GUYANA BAR ASSOCIATION LAW CONFERENCE
The term “debenture” is not a strictly technical term but is applied to a security for money, called a debenture or a debenture deed, and providing for the payment of a certain specified sum to the owner or bearer, with interest in the meantime. It may be applied to any instrument showing that the party making it owes money and is bound to pay it. In Guyana the term is only used in relation to a security given by a corporate entity and never in relation to an obligation undertaken by a natural person. Any document which either creates a debt or acknowledges it is a debenture: Levy v. Abercorris Slate Co. (1888), 37 Ch. D. 260 at 264.
A debenture may be a mere promise to pay or a promise to pay secured by mortgage or charge, either in the debenture itself or in a covering trust deed.(Refer to observations of Lindley J. in British India Steam Navigation Co. v. I.R.C. (1881), 7 Q.B.D. 165 at 172, as to what various classes of instruments are entitled to be described as debentures) and Edmonds v. Blaina Furnaces Co. (1887), 36 Ch. D. 215 at 219 where Chitty J. said: “The term itself imports a debt – an acknowledgement of a debt – and, … generally, if not always, the instrument imports an obligation or covenant to pay. This obligation or covenant is in most cases at the present day accompanied by some charge or security.”
An ordinary mortgage of freehold property is a debenture within the English Companies Act: Knightsbridge Estates Trust Ltd. v. Byrne,  A.C. 613.
It is immaterial whether the document is styled a debenture by the corporation which issued it. If an instrument contains an acknowledgement of indebtedness, that is sufficient to constitute the instrument a debenture: Lemon v. Austin Friars Investment Trust Ltd.,  Ch. 1 (C.A.); R. v Findlater,  1 K.B. 594.
In Canada it has been stated that the terms “bonds” and “debentures” are used without any distinction of meaning. I mention this because I believe that the persons who drafted our present Companies Act drew heavily on the Canadian model and practice. As applied to corporate obligations there is no legal distinction between the terms “bonds’, “debentures” and “notes” and the fact that one or another of such terms appears in the designation of the obligation cannot be relied on as an indication of the security (if any) behind the obligation. Usually words are included in the title of the obligation to indicate generally the type of security. The term ‘bond’ is applied to government obligations which ordinarily are unsecured and to corporate obligations which are secured by a specific mortgage. Corporate obligations which are secured by a first mortgage on immovable property are usually described as mortgage debentures and this is the most usual form encountered in Guyana. An obligation may also be secured by a specific mortgage or charge on collateral security such as shares, bonds or other obligations of other corporations, in which case the obligation is usually called a collateral trust bond or debenture. The term ‘debenture” may be applied to any corporate obligation secured or unsecured as may the term “note”, although the latter term is usually confined to unsecured obligations.
Debenture stock, which I have not come across in Guyana, is a term of loose meaning. It has been described as “borrowed capital consolidated into one mass for the sake of convenience.” The corporation, as security for the whole amount to be borrowed, creates a mortgage or charge by means of a covering trust deed in favour of a trustee for the holders of the debenture stock, each of whom, receives a certificate, entitling him to the sum therein specified, being a part of the whole indebtedness. The individual holders of debenture stock have no separate mortgage or charge. In this respect debenture stock differs from debentures, each of which may contain, and where there is no covering trust deed does contain, a separate charge.
On the transfer of registered debenture stock, the transferor delivers up his certificate and a new certificate is issued to the transferee, as on the transfer of shares. If all the debenture stock comprised in the certificate is not transferred, the transferor receives a new certificate for the balance not transferred. In the case of the transfer of bonds, on the other hand, the actual bond is handed over to the transferee who retains it. As I said before debenture stock is not a common security in this country but in the past has been in the United Kingdom.
Where debentures are secured by a trust deed creating a charge or where the debentures themselves contain a charge it is usual to insert a provision that all debentures of the series shall rank pari passu. Where this is not done and debentures are issued one after another in numerical order each debentures ranks in priority of charge ahead of all the others subsequently issued: Gartside v. Silkstone & Dodsforth Coal & Iron Co. (1882), 21 Ch. D. 762. In Guyana it is usual to insert a provision in the debenture that no other debenture shall rank pari passu with the instant one nor can any other debenture be issued at all except with the express permission of the debenture holder.
