Bartlett Estates Pty. Ltd. (1988) 14 ACLR 512

Luckins v Highway Motel (Carnarvon) Pty. Ltd. (1975) 133 CLR 164

United Builders Pty. Ltd. v Mutual Acceptance Ltd. (1980) 144 CLR 673

Re Bismark Pty. Ltd. [1981] VR 527

You will note also that the Corporations Law requires that charges of a certain specified type are to be registered. Which types of charge must be registered. What is the effect of the registration or non registration of the priorities issue. Note that there are statutory exclusions from the registration requirement. Why is the justification for these exclusions? In this regard READ Robertson v Grigg (1932) 47 CLR 257.

You should have noted that the investor protection provisions of Pt. 7.12 Div. 4 create the requirement for a trust deed and the appointment of both a trustee and a guarantee corporation. Why do you think that this approach was adopted rather than, say, simply imposing duties on corporate directors or on a statutory watchdog. Why should a trust format be mandated by the regulations

There are covenants to be provided for in the trust deed. How are these covenants enforceable at the instance of a debenture holder? Who can act as a trustee and who as a guarantor corporation? What is the role of the ASC in relation to such deeds? Does it have particular discretionary powers? Are the covenants adequate as they currently stand? What other covenants might be adopted to provide additional protection to debenture holders?

REVIEW the remedies of debenture holders at this point from the one of the standard texts.

 

Suggested Readings

The cases referred to in the text above, but particularly

# Re Bauer Securiites Pty. Ltd. Australian Mining Construction Pty. Ltd. v NZI Capital Corporation Ltd. (1990) ACSR 328.

# Robertson v Grigg (1932) 47 CLR 257.

# Mosely v Koffontein Mines Ltd. [1904] 2 Ch. 108

# Pullen v Abalcheck Pty. Ltd. (1990) 8 ACLC 1087.

# Re Bunbury Foods Ltd. (1984) 2 ACLC 639

# Knightsbridge Estates Trust Ltd. v Byrne [1940] AC 613

# Kreglinger v New Patgonia Meat and Cold Storage Co Ltd. [1914] AC 25

 

Review Questions

  1. The meanings adopted of the term ‘debenture’ under the general law and statute create confusion. How many different senses are there and what precisely is the significance of each?
  2. A negative pledge in a floating charge creates no proprietary interest in law or equity. Is this true? What then is the interest which it does create?
  3. A subsequent equitable charge of a company’s assets can never prevail over a prior legal charge of those assets except where the holder of the prior charge was negligent. Is this an accurate statement of the position?
  4. Chrystallisation of a charge just means that the amount due under the charge has, for a variety of possible reasons, simply fallen due for payment. Is this the case?
  5. Debentures are not participation interests under section 9 of the Corporations Law for the reason that debentures are, unlike shares, not in the nature of interests which give a right of participation or membership of the company?
  6. Under the statutory trust deed for debenture holders the roles of the trustee and the guarantee corporation are basically passive. Both are merely watchdogs not bloodhounds. Is this entirely accurate given their statutory obligations?
  7. Does an individual holder of debentures have the right to enforce a breach of covenant by a trustee?

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