DEBENTURE TRUSTEES

Lynne Counsell briefly outlines the nature of the debenture trustee and highlights
specific points relating to their powers and duties
(taken from Issue No 18  –  January 2002)

The meaning of debenture trustee
A company, if empowered by its articles, can issue stock as a form of debt security to raise funds. The term `debenture stock` is often used to describe such stock which is secured by a charge or mortgage whereas the term `loan stock` is used to describe stock which is not so secured. In this article the term `debenture trustee` simply means the trustee of debenture stock, namely stock issued as a loan security to secure the debts of the company. Debenture stock is merely borrowed capital consolidated into one mass for the sake of convenience. Instead of each lender having a separate bond or mortgage, he has a certificate entitling him to a certain sum, being a portion of one large loan; and generally debenture stock differs from a debenture in form rather than in substance.1`

For these purposes it is not necessary to explore the much-debated meaning of a debenture which at its broadest `means a document which either creates a debt or acknowledges it…[there is no] 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.2` However, the inclusion of debenture stock within the meaning of the definition of debentures has important implications under various statutes.

Under s.744 Companies Act 1985 `debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.` Quite apart from the fact that the charge created under the trust will have to be registered with the Registrar of Companies,3 numerous other provisions of the statute will thereby apply. For example, under s.402 a copy of the registrar’s certificate must be endorsed on every certificate of debenture stock. Under s.238 a copy of the company’s annual accounts, directors report and auditor’s report on the accounts must be sent to each of the company’s debenture holders not less than twenty-one days before the accounts are to be laid before the company in general meeting. Under paragraph 12 Schedule 2 Financial Services and Markets Act 2000 debentures and debenture stock are investments for the purposes of the statute, being instruments creating or acknowledging indebtedness4. Debenture stock could be the subject of a charging order for the purposes of the Charging Orders Act 1979 as under s.2 of that act assets that can be the subject of a charging order include stock. `Stock` includes `shares, debentures and any securities of the body concerned, whether or not constituting a charge on the assets of that body.5`

Advantages of a trust deed
Trustees will now invariably be appointed when debenture stock is issued to a large number of persons. The mechanics of such an arrangement are that under the terms of the trust deed the property of the company is mortgaged to the debenture holders to secure payment of the money owing under the debenture(s). The contract is between the company and the trustees6. The trustee holds the benefit of the covenant by the company to repay the monies on trust for the holders of the debenture stock.

In practical terms there are various advantages in appointing a trustee:

Monitoring
A professional trust corporation would be familiar with this type of arrangement and have the requisite expertise. Further, the trust deed would usually give the trustee the power to call for certain information from the company. The trustee(s) can thereby ensure the company is complying with its obligations perhaps more readily than an individual debenture holder might be able to ensure compliance. The company has the advantage that it only needs to deal with one person.

Enforcement
The security and all enforcement powers in respect thereof are vested in the trustee as a single entity acting on behalf of all the debenture holders. This enables a coherent enforcement procedure rather than a series of disparate actions by different debenture holders. This is an advantage to the individual holders as it ensures organised action and parity of treatment. The trust deed would usually provide that all holders are paid proportionately and one action by the trustee prevents some holders recovering and not others. It is an advantage to the company as it means it does not have to defend a series of actions for what might be a trifling breach of any one provision.7

Costs
Administration and enforcement by the trustee will be less costly than numerous parties dealing with the company.

Provisions of the trust deed
Corporate trustees will have standard form trust deeds containing the usual provisions as to the issue of the original stock, the creation of further stock, a covenant for payment by the company, the charge by the company over specific property, powers and restrictions in dealing with the charged property, the powers of any receiver appointed and distribution of monies to the stockholders. Provision will also be made for meetings of the stockholders.

