Bond Law Review Volume 6 | Issue 2 Article 3 12-1-1994 Redemption and Re-Issue of Debentures: Its Effect on Security Transactions Rod Howell Andrew Jones Recommended Citation Howell, Rod and Jones, Andrew (1994) "Redemption and Re-Issue of Debentures: Its Effect on Security Transactions," Bond Law Review: Vol. 6: Iss. 2, Article 3. Available at: http://epublications.bond.edu.au/blr/vol6/iss2/3 This Article is brought to you by the Faculty of Law at ePublications@bond. It has been accepted for inclusion in Bond Law Review by an authorized administrator of ePublications@bond. For more information, please contact Bond University's Repository Coordinator. Redemption and Re-Issue of Debentures: Its Effect on Security Transactions Abstract When corporations issue debentures to raise debt finance they may subsequently become holders of their own debentures either by repurchasing them or by taking them as security for loans advanced to third parties. In addition, if corporations are allowed to hold their own debentures there may be an opportunity to offer them as security. This paper examines the effectiveness of such transactions. The focus is on the effect of common law principles and the application of s 1051 of the Corporations Law. This section allows corporations to redeem their debentures and to re-issue them without it being regarded as an issue of new debentures. Keywords debentures, redemption, re-issue, section 1051, Corporations Law This article is available in Bond Law Review: http://epublications.bond.edu.au/blr/vol6/iss2/3 REDEMPTION AND RE-ISSUE OF DEBENTURES: I T S EFFECT ON SECURJN TRANSACTIONS BY Rod Howell Allen Allen & Hemsley and Andrew Jones Baker & McKenzie Howell and Jones: Redemption and Re-Issue of Debentures Introduction Whencorporations issuedebentures toraisedebt financetheymay subsequently become holders of their own debentures either by repurchasing them or by taking them as security for loans advanced to third parties. In addition, if corporations are allowed to hold their own debentures there may be an opportunity tooffer them as security.This paperexamines theeffectiveness of such mnsactions. The focus is on theeffcct of common law principles and the applicationofs 1051oftheCorporationsLaw . Thissectionallowscorporations to redeem their debentures and to re-issue them1 without it being regarded as an issue of new debentures.2 To this date there has been little, if any, commentary on s 1051. It is necessary to determine the effect of the section and then to identify the conceptual difficulties that seem to arise from its operation. We will focus on the issuer holding and the various types of instruments that fit within the definition of debentureas defined in s 9 of the Corpornrionr Law. In addition, we will consider conflicts where debentures are used as security. This paper seeks to identify the intention of the legislature in drafting the provisions and to develop possible solutions to conceptual difficulties. Definition and Nature of Debentures A 'debenture' is a document which either evidences or acknowledges the creation of a debt3 or makes provision for the repayment of a loan to be made in the future.4 A definition such as [his has a very wide application and 1 2 3 4 corpororionrLmv s lOSl(l). Ibid ~ ( 2 ) . Thoy akommin q u a 1 p i o n l y as if !hey wcre ncvcr m i m e d , assuming h a r !hey am debentam ihat rank pari.passu. If nm. h a y would nnk in order of !hsd a l a h e y were first issued: 4). They arenearly always ranked pati-pssu in orda toenhance markeiability: sea Schmiirhoff Palmis Cowny Law, 2A!h od pars 44-16. and Stovm~, Levy v Abrrconis Slorr & Slo6 Co (1887) 37 Ch D 2il pcrChilly J at 264 ' L ,my opinion a debentoremeas a d-mcnt which eihcr creates s debt or acknowledga ii, and any documart which f s i d h a of !h- conditionr is a'dsbon!um'. I cannot fmd any irzecisc lcsal delinition of h c t c m . .. it is noi e i h c r in law or commorcs a swiciiy ischnisal lam. or what is c a l l 4 a term of a n . 'C a m p a n h i s common law definition wiih !he dictimary defmitia which says a 'debenlure'is essentially an ~ d n o w i o d m mofindtbminess l and a mvonanc r o p y orrepay: S w d , l ! d c i o l Dicliomq (4!h ed) ( 1 9 7 2 ) v o l 2 In HondruslPtyUd v Comptroll~roJSiampr(1985) 10 ACLR 207 h e High Coun majority ( G i b h U dissmxiningl held ihai h e relevmi i n s ~ m o n i were s not dutiable ar d c h s n t u a as h e y did na acknowledge, cmxc or scivre an existing dcbi and did not pmvidc for !he future repayment of a loan. See xiso !he east of E h n d r v Bloino Fwm6es (I 887) 36 Ch D 215. - Produced by The Berkeley Electronic Press, 1994 148 1 RELXMmlON AND MiSSUE OF DEBEMURES Law Review, 11sEFFECT ON S E C UBond ~~RAN SAC ~ONS Vol. 6 [1994], Iss. 2, Art. 3 definitions in the company codes in England and Australia became inclusive in an attempt to refine the definition. For example, in the previous English companies legislation a 'debenture' included 'debenture stock, bonds, notes and any other securities of a corporation.' It has been argued5 that past definition hindered rather than eased the process of determining the scope of 'debenture' as it was used in those statutes.6 Section 5(1) of the Australian Companies Codediscarded the term 'and any other securities' to reinforce the point that the essential nature of a debenture is the creation or acknowledgment of debt. Section 9 of the Corporadons Law goes further and dispenses with any inclusive definition at all. It adopts a definition of debenture that is closer to the original dictionary meaning. Essentially, a debenture is defined as a document that either acknowledges or creates the indebtcdncss of the issuer, for money lent or deposited with it. Thisacknowledgmentmay entall some form of security over property7 and may also take the form of debenture ~ i o c k . ~ Because of the wide. non-inclusive definition. the Cor~orarions Law goeson toexcludecertaindocumcnts. Oneimportantexception aredocuments issued by banks9 acknowledging debts incurred in the ordinary course of business. Bank certificates of deposit will not be debentures and therefore s 1051will not apply to them. Certificatesofdepositarereccipts whichcvidcnce the contract of a depositor with a bank and as such they areevidenceof achose in action which potentially could be assigned or offered as security.1° In addition, thereceipt may be a negotiable instrument if it is regarded as such by the market.11 The only way documents acknowledging or creating a debt issued by banks could be debentures is if they arise out of extraordinary business activities in which case, s 1051 would apply. Section 1083 excludes theoperation of certainprovisions, including s 1051,only when it isanactivity within the ordinary course of banking. In any case it is unlikely that a bank would issue debentures outside the ordinlvy course of i s business as there would beproblems with thcirmarkctability.Thcdcbentureholders would rank 5 6 SoolK Amitage, The Dobanrue T w r Dead. 01 10 of Austin 8: Vann. The L a w o/Pubiic Company Fi-e (1986) l a w B d Company, a i 289. Thc cascs of Knighrrbridge Esulrs T m i Ltd v B y r j1940j ~ AC 631 and Compiruiier o,fSivmps (VkJ vN&veiPlyLld(1984) 84 ATC4338, a t Full Covn icvci. bolh hcid the words. 'and any 7 reference to'smuritios' Li %Ac 1~1cvanl S I Duties ~ Act was m m n LO suppianent tho casego.