Fons Hf v Corporal Ltd & Anor

This appeal concerns the proper interpretation of the definition of the word “Shares” which is contained in clause 1.1 of a legal charge (“the Charge”) entered into on 29^th September 2008 between the claimant, Fons HF (“Fons”) as Chargor, and Kaupthing Bank Luxembourg S.A. (“Kaupthing”) as Lender/Chargee. Under clause 3.1 of the Charge (headed “Grant of security”) this provided that:

“The Chargor, as a continuing security for the payment, discharge and performance of the Secured Obligations, charges and agrees to charge in favour of the Lender:

3.1.1

by way of first legal mortgage, the Shares;

3.1.2

by way of first equitable mortgage, the Distribution Rights from time to time accruing to or on the Shares; and

3.1.3

to the extent not validly and effectively charged by way of mortgage pursuant to clauses 3.1.1 or 3.1.2, by way of first fixed charge, the Secured Property and all the Chargor’s interest in the Secured Property.”

“Shares” in clause 3.1.1 is defined as meaning:

“all shares (if any) specified in Schedule 1 (Shares), and also all other stocks, shares, debentures, bonds, warrants, coupons or other securities now or in the future owned by the Chargor in Corporal from time to time or any in which it has an interest.”

The particular issue which divides the parties is whether this definition encompasses the rights of Fons under two shareholder loan agreements dated 17^th October 2007 and 15^th February 2008 (“the SLAs”) under which Fons made unsecured loans to a company, Corporal Limited (“Corporal”), in which it held both ordinary and preference shares. The loan under the first SLA was £563,500 and Fons was the sole lender. Under the second SLA, BG Holding EHF (“Baugur”) and Fons acted as joint lenders and advanced £1.5m in proportion to their respective shareholdings in Corporal. Fons provided 35 per cent of the loan. As in the case of the first SLA, the loan was unsecured.

Kaupthing contends that the rights of Fons under the SLAs were charged either as “debentures” or as “other securities” under the clause 1.1 definition of “Shares”. The judge, Mr Mark Cawson QC (sitting as a deputy judge of the High Court), rejected this argument but gave Kaupthing permission to appeal.

Before coming back to some of the detailed provisions of the Charge and the SLAs, it is convenient to set out some of the relevant factual background as found by the judge.

On 30^th June 2006 Fons, through a wholly owned subsidiary, Talden Holdings SA (“Talden”), invested some £7m in Corporal by subscribing for 85,750 A ordinary shares at 10p per share and 6,991,425 preference shares at £1 per share. As part of the same arrangements, Corporal entered into a facility agreement with Royal Bank of Scotland plc (“RBS”) and a subordination deed, the parties to which were (1) Corporal as debtor, (2) Baugur Group HF, Baugur and Talden as subordinated creditors and(3) RBS.

As a result, the capital and debt structure of Corporal became ranked in the following order:

On 30^th March 2007 Fons purchased Talden’s shareholding in Corporal for £7m.

In 2003 Hamleys, the well-known toy retailer, had been acquired by Baugur and the business was carried on through Corporal. By 2007 additional finance was required in order to develop Hamleys’ concessions in a number of House of Fraser stores. Because the facility with RBS had only recently been agreed, Baugur and Fons decided to lend the money to Corporal themselves in proportion to their respective shareholdings. On this basis, Baugur advanced £1,046,500 in August 2007 and Fons advanced £563,500 under the first of the relevant SLAs on 17^th October 2007. On 15^th February 2008 Baugur and Fons agreed to provide a further loan to finance the refurbishment of Hamleys’ Regent Street store and advanced £1.5m, again in proportion to their shareholdings in Corporal.

The first SLA provided that the loan would bear interest at 8% per annum rolled up on an annual basis and should become repayable at any time on demand by Fons following the last day of the subordination period as defined in the subordination deed with RBS. In practice this meant a date after RBS had been repaid. It was also repayable if an “exit event” occurred such as a listing of Corporal’s shares or a business sale of Corporal. Clause 6 provided that any payment by Corporal should be made in full without set off or counterclaim or any other deductions or withholdings. There was also a provision in clause 4.2 that a certificate from Fons as to the amount at any time due under the SLA should be conclusive absent any manifest error.

The second SLA was entered into on the same terms as the first save that Baugur and Fons were jointly described as “the Lenders” in respect of the £1.5m “Loan”. The clause 4.2 certificate was to be given by Baugur as “Agent” for them both.