The effect of a pari passu provision is that from the time when the security crystallises there can be no priority amongst the debenture holders: in re Midland Express Ltd.,  1 Ch. 41 at 49 (C.A.), (Note need for a separate discussion on the difference between fixed and floating charges including reference to the point at which they crystallise).
A corporation under certain circumstances may create a specific charge in priority to an earlier floating charge, so that debentures of a later issue secured by a specific charge may have precedence over debentures of an earlier issue containing a floating charge only on such property.
(Describe the contents and form of a Debenture)
Names of parties
Statement of consideration
Terms of repayment
Rate of interest
Obligations of the borrower e.g. to insure property and to provide accounts at stated intervals etc
Events of default
Powers of the lender following an event of default
Registration requirements under the Companies Act 1991
Registration is dealt with in Part III Division A ss. 233 et seq of the Act.
(Deal with the requisite provisions from the Act itself).
Irregularity in issuance
Debentures must be issued in accordance with any requirements of the by-laws, and subject also to the provisions, if any, of the articles of the corporation. See, for example, Anderson Lumber Co. v Canadian Conifer Ltd.,  5 W.W.R. 41 (Alta. C.A.); where debentures were held to be invalid as the articles of association required the authorization of a general meeting and this was never held. The holder of the debentures was deemed to know of the irregularity.
Where the issuance of debentures has been duly authorized, the form of the debenture may be left to be determined by the officers of the corporation without approval by a meeting of the board. If debentures are irregularly issued the rule that a bona fide holder for value without notice of the irregularity is protected applies : Duck v. Tower Galvanizing Co.,  2 K.B. 314; but, of course, if he has notice he will not be protected. (Note the practice in Guyana where a resolution of the Board of the corporation attesting to their intention to grant the debenture for the specific sum to the specific lending agency is required to be filed with the debenture).
Irregular and insufficient debentures for which a lender has bona fide advanced money may be evidence of an agreement on the part of the corporation to issue valid debentures, so that the holder may have a good equitable debenture on the principle laid down in Re Strand Music Hall Co. (1865), 3 De G. & Sm. 147, where Lord Justice Turner said: “I apprehend, however, that where this Court is satisfied that it was intended to create a charge, and that the parties who intended to create it had power to do so, it will give effect to that intention, notwithstanding any mistake which may have occurred in the attempt to effect it.”
Agreement to issue debentures
An agreement for consideration to issue debentures charging property constitutes a present charge of such property and the proposed debenture holder is thereby protected against an execution creditor who intervenes before the debentures are actually issued: Simultaneous Colour Printing Syndicate v. Foweraker,  I K.B. 771; So also if a winding-up occurs before the debentures are issued the lender will be secured: Tailby v. Official Receiver (1888), 13 App. Cas. 523; Re Hampshire Land Co.,  2 Ch. 743. While these are true statements of the law in England I query given the statutory requirements in the Companies Act 1991 relating to registration which I have previously referred to, whether the principles stated in these cases can be of practical assistance.
When security enforceable
The security may become enforceable under the provisions of the trust deed or independently thereof. It will become enforceable under the trust deed if any of the events of default therein specified occur, for example, non-payment of principal or interest, failure to pay taxes, suffering an execution to be levied against the mortgaged premises, etc., and if any period of grace therein provided for following a particular default has expired. Independently of any provision in the trust deed the security becomes enforceable, so far as the mortgage of the corporation’s undertaking is concerned, if the corporation ceases to carry on its business: Hodson v. Tea Co. (1880), 14 Ch. D. 859 (appointment of a receiver); in re Crompton & Co.,  1 Ch.954 (resolution for voluntary winding-up for purpose of reconstruction).
The security may also become enforceable in another type of situation. If, for example, judgments have been recovered against the corporation and executions are likely to issue, the debenture holders are entitled to have a receiver appointed even though the corporation is not in default: In re London Pressed Hinge Co.,  1 Ch. 576; or where the corporation proposed to distribute its reserve fund, which was practically its only asset, among the shareholders; Tilt Cover Copper Co.,  2 Ch. 588; or where a winding-up petition is pending: In re Victoria Streamboats, Ltd.; Smith v. Wilkinson,  1 Ch. 158; or where a writ has been issued, other proceedings are threatened and the operations of the corporation are at a standstill.