% of dcbcnruics -'siocks, bonds, and noia'. and shwid no?bc icad as cniarging the scope of debcntvru to i n c i v d c d ~ u m m u that a,cdiffcrm, incharactcr l o these caiogonc5. Tnc word 'charge' is urcd and is dcrincd widsly as a charge c i e a l d 'in any way including a 8 9 i0 mmgnge': r 9. Scc M o w undoi: (ii) 'equitable chmo Li acnoii'. Section 9 'debeniuic'dcrrition: para (c). Also crciudcd are chyuu,payrncnl ordcw bdls of exchange and piomissoiy nates of face va1ve of moic than $50 MO: para (d) and (4 S a discussion below M how to assien 'leeai c h a o s in aciion'. Su: also Am'na v Annina (1907) 4 http://epublications.bond.edu.au/blr/vol6/iss2/3 2 after depositors in the event of liquidation. The Banking Act12 imposes aduty on theReserve Bank to protect depositors13 and allows the Reserve Bank to call for information from a bank in order to aid them.14 A bank is required to notify theReserve Bank where it considers it is unlikely to be able to meet its obligations. As a result the Reserve Bank may investigate the affairs of the bank, take control of it and a n y on its business until depositors have been 1e~aid.15Section 16gives deposit holders a prior claim over the assets of the bank.16 This paper is therefore directed at corporations other than banks. The wide definition of debentures in s 9 directs attention to three possible types of interests which may underlie a debenture: i) ii) iii) legal choses in action, equitable choses in action, and negotiable instruments. Howell and Jones: Redemption and Re-Issue of Debentures The smctureof Euromarketdebentureissues also requires separateexamination as the resultant right of 'debenture' holders is unique. Understanding thenature,methodandconsequencesofassigningthese interests is necessary if we are to analyse transactions involving a corporation reissuing and redeeming its debentures. This will be particularly relevant s security by the corporation which where debentures are offered or taken a issues them. (i) Legal Chose in Action Alegal chose in action is an 'incorporeal bundle of rights enforceableby action for debt in the courts of common law.''7 By this we mean that the property is intangibleand incapableof being held physically. The owner has an intangible right of action to recover the debt owed.18 A legal chose in action can be assigned even though it is not tangible. It may be assigned either at law or in equity however, to assign at law, it must beapresent existingpropriem right which is either vested or contingent.'9 This is because the common law does notrecognise theassignmentof future property. If it was not apresentexisting right it can only be assigned in equity if thcre is consideration and the properly is clearly defined. Equity will then enforce it as an agreement to assign in the future.20 To assign at law, the assignment must be expressed to be of the 1959 (Cth) O i v 2 lbid r 12. Ibid s 13. ReswcBank may act on advice of Aiiomcy General as weU. R D S P NBan* ~ Acr 1959 (Oh),s 86. Debs due to the Raerve Bm* are also rubjut to s 16 of the E d n g Acr 1959 (Cth). Everut D,'Sacwity ovcrBonling Dapsirr'(1988) Ausi Bus L R w ar 352. For a concise discursion of the nntiiie of chosa in action set: Evaeu & McCracken. Pi-id Inrti~~iomlmr. (199O).plZ.-131.For a bmadcr discusion of dealings wiih !hem rcr: Sykcs. The Lmu ofsecuritier, (1986). C h a w r 16. Per Wideyer 1 i n N o m n v FCT (1963) I09 CLR 9 at 26. Ibid Per Windeyci and McTicman 11. Produced by The Berkeley Electronic Press, 1994 3 REDEMmlON ANDBond RE-ISSUE Of DEBEMURES Law Review, IIS EFFECT ON SECURIWIPAMACIIONS Vol. 6 [1994], Iss. 2, Art. 3 present existingright to something in the future,z1 which in our case would be the right to the principal and interest. In order to assign a chose in action at law certain formalitiesneed to be met under statute.22 There must be: an absolute assignment,23 not by way of charge, in writing, signed by the assignor, and notice in writing given to the debtor either by the assignor or the assignee.24 In addition, the Corporations Law also requires similar formalities to be met for a valid uansfer of a 'marketable security.' Section 1091 requires a proper instrument of uansfer to be delivered tothecorporation except in casesof transmission by operation of law. It will only be a proper insnument of uansfer if in relation to 'marketable securities', it complies with ss 1100-1105. 'Marketable securities' is defined in s 9and s 1097(1) to include 'debentures'. Thceffect of thesections is torequire notice t o be given to the corporation so that it may record the transfer on its register of debenture holders.25 It also imposes ad valorem stamp duty. The transfer of adebenture that isnota negotiable instrument will becompleted by means of a form under ss 1097-1I 12. If these requirements arc not met, equity may help.26 If there is consideration, then all that is required is a clear evincing of intention to assign and there would be a valid and enforceable contract which equity could enforce. This is bascdon themaxim: equity looksas done that which ought to bedonez7 Anotherrequirement is that the property assigned mustbeproperly, specifically and precisely identificd.28 Where there is no consideration for the assignment there may be a voluntary equitable assignment if the donor of the gift has done all that he or she must do.29 which is essentially, to execute the 21 See crampicr: Shephardv FCT(I965) 113 C I R 385 ~fp~su ri aristvlg nghi L o 22 Traditionally, debu cooid not be assigned as fhcy were rogaidcd as a penonal relationship between cicdiioi and debtor. Now under suiuie whoic d r h can be asaisncd a%law eiamalc: l d c o l w e Act 23 24 25 26 27 28 29 N o m n v F C 7 (196% 109 C 1 4 9 poi Windeyer J. is n n neulcd under tho smiu!~:Grey u A&~lmlian Motor~s and ~ EiprvheCorpororionriLmv d m s npurcharcd shares to hc sancdicd SAC 4. . http://epublications.bond.edu.au/blr/vol6/iss2/3 10 strong possibility that acompany that has repurchased its own debentures will not even account for them on its balance sheet. A debenture is normally contained on the liability side of an issuing corporation's balance sheet. 'Liability' is defined as: future disposition of economic benefits that a reporting entity is pesently obliged to make t o other entities as a result of past nansactions or other past events. Howell and Jones: Redemption and Re-Issue of Debentures Whenacompany repurchases its own debenturesthereisnodisposition that is required to be made 'to other entities'. A company will only owe a debt to itself. Similarly the accounting standards say that 'assets' are: service potential or future economic benefiu controlled by the reporting entity as a result of past transactions. It is unlikely that there is any 'future service potential or future economic benefit' to a corporation that owes itself a debt. The ability of the issuer of negotiable instruments to hold its own instruments, is supponed by the fact that there is a greater potential for circulation of them. More importantly, along with this increase in circulation, negotiable instruments have the benefit of title enhancement which normal legal and equirable choses do not. By allowing the issuer of non-negotiable debentures to also be a holder of them the legislation is artificially promoting the attribute of ease of circulation without the safeguard of titleenhancement. This seems an odd conclusion considering the Corporations Law seems to recognise the difference between negotiable instruments and other legal or equitable choses in action.