Chapter 11
Debentures & charges
Chapter Summary
1
DEBENTURE
1.1
Definition
A debenture of a company is defined in s 9 to mean ‘a chose in action that includes an undertaking by the body
(i.e. a company) to repay as a debt money deposited with or lent to the body’. A debenture can be secured or
unsecured. Specific things are excluded from the definition of ‘debenture’:
The borrower may describe a debenture as either a ‘mortgage debenture’, a ‘debenture’ or an ‘unsecured note or
unsecured deposit note’: s 283BH. A mortgage debenture should be secured by a first mortgage given to the
trustee over land: s 283BH, table, item 1. A debenture may be described as such where the tangible property that
secures the charge is sufficient to meet liabilities under the debenture: s 283BH, table, item 2. In other cases the
debenture is described as an ‘unsecured note or unsecured deposit note’: s 283BH, table, item 3.
A company is required to keep a register of debenture holders which contains each debenture holder’s name and
address and the amount of debentures held: s 171(1).
1.2
Requirement for a trustee and trust deed and trustee
Part 2L.1 requires a trust deed and trustee are required where a ‘body’ (which includes a company, but may also
include a society or association: s 9) issues or makes an offer of debentures ( s 283A(1)), including where the
body:
 makes an offer of debentures that needs disclosure to investors under Chapter 6D or does not need such
disclosure because of s 708(14) (debenture rollovers) or s 708A (sale offers that do not need disclosure);
or
 makes an offer of debentures as consideration for the acquisition of securities under an off-market
takeover bid; or
 issues debentures under a compromise or arrangement under Part 5.1 approved at a meeting held as a
result of an order under s 411(1) or (1A).
The requirement to have a trust deed and trustee in these situations is mandatory: s 283AA(3). The trust deed
must comply with s 283AB and the body must appoint a trustee that complies with s 283AC.
1.3
Trustee
The persons who can be a trustee are listed in s 283AC. A person cannot act as a trustee if that would result in a
conflict of interest or duty: s 283AC(2). Once a person is appointed as a trustee, that person continues to act as a
trustee until they are replaced by a new trustee: s 283AD. This applies even where the existing trustee resigns: s
283AD, note. This has the consequence that a trustee cannot effectively resign until a replacement trustee, who is
eligible to act in that office, has consented to act as trustee under the trust deed. The borrower has a duty to
replace the trustee as soon as practicable after the borrower becomes aware that the trustee has ceased to exist, or
has not been validly appointed, or cannot be a trustee under s 283AA, or has failed or refused to act as trustee: s
283BD.
The company may appoint a related party of an existing trustee as a replacement trustee. The court can also
appoint a replacement trustee on the application of the company, a debenture holder or ASIC, if the trustee has
not been validly appointed or has failed to act: s 283AE.
Chapter 11
1
1.4
Trust Deed
A trust deed, in order to comply with s 283AB, must provide that the following are held in trust for the benefit of
debenture holders: s 283A(1):
 the right to enforce the borrower’s duty to repay
 any charge or security for repayment
 the right to enforce any other duties that the borrower or company and any guarantor may have under the
provisions of the debentures or the provisions of the trust deed or Chapter 2L.
The trust deed may be revoked by a body or company after it has repaid all amounts that are payable under the
debentures, in accordance with the debentures’ terms and the trust deed: s 283AA(2).
1.5
Duties Of Borrower
A borrower that is required to enter into a trust deed under s 283AA has the duties imposed by Part 2L.2: s
283BA. These include the obligations to:
 carry on its business in a proper and efficient manner; provide a copy of the trust deed to a debenture
holder or the trustee if they request a copy
 make all of its financial records available for inspection by the trustee, an officer or employee of the
trustee or an auditor engaged by the trustee: s 283BB
 notify ASIC of the name of the trustee within 14 days after the trustee is appointed: s 283BC
 to replace the trustee in the circumstances mentioned in s 283BD (discussed above).
 to inform the trustee about any charges that it creates: s 283BE
 to give the trustee and ASIC quarterly reports: s 283BF
These duties do not apply while the borrower is under external administration, or a receiver or a receiver and
manager of the borrower has been appointed: s 283BG.