This is called the doctrine of “jeopardy”, and the principle on which the court intervenes is that the debenture holders need not stand by and see the assets seized by unsecured creditors. It is not sufficient for the plaintiff merely to show that the proceeds of the assets if realized would be insufficient to pay off the bonds: In re New York Taxicab Co.,  1 Ch. 1; The power of the court to appoint a receiver manager on the ground of jeopardy is not dependent on the provisions of the trust deed. Whether a case of jeopardy has been made out depends on the circumstances of each case. The applicant must prove some peril to the property: Eastern Trust Co. v. Nova Scotia Steel & Coal Co. (1926), 59 N.S.R. 123. In that case the appointment of a receiver on the ground of jeopardy was refused. Proof of non-payment of interest, losses in the past, curtailment of operations in the steel department and the closing down of one of several plants, were regarded as insufficient grounds. Carroll J., whose judgment was affirmed on appeal, in contrasting the case with that of the Dominion Steel Company, where a receiver manager had been appointed, said at p.126:
“In that case, however, it was abundantly proven that the company was no longer able to carry on; its credit was gone; it could not get funds to carry on its business, and it was faced with the immediate prospect of having to close down with outstanding contracts unfilled. It was in a state of suspended animation. It was a case in which the business of the company had come to an end. That is not the case here. Here we have a going concern, a live corporation, operating the property, which property is not threatened by creditors.”
Remedies on security becoming enforceable
On the security becoming enforceable by reason of default or jeopardy the trustee or the debenture holders (to the extent that independent action by debenture holders is not precluded by the trust deed) have the remedies of a mortgagee. These remedies include an action on the covenant for payment and an action to enforce the security; in the latter type of action a receiver or receiver manager many be appointed by the court. Certain other remedies may in particular cases be considered. The trust deed may provide in the event of default for the appointment of a receiver or receiver manager or for possession and sale independently of proceedings in the courts. Proceedings for the winding-up of the corporation or in insolvency may also be taken. These courses of action I will come to presently.
Action to enforce the security
Such a proceeding is a mortgagees’ action and is subject only to the laws and the rules of practice in force in the High Court. This should normally be a most expeditious procedure as the nature of a Roman Dutch mortgage in this country is such as does not permit or even entertain an equity of Levitra redemption, the deed being in the form of a “willing and voluntary” self condemnation, the Court being required only to “strengthen and confirm” that condemnation. However, as commercial practitioners know to their chagrin, as do their clients, the courts have in recent times exercised greater and greater leniency in favour of the mortgagor so that the term “security” is less and less applicable to the Guyanese mortgage.
The usual and proper course, in most cases, is to bring an action against the corporation to have the trusts of the trust deed where there is one carried into execution, to have a receiver or a receiver manager appointed, to have it declared that the trustee or the debenture holder is entitled to a mortgage and charge on the property and assets covered by the trust deed or debenture, to have the mortgage and charge enforced by sale, and for an order directing the taking of the necessary accounts and enquiries. Forthwith after action has been commenced an application is made to the court on motion for the appointment of a receiver or receiver manager.
The usual acceleration clause, whereby in the event of default for a stated period the whole principal sum becomes due, is a cumulative provision and does not interfere with the right of foreclosure which becomes immediately exercisable on the occurrence of default.
Appointment of a receiver or receiver manager under the trust deed
The trust deed frequently provides in the event of default for the appointment in writing by the trustee of a receiver or a receiver manager. The debenture holders themselves may have the power under the trust deed to appoint a receiver or a receiver manager and, subject to the provisions of the trust deed, they have the right in a debenture holders’ action to seek such an appointment from the court.
Possession and sale
The trustee for debenture holders may, if the right is given by the trust deed, enter and take possession and sell in the event of default.
A debenture holder may, if principal or interest is due and unpaid, file a winding-up petition. Re Borough of Portsmouth Tramway Co.,  2 Ch. 362; and a debenture holder who has brought an action and obtained the appointment of a receiver is not thereby disentitled from petitioning to wind up.
Sometimes in order to obviate proceedings by the debenture holders and to save expense, the debenture holders, if the corporation is in liquidation, make an arrangement with the liquidator whereby he sells the assets and pays the claim of the debenture holders out of the proceeds.
