Short Notes-Debentures DADA AFA

Write short notes on the following:

Debentures
Debentures form part of a company’s “loan capital”-section 80(1) of Act
179.
This means that debenture holders lend money to the company and
expect the company to pay back the amount borrowed by the company
and lent by the debenture holders.
A debenture is a document executed by a company as a deed in favour of
a creditor providing the creditor with security over the whole or
substantially the whole of the company’s assets and undertaking,
normally creating a fixed charge over the assets such as land and
buildings and a floating charge over the rest of the company’s assets such
as stock-in-trade and giving the creditor power to appoint a receiver with
authority to collect, run the company’s business and dispose of the assets.
Section 80(2) of the Companies Act provides that a debenture is a
written acknowledgment of indebtedness by the company setting out the
terms and condition of the loan.
The Act uses debenture in two senses. First it refers simply to debenture,
but it also refers to debenture stock (section 80(6)). A debenture stock is
a unit block of loan of a prescribed amount. The block of loan-the single
debt-i.e. the debenture.
Whereas the loan block is acknowledged by the document called the
“debenture”, each unit of the loan is acknowledged by a “debenture stock
certificate”.
Debenture is created when a company borrows the amount it requires for
the loan transaction from a single lender, usually a bank.
A debenture stock transaction occurs when a company borrows directly
from the public and when several persons buy the company’s debt
instrument.
A debenture is like a bank loan agreement with the company; a debenture
stock is like a public subscription for corporate bonds.
Debenture holders are creditors and not members of the company. They
are entitled to interest in their debentures whether the company earns
profit or not.
Debentures can be issued with no restrictions, but the issue of convertible
debentures should not be allowed as a means to issue shares at a
discount. For instance, if a debenture for 100 cedis is issued for a discount
for 90 cedis, that debenture cannot be exchanged for 100 shares at a
Short Notes-Debentures DADA AFA

value of 1 cedi per share because this will in effect amount to issuing
shares at a discount which is a prohibited transaction in shares.
Debentures may be issued in a series, for example during public offer.
They may also be issued as a single block, for example a debenture to
secure a bank loan or to obtain a fresh loan.
Difference between debenture and shareholders
1. They are creditors and not members, thus they have not the rights
ascribed to members. (no right to vote and attend general
meetings-section 80(6))
2. It is prohibited for shares to be issued at a discount, but debentures
may be issued at a discount.
3. Companies cannot purchase its own shares prima facie, but it can
be a term of the debenture that a debenture can be bought back by
the company.
4. Interests on debentures are paid whether the company declares
profit or not.
5. Interests paid on debentures are treated as an expense to the
company before profit.
Short Notes-Debentures DADA AFA

Convertible Debenture
They are issued with an option to convert to shares, in lieu of redemption,
upon such terms as stated in the debenture-section 85.
Non-Convertible
They cannot be converted into shares.
Perpetual
They cannot be redeemed by the company. For as long as the debenture
stays in the books in the company, the company is obligated to pay the
agreed interest of the company owes in accordance with the terms of
issue-section 84. It will therefore be redeemable upon expiration of the
period.
Redeemable
Can be redeemed by the company paying the principal and interest
thereof-section 84. Once redeemed the debenture may be cancelled or
re-issued in accordance with the contract of issue and regulations of the
company, unless it is forbidden by the Regulations of the company-
section 94(1) and (5). Where the redeemed debenture is re-issued, the
person entitled to the debenture shall have the same priority as if it was
never redeemed.
Naked Debenture
A naked debenture creates no charge on any of the company’s assets. (a
charge is an encumbrance-collateral or security for the loan). A receiver or
manager shall not be appointed as means of enforcing debentures not
secured by any charge (section 88(4)).
By Section 86(1), debentures may either be secured by a charge over
the company's property or may be unsecured by any charge.
Secured Debenture
Creates a charge over the assets the company. The charge can be fixed
(mortgage debenture) or floating charge. According to section 86(2) of
Act 179, debentures may be secured by a fixed charge on certain of the
company's property or a floating charge over the whole or a specified part
Short Notes-Debentures DADA AFA