1.6
Duties Of Guarantor
If the borrower is required to enter into a trust deed under s 283AA, then a guarantor in respect of the debentures
has the duties imposed by Part 2L.3: s 283CA(1). These include the obligation to:
 carry on its business in a proper and efficient manner
 make all of its financial records available for inspection by the trustee, an officer or employee of the
trustee or a registered company auditor engaged by the trustee: s 283CB
 inform the trustee about any charges that it creates: s 283CC.
Sections 283CB and 283CC do not apply while the borrower is under external administration, or a receiver or a
receiver and manager of the borrower has been appointed: s 283CD.
1.7
Duties Of Trustee
A trustee of a trust deed entered into under s 283AA has extensive duties: s 283DA. The trustee must:
 exercise reasonable diligence to ascertain whether the property of the borrower and of each guarantor
that is or should be available will be sufficient to repay the amount deposited or lent when it becomes
due: s 283DA(a)
 exercise reasonable diligence to ascertain whether the borrower or any guarantor has committed any
breach of the terms of the debentures or the provisions of the trust deed or Chapter 2: s 283DA (b)
 A trustee must do everything in its power to ensure that the borrower or a guarantor remedies any breach
of the debentures, the trust deed or Chapter 2 known to the trustee (but the trustee is not required to take
such action if the trustee is satisfied that the breach will not materially prejudice the interests of the
debenture holders or the security for the debentures: s 283DA(c))
 ensure that the borrower and guarantor comply with Part 2K to the extent that it applies to the
debentures: s 283DA(d)
 must notify ASIC as soon as practicable if:
o the borrower has not complied with s 283BE, s 283BF or s 318(1) or (4); or
o a guarantor has not complied with s 283CC ( s 283DA(e))
 must notify ASIC and the borrower as soon as practicable if the trustee discovers that it cannot be a
trustee under s 283AC: s 283DA(f).
Chapter 11
2
A trustee must give the debenture holders a statement explaining the effect of any proposal that the borrower
submits to the debenture holders before any meeting that:
o the court calls in relation to a scheme under ss 411(1) or (1A); or
o the trustee calls under s 283EB(1) ( s 283DA(g)).
A trustee must comply with any directions given to it at a debenture holders’ meeting referred to in ss 283EA,
283EB or 283EC unless:
(i) the trustee is of the opinion that the direction is inconsistent with the terms of the debentures or the
provisions of the trust deed or the Act or is otherwise objectionable; and
(ii) the trustee has either obtained, or is in the process of obtaining, an order from the court under s 283HA
setting aside or varying the direction ( s 283DA(h)).
A trustee must apply to the court for an order to protect debenture holders under s 283HB if the borrower requests
it to do so: s 283DA(i).
1.8
Exemptions of the trustee from liability
A term of a debenture, trust deed or contract with holders of a debenture secured by a trust deed is void if this
would have the effect of exempting a trustee from liability for breach of s 283DA for failure to show the degree of
care and diligence required of it as trustee or indemnifying a trustee against that liability: s 283DB(1).
Exceptions are made if the term releases the trustee from liability for something done before the release is given
or enables a meeting of debenture holders to approve of the release of the trustee from liability for something one
or omitted to be done before the release is given: s 283DB(1). For this purpose a release is approved if the
debenture holders who vote for the resolution hold 75% of the nominal value of the debentures held by all
debenture holders who attend the meeting and the holders attend the meeting in person or are represented by
proxy if proxies are permitted.
The trustee is not liable for anything done or omitted to be done in accordance with a direction given to it by the
debenture holders at any meeting called under s 283EA, 283EB or 283 EC: s 283DC.
1.9
Meetings of debenture holders
It is the borrower’s duty to call a meeting of debenture holders if:
o debenture holders who together hold 10 per cent or more of the nominal value of the issued debentures
so direct the borrower. (The purpose of the meeting will be to consider the financial statements that were
laid down before the last AGM of the borrower and to give the trustee directions in relation to the
exercise of any of its powers: s 283EA)
The trustee may call a meeting of debenture holders to inform them if a borrower or a guarantor fails to remedy
any breach of the terms of the debentures, provisions of the trust deed or Chapter 2. At such a meeting the trustee
can submit proposals to the debenture holders to protect their interest and seek their directions in relation to the
matter: s 283EB. The court may order that a meeting of the debenture holders be held for giving directions to
the trustee: s 283EC.
1.10 Power Of Court
The court has a general power to give directions and determine any question in relation to the interests of
debenture holders: s 283HA. The powers that the court has are very extensive: s 283HB.
