The Nature of Debenture

The nature of debenture

At law, debenture is any document issued by a company that evidences or acknowledges its indebtedness. In Companies Ordinance, debenture includes debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not. It need not contain any security. If the debenture issued as a deed, it will called a bond

Legal characteristics of debenture

Every trading company is assumed to have the power to borrow money unless its memorandum of association provides otherwise. Introductions Ltd v. National Provincial Bank Ltd [1970] Ch199 shows that if a company has power to borrow, it can also create debentures.

Usually, the debentures are long-term loans available form banks and deposit taking companies, and short-term finance in the form of bank overdrafts and trade credit.

If a company executes any document to evidence a financial transaction of this type, the document is a debenture.

Often a debenture is issued in a series to a large number of subscribers in order to raise a particularly large loan. Each person who takes a debenture will take the same rights against the secured property.

In such a case, each debenture would contain a pari passu clause that states that the debenture is one of series of a certain stated number of debentures, all of which rank equally. That means the company will regard the creditors as a class. If the company defaults in repaying the loan, one debenture holder can enforce the security, but only on the basis that all other debenture holders will share it.

- The requirement of registration of charges and consequences of failure to register a charge

By section 74A of the Companies Ordinance, any company which issues a series of debentures other must keep a register of the debentures.