of the company's undertaking and assets, or by both a fixed charge on

certain property and a floating charge.
A fixed charge is a loan of the company which is secured by a charge in
the form a legal mortgage over specific assets of the company such as
land, building, fixed plants and machinery. A major disadvantage is that a
company cannot dispose of the charge unless it secures the consent of
the creditor.
Section 87(1) of Act 179 defines a floating charge as an equitable
charge over the whole or a specified part of the company's undertaking
and assets both present and future, so however that the charge shall not
preclude the company from dealing with such assets until.
A floating charge is a charge that is not charged with any particular
identifiable assets of the company. Until the charge crystallizes. They are
not attached to the company’s assets, in particular, until the charge
crystallizes. The interest of the debenture holder to the asset of the
company is only an equitable one, and the company is free to dispose of
its assets without reference to the debenture holder. But upon
crystallization, the charge can be fixed on an asset which was in existence
at the time of the creation the charge instrument or an asset which was
acquired by a company after the creation of the charge instrument.
In Illingworth v. Houldsworth, Lord Macnaghten distinguished both
types of charges as follows:
“A specific charge, I think, is one that without more fastens on ascertained
and definite property or property capable of being ascertained and
defined; a floating charge, on the other hand, is ambulatory and shifting in
its nature, hovering over and so to speak floating with the property which
it is intended to affect until some event occurs or some act is done which
causes it to settle and fasten on the subject of the charge within its reach
and grasp”.
The Ghanaian position of the difference between a fixed and floating was
rendered by Edusei J in George Cohen(WA) Ltd v. Comet
Construction Co Ltd, Ghana Commercial Bank(Claimants) when he
pronounced that:
“And, what is a floating charge? A floating charge which is quite distinct
from a specific charge does not fasten on any definite property but is an
equitable charge on property which is constantly changing, for example,
stock-in-trade. Also in Gower’s Company Law (2nd ed.) at p. 390 it is
stated that a floating charge imposes a charge on property present and
future and it allows the company to continue to deal with that property in
the ordinary course of business. However, if the debenture holder, on the
happening of some event stated in the debenture takes steps to have the
Short Notes-Debentures DADA AFA

floating charge crystallised the charge then becomes a specific or fixed

charge”

Crystallization of A Floating Charge

Crystallization refers to the events which trigger a floating charge to
become fixed and enforceable.
It is an even event which operates to change a floating charge to become
fixed on an asset of a company. Cohen v Comet construction, Edusei J
said;
Crystallisation takes place, among other things, when a receiver is
appointed, and in such circumstances the company, and in this case, the
judgment debtors, cannot deal with the property comprised in the
security without the consent of the debenture holders.
The facts of the Cohen case (supra) as stated in the judgment are that in
June 1964, George Cohen (W.A.) Ltd., hereinafter described as Cohen,
recovered judgment in the High Court against Comet Construction Co.,
Ltd., hereinafter referred to as Comet, for a certain sum of money. The
amount was not stated in the judgment. In January 1965, not having
obtained payment, Cohen issued a writ of fi. fa. against the chattels of
Comet, namely, one Morris pick-up No. SG 3554 and one Morris tipper
truck No. SG 1059 and the sale was to take place on 6 July 1966. Before
the sale the Ghana Commercial Bank interpleaded and asserted that by
virtue of a debenture entered into on 1 February 1963 the said chattels
among others were secured to them by Comet. At the date of the issue of
the writ of fi. fa. the debenture had not been registered. On 12 August
1963 in exercise of powers conferred on the claimant Ghana Commercial
Bank by the debenture a receiver and manager was appointed and notice
of the appointment appeared in the Commercial and Industrial Bulletin No.
2 or the Ghana Gazette on 10 January 1964.
Short Notes-Debentures DADA AFA

Upon these facts Edusei J. as he then was, held that the security of the
debenture holder, the claimant in the case, crystallised upon the
appointment of the receiver and manager and as this was before the issue
of the writ of fi. fa. He held that the claimants had priority over the
execution creditors and ordered the vehicles to be released from
attachment forthwith.
Crystallization can take place per the terms stipulated by the debenture.
E.g. crystallization may occur by the effluxion of the time stipulated in the
debenture.
Where the loan is repayable on demand the charge will crystallize
automatically when the bank calls in the loan and the company is unable
to pay. The bank may then apply to the court to appoint a receiver to take
charge of the property and realize and pay the loan in line with section
88(1) of Act 179. Its effect is that, whenever a fixed or floating charge
has become enforceable the Court shall have power to appoint a receiver
and, in the case of a floating charge, a receiver and manager of the assets
subject to the charge
Where the company commences processes for winding up or if the
company stops operation, the charge will automatically crystallize and the
chargee may apply to the court for the appointment of a receiver. The
court may appoint a receiver when the security is in jeopardy although the
event of crystallization is not yet occurred-section 88(2)
Securities become enforceable when the terms of the loan agreement
permit the debenture holder to take steps to realise the security furnished
for the loan. The most common way to enforce security is default in
payment, i.e. when the company fails to repay the loan instalments or
amounts as and when they fall due. Delayed payment and non-payment
of borrowed moneys will entitle a security holder to enforce the security.
Security is in jeopardy when events occur or are about to occur which
satisfy the court that it is unreasonable in the interest of the debenture
holder that the company should retain the power to dispose of its assets-
section 88(3). It is immaterial that there has been no failure to pay for
security to be in jeopardy.
For example, if it comes to the attention of creditors that the company is
moving its assets o is being threatened by creditors with insolvency
proceedings or that serious overtures have been made by bidders to take-
over a company, the, despite the faithfulness of the company thus far in
meeting its debt obligations to the debentureholders, their security is
nevertheless in jeopardy.
But once the floating charge crystallized the assets which are subject to
the charge will be under the control of the receiver. Here the company
Short Notes-Debentures DADA AFA

cannot dispose of the assets and anyone who buys the assets takes it
subject to the interest of the debenture holder.