Is a loan agreement a “debenture” or even a “security”?

The High Court in Fons HF (in Liquidation) v Corporal Ltd and another [2013] All ER (D) 292 (Jun) ruled that a mortgage over securities issued by a company did not extend to a company’s rights under a shareholder loan agreement. The Court held that the loan agreement did not constitute a “security” or a “debenture” and therefore did not form part of the assets defined as “Shares” in the mortgage.

The Case

In 2007 and 2008, Fons HF (in Liquidation) (“Fons”) as shareholder of Corporal Limited (“Corporal”) provided two unsecured loans to Corporal (the “Shareholder Loans”). To secure its indebtedness to Kaupthing Bank Luxembourg S.A. (“Kaupthing”), in 2008 Fons provided Kaupthing with a charge over its shares in Corporal (the “Charge”). The benefit of the charge was transferred to Pillar Securitisation SARL (“Pillar”).

The Charge was described on its front page as “Legal Charge over Shares”. The charging clause included a charge by way of first mortgage over “the Shares” and “Distribution Rights”. The definition of “Shares” was as follows:

“All shares (if any) specified in Schedule 1 (shares), and also all other stocks, shares, debentures, bonds, warrants, coupons or other securities now or in the future owned by the Chargor in Corporal from time to time or any in which it has an interest”.

The Court considered various authorities which looked at the meaning of “securities” and “debentures”. The Judge found that in the case of “securities” most of the common law definitions referred to “documents or instruments either designed to be transmissible, or even to be of a bearer nature, or at least have about them a formality or quality demonstrative of making some underlying right more readily enforceable”.

As regards “debentures” he referred to Pollock MR’s statement in Lemon v Austin Friars Investment Trust Ltd [1926] Ch. 1 which referred to an instrument which was “to record indebtedness, to record the source from which that indebtedness is to be liquidated, and to show that the persons who are holders of the certificates are holders in a series and are to be paid pari passu, and that their names are to be recorded in a register.” He maintained that this supported the proposition that whilst an acknowledgement of indebtedness might be the primary qualification of a debenture, it may not be sufficient in itself to constitute one absent other indicators.

He believed that the ordinary businessman/company lawyer would be surprised to hear a simple loan agreement described as a “debenture” and concluded that the expression should not extend to a simple loan agreement without clear indications that the parties intended such an interpretation.

Comment

Whether a loan agreement could constitute a “debenture” has been, for some time, a matter of debate. Whilst a lot will depend on the context, this is a pretty robust rebuttal of the arguments that it does.