Company law revision question and answer

(b) Two years ago, Smart Limited issued a series of debentures in favour of Tumaini Bank. The debentures were in the Standard Bank form described as a fixed and floating charge over all the company‟s assets. There was an express term of the debenture that the company would not issue a subsequent fixed charge to rank in priority to the floating charge. Six months later, Smart Limited issued a fixed charge over its freehold property in favour of Mali Bank.
Mali Bank was unaware of the prohibition. Smart Limited has gone into liquidation and both banks are proving their debts on priority basis.

Discuss the legal position of each bank.

(c) The most common method of securing debentures is to execute a trust deed. Explain the meaning of a trust deed and outline its advantages.

• This problem is based on priority of charges created the company. It is clear that the first charge in favour of Tumaini Bank had a negative pledge clause which prohibited Smart Ltd from creating a charge in priority thereof. But Smart Ltd created a fixed charge thereafter in favour of Mali Bank which claims ignorance of the prohibition.
• Tumaini Bank‟s charge has priority in that it was created first and had a negative pledge clause and covers all the assets of the company.
• Mali Banks fixed charge ranks second in that it was created after Tumaini Banks Charge. The contention that the bank was unaware of the prohibition is untenable as the bank as a 3rdparty is deemed to know the contents of the company‟s public documents. This is because charges are registrable with the registrar of companies. Arguably, therefore the doctrine of constructive notice renders the banks argument unsustainable.

• This is a document issued a company as security whenever series of debentures or debenture stock are issued.
• It is an acknowledgment that the company is indebted to trustees on behalf of the creditors.
• It confers upon the trustees a legal mortgage over all the company‟s assets.
• It embodies an undertaking the company to honour its obligations to all creditors.
• It describes the nature of the security given, methods of redemption, circumstances in which the security may be realized meetings of creditors, powers of trustees etc.
• Facilitates protection of the company‟s assets or security for the benefit of all creditors.
• Trustees acquire a legal charge over all assets of the company.
• Trustees have the right to take possession of the security.
• Trustees are entitled to sell the security in the event of default.

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