When is a share not a share?

When is a share not a share?

Can an expanded definition of ‘share’ in a security document catch a shareholder loan agreement?

Original news
Fons HF (in Liq) v Pillar Securitisation S.à.r.l [2014] EWCA Civ 304, [2014] All ER (D) 215 (Mar)

In this case the Court of Appeal held that a shareholder loan agreement could constitute a ‘debenture’ as it is an instrument which evidences a debt.

The effect of this decision was to bring two shareholder loan agreements within the meaning of debenture within the definition of ‘shares’ under a legal charge. Consequently, the two shareholder loan agreements formed part of the assets secured by a legal charge over the shares as defined in the legal charge.

What happened in the Fons case?
Fons HF (in liquidation) (Fons) held ordinary and preference shares in Corporal Limited (Corporal).

In October 2007, Fons granted an unsecured loan to Corporal of £563,500 to assist it to expand concessions of the Hamleys toyshop into House of Fraser stores.

In February 2008, Fons provided 35% of a joint unsecured loan with BG Holding EHF (Baugur) providing the remaining 65%, totalling £1.5m to Corporal to finance the refurbishment of the Hamleys, Regent Street toy store in London. The proportions of this shareholder loan were linked to the size of their respective shareholding in Corporal.

Fons had granted a legal charge to Kaupthing Bank Luxembourg (‘Kaupthing’) in September 2008 (the ‘Kaupthing legal charge’) in respect of indebtedness which was in the region of £14m at that time.

The question arose whether the rights of Fons in each of the unsecured shareholder loan agreements could fall within the definition of ‘shares’ in the Kaupthing legal charge.

Why was the definition of ‘shares’ in the security document important?
It is the definition of ‘shares’ in the Kaupthing legal charge which the Court of Appeal examined in detail.

The term ‘shares’ was 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 [Fons] in Corporal from time to time or any in which it has an interest’.

Fons claimed that a mere unsecured loan could not fall within the term ‘shares’ and, therefore, was outside the scope of the Kaupthing legal charge. Corporal, however, argued that it was within the definition of either debenture or ‘other securities’ and so was caught by the Kaupthing legal charge. The High Court agreed with Corporal.

The crux of the case before the Court of Appeal hung on the definition of the term ‘debenture’. The court recognised that, although there is not a concise meaning in English law, the term debenture is used frequently in legal documentation. Patten LJ considered the use of the term debenture in some detail referring to a range of cases and textbooks. He understood the judge in the High Court had concluded that debenture had a ‘wider and less specific meaning than “bonds, warrants and coupons”…and was not limited to an instrument which was transmissible or of a bearer nature’.

The term debenture, he concluded, 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’.

On this basis, the shareholder loan agreements in this case were considered as debentures—they were written instruments which acknowledged the debt of Corporal to Fons as an unsecured loan from a shareholder. These shareholder loan agreements were declared to fall within the definition of ‘shares’ as drafted in the Kaupthing legal charge and so were part of the secured property available to Kaupthing as the secured creditor under the Kaupthing legal charge.

How does this affect my drafting now?
In the judgment, Patten LJ suggested that an informed observer should consider whether there is anything in the charge document which means the term debenture should be given a narrower meaning.

With this in mind, when drafting a share charge or any other security document which contains a charge over shares, lawyers should consider:

• the definition of ‘shares’ and whether it includes a catch-all provision with a reference to debentures
• whether the share charge should cover other items, such as any shareholder loan agreement, and
• whether it is appropriate to amend the drafting specifically to exclude certain assets which could fall within the definition of debentures (such as shareholder loan agreements) from the definition of ‘shares’
The same issues may arise if the security is created using a debenture (meaning, in the context of secured lending, a form of security document containing a range of charges, fixed and floating, legal charges and even assignments in some cases over a broad range of assets).

However, even if a shareholder loan agreement is excluded from the definition of ‘shares’ in a security document (and consequently from any charge over the ‘shares’), the rights under the shareholder loan agreement are still assets of the company and likely to be subject to other security interests created by the debenture document. The asset is a contractual right and a receivable will arise when the debt is due, so it may be caught by a fixed charge over contractual rights or within the definition of receivables. If not, then it is still likely to be caught by the floating charge. Drafting should be considered in light of the judgment in this case.

Parties to a security document which is a debenture should be careful not to exclude assets without consideration, if they want to make sure they have a qualifying floating charge over all or substantially all the assets of the company. Having a combination of interests which provide security over all or substantially all the assets allows the company and directors to use the out of court procedure under the Insolvency Act 1986, Sch B1, para 14 to appoint an administrator.

What should banking and finance lawyers do now in relation to existing documents?
In existing security documents, this case potentially provides comfort to the lenders that where the definition of ‘Shares’ includes the term debenture, a shareholder loan agreement is likely to form part of the secured assets.

Borrowers and their lawyers may also like to revisit the definition of ‘Shares’ in any security document taking security over shares, to check if a shareholder loan agreement would be caught or remains outside the security net.

Banking and finance lawyers may like to review existing precedent documentation (eg share charges and debentures), to see if the term debenture is used in the definition of ‘shares’, and whether rights in a shareholder loan agreement would be secured assets available to the secured creditor.

Jacqueline Cook, solicitor in the Lexis®PSL Banking & Finance team.

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.