This document discusses unsecured or "naked" debentures, which are debt instruments issued by companies without any charge on the company's assets. The key points are: 1. Naked debentures create a debtor-creditor relationship between the company and lender without security over company assets. They are valid instruments for borrowing. 2. Creating a naked debenture involves board approval, preparing and executing loan documents like a debenture trust deed, and registering the debenture. 3. A debenture trust deed is still used to protect debenture holders' rights and appoint trustees, even though there is no security. The deed must meet requirements in the Companies Act.

1. DEBENTURES: UNSECURED (NAKED) DEBENTURES
One of the three classes of securities with which companies are most commonly
associated (the others being Shares and Unit Trust) in business transactions, is the
Debenture which is also referred to as ‘Debt Securities’1
.
Debenture has been defined variously as:
a. ‘a written acknowledgement of indebtedness by the company, setting out the
terms and conditions of the indebtedness, and includes debenture stock, bonds
and any other securities of a company whether constituting a charge on the
assets of the company or not’2
b. ‘…a document that creates or acknowledges debt’3
c. ‘…an unsecured bond that is backed up by the issuer’s general credit rather than
a specific lien -called also debenture bond…’4
d. ‘A bond that is backed up only by the general credit and financial reputation of
the corporate issuer, not by a lien on corporate assets…’5
e. ‘…tools used by large companies to raise capital for their projects and
operations.’6
TYPES OF DEBENTURES
1. Perpetual Debentures
2. Convertible Debentures
3. Secured or Naked Debentures
4. Redeemable Debentures
The above types are provided for in Sections 171-174 of the COMPANIES AND ALLIED
MATTERS ACT CAP. C20 L.F.N. 2004
Other types include:
5. Registered Debentures
6. Participating Debentures
7. Convertible Debentures with options
8. Third Party Convertible Debentures
9. Convertible Debentures Redeemable at a Premium7
10. Syndicated Loan Debenture/ Pari passu Mortgage Debenture8
1
GOWER & DAVIS: Principles of Modern Company Law, 8th
ed., (LONDON; Sweet & Maxwell, 2008), pg. 1135
2
Section 567 of the COMPANIES AND ALLIED MATTERS ACT CAP. C20 L.F.N. 2004
3
Levy v. Abercorries State Co. (1887) 37 Ch D 260
4
MERRIAM-WEBSTER: Dictionary of Law, 14th
printing; (HARRISONBURG VA, 2011) pg. 122
5
GARNER: Black’s Law Dictionary, 9th
ed., (U.S.A; West, 2009) pg. 460
6
SHANBHOGUE K.V.: Company Law Procedures, 6th
ed., (NEW DELHI; Bharat Law House, 2008) pg. 346
7
Ibid. pg. 336
8
OGBUANYA N.C.S.: Essentials of Corporate Law Practice in Nigeria, (LAGOS, Novena Publishers, 2013) pg. 507

2. The focus of this paper is Unsecured or Naked Debentures and an attempt shall be
made to consider it in some detail below:
NAKED DEBENTURES
Commenting on the forms of Debentures, BOWEN L.J. in English and Scottish
Mercantile Investment Co. v. Brunton9
stated thus:
“It seems to me that there are three usual forms of debentures… The first is
a simple acknowledgement, under seal, of the debt; the second is an
instrument acknowledging the debt, and charging the property of the
company for repayment; and the third an instrument acknowledging the debt,
and charging the property of the company with repayment and further
restricting the company from giving any prior charge.”
This position enunciated by the Court reveals that though a debenture usually
creates a charge in respect of a borrowing company’s assets, it is not in every
instance that this is so. Debentures of this kind are known as ‘Naked Debenture’ and
are just as valid in creating a debtor-creditor/mortgagor-mortgagee relationship
between parties to it in the same manner as other classes of Debenture which create
a charge in respect of a company’s security assets. This position finds expression in
Section 173 (1) of Companies and Allied Matters Act Cap. C20 L.F.N. 2004 which
states ipsissima verba:
173 Secured or Naked Debentures
(1) Debentures may either be secured by a charge over the company’s property or
may be unsecured by any charge (emphasis mine)
A Naked or Unsecured Debenture has been defined variously as:
1. ‘…debenture… which is not secured by any charge.’10
2. ‘Debentures which are issued without any charge on assets…’11
Of this kind of debenture it has been stated that:
‘…If the debentures give no security on the assets of the company, the debenture
holder’s position is no better than that of an unsecured creditor’12
PROCEDURE FOR THE CREATION OF A NAKED (UNSECURED) DEBENTURE
1. Convene a Board Meeting to pass a resolution authorizing the loan and
preparation of the necessary loan documents (including a Prospectus if
debentures are to be issued to the public);
9
(1892) 2 Q.B. 700; (1892) L.J.Q.B. 136; 67 L.T.406
10
OROJO J.O.: Company Law and Practice in Nigeria, 5th
ed., (PIETERMARITZBURG, Interpak Books, 2008) pg.
169
11
SHANBHOGUE K.V.: Company Law Procedures, 6th
ed., (NEW DELHI; Bharat Law House, 2008) pg. 336
12
Spiral Globe Ltd. (1902) 1 Ch 396