The judge heard evidence from Mr Andri Freyr Stefansson, who is now Senior Legal Counsel with Landsbankinn HF, and who was in-house legal counsel for Fons between February 2007 and April 2009, about the circumstances leading up to the grant of the Charge. He was also shown various e-mail exchanges between the CEO of Fons (Mr Haraldsson) and the CEO of Kaupthing (Mr Gudmundsson) which referred to discussions between the companies about what was described as a “pledge in hamlays (sic)” to provide security for Fons’ and Talden’s indebtedness to Kaupthing. As of September 2008, Fons owed some 2.5 bn Icelandic Krona (the equivalent of £14m) and the debt was unsecured. It had also guaranteed Talden’s own liability to Kaupthing.

The judge summarises in paragraphs 24-29 of his judgment the evidence which he heard about the drafting of the Charge and various minor changes in the definition of “Shares”, none of which seems to me to be admissible on the question of construction. An earlier claim for rectification had been abandoned. The judge also made findings to the effect that Kaupthing was unaware of the existence of the SLAs at or prior to the execution of the Charge and that Mr Stefansson (who was aware of their existence) did not discuss them with Kaupthing during the negotiations. Again, none of this seems to me to be relevant. The construction of the Charge is an objective exercise to be carried out by the court through the eyes of a notional reasonable man who is credited with all the background information which would reasonably have been available to the parties at the time of the contract: see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at p. 912F-913E. The background information includes anything which would have affected the way in which the reasonable man would understand the words used but does not extend to the negotiations or to evidence of the parties’ subjective intent.

The task of the court is to determine what the parties meant by the language which they used. Consistently with that objective, the court will seek to give the words their natural and ordinary meaning derived from the context of the agreement and all other relevant facts indicating the nature and purpose of the transaction. On occasions it will become evident (as it did in ICS itself) that something has gone wrong with the language used as a matter of drafting and the innovation introduced by Lord Hoffmann in his speeches in Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749; ICS (supra); and Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101 has been the ability of the court to correct these errors through a process of interpretation rather than resorting to equity’s jurisdiction to order rectification based on common or unilateral mistake.

In most cases, however (and this is one of them), there will not have been any discernable error as such in the drafting process. The parties will have committed themselves to an agreed formula and the only issue between them will be how it should be applied. Ambiguities created by different possible meanings of the word or phrase in question will often fall to be resolved by a resort to what is commonly referred to as business common sense. In Rainy Sky SA v Kookmin Bank [2011] UKSC 50 Lord Clarke of Stone-cum-Ebony JSC said:

“[21] The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”

There are, of course, dangers here. The admissible background facts may not point clearly to one of two or more possible constructions and a resort to the criterion of business common sense in order to identify the most commercial interpretation of the agreement may misjudge what the parties themselves would have seen as the appropriate balance of interest and liability. The judge in this connection referred to a passage from the judgment of Aikens LJ in BMA Special Opportunity Hub Finance Ltd and others v African Minerals Finance Ltd [2013] EWCA Civ 416 at [24] where he said:

“The court's job is to discern the intention of the parties, objectively speaking, from the words used in the commercial document, in the relevant context and against the factual background in which the document was created. The starting point is the wording of the document itself and the principle that the commercial parties who agreed the wording intended the words used to mean what they say in setting out the parties' respective rights and obligations. If there are two possible constructions of the document a court is entitled to prefer the construction which is more consistent with “business common sense,” if that can be ascertained. However, I would agree with the statements of Briggs J, in Jackson v Dear ([2012] EWHC 2060 (Ch) at 40) first, that “commercial common sense” is not to be elevated to an overriding criterion of construction and, secondly, that the parties should not be subjected to “. . . the individual judge's own notions of what might have been the sensible solution to the parties' conundrum”. I would add, still less should the issue of construction be determined by what seems like “commercial common sense” from the point of view of one of the parties to the contract.”

In this case, however, for the reasons which I will come to, we are not faced with problems of that kind.

As explained above, the definition of “Shares” in clause 1.1 relates to the provisions of the Charge in clause 3.1. Distribution Rights in clause 3.1.2 means:

“(a)

all dividends, distributions, interest and other income paid or payable on any Share;

(b)

all shares or other property derived from any Share (whether by way of conversion, consolidation, subdivision, substitution, redemption, bonus, preference, option or otherwise); and

(c)

all other allotments, accretions, rights, benefits and advantages of all kinds accruing, offered or otherwise derived from or incidental to any Share”.

And Secured Property in clause 3.1.3 means:

“the assets charged at clause 3 (Charging clause) and includes any part or parts of them.”

