Understanding Debentures Under CAMA 2020: Sections 191–198 Explained

Understanding Debentures Under CAMA 2020: Sections 191–198 Explained

By Baha’s Books
Visit bahasbooks.com for expert accounting and corporate law insights.

The Companies and Allied Matters Act (CAMA) 2020 provides the foundation for how Nigerian companies operate, borrow money, and secure financing. One of the most detailed and important aspects of this law lies in Sections 191 to 198, which cover debentures — instruments that enable companies to borrow money from investors while offering structured rights and protections in return.

These provisions explain how companies can use their property or uncalled capital to raise funds, the legal form and content of debentures, how they must be documented, what happens when they are lost or misused, and the various types of debentures available. Together, they form the financial and legal backbone for corporate borrowing in Nigeria.

Let’s unpack each section carefully and see how they work in practice.

Section 191 — Creation of Debentures and Debenture Stock

This section gives every company the power to borrow money for legitimate business purposes and to secure that borrowing using its property or assets. A company can mortgage or charge its undertaking, property, or uncalled capital (that is, the portion of the share capital not yet paid by shareholders).

To raise funds, a company may issue debentures or debenture stock, or create other forms of securities. These can be issued outright to investors or as collateral security for a loan.

A debenture is essentially a formal acknowledgment of debt. When a company issues a debenture, it is publicly admitting that it owes a certain amount to the holder and promises to pay interest at a specified rate and to repay the principal later. The security for this debt can either be a company’s property (secured debenture) or nothing more than its promise (unsecured debenture).

This section legally empowers companies to use their tangible and intangible assets to obtain financing, allowing businesses to fund expansion or operations while protecting investors with enforceable rights.

Section 192 — Documents of Title to Debentures or Certificates of Debenture Stock

Transparency is at the heart of this provision. It requires every company that issues debentures to deliver an official certificate of ownership to the holder within 60 days of allotment or registration of transfer.

This certificate acts as a title deed confirming that the holder legally owns the debenture and all rights that come with it. The document must carry the company’s common seal (if applicable) or be executed as a formal deed, making it legally binding.

If a certificate is ever lost, damaged, or destroyed, the company must issue a certified replacement on request. However, before doing so, it can demand evidence of loss, payment of a replacement fee, and indemnity against possible future claims.

Failure to issue or replace the certificate within the specified time has serious consequences. Both the company and any responsible officer can be fined by the Corporate Affairs Commission (CAC). Furthermore, a debenture holder can apply to court to compel the company to deliver the certificate, and the court may direct the company and its officers to pay all costs associated with the case.

This section reinforces a key principle of corporate accountability — that every lender must have verifiable and timely proof of their financial relationship with the company.

Section 193 — Required Contents of Every Debenture

This section ensures that all debentures are drafted with clarity and full disclosure. Each debenture must contain detailed information that outlines the rights of the holder and the obligations of the company.

It must state the principal amount borrowed, the interest rate, and the terms of repayment — whether the amount will be paid in full at once, in installments, or on a specific maturity date.

If the debenture is issued at a discount or premium, the maximum discount or premium must be disclosed. The document must also indicate whether the debenture is redeemable (repayable at a fixed time) or irredeemable (perpetual).

If it is a convertible debenture, it must specify the conversion rate, the class of shares into which it can be converted, and the conditions for conversion.

Finally, it must list any charges or securities that protect the lender — for example, a fixed charge on a company’s land or a floating charge over its stock and receivables.

By requiring these details, Section 193 guarantees that lenders and investors know exactly what they are buying into, and that companies cannot alter the terms later to the detriment of creditors.

Section 194 — Effect of Statements in Debentures

Section 194 gives the statements in a debenture legal evidential value. Whatever is written in the debenture certificate is considered prima facie evidence — meaning it is accepted as true unless proven otherwise — of the title and rights of the person named in it.