3. 2. Preparation, Execution and Stamping of the Loan Document (Debenture Trust
Deed);
3. Entry of particulars of the Debenture in the Register of Debentures of the
company. This entry is required to be made within 30 days to the conclusion
of the agreement with the company to become a debenture holder or within
30 days of the date at which he ceases to become one13
. (The mere fact of
entry of this debenture in compliance with this provision of Companies and
Allied Matters Act (C.A.M.A)14
thus makes naked debentures a Registered
Debenture as well)
4. Leave copies of documents for inspection at the Registered Office of the
Company (i.e. Record of Instruments)
COMMENT
It is my humble view that the usual requirements for preparation, execution and
stamping of other loan documents such as Deed of Mortgage, Power of Attorney (if
any), Filing the documents at the Land Registry and obtaining Governor’s Consent
(if landed property is involved) as well as obtaining and filing the loan documents
and forms with the Corporate Affairs Commission15
are dispensed with since there is
no charge whatsoever upon the assets of the borrowing company in the case of a
Naked Debenture which is no more than an written document, under seal,
acknowledging the indebtedness of the company to the lender.
DEBENTURE TRUST DEED
The Debenture Trust Deed which is the major loan document for issuing a naked
debenture must comply with the requirements of the C.A.M.A under the following
sections:
1. Section 186(1) and provide that ‘Whether or not a debenture is secured by a
charge over the company’s property, it may be secured by a trust deed
appointing trustees for the debenture holders.’ whose duty it is ‘to safeguard
the rights of debenture holders and, on behalf of and for the benefit of the
debenture holders, to exercise the rights, powers and discretions conferred
upon them by the deed’16
Other advantages of a trust deed with respect to naked debenture include:
13
Section 193 of the COMPANIES AND ALLIED MATTERS ACT CAP. C20 L.F.N. 2004
14
CAP. C20 L.F.N. 2004
15
OGBUANYA N.C.S. Supra. pg. 517-8
16
Section 186(2) of the COMPANIES AND ALLIED MATTERS ACT CAP. C20 L.F.N. 2004