In terms of shedding any further light on the scope and meaning of “Shares”,clause 3.1.3 is therefore of no assistance. But the definition of “Distribution Rights” does at least confirm that “Shares” was intended to include assets which are capable of generating “income paid or payable” and “rights, benefits and advantages” other than dividends or further derivative share issues. Although this does not go as far as to provide a clear identification of whether the SLAs are within the type of assets which are included within the definition of “Shares”, it does at least confirm that they are not certainly excluded. The definition extends to “debentures, bonds, warrants, coupons or other securities” which are income producing. If the SLAs can as a matter of ordinary language properly be treated as falling within one or more of those descriptions, there is no contra-indication in clause 3.1 to suggest that they should be given a narrower meaning.

The other provision in the Charge which featured in the argument was clause 6.7. This provides:

“6.7

Matters relating to the Shares

6.7.1

the Shares specified in Schedule 1 (Shares) are at the date of this deed the only certificated Shares legally and beneficially owned by the Chargor in Corporal;

6.7.2

it is and will remain the sole beneficial owner of the Secured Property and (save where the Shares have been registered in the name of the Lender or its nominee pursuant to the provisions of this deed) it and/or its nominee is and will remain the absolute legal owner of the Shares subject to the provisions of this deed;

6.7.3

the Shares are fully paid and none of the Secured Property is subject to any lien, charge, equity, encumbrance, option to purchase or similar rights of any person other than the Lender;

6.7.4

the Lender is entitled to be registered or to require a nominee to be registered as a member of each of the relevant companies to which the Shares relate without any right of the board of directions of any such company to refuse registration or to consent to such registration only subject to satisfaction of conditions; and

6.7.5

it has not nominated another person or persons to enjoy or exercise all or any of its rights as the registered holder of the Shares.”

Mr Mitchell QC for Fons submitted that clause 6.7.2 was a clear contra-indication to the inclusion in “Shares” of the SLAs because in relation to the case of the second SLA it did not work. Fons was not the sole beneficial owner of the debt comprised in the SLA which was jointly owned with Baugur.

I am not persuaded by this for a number of reasons. In the first place it looks to me as if clause 6.7 is primarily concerned with the ordinary and preference shares in Corporal which are specified in Schedule 1 to the Charge. The draftsman appears to have made those shares the subject of a defined term “Shares” for the purposes of clause 6.7 as one can see from the appearance of that word in parenthesis in clause 6.7.1. This explains the contents of clause 6.7.3-5 which are concerned exclusively with problems associated with registered shares. This suggests that clause 6.7.2 should be read in the same way despite its reference to “Secured Property”. But even if that is wrong and clause 6.7.2 was intended to have a much wider application to include all the categories of assets specified in the clause 1.1 definition of “Shares”, there is no particular difficulty in applying those provisions to a jointly owned debt. Fons was able to charge to Kaupthing its beneficial interest in the relevant chose in action even if it could not charge the legal debt itself. All that clause 6.7.2 requires it to be able to confirm is that it will remain the sole beneficial owner of what it had charged under the second SLA. That it could do.

One is therefore thrown back on to the parties’ principal arguments which turn on the meaning to be attached to the words “debentures” and “other securities” as they appear in the definition of “Shares” in clause 1.1 and for that one must begin with the meaning which those terms would ordinarily bear.

The first point to be made as part of this exercise is that the definition of “Shares” was obviously intended to extend beyond the ordinary and preference shares held by Fons in Corporal. The inclusion of the reference to “debentures, bonds, warrants, coupons or other securities” clearly indicates that the Charge was to cover a much wider range of assets or investments than stocks and shares in their conventional sense. The second point is that it is now common ground (and in any case correct) that the phrase “or other securities” is not to be read as limited to some form of security in the sense of a charge over property. “Security” is defined in clause 1.2.1.7 of the Charge as including “any assignment by way of security, charge, lien, mortgage, pledge or other security” but the judge rightly rejected the definition of “security” as determinative of the meaning of the word “securities” in clause 1.1 which is not defined and takes its colour from the other contents of the definition of “Shares”. Conversely, and for that reason, it is also now common ground (as the judge also accepted) that the phrase “or other securities” (my emphasis) is descriptive of each of the preceding categories of asset set out in the definition which fall to be treated as species of what constitute “securities” for the purpose of the Charge. It is, however, important to treat this as a process of cross-fertilisation in the sense that both elements in the definition (the specific assets and “other securities”) go to inform the reader about the scope of the clause. It would be wrong, I think, to regard the word “securities” as dictating the content of what precedes it. Both parts of the definition have to be read compatibly with each other. The third point is that the asset in question must be one which Fons either “owns” or “in which it has an interest”.

