Analyzing the Legal Framework and Enforcement of Debentures in Nigeria: Implications for Secured Credit Transactions

CONTRIBUTED CHIBUEZE .K. JAMES

INTRODUCTION

A debenture is a medium to long-term borrowing instrument that allows big companies to borrow money at a fixed rate of interest. Originally used to describe a document that either creates or acknowledges a debt or an obligation, the legal term “debenture” is now sometimes used synonymously with bond, loan stock, or note in certain nations. Therefore, a debenture functions similarly to a loan bond or certificate of loan, proving that the company is obligated to pay a certain sum plus interest.

Generally, all companies are assumed to have the ability to borrow; in the event that this is not the case, a provision granting the company that ability will typically be found in the memorandum of association. The company’s borrowing capacity includes the ability to use its assets as collateral unless otherwise specified in the memorandum of association.^[1]

This article seeks to examine the development and enforcement of debentures in Nigeria and evaluate their usefulness as a secured credit transaction.

UNDERSTANDING DEBENTURE

A debenture has been defined as an instrument issued by the company, normally but not necessarily labelled as such, and providing for the payment of, or acknowledging the indebtedness in a specified sum with interest thereon.^[2] Also, pursuant to the CAMA 2020, a debenture is defined as a written acknowledgement of indebtedness by a company, setting out the terms and conditions of the indebtedness, and includes debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not.^[3]

The law specifically empowers the company to borrow money for the purpose of its business or objects. This power is coupled with rights inuring to the company including the right to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and issue debentures, debenture stock and other securities whether outright or as security for any debt, liability, or obligation of the company or any third party.^[4]

Also, a debenture can be fixed or floating, as well as secured or unsecured. A debenture is floating if it is not secured by a fixed or specific asset of the firm but rather by floating assets, either current or future. It is fixed if it is secured by a fixed or specific asset of the company.

Debentures secured on fixed assets of the company are often described as ‘mortgage debentures’ and would usually take priority over a floating charge affecting that property.^[5] The company’s land, land holdings, and ship may be used as security for a fixed debenture. Conversely, a floating debenture functions as an equitable charge over the entirety or a designated portion of the project or assets, such as cash and the company’s uncalled capital, both now and in the future.^[6]

While a floating debenture is a charge on the company’s undertakings, this does not restrict the company from dealing with the undertakings until certain events occur, such as the enforcement of security, appointment receiver or manager, transfer of assets ownership to the holder, or the company entering liquidation.^[7] The charge shall be considered to have crystallized and become a fixed equitable asset on the company’s assets that are subject to the charge upon the occurrence of any of these circumstances.^[8]

It is important to note that a trustee for each class of debenture holders is required when there are various debenture classes. According to the law, debentures that attach distinct rights will belong to separate classes, if they have different rights attached to them, such as the rate of interest or the dates on which it is to be paid; any right to subscribe for or convert the debenture into shares of the company or any other company; or the holders’ ability to realize any security.^[9]

The law is clear on the statements that must be contained in every debenture. They include;

1. the principal amount borrowed;
2. The maximum discount for issuing or reissuing debentures and the maximum redemption premium;
3. the rate of and the dates on which interest on the debentures issued shall be paid and the manner in which payment shall be made;
4. the date on which the principal amount shall be repaid or the manner in which redemption shall be effected, whether by the payment of instalments of principal or otherwise;
5. in the case of convertible debentures, the date and terms on which the debentures may be converted into shares and the amounts which may be credited as paid up on those shares, and the dates and terms on which the holders may exercise any right to subscribe for shares in respect of the debentures held by them; and
6. the charges securing the debenture and the conditions subject to which the debenture shall take effect.^[10]

Also, Statements defined in debenture or debenture stock certificates constitute prima facie evidence of the title to the debentures of the person listed therein as the registered holder and of the amounts secured by them. The statements serve as an estoppel against the company for anyone who relies on them and changes their viewpoint to their harm. The company cannot deny the continuous correctness of its representations and may be held liable for any losses incurred as a result of reliance on the statements.^[11]

TYPES OF DEBENTURES

Debentures are variously classified depending on who they are payable to; whether and when they are Redeemable; whether they are secured or not secured; and whether they are convertible or not convertible. Thus, debentures are classified as follows:

1. Perpetual Debenture: This is a type of debenture that is irredeemable and only redeemable upon the occurrence of a faraway contingency or the expiration of a long period.^[12]
2. Convertible Debenture: This type of debenture is issued with the understanding that, in lieu of being redeemed or repaid, it may be converted into shares at the holder’s or the company’s discretion, according to the conditions specified in the debentures.^[13]
3. Secured Debentures: These are debentures that are backed by a charge over the business’s assets, which could be a floating charge over the entire or a designated portion of the company’s enterprise assets or both. The charge could be fixed on certain firm properties.^[14]
4. Redeemable Debentures: This type of debenture clearly spells out the exact terms and dates by which the company must repay their debt in full.^[15]