4. (a) Events are specified upon which the principal monies and interest become
payable; and there are trustees to take necessary action.
(b) Covenants entered into by the company can be enforced by the trustees.
(c) Trustees are given power to appoint receivers or to enter into possession of
the property and carry on the business of the company in the case of
urgency.17
2. On persons competent to be appointed as trustees, Section 187 (1) provides:
A person is not qualified for appointment as a trustee of a debenture trust
deed if he is—
(a) an officer or an employee of the company which issues debentures
covered by the trust deed or of a company in the same group of companies as
the company so issuing debentures;
(b) less than 18 years of age;
(c) of unsound mind and has been so found by a court in Nigeria or elsewhere;
(d) an undischarged bankrupt;
(e) disqualified under section 257 of this Act from being appointed as a
director of a company;
(f) a substantial shareholder (as defined in section 95 of this Act) of the
company.
It must be stated that any trustee appointed under a naked debenture trust deed
stands in fiduciary position to the debenture holder(s) and is expected to show the
degree of care, diligence and honesty required of such trustees.18
Any provision in
the trust deed, which exempts a trustee from liability for breach of trust, is void.19
However, a trustee may be released from liability by the debenture holders or in
pursuance of a provision in the Trust Deed on the agreement of a majority not less
than three-fourths in value of the debenture holders present and voting at a meeting
summoned for the purpose20
3. The standard form of a debenture consists of two parts, namely the terms of
the debenture and the indorsed conditions which may either be at the back or
on the face of the debenture.21
4. Section 168 (a)-(f) sets out Statements that shall be included in every
debenture; that is:
17
OROJO J.O. Supra. pg. 173
18
Section 188 of the COMPANIES AND ALLIED MATTERS ACT CAP. C20 L.F.N. 2004
19
SHANBHOGUE K.V. Supra. pg. 347, Section 188(1) of the COMPANIES AND ALLIED MATTERS ACT CAP. C20
L.F.N. 2004
20
Section 188(2) of the COMPANIES AND ALLIED MATTERS ACT CAP. C20 L.F.N. 2004
21
OROJO J.O. Supra. pg.170

5. (a) the principal amount borrowed;
(b) the maximum discount which may be allowed on the issue or re-issue of
the debentures, and the maximum premium at which the debentures may be
made redeemable;
(c) the rate of and the dates on which interest on the debentures issued shall
be paid and the manner in which payment shall be made;
(d) the date on which the principal amount shall be repaid or the manner in
which redemption shall be effected, whether by the payment of instalments
of principal or otherwise;
(e) in the case of convertible debentures, the date and terms on which the
debentures may be converted into shares and the amounts which may be
credited as paid up on those shares, and the dates and terms on which the
holders may exercise any right to subscribe for shares in respect of the
debentures held by them;
(f) the charges securing the debenture and the conditions subject to which the
debenture shall take effect.
The effect of these statements is that:
(1) Statements made in debenture or debenture stock certificates shall be prima
facie evidence of the title to the debentures of the person named therein as the
registered holder and of the amounts secured thereby.
(2) If any person shall change his position to his detriment in reliance in good faith
on the continued accuracy of any statements made in the debenture or debenture
stock certificate, the company shall be estopped in favour of such person from
denying the continued accuracy of such statements and shall compensate such
person for any loss suffered by him in reliance thereon and which he would not have
suffered had the statement been or continued to be accurate:
Provided that nothing in this subsection shall derogate from any right the company
may have to be indemnified by any other person.22
3. Since the debenture is accompanied by a trust deed, it is said to be covered
by a trust deed. The effect of this is that:
(a) the holder of the debenture is entitled to participate in any money payable
by the company under the deed; or
(b) is entitled to the benefit of any mortgage, charge or security created by
the deed, whether alone or together with other persons.23
The Trust Deed ensures that the enforcement of the rights of the debenture holders
can be more easily effected by trustees appointed under the deed who will ensure
that the interests of all the debenture holders are protected and prevent the
22
Section 169 of the COMPANIES AND ALLIED MATTERS ACT CAP. C20 L.F.N. 2004
23
Ibid Section 183(6)