@ Debenture issues in the Euromarket The legal structure of Euro issues of debentures is quite different to a normal debentureissue. It was suggested above that a debenture holder under a global note issue is not a creditor of the borrowing company. Rather, each debenture holder has a right to a specific number of debentures or a specific value of the global note held by the clearing house. Under this scenario when a borrowing company purchases'debentures'in itsown company itisonly really purchasing a conuactual right, or chose in action, against the clearing house. Before default of the borrowing corporation there is no conceptual difficult. After default the legal relationshipschange.Theglobalnoteis cancelled and the deed poll comes into operation giving each debenture holder aright to o an sue on the covenant in the deed poll, thus convening the interest in t ordinary debenture.AfterdefaulttheBillsofExchange ACI and theCorporations 69 Sep CorporntionrLms i Il0(5) re: transfer ofdehcniui-. Produced by The Berkeley Electronic Press, 1994 15811 REDEMPllON AND RE4SSUE OF DEBEMURES Bond Law Review, Vol. nS EFFECT ON SECURiiYTNINV\CllONS 6 [1994], Iss. 2, Art. 3 Law will apply with the same result. This may allow an issuing corporation to hold its own Eurodebentures. If the interpretation of s 1051 of the Corporalions Law and s 66 of the Bills ofExchange Act is that a debenture is able to be held by its issuer before maturity, two results follow: i) ii) Thecorporation may beabletotakesecurity over itsowndebentures for advances made by it to another ennlity. Theissuerholdsarightofactionagainst itselfwhich isnotcancellcd (as would be the case at common law) and as such there is the possibility that it can be offered as security for loans or advances made to itself. Debentures as security There are two types of transaction to be dcalt with: i) ii) Wherea corporation takes its own debentures as security for a loan or advance it has made. Where a corporation offers its redeemed debentures as security for a loan or advancc made to it. Before examining each of these transactions it is useful to consider briefly the nature of purponed security transactions with respect to the various instruments that fit within the definition of debenture. (ii Nature of transacrions wilh debentures Mortgage (Assignmenrj A mortgage is simply an assignment of property to the creditor, as security, withanequitablerighttorcdeem thcproperty upon satisfactionofthedcbt.The assignment of the property will be in !he same form as discussed for each definition of debenture.70 It seems that a mortgage of a debenture is possible no matter whether it is a bare legal or equitable chose in action, or a negotiable instrument. Themortgageofadebenture mayrequireregistration.Section262(1)(f) of the Corporalions Law requires charges7' on 'book debts' to be registered, however, 'book debts' do not include 'marketable securities' or negotiable instruments.72 Debentures are included within the definition of 'marketable security'73 and therefore, charges on dcbcntures are not able to be registered ascharges on book debts. Section 262(l)(g), however, requires regisuation of 70 71 72 73 D u h m Brothers vRoberuon. (18981 !QB 765 a! 772(CA): Tamradond Om v Ddgoo Bay ond Err! A/"co Rnilwn). Co (1889) 23 QUU 239 ai 242. Chargc is givm a wide dorm;" i n m 9 PO inc!udo'mongagtx'. Smtion 262(4) Coipororionr L a . Ibid r 9. http://epublications.bond.edu.au/blr/vol6/iss2/3 12 charges on 'marketablesecurities' and is supported by s 262(1)(d)?4 Section 262(1)(g) excludes from registration: i) ii) a charges created in whole or in part by the deposit of a document of title to the marketable security: or amortgageunder which the marketablesecurityisregisteredinthe name of the chargee. Howell and Jones: Redemption and Re-Issue of Debentures It appears that registration, with respect to mortgages of negotiable instruments, is limited to cases where it is effected in equity where the debentureis notdeposited with the mortgagee. A legal mongageofadebenture in the form of a legai chose in action would require registration of the transfer75 to the mortgagee as discussed above. This is clearly excluded in paragraph two. Churge A charge is different in character to a mortgage. The essential point ID note is that no title in the property is passed to the chargee. As Lord Atkin stated in National Provincial and Union Bank of England v C h ~ r n l e y : ~ 6 ...the creditor getc no legal right of property, either absolute or special, or any legal right to possession, bur only gcts a right to have the security made available by an order of the Court. The view is supported by Day J in Burlinson v Hall:77 By a charge the title is not transferred. but the person creating the charge merely says that out of a particular fund he will discharge a particular debt. No formalrequirements7*are neededexcept inrelation tolandand that the chargee's right arises out of cither a contract or a trust?9 Theresultisthatachargeoveradebentureispossiblenomatter whether it is a legal or equitable chose in action or, a negotiable instrument. As for registration, it appears that the exclusions in s 262(1)(g), above, will not necessarily apply if the charge is effected simply by contract and therefore it should be registered. Section 262(1)(a) requires registration of all floating charges over any type of property. If the charge is not registered it will not be protected by the rules regarding priority in the Corporations Law.80 74 75 76 77 78 79 80 which m , ~ i i a mbgirua"a a thing in anion on Pcsmal chatieli which kcluda a documrnr evidcncvlg and 1 mahuable security: r 262(3). A legal vansfei ofm mahciabie security must be in accordance with tho Corporoiionr L a . ss 1091.11M. 1101.SccahoSchcdulc2Fomr 1-4. [I92411 KB 431 at449-450. (1884) 12 QBD 347 at 350. Everat D,'secwiry overBanting Dapoarr'(1988) Ausl Bus L Rev at 358 citing Stark- I in P d m r Y Carey (1924) 3 4 CLR at 392 quoiuig fiilby v O f i i a l Receiver (1888)13 A@ C a r at 543. lbid citing Stahs I in P u l m r Cora at 392 (foicaruacu!and Issacs I st 390 (foruusu). Section 279-282. An rnngisicrcd ~ h q ~ m 1a;eptiotiiy a y to a regisiercd chaigesubjectio s 2 8 0 ( l ! ( b ) . Produced by The Berkeley Electronic Press, 1994 13 REDEMPTIONANORE-ISSUE OF DEBEMURES EFFECT ON Y C U R ( T Y T ~ ~ C T I O N S m Bond Law Review, Vol. 6 [1994], Iss. 2, Art. 3 Pledge It is a well established principle of law that a pledge can only be taken over something which is capable of delivery and physical possession.81 The judicial definition of a pledge makes the same assumption. In Donald v S~ckling,~ Shee 2 J states: A [pledge] is defmed by Sir William Jones (OnBailments,ppl18-136) to be 'a bailment of goods by a debtor to his creditor to be kept by him till his debt is discharged'...;and by Lard Stair (Institutio~oftheLmuofScotland, bii tit. 13,s.1 I),'... or in thecaseofnot-payment of thedebt, to sell the pledgeandpay h i e l f out of the price'; and by Bell (Principles of the Lmu of Scotland, ss 1326.1363;4th 4.. p.512). 