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PROJECT

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DEBENTURES AND DEBENTURE HOLDERS

SUBMITTED BY RAWISEN GURIA I.D. 207062 FOR CORPORATE LAW I OFFERED BY DR. SREENIVSASULU NS.
Submitted by Rawisen Guria (ID – 207062) Topic: Debentures and Debenture Holders

1 Submitted by Rawisen Guria (ID – 207062) Topic: Debentures and Debenture Holders . 43.1 Though there is no precise definition of debenture nevertheless Section 2 (12) of the Companies Act 1956 reads: “debenture” includes debenture stock bonds and any other securities of a company.(1) The Board of directors of a public company. 260 at 264 3 This article says: 293. The Corporate Debenture System of South American Countries. Cappa.2 Section 117 to Sections 123 of the Companies Act. together with the moneys already borrowed by the company (apart from temporary loans obtained from the company's bankers in the ordinary course of business). The attributes of Debentures A movable property Issued in the form of a certificate of indebtedness by the company. where the moneys to be borrowed. reserves not set apart for any specific purpose. the quantum of such issue should be adequately covered by a borrowing resolution of its shareholders under section 293(l)(d) of the Companies Act. It could be applied to any mechanism showing that the party making it owes money and is obliged to pay it and is one of the means to raise the capital of the company. leasing or disposing of the whole or substantially the whole of the undertaking of the company under section 293 (1) (a). will exceed the aggregate of the paid-up capital of the company and its free reserves. 4 (Feb. D. Restrictions on powers of Board .3 Consent of the shareholders would also be required for selling. 571-598 2 See Chitty J. Vol. pp. The Yale Law Journal. Any document which either creates a debt or acknowledges it is a debenture.(d) borrow moneys after the commencement of this Act. liability of trustees etc. Requirements regulating issue of Debentures While the articles of a company should contain an enabling provision for issue of debentures and creation of security therefore by the Board. Abercorris Slate Co. No. Victor E.1956 (the Act). appointment of debenture trustees. creation of Debenture Redemption Reserve Account. 1956 regulate the provisions relating to debentures. that is to say. their duties. 1934)..2 INTRODUCTION The word ‘debenture’ means to borrow or that which is due and has been derived from a Latin word ‘debere’. It’s not a technical term and the definition provided does not describe the nature of debenture. except with the consent of such public company or subsidiary in general meeting. This is an inclusive definition and amounts to borrowing of monies from the holders of debentures on such terms and conditions subject to which the debentures have been issued. shall not. or of a private company which is a subsidiary of a public company. whether constituting a charge on the assets of the company or not”. 37 Ch. (1888). in Levy v..

4 Submitted by Rawisen Guria (ID – 207062) Topic: Debentures and Debenture Holders . Naked/Unsecured debentures: Debentures which do not carry any security with regard to the principal sum or due interest are called unsecured debentures or simple debentures.4 In India. Kinds of debentures Debenture can be classified as under: Secured debentures refer to those debentures where 1. These can be redeemed by annual drawings or by purchasing from the open market. A charge is produced on the assets of the company for the use of disbursement in case of defaulting which may be fixed or floating. repayment of principal and interest A charge on the assets of the company may or may not be created. The fixed charge is created against those assets which are held by a company for use in operations not meant for sale whereas floating charge involves all assets excluding those assigned to the secured creditors. 2. On the basis of redemption Redeemable debentures: These are issued for a fixed period and the principal amount is paid off on the expiry of such period in lump sum or in instalments during the life time of the company. It is also known as Perpetual Debentures because no undertaking is given for the repayment of money borrowed by issuing such debentures. 2nd mortgage debentures: The holders have a 2nd claim on the assets charged. From security point of view Secured debentures: These are the debentures that are secured by a charge on the assets of the company and are also called mortgage debentures. b. The holders of have the right to recover their principal amount with the unpaid amount of interest on such debentures out of the assets mortgaged by the company. A fixed charge is produced on a specific asset while a floating charge is on the general assets of the company. Non-redeemable or irredeemable debentures: These are the debentures which are not redeemed in the life time of the company but are repayable on the on winding-up of a company or on the expiry of a long period. Such debentures are paid back only when the company goes into liquidation.3 Generally it specifies the date of redemption. 1st mortgage debentures: The holders have a 1st claim on the assets charged. They do not have a specific a charge on the assets of the company though a floating charge can be formed on the debenture by default. debentures must be secured which can be of two types: a.