The deed will have detailed clauses relating to the powers and the duties of the trustee(s). Such powers and duties are effectively the same for debenture trustees as for any other trustees. Specific clauses that call for comment are:

Remuneration
The relevant clause will provide for the rate of remuneration of the trustee, the date for payment and the payment by the company of all VAT, costs, charges, expenses and any disbursements paid by the trustee. s.28 Trustee Act 2000 does not affect the trustee’s right to remuneration under a specific charging clause. Normally a trustee has a lien over the trust fund for his proper costs and expenses including an indemnity against future liabilities8. However in respect of debenture trustees the position remains that the remuneration of trustees is not payable in priority to the claims of the stock-holders unless the trust deed so provides9.   s.29, which provides that remuneration must be reasonable, has no application where there is an express charging clause. By contrast s.31, which deals with expenses, does apply when there is an express charging clause and it could always be argued that expenses were not `properly incurred…when acting on behalf of the trust.` The final point on remuneration that is specific to debenture trustees is that the trust deed should specifically provide that the trustees will continue to receive remuneration after a receiver is appointed.10

Indemnities
The clause indemnifying the trustee from liability will be as wide as possible. s.1 Trustee Act 2000, which imposes a general duty on trustees to exercise reasonable care and skill, would appear to have little direct effect on debenture trustees as the circumstances in which the duty applies are circumscribed by the statute11 and the duty can be excluded by the terms of the trust instrument.12     s.192 Companies Act 1985 still applies whereby any provision is void insofar as it would have the effect of exempting a debenture trustee from, or indemnifying him against, liability for breach of trust where he fails to show the degree of care and diligence required of him as trustee. Under the section the standard of care is judged `having regard to the provisions of the trust deed conferring on him any powers, authorities or discretions.` Whilst the terms of the trust deed can seek to curtail the liability, this provision means the standard required is, in fact, a high one as the powers and discretions conferred on a debenture trustee are so wide. This must also be viewed in the context that the standard required of a professional trust corporation is more onerous than that required of other trustees.13

Delegation
The trustee will have the usual discretion to delegate when it is expedient in the interests of the stockholders to do so. Any liability attaching to the trustee in exercising this power will again be judged in accordance with s.192. Whilst the general duty of care under the Trustee Act 2000 would apply to a debenture trustee when appointing an agent, the exclusion of liability of the trustee under s.23 for any act or default of agents, nominees and custodians likewise applies. The combination of these provisions, together with the supervisory powers usually exercised by the debenture trustee, means that in practice few problems are likely to be encountered by a debenture trustee in exercising any powers of delegation under the trust deed.

The above illustrates the fact that for the most part debenture trustees are subject to the general principles of company and trust law. However, it also highlights the fact that the debenture trust occupies a unique position in terms of legal analysis and is a singular entity in many ways.

Lynne Counsell
9 Stone Buildings, Lincoln’s Inn

1 Re Herring [1908] 2 Ch 493 at page 497.
2 Levy v Abercorris Slate and Slab Co (1887) 37 ChD 260 at page 264. See Lemon v Austin Friars Investment Trust Ltd [1926] Ch 1 at page 15 (income stock certificates). For a discussion of the meaning of `debenture` see Pennington’s Company Law (7th Edition) Chapter 12. See Re Quest CAE Ltd [1985] 1 BCC 389 (monies due on unsecured loan stock issued to a third party and thereafter acquired by the debenture holder are not within the debenture).
3 s.395 Companies Act 1985. See also s.191 which deals with the debenture holders right to inspect the register.
4 By reason of the various exclusions a debenture trustee acting in that capacity would be excluded from carrying on a regulated activity in breach of the act See, for example, article 66 Financial Services and Markets Act 2000(Regulated Activities) Order 2001 (SI 2001 No. 544) (Trustees).
5 s.6(1) Land Charges Act 1979.
6 Re Dunderland Iron Ore Ltd [1909] 1 Ch 446 at page 452.
7 See Re Melbourne Brewery and Distillery [1901] 1 Ch 453 at pages 458-459.
8 X v A [2000] 1 All ER 490.
9 Re Accles Ltd (1902) 51 WR 57.
10 See Re British Consolidated Oil Corporation Ltd [1919] 2 Ch 81.
11 s.2 and Schedule 1 Trustee Act 2000.
12 Paragraph 7 Schedule 1 Trustee Act 2000.
13 Bartlett v Barclays Trust Co. [1980] 1 Ch. 515.