'areal right orjus in re. inferior to property, which vests in the holder apower over the subject, to retain it in security of thedeht for which it is pledged, and qualifies so far and retains the right of property in the pledger or ownei.83 From this we can see that where a debenture is a bare legal or equitable chose in action it will not be able to k given as a pledge as the nature of the interest is intangible and thus incapable of physical delivery and possession. In thecaseof debentures this intangible property may often becoupled with a right to tangible property in the form of a chose in possession. It would bepossible to takeapledgeoveraparticularphysical document, however, the question is whether taking a pledge over the debenture document will be effective as security? The whole strength of the security lies on the ability of the pledgee to hold the legal chose in action. A pledge of the debenture document will only be effective if it results in the legal chose in action also being held by the pledgee. This will be the case where the document itself The evidences the title to the debt as in the case of a negotiable instr~rnent.8~ idea was stated succinctly by Cottrill:85 I n short, only if a debenture so embodies a holder's rights that endorsement and transfer of possession effect n m f e r of all the rights created by the debenture may it be the subject of a pledge. It appears then that only debentures that are negotiable will be able to bepledged. It hasalready been noted86 that whereadebentureismadepayable 'to bearer'it is often an indication hat it will be regarded by the law merchant 81 Sykm, T h e h ofsecvirilr. (1986). Chapu;i 16, pp 649;Evorai 8: McCracken F i m i i I Inrulurionr Low (1990) at ~22.5.par.728; R M O o d e , I a g v l Problem o/Crodit nndSecwily, (2nd Ed) (1988) a p p 11-13: 1 Crcsslcy Vainin, Persoml Proporry. (3rd cd1962) a r ~ 361-362. p (1866)LR 1 Q B 585. Ibid at 594 cited fim Evenu D, 'Sacwily over Ban!+ Dopmiir'(1988) Ausr Bur L Rev at 352. See above under hatun and defmi-on of dcbontun'. Thc ssence of care of uansferabilily and title a r h r n m c i s a nflecticn of ihe fact that legal tide is vinted in ihc holder ofihc instmmmi: Commirsiowr~ #ihe Szarr S o h g r Bnn* ofVirro"o v Psrrnoron W ~ i g h l& Co Lid (1914) 19 CLR 457 p l s a a s I at 474. VA Coluill, The @er o f r k 'Pledge' of. &bennse:(l9W) 1 6 C d ~ d i o n Bwinesr L v w l o u r ~ l ar 455. Abovevnder heading: Naiwcand Dofinition of Dcbentvniii) Ncgoiiable Lnslmmmis. 82 83 84 85 86 http://epublications.bond.edu.au/blr/vol6/iss2/3 14 as negotiable. Inaddition, debenturei not madepayable'to bearer'may still be negotiable if the terms of the issue provide that it transfers free of the equities. o be On h e usual wording used in practice, it is necessary for the transferee t registered to obtain the benefit of the clause.87 This means that the debenture document will not be evidence of title to thedebt and apledge in this case will be ineffectual. It has also been noted that where a debenture is more than an acknowledgment of indebtedness and is secured over property of the issuer, this may have the effect of rendering the insnument non-neg~tiable.~~ In summary it wouldappear that a pledge is limited to cases where the debenture is a negotiable instrument perhaps best indicated by the fact that it is madepayable'tobearer'and where the debenture document does not include security over property of the issuer. Registration is not required as s 262(1)(g) of the Corporarions Law excludes securities created by deposit of document of title. Lien A lien is essentially the same in nature as a pledgeexcept that a lien arises out of retention89 of property rather than theexpress givingof property as security. The main point to note is that a lien will still require the property to be tangible90 as is the case for a pledge and as such, it appears to be limited in application to where the debenture is a negotiable instrument. (ii) Taking your own debenlures as security Mortgage Given that a mortgage of a debenture is possible, can a corporation take a mortgage over debentures that it has issued? In effect the corporation will be the assignee of a debt which it owes and as a result the corporation will owe thedebt to itself. Suchanassignmenthasbeenrejectedin BroadvCommissioner of Stamp ~ u f i e s ? 'in relation to bank deposits which are also legal choses in action. Justice Lee stated that: any document purporting to achieve such an assignment could only operate as a release of ihe debt, or a covenant not to sue.92 Howell and Jones: Redemption and Re-Issue of Debentures 90 91 swcg cited by Everett D, 'sewriryoverBonWng Dpposirs'(1988) 16at 267. 92 Ausi Bus L Rev si360of Milloil ininre Charge C a r d S m i c ~ L t d [ l 9 8 63 ] W,R 697 a i l 2 1 and Evereit 8: McCmckcn, Finnncini l w t i t x r i o (1990) ~ ~ at w 231-232. paragraph 738. [I9801 2NSWLR40. lbid at46Dlakcn From Evcrsii V . Tecwrryovsr HonWng ihposilr'(1988) Aust Bus L Rev at 364 Produced by The Berkeley Electronic Press, 1994 15 REDEMmlON AND RE-ISSUE OF DEBEMURES: Bond Law Review, Vol. m EFFECT CW SECUinNlR4MACnOFs 6 [1994], Iss. 2, Art. 3 This view is supported by Millet J in the case of In re Charge Card Services LIB3 where he said: [a debt] cannot be made the subject of a legd or equitablemortgagein favour of the debtor since this requires a conveyance or assignment by way of security,and this operates as a conditional release. The analysis above would apply where the debenture is a bare legal or equitable chose in action. It may be argued, however, that if the debenture is a negotiable insuument the mortgage will be effective in conceptual terms. If our analysis of the position of negotiable instruments is validand an issuer of a negotiable debenture is able to be a holder of it without it being discharged, then the corporation will in effect be holding a right to sue itself which is not possible at common law. If a debenture is a negotiable insmment the normal rule relating to choses in action can be avoided. It may also be argued that the mortgage will be effective conceptually even if the debenture is non-negotiable. The argument depends on s 1051(1)(3) being interpreted as attributing to all debentures the ability of being assigned back to their issuer in a similar way hat negotiable instruments are i l l so f Exchange ACI. treated under s 66 of the B If a mortgage is possible why would a corporation take its own debentures as security? Upon dcfault the corporation would either have to which woulddiscbargethedcbtor, itwould enforce thedebentu~againstitself sell the debenture, thereby assigning the debt it owes to itself to someone else which it wilt have to satisfy in the future. The net effect of the transaction is really a set-off of the debt the corporation owes on the debenture and the debt owed to it via the loan.94 Charge It has been held that a charge of a debt in fmour of the debtor discharges the debt.95 In re Charge Card Services Lld Millet J remarked: 'The objection to a charge in these circumstances is not to the process but to the resu1t8?6 It is arguable that these words indicate that there is no conceptual difficulty in a corporation taking a charge over a debenture that it has issued as long as there is no default by the corporation offering the debentures as security. A charge gives the chargee only a contractual right and no direct proprietary right in the debentures. This means that up until dcfault the corporation taking the security will not hold its own debentures but will hold a connactual right. This would apply whethcr the debenture is a negotiable instrument or asimplechose in action. If, however, Millet J's judgment means that the rule regarding morigages of debts in favour of the debtor apply in the 93 94 95 [I9861 3 WLR 697 a1719B. Rwidedtha, ,hc dcbentvrc has a mllunly dale a, the u m e ,ha, tho debtbccmos due. Miller J Inrecharge CurdSeviceLtd (19861 3 W . R 697. Ibid at 72011. 