Can A Debenture Holder Sue On The Basis Of Oppression?

What is a debenture holder? Can a debenture holder raise an oppression claim in court? This question was dealt with in the recent case of The Bank Of Nova Scotia Berhad & Anor v Lion DRI Sdn Bhd & Ors. We shall briefly share with you what the court says on this matter.

What is a debenture holder?

To understand what a debenture holder is, we must first understand what is a “debenture”.

A debenture is an instrument that creates or acknowledges an obligation to pay a sum of money that may or may not be secured on the property of the company. It could be in the form of stocks, bonds, Sukuk, notes, and any other securities of a corporation whether constituting a charge on the assets of the corporation vice versa.

Therefore, combining what we know from above, a debenture holder is a person who holds the above instrument against the company in question.

Now let us dive into the case. 

Brief facts of the case

Lion DRI and Nova Scotia entered into an agreement whereby Lion Dri obtained baking facilities from Nova Scotia while Nova Scotia was granted various securities for the facilities, including a debenture over the assets and undertaking from Lion DRI.

Lion DRI failed to repay the facilities and Nova Scotia sued Lion DRI and its directors in courts, raising oppression under section 346 of the Companies Act, claiming that the Directors of Lion DRI had committed acts which unfairly prejudiced, discriminated, and/or were detrimental to and/or in disregard of Nova Scotia’s interests as the holder of the debenture.

The parties contention

One of the gripe between both parties was whether Nova Scotia is considered a debenture holder under section 346 of the Act (thereby allowing it to raise oppression under section 346 of the Act). 

Lion DRI’s directors contended that ‘debenture holders’ within section 346  of the Act means only members of the public who invest in debt instruments issued as ‘debentures’ by a company to raise corporate finance (this was backed up by the Capital Markets and Services Act (“CMCA”), which expressly excludes loan agreements executed between parties where the lender is in the business of lending i.e. a bank). These ‘debentures’ are securities of the company akin to shares. Furthermore, they contended that the section is part of a statutory regime under the Act designed to protect minority debenture holders against the oppression of majority debenture holders in the same way as the section is designed to protect minority shareholders. Essentially, a ‘debenture holder’ under the section does not include a single banker making commercial loans to a company as the bank in such a case is not an investor in the securities of the company.

On the other hand, Nova Scotia claimed that some provisions clearly suggest that ‘debenture’ refers to a debenture creating security for a loan and not a debt instrument that is tradeable as provided for in the CMSA. Essentially, those provisions include a debenture creating security for a loan as in the debenture that is currently registered in the name of Nova Scotia, and accordingly, the words ‘debenture holder’ in section 346 of the Act must necessarily include and or is wide enough to include someone like Nova Scotia who is a holder of a debenture created as a security for the loans that were extended by them to Lion DRI.

The court’s decision and rationale 

The court disagreed sided with Lion DRI. In its judgement, the court states that:

“…in construing the meaning of the word ‘debenture holder’ in section 346, this Court must confine itself to the meaning as expressed and defined in section 2 of the CA 2016. I agree with learned counsel for the 2nd and 3rd Defendants that resultant compendious reading of the definitions of “debentures” and “securities” under the CA 2016 and the CMSA clearly shows that ‘debenture’ for the CA 2016 (unless the context otherwise requires) means debt or financial instruments issued for fundraising or arising from instruments or transaction effected in the money market. In fact, the entire Subdivision 10 of Part III Division 1 of the CA 2016 dealing with ‘Debentures’ refers to the debentures as debt instruments that are issued by the company and offered to the public for subscriptions…Indeed, if this Court were to find that the Plaintiffs have the locus standi to commence an action under section 346, it would open the floodgates for banks or lenders who have obtained debentures as a form of security (in the sense that of a debenture document creating a charge over assets in respect of commercial loans) to mount an action under section 346 to recover the outstanding debts from the shareholders and/or directors of the subject company personally when faced with perceived difficulties or the possibility of a shortfall in the recovery of their loans. This will open the flood gate to permit creditors of the company to file oppression actions as a means of recovering their debts.”

Essentially, the definition of a debenture holder is confined to those expressed in the Act and did not include holders of security given to bankers (such as Nova Scotia).

However, bear in mind this is a high court case. We shall update you accordingly shall there be an appeal in this matter.