Indenture

An agreement declaring the benefits and obligations of two or more parties, often applicable in the context of BANKRUPTCY and bond trading.

The term indenture primarily describes secured contracts and has several applications in U.S. law. At its simplest, an indenture is an agreement that declares benefits and obligations between two or more parties. In bankruptcy law, for example, it is a mortgage or deed of trust that constitutes a claim against a debtor. The most common usage of indenture appears in the bond market. Before a bond is issued, the issuer executes a legally binding indenture governing all of the bond's terms. Finally, the concept of indenture has an ignominious place in the history of U.S. labor. Indentured servants of the seventeenth and eighteenth centuries were commonly European workers who contracted to provide labor for a number of years and in return received passage to the American colonies as well as room and board.

As an investment product that is used to raise capital, a bond is simply a written document by which a government, corporation, or individual promises to pay a definite sum of money on a certain date. The issuer of a bond, in cooperation with an underwriter (i.e., a financial organization that sells the bond to the public), prepares in advance an indenture outlining the terms of the bond. The issuer and the under-writer negotiate provisions such as the interest rate, the maturity date, and any restrictions on the issuer's actions. The last detail is especially important to corporate bonds because corporations ACCRUE liability upon becoming bond

A 1794 indenture contract from Philadelphia for the apprenticeship of a 16-year-old freed male slave.
ARCHIVE PHOTOS, INC.

issuers and therefore seek to have the fewest possible restrictions placed on their business behavior by the terms of the indenture. As a consequence, potential buyers of corporate bonds should know what the indenture specifies before buying them.

Federal law governs these indentures. For 50 years, the Trust Indenture Act of 1939 (TIA) (15 U.S.C.A. § 77aaa) was the relevant law. Significant changes in financial markets prompted Congress to amend the TIA through the Securities Act Amendments of 1990 (Pub. L. No. 101-550, 1990; 104 Stat. 2713), which included the Trust Indenture Reform Act (Pub. L. No. 101-550, 104 Stat. 2713). The reforms simplified the writing of indentures, recognized the increasing internationalization of corporations by creating opportunities for foreign institutions to serve as trustees, and revised standards for conflicts of interest. The reforms also broadened the authority of the SECURITIES AND EXCHANGE COMMISSION.

In early American history, indenture was a form of labor contract. Beginning during the colonial period, employers in the largely agricultural economy faced a labor shortage. They addressed it in two ways: by buying slaves and by hiring indentured servants. The former were Africans who were brought to the colonies against their will to serve for life; the latter were generally Europeans from England and Germany who had entered multiyear employment contracts. From the late sixteenth century to the late eighteenth century, approximately half of the 350,000 European immigrants to the colonies were indentured servants. During the seventeenth century, these servants outnumbered slaves.

An indentured servant agreed to a four-to seven-year contract, and in return received passage from Europe and guarantees of work, food, and lodging. Colonial courts enforced the contracts of indentured servants, which were often harsh. Employers were seen as masters, and the servants had not only to work for them but also to obey their orders in all matters. For some, indentured servitude was not a VOLUNTARY ACT. Impoverished women and children were pressed into servitude, as were convicts. Nevertheless, this servitude was not equivalent to SLAVERY. Slaves remained slaves for life, whereas indentured servants were released at the end of their contracts. Moreover, as parties to a contract, indentured servants had rights that slaves never enjoyed. The practice of indentured servitude persisted into the early nineteenth century.