Debenture

A buyer or seller may meet the word when reviewing a corporation’s debts. It names a debt obligation; whether it is secured depends on its terms. See what a general security agreement is on an acquisition loan and general security agreement. This entry cites the CBCA and Ontario’s PPSA; check the rules where you are.

What the statutes say

The CBCA defines a debt obligation as a bond, debenture, note or other evidence of indebtedness or guarantee of a corporation, whether secured or unsecured. Unless the articles, by-laws or a unanimous shareholder agreement provide otherwise, its directors may, without shareholder authorization, borrow money, issue debt obligations and create a security interest in all or any of its property, owned or subsequently acquired (s.189(1)). Ontario’s PPSA applies to a transaction that in substance creates a security interest, whatever its form, including a debenture or floating charge (s.2), subject to the exclusions in s.4(1).

What to check or ask

• Whether the debenture is secured, and over which property.
• Whether a financing statement is registered against the company.
• Whether the articles, by-laws or a unanimous shareholder agreement limit the directors’ borrowing powers.