96 163 http://epublications.bond.edu.au/blr/vol6/iss2/3 16 same way to charges of the same nature, then the argument with respect to s 1051 can be applied here. Similar commercial advantages and disadvantages apply. Pledge and Lien Howell and Jones: Redemption and Re-Issue of Debentures As argued above apledge and lien97 may only be effective to give the pledgee or tienee security where the debenture is a negotiable instrument. Pledges and liens have thecharacteristicof notvesting in thepledgeeor lienee any property rightsandassuch thereisinherent difficulty with acorporation takingapledge or lien over its own debentures. The corporation will not be the assigneeof the right to sue itself. In any case if the debenture is a negotiable instrument the issuing corporation would be able to hold such a right by reason of s 66 of the B i l l s of Exchange Act. Once again the commercial advantage is in the ability of the corporation to recoup debts except in this case it will be done by selling98 the debenture, in the case of the pledge, and not by exercising it. A lienee only has the right to retain possession of the debenture, there is no inherent power of sale. Debenture issues in the Euromarket Pledges or possessory liens are not possible in the case o l Eurodebentures under a global debenture because the right against the clearing house is not a negotiable instrument and therefore ~ntanglble and not capable of being the subject of possessory security. Wherea borrowing corporation has an interest in a global note held by a clearing house that interest may be mortgaged or charged back to the corporation which issued the global note. The reason is that until default or maturity the issuing corporation will not hold a chose in action against itself, but only a chose in action against the clcaring house99 (iii) Offering your own debentures as security Mortgage It is evident from our description of negotiable instruments that when a company holds its own debentures the right of action for the debt is not extinguished. This right of action is capable of being mongaged to a creditor using the methods outlined above. If a mortgage of the chose occurs the creditor will have the right to sue the debtor under thedebenture if he defaults on the loan. 97 98 As to whst i p s of lirn the corpntion may hold see &low under hrading: iii) Offwing yomown debcna$ security: Pledge and Lirn. has. A ticneemay only h a v s a power of sale w h e r s i l i s a P o w o o f s d o i s the only right. bnnkm liol or under sane siaiutory provisions. See k l a w under heading: iii) Off-g yovr o w debcnuvu as recuriw: . P l d m and Lim. This is tho case for a rnongage. Under a charge thc u ~ i i l ~ g i c h ~ ~ ~ ~ c o i p aholds r a i ia o chare n in which u p dciaull will allow nccar to thc chargois chose action against the bornwing in action against thc clearing hourc. This mulls in tho samc practical effeci as s mongags. 99 - Produced by The Berkeley Electronic Press, 1994 17 REDEMmlONAND RE-ISSUE OF DEBEMURES: ilS EFFECT ON SECURliYTRI\NSAClIONS Bond Law Review, Vol. 6 [1994], Iss. 2, Art. 3 Can the same be said if the debenture is a non-negotiable chose in action? Underthegeneral law oncea chose in action is transferred to thedebtor the right of action is cancelled. The result is that there is no longer a chose in action that can be mortgaged. The argument that s 1051(1)-(3) of the Corporations Law enables a corporation to hold its own debentures no matter what their legal nature without extinguishing the rights under the debentures means that the rights may be mortgaged. Further 1051(4) lends weight to this reasoning. It slates that: Where a company has ...deposited any ofits debentures to secure advances on current account or otherwise, the debentures shall not be taken to have been redeemed merely becauseof the account of the company having ceased to be in debit while the debentures remain so deposited. Does the subsection contemplate mortgages? The words 'deposit as security' may well limit the application of the sub-section to a pledge of the debenture. A pledge, would fit the literal meaning of the provision in that it would involve a deposit of the debenture. It would not, however, be too great a leap in reasoning to suggcst that thc words could be applied t o an equitable mortgageevidenced by thedepositof the instruments. In most cases where the debenture is assigned it will also be deposited with the creditor. In any event, the legislature in drafting the Corporations Law, has adopted a fairly vague distinction bctwcen the various sccurity transactions in other areas of the @ 'A tc and there is no reason to suggcst &at a different policy would apply to s 1051(4). The subsection may also appear to be limited to advances on 'current accounts'. Where the rest of the subsection refers to the debenture not being redeemed merely on account of the.balance of the corporation ceasing to be in debit, it is obviously dealing with the situation where the corporation has an overdraft facility on its current account. The balance of thc account will be fluctuating so that at times the corporation will not be in dcbt. In normal circumstances the security would revert back to the debtor. However, it is convenient in such a case that the creditor retain the instruments inanticipation that the debtor may make a further overdraft in the future. The sub-section provides that thedebcnture is not cancelledlol during a timc when the creditor holds the security where therc is no debt. Such a provision avoids thc need for new security to bc issued. It would appear unusual if this type of arrangement was intended by the lcgislaturc toapply IOall forms ofadvancesand not simply to current accounts. However, the words 'or otherwise' would appear not to limit it in such a way. In summary, it would be reasonable to interpret the subsection as nor limiting the ability to give dcbcnturcs as sccurity for advanccs to current accounts only but, limiiing the rcfcrence to a dcbcnture not being rcdccmcd, to http://epublications.bond.edu.au/blr/vol6/iss2/3 18 advances on current account. In any events 1051(1)-(3) suggests that such security is possible whatever the nature of the advance. The use of such a security transaction has no apparent commercial benefit. The creditor holds as security the right to sue the debtor corporation on the debenture. In the event that the debtor corporation defaults on its loan the creditor can either self the debenture or exercise it against the defaulting corporation. It would appear that the fact that the issuing corporation defaults on its loan indicates that it may be unable to pay its debts as they fall due and that it may also not be able to pay on the debentures. The result is that the creditor would find it hard