Reconstruction with or without a sale
Upon the security becoming enforceable it may become clear prior to or following the institution of enforcement proceedings that a satisfactory sale of the mortgaged premises cannot be effected for cash. In such circumstances it may become necessary to attempt to bring about a reconstruction under which the mortgaged premises will be sold for securities of another corporation (which may be a corporation specially formed for the purpose) which will be distributed to the debenture holders, or the debenture holders will accept new securities of the existing corporation in lieu of their bonds or agree to some modification of their existing securities. (See Division K ss.217 and 219 et seq of the Companies Act 1991).
Where the trust deed contains adequate provisions enabling a stated majority at a meeting of the debenture holders to consent to what is proposed, such provisions will frequently be utilised to effect a reconstruction. Such a reconstruction requires the co-operation of the shareholders and possibly of other creditors as well as the requisite approval of the court.
Receivers or receiver managers may be appointed by the trustee or by the debenture holders, where the trust deed or the bonds so provide, or by the court in an enforcement action.
The law applicable to receivers and receiver managers is a vast study and cannot be gone into in depth here. Maybe on the next occasion if invited I could attempt to dilate on that topic. What can be usefully be included here, however, is a discussion of the provisions contained in Part III Division C of the Act that deal with receivers and receiver managers (ss. 272-284).
Receivers and receiver managers may be appointed by the court upon application of an interested person or may be privately appointed by a creditor pursuant to the authority granted to it in its debt instrument. Part III of the Act deals with receivers and receiver managers of both kinds.
Since court-appointed receivers and receiver managers are not appointed on anyone’s behalf, these statements of function would seem to apply only in the case of private appointments.
If a receiver manager is appointed, either by a court or privately, the corporation’s directors may not exercise those powers that the receiver manager is authorised to exercise so long as the receiver manager is in place (s.275). Generally, such a provision will not prevent the directors of the corporation from bringing an action seeking relief as a result either of the receiver manager’s allegedly improper appointment or his allegedly improper conduct while in office: Golden West Restaurants Ltd. V. Canadian Imperial Bank of Commerce,  5 W.W.R. 471
A privately appointed receiver or receiver manager must comply with the terms of the instrument pursuant to which he is appointed and any directions of the court. Specific provision is made in the Act for the court to make any order it thinks fit including directions on any matter relating to the duties of the receiver or receiver manager: (s.276). Such a receiver or receiver manager must also act honestly and in good faith and must deal with the corporation’s property in his possession or control in a commercially reasonable manner (s.278).
In the many other aspects of receivership law not dealt with in the Act, the developed law concerning receivers and receiver managers will be applicable. For instance, the Act says nothing about when a court should appoint a receiver or receiver manager or what the powers and duties of a court-appointed receiver or receiver manager should be nor does it deal with the question of whether a privately appointed receiver or receiver manager is the agent of the creditor or the debtor corporation. In connection with these and many other issues, the usual rules apply.
Receivers appointed under power
Receivers or receiver managers may be appointed by the trustee or by the debenture holders, where the trust deed or the bonds so provide, or by the court in an enforcement action. Very different consequences flow from the two modes of appointment.
Trust deeds securing bonds now invariably provide that the trustee may, in the event of default, appoint a receiver and, on such appointment, the instrument itself must be referred to for the powers and duties of the receiver. Such power must be exercised bona fide, otherwise the court will appoint its own receiver: Re Maskelyne British Typewriter Ltd.,  1 Ch. 133 (C.A.). The appointment of a receiver by debenture holders under their debentures does not necessarily prevent the court from appointing a receiver: In re “Slogger” Automatic Feeder Co.,  1 Ch. 478. A receiver appointed under an instrument is to act in accordance with that instrument and any direction of a court (s. 277).
Unless the trust deed states, as it ought, that the receiver is to be deemed the agent of the corporation he will be deemed to be the agent of the debenture holders or the trustee, who will be liable for any default on his part: Re Vimbos Ltd.,  1 Ch. 470. (debenture holders held to be personally liable for debts incurred by the receiver). If the receiver is the agent of the debenture holders he can claim remuneration from them.
A receiver appointed under a debenture which provides that the receiver is to be the agent of the corporation and confers upon the receiver express power to get in the property charged, can bring an action in the corporation’s name for that purpose: M. Wheeler & Co. v. Warren,  Ch. 840 (C.A.).
