The courts have struggled mightily to define debenture - the law reports containing many references to the difficulty in a precise definition.
A debenture has been said to be similar to a promissory note but with more elaborate conditions and generally in anticipation of a more longer-term loan and, optionally, with some form of security.
In 1887, in Edmonds, Justice Chitty adopted these words:
"The term debenture has not, so far as I am aware, ever received any precise legal definition. it is, comparatively speaking, a new term.
"The term itself imports a debt - an acknowledgment of a debt....
"Generally, if not always, the instrument imports an obligation or covenant to pay. This obligation or covenant is in most cases at the present day accompanied by some charge or security. So that there are debentures which are secured, and debentures which are not secured."
In English Scottish Trust, Justice Bowen wrote that a debenture could be:
"(1) A simple acknowledgment under seal of the debt; (2) an instrument acknowledging the debt and charging the property of the company with repayment; (3) an instrument acknowledging the debt, charging the property of the company with repayment, and further restricting the company from giving any prior charge."
The law in regards to debentures is often set within the terms of the debenture itself such as, for example, the rate of interest if any. Further, some statutes do define debentures.
Debentures allow persons to have a financial stake in an entreprise but without the management rights associated with share ownership.
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