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Security over shares - could it catch shareholder loans?

Gateley Legal

A familiar requirement of secured credit is for the customer to provide a debenture, which is commonly understood as meaning security over the customer’s business and assets.

However, a recent decision* highlighted an older and wider meaning of debenture – any document that creates or acknowledges a debt (and not just one creating security). A somewhat unusual twist was given to this wider meaning by the Court of Appeal in the case in question.

‘Shares can mean loans?’

A company (Topco) had granted a charge over the shares in its subsidiary (Subco) in favour of Topco’s bank. The charge defined the ‘shares’ charged as including “…all shares, debentures…and other securities owned by Topco in Subco…or in which it has an interest”. As a shareholder in Subco, Topco made certain loans to Subco, although the bank was not initially aware of them. When the bank came to take legal action, the repayment rights of Topco under these loans were worth more than the charged shares in Subco. It was held that the loan repayment rights arose under agreements which acknowledged a debt and, therefore, were ‘debentures’  – as a result, the bank had security over them. It was irrelevant that the bank did not know about the loans at the outset.

The result was surprising as it was not thought that a loan agreement was a ‘debenture’. That view has now been firmly rejected. When a transaction involves the creation of security over shares:

  1. security providers will want to make sure that the benefit of shareholder loans is not inadvertently charged by this rather tortuous route;
  2. shareholders putting additional money into an investment through a loan should check whether any existing share security would catch the benefit of such loans;
  3. banks – where they do not already have an assignment of the benefit of such loans – might consider whether they can have control over the benefit of the loan if the definition of shares in the relevant document is drafted in a manner case. Having such control could affect the negotiating strengths of the parties on a restructuring, for example.

*Fons Hf v.Corporal Limited and another [2014] EWCA 304

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