UK: England and Wales: Court of Appeal considers the meaning of 'debenture'

In a judgment delivered yesterday - Fons Hf v Corporal Ltd [2014] EWCA Civ 304 - the Court of Appeal considered the meaning of the term 'debenture'. The question of meaning arose in a dispute between the parties as to whether rights under unsecured loan agreements had been charged. The legal charge provided, amongst other things, that 'shares' were subject to the charge and a definition of 'shares' was given that included the word 'debentures'.

The Court of Appeal unanimously held that the rights under the agreements were subject to the charge, thereby reversing the decision at first instance (see [2013] EWHC 1801 (Ch)). Lord Justice Patten, delivering the leading judgment, observed that as a matter of language, "the term [debenture] can apply to any document which creates or acknowledges a debt; does not have to include some form of charge; and can be a single instrument rather than one in a series" (para. [36]).

Lady Justice Gloster considered whether loan agreements, either when originally entered or when novated, constituted debentures. In doing so she referred to the view that they could not be so regarded because no debt was created until drawdown and that, accordingly, there was no debt capable of acknowledgment at the time of the agreement. Her Ladyship rejected this view as "wrong, and unnecessarily technical. The obligation to repay clearly arises on execution of the loan instrument itself, albeit that such obligation may be contingent on drawdown actually taking place" (para. [50]).