For example, if a certificate states that a holder owns ₦50 million worth of secured debentures, that is accepted as fact until challenged with solid evidence.

If a person acts on the faith of such a certificate and suffers a loss because the information later turns out to be inaccurate, the company cannot simply deny responsibility. It will be legally estopped (barred) from denying the truth of the statement and must compensate the affected party.

However, this does not stop the company from seeking reimbursement from anyone who caused the error, such as through fraud or carelessness.

This provision ensures the integrity of debenture documentation, instilling confidence in investors that what they hold is legally reliable.

Section 195 — Enforcement of Contracts Relating to Debentures

This section provides a direct legal remedy for investors. When a company enters into a contract to issue debentures — or to honor existing ones — that contract is enforceable in court.

If the company defaults or refuses to perform its obligations, the court can issue an order of specific performance, compelling the company to carry out its promise rather than simply paying damages.

This ensures that debenture holders can rely on the courts to enforce their rights and that companies cannot walk away from contractual commitments related to corporate debt instruments.

Section 196 — Perpetual Debentures

Section 196 clarifies that companies can issue perpetual debentures, which have no fixed date of repayment. These are long-term instruments under which the company pays interest indefinitely, without ever being required to return the principal.

This arrangement is useful for projects or companies that want to maintain permanent financing without constant refinancing or repayment obligations.

Even if the debenture’s terms state that repayment depends on a remote or uncertain future event — for example, the liquidation of the company or the achievement of a specific milestone — the law recognizes such instruments as valid. No court can declare them invalid merely because they are long-term or indefinite.

This provision gives companies flexibility in designing financial instruments that suit their capital needs.

Section 197 — Convertible Debentures

A convertible debenture is a hybrid security that combines debt and equity features. Section 197 allows companies to issue such instruments, giving holders the option to convert their debentures into shares of the company.

This conversion may occur on terms set out in the debenture, such as after a specific period or at a set conversion rate.

Convertible debentures are especially popular with investors who want the safety of earning interest while retaining the opportunity to become shareholders if the company performs well. For companies, they represent an attractive funding option because they delay equity dilution until the business grows stronger.

Section 198 — Secured and Unsecured Debentures

Section 198 identifies two broad types of debentures — secured and unsecured.

A secured debenture is protected by a charge over the company’s property. This means that certain assets, such as land, equipment, or inventory, are pledged as collateral. If the company defaults, those assets can be sold to repay the lender.

An unsecured debenture, on the other hand, has no specific collateral backing it. The lender relies on the company’s credit reputation and overall solvency.

Subsection (2) introduces two forms of security:

  • A fixed charge, which attaches to a specific, identifiable asset like real estate or machinery. The company cannot dispose of the asset without the lender’s consent.

  • A floating charge, which covers a class of assets that change from day to day, such as stock-in-trade or receivables. This charge “floats” until an event like default occurs, at which point it “crystallizes” and attaches to existing assets.

Subsection (3) confirms that when a default or trigger event occurs, the charge automatically becomes enforceable, allowing lenders to take possession of or sell the secured property to recover their funds.

This section ensures that lenders have clear, legal mechanisms to recover money while giving companies flexibility to use either specific or general assets as security.

The Broader Picture

Sections 191 to 198 of the Companies and Allied Matters Act (CAMA) 2020 lay down the legal foundation for corporate borrowing in Nigeria. They allow companies to raise capital through debentures and ensure that both the company and its lenders are protected by proper documentation, transparency, and enforceable rights.

By regulating how debentures are issued, documented, and enforced, CAMA balances corporate flexibility with investor protection. Companies gain the ability to leverage assets for growth, while lenders receive legal assurance that their funds are secure.

Ultimately, these sections reinforce corporate integrity, promote investor confidence, and maintain the trust essential for a healthy business ecosystem in Nigeria.

For expert insights into corporate finance, accounting systems, and legal compliance under CAMA, visit bahasbooks.com — your trusted partner in accounting, tax, and business advisory.

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