Debentures

Debentures, as defined by section 2 of Cap 212 and the Companies Act, encompass debenture stock, bonds, and other securities of a company, whether or not constituting a charge on the company's assets. In legal terms, a debenture is seen as a document that either creates a debt or acknowledges it.

In Levy v Abercorris Slate & Slab Co. (1897) 37 Ch. D 260, a debenture was defined as a document acknowledging or creating a debt. Chitty J in Edmonds v Blaina Co. (1887) 36 Ch.D 215 stated that the term "debenture" implies a debt or acknowledgment of debt accompanied by some charge or security.

Essentially, a debenture is a written acknowledgment of a company's debt to certain individuals, publicly issued through a prospectus like shares. It typically includes provisions for interest payments and the eventual repayment of the borrowed sum at a fixed date. Debentures can be bought and sold similarly to shares and are often secured against the company's assets to provide security to lenders.

Debentures are commonly issued through prospectuses, and the repayment amount may be payable in installments or as a lump sum. While debentures represent debt and lack certain rights associated with equity securities, companies may issue convertible or redeemable debentures that grant additional rights to holders.

There are different classes of debentures based on negotiability, security, and permanence:

According to Negotiability:

Bearer Debentures: Payable to the bearer, transferable by delivery, and regarded as negotiable instruments.

Registered Debentures: Payable to registered holders, with names appearing on both the debenture certificate and the company register.

According to Security:

Secured Debentures: Create a charge on the company's property.

Unsecured or Naked Debentures: Do not create a charge on company assets, and holders can sue the company as unsecured creditors.

According to Permanence:

Redeemable Debentures: Issued with conditions for redemption after a specified period.

Irredeemable Debentures: Also known as perpetual debentures, with no fixed redemption period or conditional redemption.

In the event of insolvency or dissolution, debenture holders are prioritized over equity shareholders, and courts may address the equitable subordination of claims during winding up, especially if there are breaches of fiduciary duties or fraud.