to convince anyone to buy its debentures and suing on the debenture is no better than suing on the loan. One possible reason for entering into such a transaction is that the original debenture issue may be secured over property of the issuing corporation. A subsequent creditor may beunabletoaccessthispropeny and may havetoranklater in tennsofpriority. Section 1051(3), however, provides that a debenture that has been re-issued has thesame priority as if it had never been redeemed. In many cases debenture holdersevenofdifferentissuesrankpari-passuintennsofsecurity. Accordingly it is apparent that the creditor may be able to access property of thecorporation and rank equally with other debenture holders by taking a redeemed, reissued debenture as security. This suggestion is effective if as argued above, an assignment under a mortgage is a re-issuc of a debenture. Oneother reason for a corporation to take such a security is that it may be required to adhere to a lending policy that requires it to have security over a certain percentage of its loan assets. If this is the case and the corporation is lending without adequate security then using the method suggested above mightallow acompany tocreatesecurity that is artificial in thesense that there is no real benefit. Howell and Jones: Redemption and Re-Issue of Debentures Charge We havenotedthat ithasbeen held thatachargeofadebtinfavourof thedebtor was ineffectual so that the debt was automatically discharged.la It may be argued the focus by Millet J in In re Charge Card Services on the result of the transaction meant that he did not intend to deny that a chargee holds a contractual right and that the chargor retains the property right in the debt. If this is correct then it would mean that a charge given over a repurchased debenture would result in the original issuing corporation continuing to hold the property right to sue on the debenture. Is this possible? If the debenture is a negotiable instrument then it would appear the answer is 'yes'. Itisarguedabove that it is possible for an issuerofa negotiable instrument to be its holder at a date before maturity. What if thedebenture is simply achose in action? Prima facie acharge Produced by The Berkeley Electronic Press, 1994 19 Bond Law Review, Vol. 6 [1994], Iss. 2, Art. 3 would be invalid as the issuing corporation would continue to hold a right to sue on the debenture which is essentially a right to sue itself. Using the argument that s 1051f3)allows the sameresult for all debentures as those just described for negotiable instruments, it is suggested that such a transaction is conceptually valid. Section 1051(4) would not appear to help as it refers to the 'deposit' of debenture as security which would not fit the description of a charge. In any case, reliance on s 1051(1)-(3) would appear to be sufficient. Once again there is little commercial benefit in the transaction. There is even less benefit than where a morteaee is taken. Where there is a default under a charge the creditor may have a conuactual right to make the debtor corporation exercise its right under thedebenturein its favour. Thismeansthat the debtor corporation will have to sue itself and at this stage the debt would discharge. The creditors would have no right to any security under the debentures as that would entail the debtor corporation claiming a tight to its own property where it is bankrupt.'m If the charge agreement specifies that apowerof sale is possible then it is likely that, like the mortgagee, the chargee willbeunabletofindabuyer.Theonly possibility is that the transaction creates an artificial security for the sake of appearance. In any event this is only effective as long as there is no default and the debentures have not matured. -- Pledge and Lien A pledge may arise where the debentures are deposited with the creditor as security ands 1051(4)wouldscem to contemplate this possibility. In whatcase will a lien arise? The law recogniscs a number of different kinds of liens that have been established by the law merchant. The traditional banker's lien may be applicable here. The nature and scope of this lien has been the subject of recentdiscussion, h o w e ~ e r , i t a ~ ~ c a that r s ~thelien 0 ~ will stillbesubject tothe need for the property to be tangible. A lien may arise ifrepurchased debentures are deposited with a bank for safe custody and subsequently the bank were to make a loan to the corporation that deposited them. In accordance with our previous arguments, the current discussion is directed to the case of a debenture that is a negotiable insuument.l05 Once again there is a potential problem in that the debtor corporation will hold the property rights in the debenture even though posscssion is in the hands of the creditor. It follows that the debtor company will hold the right to sue itself. However there is no conceptual problem at this stage because a negotiable instrument is able to be hcld by its issuer prior to maturity. Eisspting if ihe d m m o n i includs-ihcpowsi $0lorsslme which would l u d t in !hs~ h q c e takLig t i t l e in tho debcntm, ihcnfoie !hec h a r g e would have access to pmpcny sssuid under ihs debcnrm. 101 Sec: H01eroiu.n P~euwork ondAssemblizsLldv Wesiminnsr BonXLld [I97013 AU EK 485 and I n re Chnrge CardSenicerL1d1198613 W1.R 697.For a discussion dihccarcs and lhcnaiureaf a banker's Lien sce: Evemi D.'Secwiry owrBon*ing Deporiw'(l988) Ausl EusI. Rcv at 352 and W S Wcerasoora, Banking Lmu and iho Finnnciol Sysrm in Auslrolio, (2nd c d 1988)Ch 22. 105 S e =bowunder heading: N a w x of M D S ~ C ~ Dwith S d ~ b c n wPlcdgc. ~~: 103 http://epublications.bond.edu.au/blr/vol6/iss2/3 20 The only benefit of such amsaction is where acorporation wishes to appear to be holdinga security. It has noother effect as security'" because in the event of default the pledgee or lienee can only exercise a power of sale and nobody would be willing to buy debentures of a company Ihat cannot meet its debts. If the debentures were secured over property of thecompany the pledgee and lienee would not have a claim to this as at most their rights extend only to apower of sale and not to exercising the debenture.lo7 Can it be argued that because the debenture is a negotiable inslrument evidence of title to the security is manifest in the fact that they hold the instrument? This could possibly be the case hut we have noted that a debenture that is secured over property will not be regarded as negotiable.108 Euromarket issues Howell and Jones: Redemption and Re-Issue of Debentures Giving a true possessory pledge or lien of a Eurodebenture is impossible for the same reasons that taking a pledge or lien over intangible property is impossible. Complications may arise when a mortgage or charge is given over Eurodebentures that are being held by the corporation that issued them under a global note. If theargument, that beloredefault an issuingcompanycan hold itsown Eurodebentures, is accepted, then there is no problem with a mortgage of the debentureholders'conlractualright againstthe clearing house. Whereboth the mortgagor and mortgagee are members of the clearing house system the securities account of the mortgagor is debited and mortgagee's account credited'" upon notice being given to the clearing house. This satisfies the requirements for a legal mortgage if the