Page:EB1911 - Volume 07.djvu/926

 governed by the Companies Clauses Acts, have only limited powers of borrowing.

An implied power of borrowing, even when it attaches, is too inconvenient to be relied on in practice, and an express power is always now inserted in a joint stock company’s memorandum of association. This power is in the most general terms. It is left to the articles to define the amount to be borrowed, the nature of the security, and the conditions, if any,—such as the sanction of a general meeting of shareholders,—on which the power is to be exercised. Under the Companies Act 1908, § 87, a company cannot exercise any borrowing power until it has fulfilled the conditions prescribed by the act entitling it to commence business: one of which is that the company must have obtained its “minimum subscription.” A person who is proposing to lend money to a company must be careful to acquaint himself with any statutory regulations of this kind, and also to see (1) that the memorandum and articles of association authorize borrowing, and (2) that the borrowing limit is not being exceeded, for if it should turn out that the borrowing was in excess of the company’s powers and ultra vires, the company cannot be bound, and the borrower’s only remedy is against the directors for breach of warranty of authority, or to be surrogated to the rights of any creditors who may have been paid out of the borrowed moneys.

A company proposing to borrow usually issues a prospectus, similar to the ordinary share prospectus, stating the amount of the issue, the dates for payment, the particulars of the property to be comprised in the security, the terms as to redemption, and so on, and inviting the public to subscribe. Underwriting is also resorted to, as in the case of shares, to ensure that the issue is taken up. There is no objection to a company issuing debentures or debenture stock at a discount, as there is to its issuing its shares at a discount. It must borrow on the best terms its credit will enable it to obtain. A prospectus inviting subscriptions for debentures or debenture stock comes within the terms of the Directors’ Liability Act 1890 (re-enacted in Companies Act 1908, § 84), and persons who are parties to it have the onus cast upon them, should the prospectus contain any misstatements, of showing that, at the time when they issued the prospectus, they had reasonable grounds to believe, and did in fact believe, that the statements in question were true; otherwise they will be liable to pay compensation to any person injured by the misstatements. A debenture prospectus is also within the terms of the Companies Act 1908. It must be filed with the registrar of joint stock companies (§ 80) and must contain all the particulars specified in § 81 of the act. (See .)

The usual mode of borrowing by a company is either on debentures or debenture stock. Etymologically, debenture is merely the Latin word debentur,—The first word in a document in common use by the crown in early times admitting indebtedness to its servants or soldiers. This was the germ of a security which has now, with the expansion of joint stock company enterprise, grown into an instrument of considerable complexity.

Debentures may be classified in various ways. From the point of view of the security they are either (1) debentures (simply); (2) mortgage debentures; (3) debenture bonds. In the debenture the security is a floating charge. In the mortgage debenture there is also a floating charge, but the property forming the principal part of the security is conveyed by the company to trustees under a trust deed for the benefit of the debenture-holders. In the debenture bond there is no security proper: only the covenant for payment by the company. For purposes of title and transfer, debentures are either “registered” or “to bearer.” For purposes of payment they are either “terminable” or “perpetual” (see Companies Act 1908, § 103).

The Floating Debenture.—The form of debenture chiefly in use at the present day is that secured by a floating charge. By it the company covenants to pay to the holder thereof the sum secured by the debenture on a specified day (usually ten or fifteen years after the date of issue), or at such earlier date as the principal moneys become due under the provisions of the security, and in the meantime the company covenants to pay interest on the principal moneys until payment, or until the security becomes enforceable under the conditions; and the company further charges its undertaking and all its property, including its uncalled capital, with the payment of the amount secured by the debentures. Uncalled capital if included must be expressly mentioned, because the word “property” by itself will not cover uncalled capital which is only property potentially, i.e. when called up. This is the body of the instrument; on its back is endorsed a series of conditions, constituting the terms on which the debenture is issued. Thus the debenture-holders are to rank pari passu with one another against the security; the debenture is to be transferable free from equities between the company and the original holder; the charge is to be a floating charge, and the debenture-holders’ moneys are to become immediately repayable and the charges enforceable in certain events: for instance, if the interest is in arrear for (say) two or three months, or if a winding-up order is made against the company, or a resolution for winding-up is passed. Other events indicative of insolvency are sometimes added in which payment is to be accelerated. The conditions also provide for the mode and form of transfer of the debentures, the death or bankruptcy of the holder, the place of payment, &c. The most characteristic feature of the security—the floating charge—grew naturally out of a charge on a company’s undertaking as a going concern. Such a charge could only be made practicable by leaving the company free to deal with and dispose of its property in the ordinary course of its business—to sell, mortgage, lease, and exchange it as if no charge existed: and this is how the security works. The debenture-holders give the directors an implied licence to deal with and dispose of the property comprised in the security until the happening of any of the events upon which the debenture-holders’ money becomes under the debenture conditions immediately repayable. Pending this the charge is dormant. The licence extends, however, only to dealings in the ordinary course of business. Payment by a company of its just debts is always in the ordinary course of business, but satisfaction by execution levied in invitum is not. This floating form of security is found very convenient both to the borrowing company and to the lender. The company is not embarrassed by the charge, while the lender has a security covering the whole assets for the time being, and can intervene at any moment by obtaining a receiver if his security is imperilled, even though none of the events in which the principal moneys are made payable have happened. If any of them has happened, for instance default in payment of interest, or a resolution by the company to wind up, the payment of the principal moneys is accelerated, and a debenture-holder can at once commence an action to obtain payment and to realize his security. At times a proviso is inserted in the conditions endorsed on the debenture, that the company is not to create any mortgage or charge ranking in priority to or pari passu with that contained in the debentures. Very nice questions of priority have arisen under such a clause. A floating charge created by a company within three months of its being wound up will now be invalid under § 12 of the Companies Act 1908 unless the company is shown to have been solvent at the time, but there is a saving clause for cash paid under the security and interest at 5%.

Trust Deeds.—When the amount borrowed by a company is large, the company commonly executes a trust deed by way of further security. The object of such a trust deed is twofold: (1) it conveys specific property to the trustees of the deed by way of legal mortgage (the charge contained in the debentures is only an equitable security), and it further charges all the remaining assets in favour of the debenture-holders, with appropriate provisions for enabling them, in certain events similar to those expressed in the debenture conditions, to enforce the security, and for that purpose to enter into possession and carry on the business, or to sell it and distribute the proceeds; (2) it organizes the debenture-holders and constitutes in the trustees of the deed a body of experienced business men who can watch over the interests of the debenture-holders and take steps for their protection if necessary. In particular it provides machinery for the calling of meetings of debenture-holders by the trustees, 