DEBENTURES Section 2 of the company act defines debentures as including debentures stock, bonds and any other securities

of a company, whether consisting a charge on the assets of the company or not. The section does not actually describe what a debenture really is. In Level vs. Abercorris state and slab Company (1897) 37 ch D 260. Debenture was defined as a document, which either creates a debt or acknowledges it. In Edmonds vs. Blaina Co. (1887) 36 ch. D 215 chitly S. debenture was defined. “The term itself imports a debt an acknowledgement of a debt an obligation or covenant to pay. This obligation or covenant is in most cases accompanied by some charge or security”. A debenture is thus an acknowledgement in writing a debt by a company to some persons and it is issued to the public by means of a prospectus. The prospectus has provisions for interest payment and repayment of loans lenders are usually given a security against the non-repayment of their loan, by a charge against the assets of the company. Characteristic features of a debenture In Lemon vs. Asustin Friars investment Trust Ltd (1926) ch. 1 debenture was defined as follows “a debenture is a document containing an acknowledgement of indebtedness which need not be, although it usually is, under seal, which need not give, although it is usually does give a charge on the assets of the company by way of security and which may or may not be one of the services”. The following are characteristics of a debenture: 1. It is used by a company and is usually in the form of a certificate. 2. It is issued under the company’s seal. 3. It is one of a series issued to a number of lenders although there can be a single debenture, for example a mortgage of a company’s property to a single individual. 4. It specifies the period and date of repayment.

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6. the stock is called unsecured loan stock. Security 3. Debenture stock can be issued directly as such it is not necessary for an issue of debentures to be fully paid and then turned into stock. These are negotiable instruments and are transferable by delivery and a bonafide transferee for value is not affected by the defect in the title of the prior holder. Negotiability 2. but this is not always necessary. The debenture stock is usually secured by a trust deed and in case there is no charge. 648 Co. Classification according to negotiability a) Bearer debentures These are also known as unregistered debentures and are payable to the bearer. Debenture stock A debenture stock is borrowed capital consolidated into a unit with each leder having a certificate entitling him to a certain sum being a portion at one large loan. The secretary pledged the debentures with a bank security for a loan taken by him. London Trading Bank Ltd (1898) 2 QB. It kept them in a safe of which the secretary had the key. Page 2 of 6 . In Bechuanaland Exploration company vs. It was held that the bank was entitled to the debentures as against the company. Debenture holders do not vote in company meetings. Classes of debentures Debentures are classified according to the following characteristics: 1. Convertibility 4. payable to bearer. Priority 1.5. held debentures of an English company. The bank took the debenture’s bonafide. It creates a charge on the undertaking of the company or parts of the company property.

A registered debenture is issued under the seal of the company and contains the following clauses: (i) (ii) (iii) A covenant to pay the principal sum. (iv) A statement that is issued subject to the conditions endorsed thereon. A description of the charge on the company’s undertaking property. Classification according to security a) Secured debentures These debentures create a charge on the property of the company. 3. A holder is one whose name is on the certificate and in the company’s register of debentures. The charge may be fixed or floating. When assets are insufficient to pay all debts the debentures rank proportionately. c) Debentures with ‘Pari Passu’ clause These are debentures payable ratebly. debentures are payable according to the date of issue. b) Irredeemable or perpetual debentures These are debentures with no fixed period for repayment of the principal amount or repayment of it is made conditional on the happening of an event which may not happen or may happen is specified events like winding up. Covenant to pay interest. Classification according to permanence a) Redeemable debentures These are issued on condition that they shall be redeemed after a given period. b) Unsecured or naked debentures These do not create any charge on the assets of the company. 2. Page 3 of 6 . If there is no Pari passu change in the terms of issue.b) Registered debentures These are debentures payable to registered holders. though issued at different and varying times.

The trustees have power to appoint a receiver to run the company. In case of doubt or contingency the trustees can call a meeting of debenture holders to make a decision.A company cannot however issue a new batch of debentures to rank Pari Passu with an on batch. The trustees act as watchdogs for the debenture holders. it gives trustees a legal mortgage over the company’s property. Advantages of the trust deed 1. When the trustees are appointed a trust deed is executed conveying the property of the company to the trustees. 5. supervisions of the assets charged and the keeping of a register of debenture holders. 6. it specifies the events upon which principal and interest are payable and trustees ensure that the money is paid. Debentures trust Deed Debenture holders may appoint persons as their trustees. 2. The trust deed contains the terms and conditions endorsed on the debentures and defines the rights of debenture holder and the company. Trustees Act are at better position of safeguarding the interests of the debenture holders. Under the terms of the deed the company commits itself to pay the debenture holder their principal and interest and charges its property to the trustees as security. Page 4 of 6 . Other contents of debentures are provisions concerning meetings of the debenture holders. It empowers the trustees to appoint a receiver to protect the interest of debenture holders. 3. The company is given power to deal with its own property advantageously for the purpose of its business without prejudicing the interests of debenture holders. 4. Incase of default by the company the trustees take action on behalf of the debenture holders. 7.

Page 5 of 6 . Where a majority of not less than ¾ th in value of the debenture holders present and voting in person or where proxies are permitted by proxy at a meeting summoned for the purpose.8. 3. A company can create a specific charge after a floating charge. 2. Liability of trustees A trustee is liable for any breach of trust where he fails to show the degree of care and deligence required of him as trustees. A company is prohibited from creating a second floating charge having priority over the first. A company is prohibited from creating mortgages ranking in priority after crystallization of floating charge. 3. A fixed charge over the same assets has priority over the floating charge. 1. Where the trustee acted honestly and reasonably. On crystallization of floating charge becomes a specific mortgage. 4. In case of default by the company the company can act to protect debenture holders. section 402. agree and the voting relates to specific Acts or omissions or to a trustee who is dead or has ceased to act. 2. Priority of charges 1. Where the trustee can show that he took such care and deligence as is required of him as trustee. Specific charge first in point of time takes priority. 5. Rights to copy the trust deed A registered debenture holder is entitled to require a copy of a printed trust deed section 89 (2). Any clause in the trust deed releasing the trustee exempting him from liability for breach of trust or indemnifying him against liability for breach of trust is void except in the following cases.

rates.g.Floating charge is postponed to the rights of the following persons if they act before the security crystallizes. Page 6 of 6 . wages and salaries. if the goods are sold by the sheriff. e) Preferential debts e. c) A creditor who obtains a garnishee order absolute d) A supplier of goods on hire purchase agreement has priority over such until goods are paid for in full. taxes. a) A landlord who distrains for rent b) A judgement creditor.

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