2
CHARGES
A charge is defined to mean ‘a charge created in any way and includes a mortgage and an agreement to give or
execute a charge or mortgage, whether on demand or otherwise’: s 9. A chargee is ‘the holder of a charge and
includes a person in whose favour a charge is to be given or executed, whether on demand or otherwise, under an
agreement’: s 9. A charge does not normally involve any change of ownership of the assets that are charged.
2.1
Examples
A covenant to give a further security is a charge that requires registration: ABALCHECK PTY LTD V PULLEN
(1990) 8 ACLC 1078, (1990) 3 ASCR 246.
Chapter 11
3
The courts have held that a negative pledge is not a charge. A negative pledge is a pledge that the borrower will
not create a further security over the assets of the borrower without the consent of the lender. This is not a charge
but a contractual promise, independent of the original charge: PULLEN V ABALCHECK PTY LTD (1990) 20
NSWLR 732, 8 ACLC 1119.
A reservation of title clause is not a charge: ASSOCIATED ALLOYS PTY LTD V ACN 001 452 106 PTY LTD
(2000) 202 CLR 588, 18 ACLC 509, [2000] HCA 25.
2.2
Fixed charge
Under a fixed charge, which is usually given over fixed items such as machinery or intellectual property, the
company cannot sell or dispose of those assets that are subject to a fixed charge without the consent of the
chargee.
2.3
Floating charge
A floating charge will take effect when the company by an act or omission is in default under the debenture either
in not paying any instalment of capital or principal under the debenture or in not observing any other provision of
the debenture. Until the company commits an act of default, when ‘crystallisation’ of the floating charge occurs,
the charge will provide that the company is free to sell charged stock or assets in the ordinary course of the
business of the company. When default occurs the charge will generally, under the terms of the debenture,
become a fixed charge. This is recognised by the fact that a floating charge is defined as including ‘a charge that
conferred a floating security at the time of its creation but has since become a fixed or floating charge’: s 9 and
FIRE NYMPH PRODUCTS LTD V THE HEATING CENTRE PTY LTD (1992) 10 ACLC 279, (1992) 7 ACSR
365.
In WILY V ST GEORGE PARTNERSHIP BANKING LTD (1999) 84 FCR 423, (1999) 17 ACLC
279, (1999) 30 ACSR 204, the court held that payments which represented the proceeds of the sale of plant and
equipment which were the subject of the fixed charge were not recoverable as preferences. The court also ruled
that the payments made in respect of the assets which were the subject of the floating charge were not recoverable
as preferences. This is because, if the payments had not been made, the property available for distribution among
creditors would not have been increased. Some members of the court considered that the holder of a floating
charge gives the chargee an equitable interest in the charged assets of a proprietary nature.
In BARCELO V ELECTRONIC ZINC COMPANY OF AUSTRALASIA LTD (1932) 48 CLR 391, [1932]
VLR 94 the court noted that even
before the charge becomes fixed or crystallised, the debenture holders are entitled to an injunction to restrain
the company from parting with its assets otherwise than in the ordinary course of its business.
3
REGISTERS
3.1
Company must keep register of charges
The company must also keep a register of charges which includes charges that cannot be registered on the
Australian Register of Company Charges: s 271. This register is open to public inspection.
3.2
Australian Register Of Company Charges
ASIC is required by the Corporations Act to maintain the Australian Register of Company Charges: s 265(1).
ASIC enters upon this register any charges that are registered or any variation or discharge of those charges. A
charge may be registered at any regional office of ASIC: s 261. There is a system of provisional registration upon
the register where a notice of charge is not completed properly or where duty has to be paid.
3.3
Charges required to be registered
The following charges must be registered on the Australian Register of Company Charges (s 262(1)):
o floating charges on all or part of the property, business or undertaking of a company: s 262(1)(a)
o a charge on uncalled share capital: s 262(1)(b)
o a charge on a call on shares made but not yet paid: s 262(1)(c)
Chapter 11
4
o
o
o
o
o
o
a charge on a personal chattel including a personal chattel that is unascertained or is to be acquired in the
future, but not including a ship registered under an Australian law relating to title to ships: s 262(1)(d)
a charge on goodwill, on a patent or licence under a patent, on a trademark or service mark or a licence
to use a trademark or service mark, on a copyright or licence under a copyright or on a registered design
or a licence to use a registered design: s 262(1)(e).
a charge on a book debt: s 262(1)(f).
a charge on a marketable security, not being:
o a charge created in whole or in part by the deposit of a document of title to the marketable
security; or
o a mortgage under which the marketable security is registered in the name of the chargee or a
person nominated by the chargee; or
o a charge where there is an agreement in force under which the chargee (or a person who has
agreed to act on the instructions of the chargee) controls the sending of some or all electronic
messages or other electronic communications by which the marketable security could be
transferred : s 262(1)(g).