On the basis of convertibility Convertible debentures: The debentures that can be converted into shares of the company or in any other security on the expiry of pre-decided period at the option of the company or the debenture holders are called convertible debentures. Interest is paid to person who produces the interest coupon attached to such debentures. A debenture trustee hence enjoys an exclusive place of an independent entity unconnected with the issuer of security but appointed to guard the interest of holders of debentures. These are transferrable merely by delivery. the company and every officer of the company who is in a default.4 3. The term and conditions of conversion are generally announced at the time of issue of debentures and are either fully convertible or partly convertible.5 The need for executing a trust deed arise when a company wants to issue a prospectus or letter of offer to the public for securing subscription to its debentures and for this purpose appoints one or more debenture trustees. shall be punishable. Non-convertible debentures: The debenture holders of such debentures cannot convert their debentures into shares or in any other securities of the company. Issue of Debentures and creation of security Section 117A of the Act puts a company which issues debentures under an obligation to create security pursuant to by executing trust deed. with fine which may extend to five hundred rupees for every day during which the offence continues. (2) A copy of the trust deed shall be open to inspection to any member. 5 Submitted by Rawisen Guria (ID – 207062) Topic: Debentures and Debenture Holders . or debenture holder of the company and he shall also be entitled to obtain copies of such trust deed on payment of such sum as may be prescribed. These debentures are transferred only by executing a regular transfer deed. Bearer debentures: These are the debentures which are not recorded in a register of the company. On the basis of Records Registered debentures: These are the debentures that are registered with the company and the amount of such debentures is payable only to those debenture holders whose name appears in the register of the company like all details including names. Most debentures issued by companies fall in this category. The documents states that the debenture trustees have consented to be appointed as such as required by section 117B of the Act. addresses and particulars of holding of the debenture holders are entered in a register kept by the company. 117A. for each offence. Debenture trust deed: (1) A trust deed for securing any issue of debentures shall be in such form and shall be executed within such period as may be prescribed. 4. (3) If a copy of the trust deed is not made available for inspection or is not given to any member or debenture holder.

Debenture holders have a right to inspect the trust deed under clause (4) of s. Within seven days of the making of the payment a copy of any trust deed shall be forwarded to the holder of any such debenture for securing any issue of debentures. The legal relationship between the company and the debenture holder is simply that of a contractual relationship of debtor and creditor.500 and then with a further fine up to Rs. The Court held that it can inspect the purpose of petitioner so as to see whether the issue is of the interest of the debenture 6 (1986) 3 Company Law Journal 179 Bombay Submitted by Rawisen Guria (ID – 207062) Topic: Debentures and Debenture Holders . If the copy is not forwarded within the time specified the company shall be punishable for the offence with a fine of up to Rs. Ltd 6 this right is examined by Justice Sujata Manohar of the Bombay High Court.5 I. Dyeing & Mfg Co. This right was available only to the debenture holders under the previous Act but the present Act permits any member of the company to inspect the trust deed. The Court agreed with the company and held that the individuals who had 4 % of the debentures had no rights to go beyond the declared accounts. Rights of the debenture holders Following rights are available to the Debenture Holders: 1. If the debt is secured on some or all of the company’s assets then the relationship is that of mortgager and mortgagee.118. Registration of a charge for issue of debentures is obligatory as per Section 125 (4) of the Companies Act. In this case a company proposed to issue a new series of debentures. In Narotamdas T. DEBENTURE HOLDERS Debenture holders are not the members but the creditors of the company. The validity of the proposal was questioned and a stay order on the proposal was sought in the court. If a company issues debentures which are secured by charge then as per the provisions of Section 128 benefit is available to all debenture holders.200 for every day default is levied. Toprani v. To get the copy of trust deed prescribed fee is needed to be submitted. Rights to obtain copies and inspect trust deed Under s 118(1) of the Companies Act each debenture holder of a company has the right to ask for the copy of the trust deed. It allowed the company to go ahead with its debenture issue subject to the condition that if the aggrieved shareholder wanted payment he should be paid out in cash.