6. incidence of multiple suits at the instance of many debenture holders seeking to
enforce their rights thereunder.24
Section 183(1) provides:
Execution of debenture trust deed
(1) Every company which offers debentures to the public for subscription or purchase
shall, before issuing any of the debentures, execute a debenture trust deed in
respect of them and procure the execution of the deed by the trustee for the
debenture holders appointed by the deed.
(2) No debenture trust deed shall cover more than one class of debentures, whether
or not the trust deed is required by this section to be executed.
(3) Where a trust deed is required to be executed by this section but has not been
executed, the court, on the application of a debenture holder concerned, may—
(a) order the company to execute a trust deed;
(b) direct that a person nominated by the court shall be appointed to be trustee; and
(c) give such consequential directions as it thinks fit, as to the contents of the trust
deed and its execution by the trustee thereof.
4. Section 183(2) provides no debenture trust deed shall cover more than one
class of debentures, as defined by Section 183(4) and (5)
5. Section 184 (1) provides for the mandatory contents of every debenture trust
deed including the maximum sum which the company may raise by issuing
debentures of the same class, the maximum discount payable, the nature of the
assets involved, the date of payment of interest and of the principal, the
circumstances in which the charge, mortgage or security may be realised (in the case
of secured debentures), the power to call meetings of debenture holders and the
amount and rate of remuneration.
6. Section 185(1) provides that every debenture covered by a debenture trust
deed must state either in its body or in a note forming part of the same document or
endorsed on it, certain matters required to be stated in the trust deed. It must also
state whether the trustee holds the securities vested in him by the trust deed in trust
for the debenture holders, and if so, which debenture holders, and whether the
debenture is secured. If a debenture is unsecured, it must state this fact clearly on
its face.25
TRANSFER OF NAKED DEBENTURE
Section 189 provides:
(1) Except as expressly provided in the terms of any debentures, debentures shall
be transferable without restriction by a written transfer in common form and
so that the transferee shall be entitled to the debenture and to the moneys
24
OROJO J.O.: Company Law and Practice in Nigeria, 5th
ed., (PIETERMARITZBURG, Interpak Books, 2008) pg.
172
25
OROJO J.O. Supra. pg, 173

7. secured thereby without regard to any equities, set-off, or cross-claim
between the company and the original or any intermediate holder.
(2) The terms of any debenture may impose restrictions of any nature
whatsoever on the transferability of debentures, including power for the
company to refuse to register any transfer and provisions for compulsory
acquisition or rights of first refusal in favour of other debenture holders, or
members or officers of the company:
Provided that if any restriction is imposed on the right to transfer any
debenture, notice of the restriction shall be endorsed on the face of the
debenture or debenture stock certificate and in the absence of such
endorsement, the restriction shall be ineffective as regards any transferee for
value, whether or not he has notice of the restriction.
REMEDIES FOR NAKED DEBENTURE HOLDERS IN THE EVENT OF BREACH
IN Spiral Globe Ltd. (1902) 1 Ch 396, the Court held that:
‘…If the debentures give no security on the assets of the company, the debenture
holder’s position is no better than that of an unsecured creditor’
In view of the above position, given below are the options availing naked debenture
holders upon default/breach of the borrowing company:
1. ACTION FOR SPECIFIC PERFORMANCE: Section 17026
provides:
Enforcement of contracts relating to debentures
A contract with a company to take up and pay for any debentures of the
company may be enforced by an order for specific performance.
Notwithstanding the unsecured nature of the debenture, the debenture trust deed is
creates a contractual relationship of debtor-creditor between the borrowing
company and holders of the naked debentures, hence, trustees of holders of naked
debentures can apply to the Courts to enforce the covenants within the Debenture
Trust Deed as it affects them.
2. ACTION FOR RECOVERY OF PRINCIPAL AND INTEREST
Whether the debenture is secured or not, if there is default in the payment of the
principal or interest, the debenture holder may sue to recover the principal and
interest as for any other debt, and after judgment, he may levy execution on the
property of the company27
3. PETITION FOR WINDING-UP
Subject to any conditions imposed by the debenture, the debenture holder may
present a petition for winding-up as a creditor of the company if the company is
26
COMPANIES AND ALLIED MATTERS ACT Supra.
27
OROJO J.O. Supra. 179

8. unable to pay the principal and/or interest which, as a debt, will be grounds for
winding-up under Sections 408(d) and 209 (b) (ii) of C.A.M.A.
4. SALE
In Re Forster Clark Ltd’s Indenture Trusts, Loveland v. Horscroft28
, the Court stated
where there is a debenture trust deed, there will normally be an express power of
sale and sale of the company’s business operates to determine the contract of
service of the employees.
Other remedies such as Debenture Holder’s action, Foreclosure, Valuation of Security
and proving for balance on winding-up as well as Appointment of Receivers and
Managers can only avail holders of secured debentures who hold either a fixed or
floating charge on the assets of the borrowing company29
28
(1966) 1 WLR 125
29
COMPANIES AND ALLIED MATTERS ACT Supra. Section 180(3)