Understanding Sections 201–204 of CAMA 2020: Rights of Debenture Holders, Trustees, and the Role of Fixed and Floating Charges

Understanding Sections 201–204 of CAMA 2020: Rights of Debenture Holders, Trustees, and the Role of Fixed and Floating Charges

Published by Bahas Books
For in-depth business and compliance resources, visit bahasbooks.com

In modern corporate finance, debt instruments such as debentures play a vital role in helping companies raise funds while offering investors security and predictable returns. The Companies and Allied Matters Act (CAMA) 2020, in its Sections 201 through 204, provides a detailed legal framework for how debentures are managed, the rights of those who hold them, and how the assets charged under them are treated in the event of default or liquidation.

These sections work together to ensure that the process of corporate borrowing through debentures is both secure for investors and transparent for the company. Let’s break them down comprehensively.

Section 201 — Rights of Debenture Holders

Section 201 outlines how the relationship between the company, debenture holders, and the trustee is structured and governed.

When a company issues debentures that are covered by a trust deed, it must appoint a trustee — a person or entity responsible for protecting the interests of debenture holders. The trustee holds all rights, undertakings, mortgages, and securities connected to the debentures for the exclusive benefit of the investors. This means the trustee acts as a legal guardian of those securities, not on behalf of the company, but for those who provided the loan through debenture subscription.

The law requires the trustee to exercise due diligence in carrying out their role — which involves verifying compliance with the terms of the deed, monitoring the company’s obligations, enforcing securities where necessary, and ensuring that debenture holders are not disadvantaged.

For instance, if a company defaults on interest or fails to maintain the collateral backing the debentures, the trustee must take swift and reasonable action — which may include initiating legal enforcement or seizing secured property.

Subsection (2) grants debenture holders the right to sue. A holder may directly sue:

  • The company, for payment of sums due under the debentures (such as interest or principal); or

  • The trustee, if the trustee fails to perform their duties or breaches their obligations under the trust deed.

Importantly, an individual debenture holder can sue alone without joining other holders of the same class. However, where the action is against the company, the trustee must be joined as a co-defendant to ensure a coordinated legal process.

Subsection (3) introduces a mechanism for collective decision-making. If debenture holders representing at least three-quarters of the value of a particular class pass a resolution, it becomes binding on all holders of that class. Such resolutions can:

  • Release a trustee from liability for past actions or breaches of duty;

  • Alter or abolish certain rights or powers of the debenture holders or the trustee; or

  • Approve the substitution of one class of debentures for another, possibly issued by a different company, in exchange for cancellation of the existing debentures.

This ensures unity and coordination among investors — major decisions can be taken collectively, reducing disputes and inconsistencies.

Section 202 — Meetings of Debenture Holders

Section 202 details how debenture holders may meet to deliberate and make collective decisions. These meetings function similarly to shareholder meetings but are limited to issues affecting debenture-related matters, such as enforcing security, altering terms, or replacing a trustee.

The law allows the debenture trust deed or the terms of the debenture itself to specify how such meetings should be convened, the notice requirements, and how resolutions are passed.

However, the Corporate Affairs Commission (CAC) has supervisory powers under subsection (2). The Commission may, at any time, order a meeting of debenture holders to be convened — especially where it considers such a meeting necessary for resolving disputes or ensuring compliance with the law. The CAC can also direct how the meeting should be conducted, ensuring transparency and fairness.

Subsection (3) further empowers debenture holders themselves. If investors holding at least one-tenth of the total voting rights attached to all debentures of a particular class demand a meeting, the trustee must call it.

For example, if a company has issued ₦500 million worth of debentures, holders representing ₦50 million (10%) can demand a meeting. This provision ensures that even minority holders have a voice and can push for action when they believe the trustee or company is neglecting their obligations.

Such meetings serve as vital instruments of accountability, ensuring that the trustee, company directors, and even the CAC act in the best interests of investors.

Section 203 — Fixed and Floating Charges

Section 203 introduces the fundamental concepts of fixed and floating charges, which define how a company’s assets are used as security for debentures.

A fixed charge is a security interest attached to a specific, identifiable asset — for example, a parcel of land, building, or equipment. Once created, the company cannot sell or dispose of that asset without the lender’s consent.

A floating charge, on the other hand, is more flexible. It “floats” over a category of assets that changes from time to time, such as stock, raw materials, receivables, or other current assets. The company is free to use and trade these assets in the normal course of business.

However, subsection (1) explains that the floating charge remains “floating” only until a specific event triggers its crystallization, converting it into a fixed charge. These events include:

  • When the lender enforces the security and appoints a receiver or manager;

  • When the court appoints a receiver or manager on the lender’s application; or

  • When the company goes into liquidation.

At that point, the floating charge “locks in” to cover all existing assets in the defined class, and the lender gains enforceable control over them.

Subsection (2) provides additional clarity: if the situation changes — for example, if the receiver is withdrawn or the debt is repaid — the charge can revert to its floating nature.

To illustrate: imagine a company borrows ₦200 million secured by a floating charge over its inventory. It can buy and sell goods freely in the ordinary course of business. But if it defaults, the charge crystallizes, fixing on whatever stock remains at that time, allowing the lender to recover the debt from those assets.

This flexibility allows companies to use their assets dynamically while giving lenders assurance that their loans remain secured.

Section 204 — Priority of Fixed Over Floating Charges

Section 204 determines which lender’s rights prevail when fixed and floating charges overlap.

The rule is clear: a fixed charge takes priority over a floating charge that affects the same property, except where the floating charge agreement itself forbids the company from granting such priority to a later lender.

For instance, if a company first creates a floating charge over all its assets and later grants a fixed charge on one of those assets (say, machinery), the fixed charge will normally come first. But if the floating charge document includes a clause prohibiting this, and the prohibition is registered with the Corporate Affairs Commission (CAC), the later fixed charge will be subordinate.

This ensures transparency and predictability. Every lender can assess their level of risk and security by checking the CAC’s register of charges, which records existing encumbrances.

By giving fixed charges priority, CAMA reinforces the principle that lenders who rely on specific assets as security should have a stronger legal claim than those who rely on a broader, more flexible floating charge.

Why These Provisions Matter

Sections 201–204 collectively build a robust legal structure for Nigeria’s corporate borrowing framework. They ensure fairness, protect investor rights, and provide mechanisms for orderly debt enforcement.

Under this framework:

  • Trustees are accountable fiduciaries who must protect investors’ interests with diligence.

  • Debenture holders have enforceable rights, both individually and collectively, through meetings and resolutions.

  • Lenders have clarity on how their charges (fixed or floating) will operate and which will take precedence in case of insolvency.

  • Regulators, particularly the CAC, retain oversight powers to intervene where necessary for investor protection.

Together, these rules promote confidence, transparency, and order in Nigeria’s credit markets. Companies can raise capital with clear terms, while investors and lenders can engage knowing their rights are safeguarded by law.

For a professional understanding of how to apply these principles in practice — from preparing compliant trust deeds to structuring secured corporate borrowing — visit bahasbooks.com.
Bahas Books simplifies complex legal and financial concepts for Nigerian businesses, empowering entrepreneurs, accountants, and investors with the knowledge to operate confidently and compliantly.

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