The essential case for Fons is that none of the descriptive terms included in the definition of “Shares” can properly in the context of the Charge be read as including a mere unsecured debt due under the SLAs. Each of the terms denotes a species of asset identifiable, as it were, at a glance by the instrument itself and which constitutes something more than a simple obligation to pay money. The judge accepted this argument. He said:

“77.

I have analysed in para 57 above the nature of the particular documents or instruments specified within the Definition. They are all, with the possible exception of “debentures” given the potentially wide common law definition thereof, documents or instruments either designed to be transmissible, or even to be of a bearer nature, or at least have about them a formality or quality demonstrative of making some underlying right more readily enforceable. As to “debentures”, whilst “debentures” might, in an appropriate context, be construed as extending to a simple loan agreement, I accept that the ordinary businessman or, indeed the ordinary company lawyer, would be surprised to hear a simple loan agreement described as a “debenture” absent more by way of indicia of a debenture as commonly understood (cf. the citation from Lemon v Austin Friars at page 16, per Pollack MR, referred to in para 68 above), and that a simple loan agreement does not, without more, accord with the legal meaning of debenture as ordinarily understood.

78.

As the various documents or instruments specifically set out in the Definition are to be taken as examples of “other securities”, they do, in my judgment, point firmly to what the relevant reasonable objective observer would have understood the parties to have intended by the word “securities”, namely some document or instrument with like qualities.

79.

Consequently, I accept Mr Cadwallader’s argument that ordinary business people, or more pertinently, a relevant reasonable objective observer, looking at the wording of the Definition taken as a whole, in particular given the inclusion of the references to "shares", “stocks”, “bonds”, “warrants” and “coupons”, would not understand the parties to have intended the reference to “other securities ”, or indeed the reference to “debentures”, as extending to documents such as the SLAs, or the unsecured liabilities arising thereunder. I consider that, in the present context, the words “other securities” and “debentures” bear an ordinary meaning quite different from a mere loan agreement.”

The judge’s recognition that “debentures” can, as a matter of language, apply to a simple loan agreement is based on a series of cases beginning with the decision of Chitty J in Edmonds v. Blaina Furnaces Company (1887) 36 Ch. D 215. The issue was whether a loan agreement under which the debtor company and its debenture-holders also agreed to charge the undertaking and property of the company and the debentures in the company held by the debenture-holders as security for the repayment of the loan constituted a “debenture” for the purpose of s.17 of the Bills of Sale Act 1882. The judge held that it did. He said (at p. 218):

“The term "debenture" has not, so far as I am aware, ever received any precise legal definition. It is, comparatively speaking, a new term. I do not mean a new term in the English language, because there is a passage in Swift which has been mentioned to me where the term "debenture" is used. I have the quotation before me (Footnote: ¹). But although it is not a term with any legal definition, it is a term which has been used by lawyers frequently with reference to instruments under Acts of Parliament, which when you turn to the Acts of Parliament themselves are not so described. The "debentures" of a railway company are frequently spoken of; but the Companies Clauses Act of 1845 speaks of "bonds and mortgages" and not "debentures"; in argument, however, they are frequently so called. In the same way the instruments of a company incorporated under the Act of 1862, of which a register must be kept, are commonly called debentures, but the term in the Act is "mortgages" and "charges." It is an expression used frequently in the Law Courts, both by counsel and Judges, and it is a very convenient term; but it has no legal definition. That is the opinion of Mr. Justice Grove and of Lord Justice Lindleyas expressed in the case of British India Steam Navigation Company v. Commissioners of Inland Revenue. The term itself imports a debt - an acknowledgment of a debt - and speaking of the numerous and various forms of instruments which have been called debentures without anyone being able to say the term is incorrectly used, I find that generally, if not always, the instrument imports an obligation or covenant to pay. This obligation or covenant is in most cases at the present day accompanied by some charge or security. So that there are debentures which are secured, and debentures which are not secured. This distinction is shewn on the face of the 17th section, which speaks of "debentures" issued by an incorporated company, and secured upon its capital stock and chattels.”