notice is in writing and signed. If on the olher hand the mortgagee is not a member of the clearing house, the mortgage or transfer may not be effective at lawllo as no notice in writing is given to theclearing house. Only anequitablemortgage wouldarise. The right under the deed poll may not pass with the equitable mortgage as the 106 lhis was diwvssd by VA Cotuii. T h o effml of the 'Plcdgd of a deknturo'. (19W) 16 ~ concludes that jun bccaurc the scfvtily C a ~ d i m B v r i n r s r l m w J o v at ~ l459-10 w h m t h author is incffmtual a rommercialiy dm< not mean that it is insRcciual concepluslly in-s of the law. Note that t h e a e c u d lendermay noi actually be able io accar the s c c u d p m p a y . In S e m u u r Proderr (NFI)Lrd vRoyalBank o f Canada (1980) 36 CBR (NS) a Canadian Supnms Coun huld that a debcnurm holder who had a plcdgc over the dobenurre had io T m sell the dcbcnurrebefom any action could be taken agaimlthc a e c u d piapeny. nic dckntuie was cffcctivuly 'down-gradEd' a d ~ i l c wilino d thjs spe COW, ~ h ~ ~ f f c n ~ f i h c ' n c d g e ' b c c a i~ ~ was ~ c asdsccunty of a Debcnmrc', (19W) Vo116 C a d m B w i i i L m r l o w ~ I July , 90. It should b e n d that th= power of sale of a lienee has noi beon eo&med. For a discussion on ! h i ss a E v w & McCracken, P i ~ i n l I m t i ~ u i (Scmdip o ~ L ~ Publicatims, 1987) paragraph 835. VA C ~ ~ l . l h e E f l m i o f t h e ' P l d g o 'a odebmlure', f (1990) I 6 C o m d i m B - i i h 10-1 1990 rt455-456 dng: A&, Khm v Aturr Singh [I9361 2 AU ER 545 ( P C ) 8IS50. F LardA~kLi;Wirb v Weigdlcygoee & CoL#d[1939]3 A U EK 7 1 2 K 8)atpp720-1. Euro-cloaj Terms and Conditims, s 6.l(a)(i). r 199 of tho PmpertyLmrAcr 1979 would rcquiic t h r h ~ a m f of ~ rt h c c h o s if it wcrc in @-land in action to be in wnung and ~ i ~ f~d~ .~ e m b oor u Belgian ig law has basically !he same rcquircmmu. 107 108 109 110 Produced by The Berkeley Electronic Press, 1994 21 REDEMPTIONAND RE-ISSUE O F DEBENTURES llS EFFECT ON SECUWW T R A W T I O M Bond Law Review, Vol. 6 [1994], Iss. 2, Art. 3 deed poll relies on the clearing house to keep track of who are the subscribers to the global note 'from time to time'. It may be possible to give notice to the clearing house to get around the problem. If the chose in action is assigned more than once then priority will be determined by the time that notice is given to the clearing house."l Where a Eurodebenture is charged by the issuing corporation the chargee will have a conuactual right to access the chose in action that the issuing corporation holds against the clearing house before default. In the case of mortgages, after default by the issuing corporation, the contractualrightagainst theclearing houseconverts toachoseinactionagainst the issuing corporation. If the issuing corporation is holding the debenture at this time the problems discussed above with a company holding its own debenturesarise.If, however, thedebenture hasbeen mortgagedbeforedefault these problems will not be encountered as legal title to the debentures will be in the hands of the mortgagee, not the issuing corporation. The same problem would arise in relation to charges as the agreement between the parties is only contractual and the clearing house would have no knowledge of this. On default the charge will not be effective as the chargor corporation willonceagain hold theright to sueitself. Thechargee'sargument will once again be that s 1051 of the Corporations Law avoids this problem. Suggested Solutions to conceptual problems The following structures, attempt to avoid the conceptual problems that arise where an issuer of a debenture holds the right to sue himself either as a result of redeeming but not cancelling the debenture112 or, by the operation of the security uansactions."3 The problems arise in the following situations: i) where the company takes its own debentures as security by way of amortgageorcharge.114 (Pledgesand liensarenot includedas they neveractually involve the pledgee or lienee holding property rights in debt). in thecase of acompany offering its own debentures as security: by way of a charge, pledge, or lien. (Mortgages arenot included as the right to sue has been assigned). ii) Thesuggestions may helpavoid theapparent abrogationof the rule that precludes a borrower holding a right to sue itself. It would be even more important if s 66 of the Bills of Exchange Act were held not to mean that the holder of negotiable instruments arc able to abrogate this law at any time up 111 112 113 114 ThcruIeLiDrnriru Holl(l82l) 3Rurs 1. Unders 1051 C o r p o r a i o n r h . Discused above: Debentura as Security. -ding on how the judgmurt of Millu I is Literpieied: In re Chorgr Cord Senices [I9861 3 WLR 697 a1720H. 169 http://epublications.bond.edu.au/blr/vol6/iss2/3 22 (IP94) 6 BOND L R until the insuument matures. If in any case it is decided that negotiable instrumeurs are able to abrogate the rule, the suggestionsput forward here are relevantwherethedebentureisnon-negotiableeiy ifs 1051isinterpreted n mean that all debentures are given the benefit of abrogating the rule. not t It should be noted that the suggestions may only help where this conceptualconflictexists before thematurity of thedebentures. Oncematured the debentureisdischarged. In addition it will only help resolve theconceptual conflicrs as long as the party offering the debentures as security does not default. Itdoesnothelpovercome thecommercial inadequaciesofthesecurity, outlined above, once default occurs. (iJ Trustee a s Intermediary In most cases where debentures are issued by a corporation, a debenture trust deed is required.115 Typically this trust deed acts: as a contract between the borrowing company and the trustee, and as an Howell and Jones: Redemption and Re-Issue of Debentures It has been argued that a debenture holder under a trust deed does not have any direct right against the borrowing colporation. Commentators have suggestedll7 that Re Dunderland Iron Ore Company Ltd1'8 held that where there is no covenant by the borrowing corporation with the debenture holders torepay, butonly acovenantwith thenustee,then thedebentureholderscannot be said tobecreditors. If this is the case, it is arguable that whereacorporation issues debentures and subsequently holds them, it does not hold the right, as a creditor, to sue itself. It is submitted that this conclusion cannot be drawn from thecase. The reason for this is Dunderland's case considers 'debenture stock holders' as opposed to 'debenture holders'.I19 In a normal issue of dcbcntures to the publlc the trustee holds the covenants of the debentures on trust for the debenture holders and each debenture holder has an individual chose in action against the borrowing company. In contrast, debenture stock is issued by a uustee who has a single chose in action against the borrowing company. Each debcnture stock holder will heabeneficiary ofthc uustee, and will therefore havean equitableinterest in the chose in action. Although the names are similar the legal processes behind a 'debenture stock' issuc and a 'debcnlure' issue are significantly different. 117 118 9 lbid i f p 266. 