I am very worried about Section 95. I do not know whether I have completely misunderstood it or not but it seems to me to provide such an easy method of fraud that I feel I must have misunderstood it. As I understand the matter, subsection (2) provides a method by which redeemed debentures can be reissued and get the same priority on reissue as if they never had been redeemed. Perhaps the Minister would consider this case I have in mind. A company has an issue of debentures of £10,000 issued on 1st January, 1950. It redeems those debentures on 1st January, 1955, and having redeemed those debentures on 1st January, 1955, it then borrows money on an unsecured basis on the representation that it has no debentures outstanding, I am thinking of a company that is trying to be fraudulent. It then reissues its debentures in favour of one of its pals on 1st January, 1960, and by so doing it gets a priority back to 1950 over the people who have lent the money in 1955. That certainly was never intended and as far as I can see—and I have taken the opportunity of consulting others on this section also and as far as they can see—that is the effect of the section. I know lenders always get the company to pass a minute saying that during the guarantee of their unsecured loan, the company will not issue debentures. That is all right for the honest case but I am thinking of the fraudulent case. It seems that notwithstanding that minute, the fraudulent company can by its board of directors pass another resolution revoking the previous minute, reissue the debentures and by reissuing those debentures create for them a priority that completely defeats the existing loan. I am quite certain that that was never intended but I cannot find any other reading for this section.
SECTION 95.
I am not absolutely certain of this but the explanation may be that in the case the Deputy mentions, the second lender would probably ask the company whether it had any debentures which had not been cancelled. " Cancellation " is the important thing.
I agree.
And if they say " no ", I presume that is all he can rely on.
Supposing the company says " yes; we have debentures that were cancelled ", can the second lender, in the light of that section, protect himself?
He will not lend.
Then that is putting a premium on ordinary commercial transactions that we do not want to put on.
Can the lender not ask for evidence of cancellation, either a resolution to that effect or some other act as provided in paragraph (b).
There is also the point that the Sixth Schedule requires the balance sheet to give particulars of any redeemed debentures which the company has power to reissue.
I agree.
When people ignore the requirements of the law and set out to be fraudulent, there is sometimes very little we can do to prevent them. I do not think you can think up any alteration to Section 95 which would prevent people from being fraudulent.
I am not sure I agree that you cannot think up some method of catching or preventing fraud. I am not on to that at this stage. I want to establish whether I interpreted the section correctly that there can be fraud. I think there can. Why do you want to reissue redeemed debentures?
Everyone has been in great difficulty about the purpose and the origin of this section. The Company Law Reform Committee said they had examined the existing provision at great length and were not quite sure what was its meaning. But they did think the principal intention was to deal with cases where a company has an overdraft and its account at the bank subsequently ceases to be in debt. One of the purposes of the section re-enacted in subsection (3) is to ensure that the security which had been given for the overdraft would not then cease to operate. There was a whole series of court cases about this sort of thing in 1907 mainly on the point whether a company can be debtor to itself. It was decided that a corporation could not be debtor to itself no more than an individual. That created a lot of difficulty for companies who had redeemed debentures. This rather lengthy section was thought up to deal with it. When that section was passed, before very long there began to be great difficulty about the meaning of certain clauses in it. It was re-drafted in Britain in 1928 and the clause with which the Deputy has been dealing was specifically inserted at that stage. The wording which was used in the Act of 1908 in relation to reissued debentures was : " the person entitled to the debentures shall have the same rights and priorities as if the debentures had not previously been issued." That wording caused difficulty as, in effect, it meant the reissued debentures were not the same debentures as those which had been redeemed. The Company Law Reform Committee also specifically dealt with the point and thought it preferable that the law should provide that the reissued debentures should have the same priority as if they had never been redeemed. It is probably a better arrangement. It brings home the idea of continuity. The debentures, although they are redeemed, continue to exist and when they are reissued, they have the same security.
Why should they continue to exist when they are redeemed?
I presume it is for convenience, to avoid going through the process of re-negotiating entirely new debentures. It may be very useful for the company, according as the debentures are redeemed, to have the power to issue them again without any formality.
The only effect will be either (a) that you will leave it open to fraud or (b) that any lender will insist on a formal resolution of the company in general meeting cancelling debentures, which in effect negatives the whole purpose of the section.
There is a distinction which was mentioned earlier and which it might be as well to clarify. In this context, the word " cancel " and the word " redeem " were used. As I understand the position, mere redemption cancels the debenture but the company still has the right to reissue in a peculiar kind of way. Is that right ? The debentures still subsist, even if they are redeemed.
Yes.
It would be possible, as Deputy Sweetman said, formally to cancel the debenture.
And there would be no trouble then.
But then there would be no need for the section.
I must say Deputy Sweetman's point has not been answered to my satisfaction, that if the debenture is issued and is redeemed and then there is another borrowing transaction, it captures priority if it is reissued. Therefore the way is open to fraud and anybody negotiating will be very cautious. It will inhibit any further borrowing until that debenture is out of the way.