Later in the same judgment (at p. 221) he went on:

“I have seen debentures of various kinds and classes, and it is a mistake to say that to be debentures the instruments must be issued and numbered seriatim. I have even seen a single debenture issued to one man. There is nothing in the section requiring that more than one instrument should be issued. In this case the security is given to each one so that each shares pari passu with the other. No doubt as a rule the instruments called debentures are issued so that each person gets his own document and can deal with it separately. He has greater facility of dealing with it in the market than is afforded by this instrument, but it would be unreasonable to hold that because the obligation to pay and the security in favour of several persons is contained in one single document, therefore the instrument is not within the protection of the section. There would not be any principle in doing that. I do not see why a single debenture should not be given to half-a-dozen persons and still be a good debenture within the Act. In my opinion, therefore, this is a valid instrument.”

The same issue arose before the same judge in Levy v Abercorris Slate and Slab Co (1887) 37 Ch D 260 which again concerned a loan agreement coupled with a charge. Chitty J said (at p. 263):

Now what is a "debenture"? I am unable to add anything to what I have already stated on this point in Edmonds v. Blaina Furnaces Company. My attention has been called to extracts from Skeat's Etymological Dictionary and Blount's Law Dictionary as to the derivation of the word "debenture," from which it appears that the term is a very old one and is derived from the Latin "debentur," because it is said "these receipts began with the words 'debentur mihi'".

Bearing in mind the four divisions of sect. 17 as I have just given them, I must try and find out what "debenture" means. In the course of the argument I asked Sir Arthur Watson and Mr. Byrne to define a "debenture," and they did not satisfactorily do so. I do not accept Sir Arthur Watson's definition that a debenture must be one of a series of instruments or issued pari passu with others.

I have myself known an instance of a single debenture payable to one individual. In my opinion a debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a "debenture." I cannot find any 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.”

One moves next to the decision of the Court of Appeal in Lemon v Austin Friars Investment Trust Ltd [1926] Ch 1. The issue was whether the “income stock certificates” issued by a company to raise loan capital which was repayable out of profits constituted debentures within the meaning of s.102 of the Companies (Consolidation) Act 1908. Under the terms of the certificates the loans were repayable out of a specified proportion of the company’s net profits which were to be set aside in each year for that purpose but were otherwise unsecured. The Court of Appeal (affirming Lawrence J) held that they did constitute debentures within the meaning of the Act. Sir Frederick Pollock MR (at p. 12-13, 15) said:

“Our attention has been called to what is a matter of interest, that this word "debenture" is one very old in use in the English language. Some account of it is to be found in the opening words of the first chapter of Part 3 of Sir Francis Palmer's Company Precedents (12th ed.). Again, Chitty J., in Levy v. Abercorris Slate and Slab Co. (1), mentioned the fact that he had had his attention called to the old uses of the word "debenture." Sir Francis Palmer in his book has collected a number of characteristics, some of which are to be found in various debentures. They are tabled on pp. 3 and 4 of the volume to which I have already referred, and some nine characteristics are pointed out as not uncommon in some debentures. But it is not essential that these characteristics should all be present, and some indeed are almost the antithesis the one of the other. For instance, sometimes you have a number of debentures issued as a series with a register of the series; on the other hand, you sometimes have a debenture which is issued to one person only, a single debenture. That single debenture is perhaps less common in the present day than it was formerly. At any rate, there are a number of characteristics which I think are summarized in the passage to which I have referred; but whatever the characteristics which you would expect to find or may find in the debentures, the root meaning of the word is "indebtedness"; that it does record an indebtedness.

…

Now, Sir Francis Palmer in his catalogue of the characteristics of a debenture says: "A debenture is, as a general rule, one of a series." This document is certainly one of a series. The term "debenture" is applied, as a general rule, to instruments issued by a company. This instrument is issued by a company. It is not issued, it is true, under seal. A debenture usually provides for the payment of a specific principal sum at a specified date, but that, as he points out in the paragraph, is not essential, for there are millions of debentures which have not an actual provision for repayment because they are perpetual or permanent debentures. A debenture usually provides for payment of interest. This document does not, and a debenture generally contains a charge on the undertaking of the company; but from the cases that are referred to it is quite plain that there are a number of debentures in which there is no such charge; and indeed one must be careful not to confuse a debenture with a mortgage debenture.”