119091 1 Ch446. Re D&rlondlron oreCowny ~ l swinfon d &dy J h o l d e n l h c y aio doben~uioriockholdcd. out 452: They arc n n d e b r u m - Produced by The Berkeley Electronic Press, 1994 23 REDEMmlONANDRE4SSUE O F DEBEMURES m EFFECT ON sBond ~ c u n Law trv~a wc~~c+ s Review, Vol. 6 [1994], Iss. 2, Art. 3 A debenture stock holder may not have a chose in action against the bormwing company, as by definition they hold only pansof a whole debt held by the trustee,'20 the same cannot be said of the debenture holder. In any case, if theoriginal interpretation of thedecision inDunderland's caseiscmect then itcan also becriticisedas it failed tolook atcasessupporting the principle that abeneficiary can enforcecontractual rights held on m s t for him against a third party121 and on this basis a holder should be regarded a creditor of the issuing corporation. In addition the argument that debenture holders are not creditors of the issuing corporation may not bevalid when applied to Australian corporations. One commentator has noted'= that in most cases the trust deed will contain a covenant with the provision enabling each debenture holders to sue for amounts due to them individually. However, it appears that this provision is qualified by a discretion given to the trustee not to allow it. Another point to note is that debenture holders are generally treated as direct creditors for the purposes of schemes of arrangement under Part 5.1 of the Corporations Law. In summary, it would appear that there are enough arguments for a bolder of adebenturebeing adiect creditor of the issuing corporation. A m s t deed, therefore, does not have the effect of stopping the corporation holding a right to sue itself as a creditor. (ii) Subsidiary or Related company a s an Intermediary Where a corporation takes its own debentures as security, the problem of the corporation holding its own debentures may be avoided where a third party, such as a subsidiary or associated entity, takes the debentures as security. The argument is that the issuing company never holds its own debentures. An analysis by Professor Everett in relation to bank deposits can be applied to the circumstances here. In summary, Professor Everett assert@ that the use of a subsidiary will most probably only be effective where the security is by way of mortgage as a charge is only enforceableby contract and therefore, requires consideration to be given by the subsidiary which in most cases is not. In the case of a corporation offering irs own debentures there are two possible transactions. Firstly, where the company has its subsidiary purchase thedebenturesfrom holdersratherthanrepurchasingthem itself.Thesubsidiary then guarantees the loan to the parent company. In a guarantee the subsidiary would incura direct conuactual liability to the creditor of the parent company 120 121 1 2 1 2 3 See aboveunda heading 'Equilablichin achon'. Polrmr'sComp~yLm (23rdcd 1982) Vol I. Ch46-01 and noic4. IK A r m i l a g s l h c ~ i u r c T m a Deed. 0 10 of Ausiin & Vann, ThoLaw of Public Conpwy Fi-e (1986) at 265. S EE ~ v m t D. ' S e c w q o ~ e ~ B ~ n t i n Deposis'(1988) tig Aurr Bus L Rev ai 371-372 171 http://epublications.bond.edu.au/blr/vol6/iss2/3 24 Howell Jones: Redemption and A Re-Issue of Debentures where the and parent company defaults. problem exists in that when the subsidiary company is deciding whether or not to guarantee the parent, it must consider its own interests rather than the interest of the group. This is known as the doctrine of corporate benefit. In most cases a guarantee will be said to be of corporate benefit if the 'guarantors welfare is so enmeshed with the wetfareof thegroupthat what isgccd for thegroup isgccd fortheguaranto1'.12~ Proving this corporate benefit will be much harder where the parent company is in trading difficulty and the guarantor is not. In this case it will only be of corporate benefit to give a guarantee if the 'group has substantially similar Whether or not there credilorswho will oblain thegroupassets~ncollapse'.~~ isany corporatebenefitwill then,dependon the particularcircumstancesof the case. If there is a corporate benefit then the use of an intermediary as a guarantor may overcome the conceptual conflict of a debenture issuer as holder. Commercially, thecreditor will still be relying on thecredit-worthiness of theoriginal issuing company.Thecreditor will exercise the guarantee if the parent company defaults. The subsidiary will be relying on the debentures it holds to meet the guarantee and these will most likely be ineffective as the parentcompany is insolvent. The only benefit is if they are secured debentures and therefore property of the parcnt is available. Conclusion If the interpretation of s 1051of Lhe Corporarions Law and s 66 of the Bills of ExchangeAct is thatadebenture is able t o be held by its issuer before maturity, two results follow: i) The issuer holds, in effect, a right of action against itself which is not cancelled (as would normally be the case) and as such there is the possibility that itcan beoffered as security for loans or advances made to the corporation. Thecorporationmay beableto rakesecurity over itsowndebentures for advances made by it to another entity. ii) The effectiveness of this argument is, of course, stronger where the debenture is a negotiable instrument. Where a debenture is a non-negotiable insmmenttheeffectofs 1051appears to be wholly artificialandopens the way for abuse by companies seeking to give theappearance of holding satisfactory security. We have seen that there is very litde commercial benefit where a creditor rakes security over debentures that have been repurchased by the 124 O Bunon, AumaiianFimmiii Tr(yv(yvcliiiLmv, (1991) a1 372. Ibid at 373. See cases giver as tramples: ANI. Elocuwrs & Tmtas Co Lid v QintexLld end Qintar AmnaiinLd(i990) 8 A C E 1 9 1 a i f m e d on appoal: (1990) 2ACSR 676: 8 ACLR 980. Byme1 dEdded that an a p a m n r to givc a guazantec, al!hough it iwk !hefom of s dced, was incapable of b i n g !he svbjwr of an oidcrfor specific pcifomancc whore !he giving of !ha guarantee w w i d not, a1 h e iimr ir was savghi l o bcimplanemed, h s f a !hc corpmaw bm& of !hogusranior. 125 Produced by The Berkeley Electronic Press, 1994 25 REDEMPilON AND RE-ISSUE OF DEBEMURES Bond Review, Vol. WS EFFECT ON Y C WLaw TRAMACnONS 6 [1994], Iss. 2, Art. 3 issningldebtor corporation. In addition, such pwported security transactions will be limited to mortgages and charges unless the debenture is a negotiable instmment, in which case a pledge or lien is also possible. A mortgage, however, appears to be the only transaction which will provide any security benefit at all as the creditor may be able to access property of the debtor corpo~ation which has been given as security for the debenture holders. The other three transactions will not give such access. Where the corporation takes its own debentures as security there is a commercial benefit in that the security will act as a set-off upon default in the case of a mortgage oracharge. In the caseof a pledge or lien the benefit arises only if there is a power of sale allowing the corporation to recoup the money lent. In light of all this it would appear that the legislation needs to be redrafted to make it clear whether s 1051 is intended to erode the distinction between negotiable instruments and other choses in action and whether the results described in this paper are desirable. http://epublications.bond.edu.au/blr/vol6/iss2/3 26