Where the receiver is expressly stated to be the agent of the corporation there is no personal liability of the receiver or trustee for debts incurred in carrying on the business, indeed s.281(1)(b) of the Act provides the receiver with an indemnity out of the assets of which he was appointed to be a receiver.
Receivers appointed by court
In an enforcement action the court may appoint a receiver or a receiver manager and in such case he is to act in accordance with the directions of the court (s. 276). See s. 279 of the Act for directions that may be given. I shall deal with the procedure presently. Where, as is usually the case, the business of the corporation is included in the charge, the court will appoint the receiver to act as manager of the business.
A receiver manager is empowered to carry on the business of the corporation for the purpose of realisation. It is his primary duty to preserve and carry on the undertaking as a going concern. A receiver manager will not be authorised to make large expenditures where this is not clearly beneficial to the estate. While a receiver ought to obtain the authorisation of the court before making large expenditures, yet where such expenditures have been made without authorisation but in good faith and have resulted in benefit to the property, the court would likely approve such expenditures.
The receiver will not be directed to manage the business unless the latter is by express terms or by implication included in the security: Whitley v. Challis,  1 Ch. 64 (C.A.). The business of the corporation will be included in the security if the latter covers the “goodwill” of the corporation, and it is important that the trust deed should so provide. The word “property” may be sufficient to include the goodwill or business of the corporation: Salter v. Leas Hotel Co.,  1 Ch. 332.
The duty of the receiver is to take possession of and protect the assets of the corporation comprised in the charge. He is responsible for negligence in administering the estate and reasonable care and ordinary business control are required.
The position of a receiver manager appointed by the court is thus described by Haldane L.C. in Parsons v. Sovereign Bank of Canada,  A.C. 160 at 167:
A receiver manager appointed, as were those in the present case, is the agent neither of the debenture-holders, whose credit he cannot pledge, nor of the company, which cannot control him. He is an officer of the Court put in to discharge certain duties prescribed by the order appointing him…
Effect of appointment on the corporation
The appointment of a receiver by the court leaves the corporation in existence, but deprives the corporation of all power to enter into contracts, or to alienate, pledge or otherwise dispose of the assets of which the receiver is put in possession. The corporation’s powers are in abeyance: Moss Steamship Co. v. Whinney,  A.C. 254.
The appointment of a receiver will ordinarily operate as a dismissal of the corporation’s servants: Reid v. Explosives Co. (1887), 19 Q.B.D. 264.
The appointment of a receiver does not necessarily put an end to all the corporation’s trading contracts. As the receiver is appointed to manage the corporation’s business, he is at liberty to continue with a contract or repudiate it: Parsons v. Sovereign Bank of Canada,  A.C. 160. If the repudiation of a contract would destroy the goodwill of the corporation, which it is the duty of the receiver to preserve, the court will not permit the repudiation. In re Newdigate Colliery Ltd.,  1 Ch. 468 (C.A.).
Procedure for appointment of receiver by the court
As soon as the writ in an action to enforce the security has been issued and served an application may be made to the court for the appointment of a receiver or receiver manager.
The order usually requires the receiver manager to give security to be fixed by the Court. It is usually desirable that the order should permit the receiver manager to act at once and before giving security.
I trust that I have succeeded in giving you an overview of the topic of debentures and some practical information. I have also endeavoured to draw to your attention to the specific provisions of the Companies Act 1991, which have a lot to say on the subject. Practitioners would be well advised to carefully study the Act before attempting to function in this area of commercial law as the pitfalls are numerous and serious.
On another occasion we could investigate the essential differences between fixed and floating charges and their effect when an event of default occurs. Also as we noted during my presentation the law relating to receivers and receiver managers is a complex study which itself would require far more time to examine than is available here.
Richard B Fields SC
(a) The main part of the text of this presentation is taken from Fraser & Stewart’s Company Law of Canada by Harry Sutherland 6th Edition amended to include references where appropriate to the Companies Act 1991 and to relevant local practices.
(b) Halsbury’s Laws of England Vol 6 Simond’s Edition was consulted for the purpose of confirming certain statements of the law.
(c) Companies Act 1991.
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Dated the 25th November 2000