Warrington LJ (at p. 17) added:

“Now, it has been said by a wiser man than myself that it is impossible to give an exhaustive definition of the word "debenture"; and I certainly do not propose to incur the reproach of venturing where wise men fear to tread, and therefore I shall not attempt to give any definition of the word "debenture." But there are certain characteristics which, if found in a document, have usually in legal and commercial transactions been held to constitute that document a debenture. One of those is that the document is an acknowledgment of indebtedness, and I look to this document to see whether it does or does not contain at least that characteristic. I find that it does. It certifies that the company "is indebted to" the plaintiffs "or other registered holder for the time being of this certificate in the sum of 2100l." That is a clear acknowledgment of the indebtedness of the company in that sum. It is quite true that the document contains special provisions with regard to the funds out of which that indebtedness will be satisfied by payment; but that, in my opinion, is irrelevant to the question that we have to determine. If you find that a document of this kind contains an acknowledgment of indebtedness, it satisfies, at all events, that part which was thought to be sufficient by Chitty J. and was said in express terms to be sufficient by Lindley J., and I need not express my own opinion. On these authorities it is obviously sufficient to constitute the document a debenture, and on that simple ground, in my opinion, the judgment of Lawrence J. was correct.”

Lloyd J applied these authorities in NV Slavenburg's Bank v Intercontinental Natural Resources Ltd and others [1980] 1 All ER 955 when expressing a view (obiter) that agreements by a company to charge present and future debts as security for a general credit agreement under which the secured debt was not quantified at the date of the agreement would nonetheless constitute debentures within the meaning of s.17 of the Bills of Sale Act. It is not necessary for us to express any view as to whether that is correct. The only immediate relevance of the decision is the statement by the judge that there is (as a matter of authority) no hard and fast definition to be attached to the word “debentures”.

The other decision we were referred to is that of the House of Lords in Knightsbridge Estates Trust Ltd v Byrne [1940] AC 613 where a mortgage of freehold land contained a covenant to repay the secured loan by half-yearly instalments over a period of 40 years. The mortgagors sought early redemption arguing that the contractual postponement of repayment over a 40 year period was void in equity. The respondents relied upon the mortgage constituting a debenture as defined by s.380 of the Companies Act 1929 so that s.74 applied to prevent the condition for postponement becoming invalid in equity on grounds of the length of the period. The House of Lords held that it was a debenture.

Section 380 defined a “debenture” as including:

“debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not”.

Viscount Maugham (at p. 621-622, 623) said:

“If we begin by asking what the word "debenture" means, apart from any definition, the reply must be that it has no precise meaning. Chitty J. observed in the case of Levy v. Abercorris Slate and Slab Co., that the word "means a document which either creates a debt or acknowledges it, and any document which fulfills either of these conditions is a debenture." An interesting extract from Skeat's Etymological Dictionary (1882) will be found in a footnote to the case (p. 264). Sir Nathaniel Lindley had previously stated simply, "What the correct meaning of 'debenture' is I do not know": British India Steam Navigation Co. v. Inland Revenue Commissioners. In Lemon v. Austin Friars Investment Trust, Ld., the same ignorance was professed in the Court of Appeal. Warrington L.J. in particular, after observing that it had been said "by a wiser man than himself" that it was impossible to give an exhaustive definition of the word "debenture," went on to remark that he did not propose to incur the reproach of venturing where wise men fear to tread. The text books are agreed at least in this that no accurate definition of the word can be found. I think it sufficient to cite Buckley on the point (11th ed., p. 174). It is clear, therefore, that it was desirable to insert in any consolidation of the Companies Acts a definition of the word.

…

I do not think there is any strong argument for suggesting that s. 74 of the Act of 1929, or any of its predecessors, ought by reason of its nature to be confined to what may be called ordinary debentures. As we have seen, some definition was certainly desirable, and the very wide terms used by the Legislature in the Act of 1928 and reproduced in the consolidating Act of the following year seem to me to show that it was intended to give freedom of contract as regards the particular matter involved in s. 74 in relation to any securities granted on loan by a company registered under the Companies Acts. It is contended that the context otherwise requires. I am unable to find any such context.”

The issue in the case was whether “debenture” in the context of the Companies Act included a mortgage of land but there is nothing in these passages which casts any doubt upon the views of Chitty J and the Court of Appeal as to the ordinary meaning to be attached to the word.

One can see from those authorities why the judge in this case acknowledged that “debenture” had a wider and less specific meaning than “bonds, warrants and coupons” and, context apart, was not limited to an instrument which was transmissible or of a bearer nature. As a matter of language, the term 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. This is fortified in the present case by the acceptance of both parties that it is not possible to import into “securities” the definition or concept of “security” as defined in the Charge.