REALISATION OF DEBENTURES

The essence of obtaining security is to provide the creditor with a realistic chance of recovering the loan in the case of the debtor’s insolvency. The form of charge used to secure the debt will determine in large part when a debenture can be enforced. That is, the time when a debenture may be realised is dependent on whether the charge is fixed or floating. The CAMA 2020 specifies the conditions under which the holder of the debenture may proceed to realise the security if it is secured by a fixed charge. These conditions are;

1. when the company fails to pay any sum outstanding (principal, interest, or other agreed sum) within a month after it becomes due;
2. when the company fails to fulfil any obligation imposed on him by the security instrument;
3. when circumstances occur which, by the terms of the security instrument, entitle the holder of the debenture to realise his security; or
4. when the company is wound up.^[16]

On the other hand, the holder of a debenture stock covered by a floating charge, or the trustees of the covering trust deed, can realise their security in the event of any of these circumstances under the CAMA, 2020. They include;

1. If the creditor of the company issues a process of execution against any of its assets or commences proceedings for winding up of the company by order of a court of competent jurisdiction;
2. the company ceases to pay its debts as they may fall due;
3. the company ceases to carry on business;
4. if the company suffers after the issue of security of the class concerned, losses or diminution in the value of its assets which in aggregate amount to one-half of the total amount owing in respect of the security of the class held by the debenture holder who seeks to enforce his security, and other securities whose holders rank before him for payment of principal or interest; or
5. if any circumstances occur which entitle a debenture holder, who ranks for payment of interest in priority to the security holders secured by the floating charge to realise his security.^[17]

The Companies and Allied Matters Act, 2020 further specifies how debenture holders can enforce their securities. When a debenture holder is entitled to realise their security, whether by a mortgage, charge, or other means, a receiver may be appointed for the class of debenture holders or the trustees of the covering trust deed.^[18] The receiver can be appointed by the trustee of the debenture holders, holders of the same class with the power to appoint, holders with more than half of the total amount owing for all debentures in the same class, or the court upon the trustees’ application. In addition to appointing a receiver for the business’s assets, debenture holders or trustees can file a representative application after acquiring permission from other holders against the corporation for payment and enforcement of the security, subject to any conditions specified in the debenture trust deed.^[19] A debenture holder may recover security by filing a foreclosure action against the firm.

CONCLUSION

In conclusion, while debentures have been a popular means for companies to raise capital, their appeal has waned in recent years. Unlike other forms of secured credit transactions, debentures are associated with complex processes for creation, management by trustees, and challenges in realization, which diminish their benefits.^[20]

In recent years, there has been a notable shift in the capital-raising strategies of companies. Many companies are now turning to public offers and private placements of shares as their primary means of raising funds. This shift is driven by factors such as the potential for higher returns and the opportunity for investors to participate in the ownership of the company, which shares offer.

As a result of this trend, debentures have become less fashionable among investors. Modern investors often prefer the dynamic nature of equity investments over the fixed-income nature of debentures. Consequently, debentures may be perceived as belonging to a bygone era in corporate financing, overshadowed by more contemporary and flexible capital-raising instruments.

It is important to note that while debentures may have lost some of their appeal, they still hold value for certain investors seeking stable, fixed-income securities. Despite their declining popularity, debentures continue to play a role in the financial markets, albeit to a lesser extent compared to previous years.

1. Introduction Ltd v. National provincial Bank Ltd (1907) Ch. 199 ↑
2. Palmer, F. G., & Schmitthoff, C. M. ‘Palmer’s Company Law’ (1976). ↑
3. Companies and Allied Matters Act 2020, Section 868(1). ↑
4. Companies and Allied Matters Act 2020, Section 191. ↑
5. Section 204 CAMA 2020 ↑
6. Section 203 CAMA 2020 ↑
7. Section 203(1) CAMA 2020 ↑
8. Section 203(2) CAMA 2020 ↑
9. Section 208(4) CAMA 2020. ↑
10. Section 193 CAMA 2020 ↑
11. Section 194 CAMA 2020 ↑
12. Section 196 CAMA 2020. ↑
13. Section 197 CAMA 2020. ↑
14. Section 198 CAMA 2020 ↑
15. Section 199 CAMA 2020. ↑
16. Section 232 CAMA 2020 ↑
17. Section 232(2) CAMA 2020 ↑
18. Section 233(1) CAMA 2020 ↑
19. Companies and Allied Matters Act 2020, Section 233 (2) ↑
20. RM Goode, ‘Legal Problems of Credit and Security’ (1982) ↑