• A lien or charge on a crop, a lien or charge on wool or a stock mortgage: : s 262(1)(h).
• A charge on a negotiable security other than a marketable security: s 262(1)(j).
The following charges do not need to be registered on the Australian Register of Company Charges: s 262(2):
o A charge or a lien over property arising by operation of law: s 262(2)(a).
o A pledge of a personal chattel or of a marketable security: s 262(2)(b).
o A charge created in relation to a negotiable instrument or a document of title to goods being a charge by
way of pledge, deposit, letter of hypothecation or trust receipt: s 262(2)(c).
o A transfer of goods in the ordinary course of the practice of any profession or the carrying on of any
trade or business: s 262 (2)(d).
o A dealing in the ordinary course of the practice of any profession or the carrying on of any trade or
business, in respect of goods outside Australia: s 262 (2)(e).
o A ‘charge on land’ need not be registered: s 262(8). This is because a mortgage of registered land,
which is effectively a charge, will already be registered in land titles offices under the Torrens statutes in
Australia.
The definition of ‘document of title’ is relevant for the purposes of ss 261(1)(g), 262(2)(c) and 262(5). A
‘document of title’ is defined in s 261 to mean a document used in the ordinary course of business as proof of the
right to possession or control of property other than land. The term includes a bill of lading, a warehouse keeper’s
certificate, a wharfinger’s certificate, a warrant or order for the delivery of goods, and a document that is a
marketable security: s 261(1). The possession by a person of a document of title would give that person the right
to take possession of goods described in the document of title. A person who has a bill of lading can take
possession of cargo from a vessel. The Corporations Act does not require documents of title to be registered. It
would be an unreasonable burden on business to require such documents to be registered.
3.4
Failure to register charge
The failure to register a charge with ASIC that is required to be registered does not invalidate the charge: 262
(11). The charge is enforceable against the parties to the charge. However, the charge cannot bind or be
enforceable against any administrator, liquidator or third party. A charge may be void against the appointment of
an administrator or liquidator where it has not been lodged within 45 days after the creation of the charge: ss
266(1) and (2).
3.5
Priority of charges
There are priority rules for the purpose of resolving which charge will take precedence over another charge. There
are statutory rules for resolving priority disputes between registrable charges: ss 279 to 282. The general law has
equitable rules for resolving priority disputes of unregisterable charges. Generally speaking, the order in which
charges are registered will govern the priority of charges. It should be appreciated that the fact that a charge is
registered will not automatically give it priority over other charges. An unregisterable charge may take priority
over a later registered charge.
3.6
ASIC’S power to exempt and modify
ASIC has power to exempt a person from a provision of Chapter 2. ASIC may impose any conditions for granting
an exemption: s 283GA.
Chapter 11
5
3.7
Power of court
The court has power to extend the time for registration of charges: s 266(4) if the court if it is satisfied that the
failure to lodge a notice in respect of a charge:
o was accidental or due to inadvertence or some other or sufficient cause (s 266(4)(a)); or
o is not of a nature to prejudice the position of creditors or shareholders (s 266 (4)(b)); or
o that on other grounds it is just and equitable to grant relief.
Examples of such extensions are NATIONAL AUSTRALIA BANK LTD V DAVIS & WADDELL (VIC) PTY LTD
(2003) 44 ACSR 296, (2003) 21 ACLC 1401, [2003] VSC 1; HEWLETT PACKARD AUSTRALIA PTY LTD V
GE CAPITAL FINANCE PTY LTD (2003) 203 ALR 51, (2003) 47 ACSR 589, (2003) 22 ACLC 146, [2003]
FCAFC 256.
The court can also correct any error or misdescription in the Australian Register of Company Charges by
rectification of the register: s 274.
Chapter 11
6