On this basis, the SLAs are debentures. They comprise in each case a written instrument (albeit not under seal) which creates and thereby acknowledges the relevant debts owed by Corporal. Mr Davies-Jones QC for Pillar submitted that the terms of the SLAs which provide for rolled-up interest and subordinated payment confirm that the loans to Corporal were intended to form part of its medium to long-term capital. That is true but is not, I think, critical to the application of the definition. The point was made to counter Mr Mitchell’s argument that to include any unsecured loan due from Corporal to its shareholders could catch a very wide range of debts with possibly serious consequences for the parties to those arrangements. But the judge had no evidence about this and the issue for us is the limited one of whether the terms of the Charge are wide enough to include the SLAs which are specific identifiable agreements embodied in written documents.

The fact that an unsecured loan agreement of this kind is within a possible meaning of the word “debenture” does not, I accept, make it an available meaning: still less the correct meaning of the word. But it does lead the informed observer to ask himself whether there is anything in the Charge or the relevant background which requires it to be given a narrower meaning. I accept Mr Mitchell’s submission that cases such as Edmonds v. Blaina Furnaces Company and Lemon v Austin Friars Investment Trust Ltd were concerned with interpreting the word “debenture” in the particular statutory contexts of the Bills of Sale Act and the Companies (Consolidation) Act when the purpose of the statute was a critical factor in determining whether to give the word its wide or a more narrow meaning. But the decisions are relevant in this case because they set the parameters of possible meaning and the question for us is where in that scale of meaning the contextual factors relevant to the Charge suggest the word should be put.

If security in the sense of a charge is not a necessary feature of a “debenture” within clause 3.1 of the Charge, then what other limiting factor should there be? The judge talked of the transmissibility or even the bearer nature of the other components in the definition of “Shares” but a debenture would not ordinarily have the bearer nature of a stock, bond or warrant and the express inclusion of those terms alongside “debentures” suggests to me that the draftsman wanted to include as wide a range of assets as possible rather than a more limited class.

The judge, I think, accepts in [77] of his judgment that “debentures” does not as a term fit into the category of assets which can be identified by the two characteristics which he mentions. But what seems to have tipped the balance is the reference in the definition to “other securities”. He gives no other reason why the reasonable observer would assume that “debentures” should be given a meaning different from a simple loan agreement nor does he state or explain what that meaning is.

In Taylor Clark International Ltd v Lewis [1997] STC 499 Robert Walker J (at p. 519) said that “securities” was “an imprecise term which takes its colour from its setting”. In that case the context was the Capital Gains Tax Act 1979. It is, I think, accepted by both sides that the word “security” has at least two principal meanings: the first is a debt or claim the payment of which is secured by a charge or guarantee; the second is as a more general term for describing investments: see e.g. Re Rayner [1904] 1 Ch 176 at 179 and 189. The word can, however, also be used to describe an instrument which merely indicates or acknowledges a debt. In Henry Ansbacher & Co v Inland Revenue Commissioners [1961] 1 WLR 1171 the Court of Appeal (quoting from Wright J in Jones v Commissioners of Inland Revenue [1895] 1 QB 484) held that “security” when used in Schedule 1 to the Stamp Act 1891:

“does not mean as in popular language some obligation which is auxiliary to some other obligation, but means any obligation created by any instrument.”

It appears from that passage not only that the word “security” must be construed in the same way in both headings, but that the word as used in Sch 1 has not its ordinary meaning, but means any written obligation for payment of money.”

See Harman LJ at pp. 1176-7

As explained earlier, the judge rejected the narrower and perhaps more ordinary meaning of the word as something involving a charge or similar collateral security for the obligation to pay. But he does not explain why in those circumstances the informed reader should not assume that the words “other securities” should be given one of their alternative meanings. Mr Mitchell suggested that “security” would apply, for example, to some kind of bundled derivative which was tradeable and therefore had a legal existence apart from the underlying loans upon which it was based. The Stamp Act meaning is, he submits, not one of the ordinary meanings of the word and is justified only by the specific statutory context in which “security” is there used.

The difficulty, however, about this argument is that it does not resolve the issue of what meaning is to be given to the word “debentures” even if “other securities” is simply treated as a synonym for “investments”. The words “or other securities” appear at the end of a list of items all of which can loosely be described as investments. Clause 1.2.6 of the Charge confirms that the plural is to include the singular and it is not therefore possible to exclude the SLAs from being “debentures” on the basis that they were not part of a series or that they did not include security in the form of a charge. What they did represent was relatively long-term loan capital for Corporal not repayable before the company’s principal loan facility with RBS. From Fons’s point of view this could reasonably be regarded and described as an investment in Corporal secured by the terms of the SLAs.

