Australia: Issuing debentures: what's in a name?

Background

When a company intends to issue debentures, how to describe the debentures in a prospectus or an advertisement is a key consideration for that company.

Currently, under s283BH of the Corporations Act 2011, three descriptions are permitted:

1. mortgage debenture – if the repayment of all money under the debentures are secured by a security interest in real property
2. debenture – if the repayment of all money under the debentures are secured by a security interest in tangible personal property
3. unsecured notes or unsecured deposit note – if the notes are not secured or are secured by intangible property (e.g. accounts receivable).

Problem

Many debenture issuers are financing companies whose main source of revenue is generated by lending money. Thus, their assets comprise primarily of accounts receivable. Accounts receivable are intangible property for the purposes of describing debentures. Therefore, previously these debentures could only be described as 'unsecured notes' or 'unsecured deposit note', when they were in fact secured by intangible property.

Solution: the missing link

ASIC Class Order CO 12/1482 came into effect on 8 February 2012. This Class Order effectively inserts a new class into s283BH called "secured notes". These are debentures secured by intangible assets such as receivables.

The key requirements for a debenture to be described as "secured notes" are:

1. it must be a first ranking security interest in favour of the trustee over the whole or any part of the borrower's and/or the guarantor's property; and
2. the whole or part of the property covered must be sufficient and reasonably likely to be sufficient to repay all liabilities that have been and may be incurred and are ranked ahead or equally in priority to the security interest covering the notes.

Things to 'note'

If the debentures you issue satisfy the above criteria and you choose to describe them as "secured notes", there are required statements and disclosures that must be made along with this description.

For example, a prospectus or any document relating to an offer for 'secured notes' must expressly state that (1) the secured note is not a bank note and (2) there is a risk that investors can lose some or all of their money. There are different requirements for disclosure documents and quarterly reports and for use on a website.

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This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.