Question 1

’In my opinion a debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a “debenture”. I cannot find any precise legal definition of the term, it is not either in law or commerce a strictly technical term, or what is called a term of art.’ (Per Chitty J, Levy v Abercorris Slate and Slab Co (1887) 37 Ch D 360)  Discuss.

Answer guidance

Here you need to consider definitions of a debenture, to identify what it means and includes. That will require an assessment of Chitty J’s statement, the statutory definition, and an appreciation of the types of debenture and their features.

Start by considering both the statutory definition (CA 2006, s. 738) and Chitty J’s definition – recognising neither is particularly informative, but highlighting the key points. Explain that the term covers a vast array of different instruments, thus making a clear and comprehensive definition particularly difficult.

A particular point you must address is the inclusion within the definition of both secured and unsecured debentures, and how that differs from common practice. Recognise that priority of debenture holders in insolvency will depend on whether they are secured or not, and whether any security is fixed or floating. You should also explain the different types of debenture: single, in series and debenture stock. You may also look at perpetual, redeemable and convertible debentures. You can add depth to your consideration of debentures by comparing them to shares as a method of investment and highlighting differences in their features and requirements such as maintaining a register.

Question 2

Fernando Ltd (F Ltd) operated a nightclub. In June 2014, Lola Bank plc (LB plc) agreed to allow F Ltd an overdraft on the security of a combination fixed and floating charge over the whole of F Ltd’s assets. The debenture was executed on 21 June 2014. The company secretary of F Ltd meant to register the debenture but forgot to do so. The failure to register the debenture was discovered in January 2015.

In December 2014, F Ltd created a second fixed charge over its leasehold premises in favour of Ravers Ltd (R Ltd) to finance the installation of a sound system. R Ltd was informed of the earlier charge to LB plc and noticed that the charge had not been registered when it applied for registration of its charge.

Advise the company secretary of F Ltd how best to secure the validity of the charge to LB plc and of the priority in respect of the two charges and of any unsecured creditors to whom the company became liable before the charge was late registered.

Answer guidance

This question requires you to consider the effect of failure to register charges within the requisite statutory period, the possibility and legal effect of late registration and the priority of charges. You will need to apply CA 2006, Chapter A1, inserted by the Companies Act (Amendment of Part 25) Regulations 2013.

For the LB charge, consider what charges are registrable (recognising now very limited categories of excluded charges: s. 859A(6)), the timescale for registration (21 days) and the consequences of failure to register (void as against a liquidator etc: s. 859H, but no longer a criminal offence).

Discuss the possible courses of action open to the company secretary. First consider an application to the court for late registration (s. 859F). Discuss the grounds for the application, the effect of late registration, and the possible terms and conditions of late registration. Consider cases such as Re Kris Cruisers Ltd [1949] Ch 138, Re Teleomatic [1994] 1 BCLC 90 and Barclays Bank plc v Stuart Landon Ltd [2001] 2 BCLC 316.  Also consider whether the company secretary could falsify the date on which the charge was created and register it within 21 days. Contrast Esberger & Son Ltd v Capital and Counties Bank [1913] 2 Ch 366, with National Provincial and Union Bank of England v Charnley [1923] 1 KB 431 and Re Eric Holmes (Property) Ltd [1965] Ch 442.

For the R Ltd charge, recognise that awareness of the LB’s charge does not affect the validity and priority of their registered charge: Re Monolithic Building Co [1915] 1 Ch 643. Consider the priorities between the two charges, looking at the dates of registration.