Katy: Dom, this investment you were telling me about—the website. What are you being offered in the way of security?
Dom: The details are a little vague at the moment.
Nigel: I’m sure they are!
Katy: What kind of website is it?
Dom: It’s a networking site for dentists, Pearl-e-whites.net. Do you know it?
Katy: Oddly enough, no. Look, before you start investing in crazy schemes you need to carry out a due diligence. I can do that for you if you want.
Dom: Really? That’s great, thanks!
Hannah: So Katy—what exactly is due diligence, then?
Dom: Being careful?
Katy: Maybe you’d be better off putting your money in a high interest account. Actually, you’re not far off. It basically means checking out the state of the company before investing in it.
Hannah: So how can we make sure Dom doesn’t end up losing all of my hard-earned savings?
Katy: By means of the debenture that Dom mentioned earlier. Dom, is this a US or UK company?
Dom: UK. Why?
Katy: Because the term doesn’t have the same meaning in America as it does here. I wanted to check that we were talking about the same thing.
Dom: So what’s the difference?
Katy: What you’re talking about isn’t a loan as such, but the instrument governing the loan. In its simplest form a debenture is a document issued by a company acknowledging a debt, unlike in the US. See it as a kind of secured debt. It’s quite different in America. For us a debenture represents some kind of security, for them it’s simply an unsecured debt. It doesn’t guarantee interest payments. In fact, it doesn’t even guarantee repayment of the principal money.
Hannah: So we really do speak two different languages. Anyway, assuming Dom’s right and this is a UK company using UK terms, this piece of paper is my security?
Katy: It can help. You can write certain remedies into the debenture instrument. For example, the express power to sue as a creditor or petition for winding-up should the company fail to pay interest.
Nigel: And by petition she doesn’t mean you have to go out and get a bunch of signatures!
Katy: Remind me, Nigel. Was it for your sense of humour that I married you? No, I guess it can’t have been. Sorry about him, he has a problem with what he likes to call ’lawyer-speak’.
Nigel: Look, I’m sorry but why say 'petition for winding up' when what you mean is 'apply for the company to be wound up'?
Katy: Well which do you think sounds more elegant? Silly me, I’m clearly asking the wrong person.
Hannah: I'm sorry to interrupt this sweet little tiff, but this debenture is my security for the loan? It will guarantee my interest payments?
Dom: And what if I’m having trouble getting back the debt itself?
Katy: What, the actual money you lend in the first place? That’s called the principal money. It would be common for the debenture to contain an express power of sale.
Katy: You should also make sure it grants you the power to appoint a receiver, someone to realise your security should your debtors not be able to pay either the interest or the principal money. The debenture will state the circumstances in which these powers will arise.
Dom: OK, sure. So, if they don’t pay their interest on time …
Katy: Then the debenture may grant that those powers I just mentioned when the lender’s …
Hannah: That’s you, Dom.
Katy: … when the lender’s interest is in arrears for a specified period.
Dom: What powers were those again? Sorry, it’s getting late.
Nigel: Yes, it is. Maybe we should be going, Katy?
Katy: Nigel, what is your problem tonight? OK, nice and slowly for you, Dom. First, there may be an express power of sale.
Dom: Meaning that I can sell the debt if I want?
Katy: No. It’s a step that can be taken by lenders if somebody defaults on their agreed interest payments. It authorises the sale or transfer of land in accordance with the terms of the provisions.
Dom: So I sue them and they have to sell their property?
Katy: I told, you. Dom, we don’t spend all our time suing! Anyway, generally speaking a right of sale gives you the right to force the sale of the property without judicial proceedings.
Dom: And I need to make sure that this is an express power written into the debenture document?
Katy: Actually, the Law of Property Act gives the lender the implied power to sell the property used a security and appoint a receiver under one of two conditions.
Dom: Which are?
Katy: You can appoint a receiver if either the debenture has been made under seal and interest is two months in arrears, or if the principal money hasn’t been paid three months after it becomes due. Of course, you’re also free to negotiate your own express powers, for example—you could grant yourself the right to appoint a receiver if interest payments are only six weeks in arrears, rather than eight as implied by law.
Dom: And what would happen if either of those conditions were met?
Katy: The receiver would be appointed under the terms of the debenture to realise assets charged and apply the proceeds to the benefit of those entitled.
Hannah: That’s you, Dom.
Dom: Sorry, you said that these terms are implied? You mean that whatever the terms of the debenture, the law gives me those powers anyway?
Katy: If the debenture is made under seal, yes. But when the debenture is drafted you should include express powers anyway, as these can be made much wider than powers implied by law.
Nigel: So, Hannah, how’s Ruby doing these days?
Hannah: She’s fine, thanks Nigel. Sorry Katy, so this debenture thing has to be made under seal?
Katy: It doesn’t have to be, but it’s better for you if it is. It’s like this, a seal is a device for stamping the company's name in paper. It used to be the case that any contract entered into by a company had to be under seal, subject to some minor exceptions. This requirement was abolished about 20 years ago in the UK, but many companies still use a company seal for deeds, share certificates and other important documents.
Hannah: Why bother using seals if they don’t need to?
Nigel: Probably being advised to by dodgy lawyers.
Katy: No, Nigel. A company seal is a good authenticating device. Old habits die hard in the legal profession. The term contract under seal is now synonymous with an agreement made by deed. As I tried to explain just now, you are granted certain implied powers if your debenture is under seal. Sorry about Nigel, things didn’t really work out for you at law school, did they darling?
Dom: Er, Katy. Maybe it would be better if I came round to see you sometime next week? I think we’re all getting a little tired.