Armed with this knowledge, I can see no reason why the reasonable observer should regard the reference to “other securities” as limiting “debentures” to a meaning which would exclude the SLAs in this case. Once it was clear from a reading of the Charge that they did not have to include a charge over Corporal’s assets he would, I think, have read “debentures” as having its ordinary meaning of an acknowledgement of debt recorded in a written document. The judge has not suggested any alternative meaning which would have been obvious from the admissible background.

I would therefore allow the appeal and make a declaration that the rights of Fons under the two SLAs are included within the Charge.

I agree.

I agree that this appeal should be allowed. Whilst, as the authorities to which Patten LJ has referred show, there is no precise definition of the term “debenture”, Chitty J's formulation in Levy v. Abercorris Slate and Slab Co., that:

“a debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a debenture.”

has been widely accepted in subsequent cases; see, in addition to Lemon v. Austin Friars Investment Trust, Ltd.supra, City of London Brewery Co Ltd v IRC [1899] 1 QB 121 at 139 per Rigby LJ, Clark v Balm Hill & Co [1908] 1 KB 667 at 670 per Phillimore J; R v Findlater [1939] 1 KB 594 at 599 per the Court of Criminal Appeal (and despite the disapproval of Edmonds v. Blaina Furnaces Company expressed by North J in Topham v Greenside Glazed Fire-Brick Company (1887) 37 Ch D 281 at 290). In those circumstances it is not now realistically open to us to question whether Chitty J’s definition, formulated in the context of the courts' concern to avoid the impact of the Bills of Sale Acts on corporate loans, and which has been described as:

“a departure from the established core concept of a debenture, i.e. an instrument issued in a series to enable persons to trade and deal with it in the markets." (see Tennekoon, The Law and Regulation of International Finance (1991), at page 126),

is correct.

In my judgment, both the SLAs fall within Chitty J's basic formulation of what is meant by a debenture.

So far as the loan agreement dated 17^th October 2007 is concerned, because the recital and clause 2.1 show that the loan had already been advanced by Fons to Corporal before the agreement was entered into, it might be said that the written instrument did not create, but rather merely acknowledged, the relevant indebtedness.

So far as the loan agreement dated 15^th February 2008 is concerned, where the loan had not apparently been drawn down prior to the agreement, I agree with Patten LJ that the written instrument both creates and acknowledges the relevant debt which will be owed by Corporal on drawdown. It does not seem to me that the possible argument that, until there had been an actual disbursement of the funds to Corporal on drawdown, there was no existing indebtedness, prevents the loan agreement from being a written instrument which both created and acknowledged the relevant debt. That was clearly implicit in the view expressed by Lloyd J (as he then was) in NV Slavenburg’s Bank v Intercontinental Natural Resources Ltd [1980] 1 All ER 955 at 976 c-d. However the editors of Gore-Browne on Companies, at 27 [17] suggest that it is unclear whether loan agreements themselves (either when originally entered into or when novated) constitute debentures, and point out at footnote 17 that the view has been expressed (by Tennekoon, op.cit., at page 127) that there is no debt created until drawdown, and that, accordingly, at the time of the agreement there is no debt which is capable of acknowledgement. I regard that latter approach 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.

Save in the above limited respect, I agree with Patten LJ that there is no need for us in this case to express any view as to Lloyd J's (obiter) view, as expressed at 976 c-d, that agreements by a company to charge present and future debts as security for a general credit agreement, under which the secured debt was not quantified at the date of the agreement, would nonetheless constitute debentures within the meaning of s.17 of the Bills of Sale Act.

For the reasons given by Patten LJ, I agree that there is nothing in the wording of the Charge or in the relevant contextual background which requires, or even suggests, that the word “debenture” is to be given a narrower meaning than that which is the ordinary meaning of the word, in accordance with Chitty J's formulation. I agree with him that the reference to “other securities” does not limit or restrict the meaning of “debentures” to one which would exclude the SLAs in this case.

Interestingly, it may be the case that the term “debenture” is no longer used so widely. For example, over 10 years ago, the editors of Pennington’s Company Law, 8^th ed. (Butterworths, 2001) wrote at page 532:

“The vast increase in the provision of long and medium-term loans for companies by the commercial banks and their subsidiaries in recent years has had a substantial influence on the forms of security taken in connection with such loans to companies and on the style, contents and nomenclature of the relevant documentation. In particular, the terms ‘loan’ and ‘security agreements’ are now widely used in place of the terms ‘secured’ and ‘unsecured debentures’, and in order to embrace the whole range of loan and debt securities…,it has become usual to refer to them simply as debt securities, or in a more expanded form, as debentures, debenture stock, loan stock and notes and other debt securities.”

For the above reasons, I would allow this appeal.