28 Jun 2006

Are promissory notes "debentures" under the Corporations Act?

by Brian Salter, Louise McCoach

There is now a definitive answer to the conceptual debate about whether a pre-payment option takes a note out of the exclusion in section 9(d) of the Corporations Act.

On 15 June 2006, the Supreme Court of Western Australia, Court of Appeal held by majority that notes issued by Westpoint Group SPV were not securities for the purposes of Chapter 6D of the Corporations Act 2001 (Cth).

The decision sheds light on the approach of the Australian courts to interpreting the definitions of "promissory note" and "debenture" for the purposes of the Act. The findings of Justice Simmonds at first instance on this aspect of the decision are discussed in more detail below.


The case discussed in this paper is Australian Securities & Investments Commission v Emu Brewery Mezzanine Ltd [2004] WASC 241 and the facts are set out below. To part-finance a property development, the Westpoint Group set up an SPV. The SPV was to raise money from the public and on-lend it to the development's corporate trustee. In return, the SPV would receive second-ranking security and a guarantee from a company in the Westpoint Group.

The SPV released offering documents relating to the issue of "promissory notes" with a minimum face value of $50,000. ASIC initiated proceedings against the SPV, seeking various declarations including that the notes were debentures and as such constituted "securities" within the meaning of section 761A of the Act or alternatively that the notes constituted interests in a "managed investment scheme" ("MIS") within the meaning of the Act. ASIC then sought to establish that the provisions of the Act relating to the issue of debentures, including the requirement for investors to receive a complying disclosure document, applied to the issue of the notes.

At first instance, Justice Simmonds in the WA Supreme Court held that the borrowing and the issuing of the notes did constitute an interest in an MIS. As with any MIS question, this matter turned on the specific facts. One particularly interesting point is that the interpolation of the SPV apparently helped the court to its conclusion that this was an MIS.

For the reasons outlined below, Justice Simmonds also held that the promissory notes were not debentures.


This matter was not as simple as merely determining whether the notes fell within the basic definition of "debenture"; section 9(d) of the Act excludes, from the statutory definition of "debenture", promissory notes with a minimum face value of $50,000. The notes issued by Emu were prima facie excluded by this section as they each had a face value of $50,000.

ASIC approached this problem with two alternative arguments:

  • the SPV borrowings fell within the definition of debenture in two different ways - as a promissory note and as a separate undertaking to repay the moneys lent; and
  • the SPV's borrowings were not promissory notes within the meaning of the exception in section 9(d) of the Act.

Undertaking to repay

ASIC submitted that, in addition to the undertaking to repay in the notes, there existed, outside the notes, a separate implied undertaking to repay. This separate undertaking was alleged to have arisen through a combination of the "language" and the "promissory features" contained within the offering documents

Justice Simmonds dismissed this argument, holding that if it were correct, the notes would merely be an additional security to that implied repayment obligation. He held that when the offer documents were examined, it could be seen that the notes were the focus of the borrowing.

Value of the notes

The notes each had a face value of $50,000. ASIC nevertheless contended that the notes did not fall within the section 9(d) exception on the grounds that they were not "promissory notes" within the meaning of the Act. Both parties agreed that the relevant definition of promissory note was that contained in section 89(1) of the Bills of Exchange Act 1909:

"A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person, or to bearer." [emphasis added]

ASIC argued that as the notes had a partial prepayment option, they were outside the Bill of Exchange Act definition:

"prepayment of part of the face value of a note would mean that … at the time of the issue of the Notes there was a contingency preventing there being "a sum certain" within the Act."

After noting that there is judicial disagreement on this issue, Justice Simmonds engaged in a lengthy analysis of the relevant authorities and concluded that a pre-payment option (partial or otherwise) does not exclude a note from the definition of promissory note. The Full Court agreed with this conclusion.


ASIC appealed the finding that the notes were not debentures. A majority of the Western Australian Court of Appeal upheld the finding of Justice Simmonds and ruled that the notes were not debentures.

This decision is important both for reasons of practice and principle. It provides the Australian financial industry with a definitive answer to the conceptual debate about whether a pre-payment option takes a note out of the section 9(d) exclusion. At the same time, the Court of Appeal's extensive survey of the case law (with extensive reference to English, Canadian and US law) is an extremely useful summation of the state of the judicial and academic debate on this question.

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