This section inhibits ordinary commercial transactions until the debentures are cancelled. If it means they are going to be cancelled because of the section, why put the section in at all as it is ?
This section as we are now rewriting it, meets the recommendation of the Company Law Reform Committee, and is the same as that now prevailing in Britain. I do not remember seeing any complaint about the section as it has operated in Britain since it was rewritten there.
What we are up against is that either we take this draft as you have it here or we have to repeal an existing provision.
Oh, no. It rewrites the 1908 Act substantially.
That is the point I am making. What is put up to us is either we re-enact or repeal the 1908 Act because everything we do not deal with in the 1908 Act goes. Is that not right ?
No. There is a saver to which I objected.
The Act of 1908 will go when the Bill is passed.
Would it be true to say that this section is primarily designed to facilitate a company borrowing, say, from a bank, paying off its overdraft and then borrowing again ?
The Company Law Reform Committee thought so.
This really would not operate in the case of a special issue of debentures or normally deal with a private individual ?
It would.
That situation is covered in a different way in subsection (3) because the debentures remain deposited and as long as the debentures remain deposited, there is a different story altogether. They are not redeemed. They may be technically redeemed but they are not bought back and brought out again.
I cannot see that there is any great difficulty involved in issuing new debentures.
Take the case of a bank, which is probably the more common one. You issue general debentures of the assets of the company in order to secure the company's overdraft with the bank and subsection (3) covers the point where the company no longer owes the bank any money. The debenture did not get redeemed or cancelled. It may remain in operation in case at a subsequent date the company again goes into the " red " but I cannot see any reason for any company redeeming that debenture and then requiring to reissue it. The company is not prejudiced by leaving the debenture as it stands because it is only of the same value as its indebtedness to the bank. If the indebtedness does not exist then the debenture is valueless.
Certainly in the case of ordinary overdrafts, that is so. As long as the bank holds the debenture, whether there is an overdraft or credit, it is not redeemed and priority continues. Is that not the position ?
The bank always insists on having priority. They are narrow-minded on the point.
In practice, if there is any likelihood of a continued overdraft, the debenture will lie there, will it not ?
Yes.
Surely nobody would lend a substantial sum of money without making certain that the previous one was cancelled ?
If it is cancelled, you start with a new point. There is no point in the section if you have to do that.
I think the idea behind permitting a company to reissue debentures is that there might be a situation in which a resolution had been passed authorising them to issue debentures, for, say, £10,000 and the company might find it convenient subsequently to redeem some of these debentures after they had been issued. Later on, they might wish to borrow more money. If they did not have the power to reissue the redeemed debentures, they would have to go through the various formalities of getting sanction to make an entirely new issue.
We could concede that. It is the priority that is worrying us. I think nobody is going to object to the issue if the machinery is there authorising the issue of the debentures and if these debentures are in fact redeemed, from the company's point of view, there is absolutely no objection to having them reissued but Deputy Sweetman made the point in regard to the priorities and I am not convinced he is not right. Why should the priority attach not to the debenture but to the actual loan and the issue ?
For some reason which is not very clear the old wording was regarded as objectionable by the Company Law Reform Committee. I think that is about as far as we can go.
Do we wish to legislate now that once a debenture is issued and uncancelled it will carry priority from the date of original issue, no matter how many times it is reissued? If that is so, it must completely inhibit any subsequent borrowing transactions.
It seems to me the only effect of the section is going to be that anybody who wants to make a loan where there are redeemed debentures will say : " You can cancel them ". Then, if he is going to do that——
Or see that he gets security. Any subsequent borrower says, if there are redeemed debentures : " Give the money to me ".
That means the section is out.
On the other hand, it has been there since 1908.
It is in a different form.
It was re-written in order to achieve a purpose.
I am rather interested to know what it was rewritten to achieve. Could we ask ourselves what it is aiming to achieve in the re-writing? What are we attempting to do here and if we do not know what we are attempting to do——
I am afraid the committee did not help us very much on this particular point. The reason may be that the wording of the 1908 Act puzzled very many people.
Their deliberations may have been clear but their report of such deliberations is not.
We are now going to legislate and I think it is the least part of our duty to be definite on what we are doing.
And why.
Is the difference between the old and the new law the question of priority being handed back to the original date of issue?
That would be one of the substantial changes.
The suggestion would be that the redemption of a debenture would automatically cancel a debenture but the company would have power to reissue.
Subject to priorities and that——
And that the company would be entitled to reissue the debenture in its own priority.
It is getting a bit late now. The comments of the Committee have been very constructive and I will re-examine the matter in the light of what members have said.
Section 96 seems to have a bearing on the first mortgages but it only complicates the situation further.
It does not disturb the existing arrangements. I suggest that we pass Sections 95 and 96, subject to what I have said about Section 95.
I do not think this is the correct stage with which to deal with the winding up of companies. Section 285 is more appropriate.
We can leave that until Section 285.