before confirming the alteration. 2. at the time of appointment of the receivers.. Thus although in the case the goods were..(1893) 1 Ch 477 New York Taxi Cab Co. Dudley Marshall(properties) Ltd. The annual reports. The execution of a decree is only complete after attachment and sale. Right to get notice before confirming the alteration of Memorandum of Association [sec. Re. Justice Harman in the case of Four-Maids Ltd v.6 holders or otherwise. (1958) 28 Com Cases 523. copies of certificates. The mortgagee may go into possession as soon as possible unless there is something in the contract expressly or impliedly whereby the mortgagee has contracted out of those rights. Ltd.9 4. other documents the register of members and of the debenture holders can be inspected and copies obtained by the provisions of section 163.529 10 (1957) Ch 317 at 320 Submitted by Rawisen Guria (ID – 207062) Topic: Debentures and Debenture Holders .7 There is general principal applicable to all authorities conferred on majorities of classes enabling them to bind minorities that the power must be exercised for the purpose of benefiting the class as whole and not merely individual members only.17 (3) (a)]: As mentioned under sec 17(3) (a) of the Act.10 gave a proper insight in this matter. the central government must be satisfied that sufficient notice has been given to every holder of the debenture of the company. The majority of the debenture holders in the exercise of this power cannot authorize the company to sell the assets charged and to divide the proceeds among all the debenture holders. Re. The right of detailed inspection of the record and registers and books of account is not allowed and no bad conclusion can be drawn if the company does not permit it. Valley Gold Co. The right of a debenture holder of inspecting the company’s record is extremely limited and under section 118 he can only inspect the debenture trust deed and obtain a copy of it. Authority to modify the rights of debenture holders with the consent of majority The trust deed sometimes contains a clause that the rights of the debenture holders may be modified with the consent of a majority of (three fourth. Right to take possession of charged property: A legal chargee gets the legal title to the charged property and therefore has an immediate right to possession of the property..8 3. under the 7 8 Sneath v.. Until then the property remains that of the execution debtor and the title does not pass to execution creditor. and to every other person or class of persons whose interests will be affected by the alteration of the memorandum. and that this consent shall bind all the debenture holders. (1913) 1 Ch 1 9 Orient paper mills Ltd. but among only those willing to accept the lowest price for their debenture. for instance) of them.

The charge crystallized because of the transfer and the assets transferred remained subject to the charge. In Bank of Credits & Commerce International SA v. Where the company is in a state of suspended animation. The exact arrangement under which the transfer of assets had taken place and what was the financial and commercial relationship between the two companies was very difficult for the court to reconstruct. An appointment of a receiver by a debenture holder takes effect when the document of appointment is handed to him by the person having the necessary authority in the circumstances from which it is fairy to be said that he was appointing a receiver. iii. The debenture holder sought appointment of a receiver and manager for the associated company also. the goods remained subject to the floating charges created by the debentures. Kenya Furfural.. When there are decrees and the judgments against the company. (1918) 13 (1994) 1 BCLC 211 (Ch D) 14 Cripps (pharmaceuticals) Ltd v. West Somerset Rly. and the receiver accepts the proffered appointment. where principal or interest is in arrear or even where there is no such arrear the assets are in danger. Wickenden( 1973) 2 All ER 606. though there was some evidence that the associated company had acquired its own assets in the course of trading. iv. The court of Appeal followed Mackerzie (Kenya) Ltd v. The mixed individual assets of the associated company could be ascertained when an account was taken.Ltd. The court granted the order.13 Administrative receivers were appointed by the court over the assets of a company.12 v.7 control of the court broker. Where the company is in liquidation or is on the point of being wound up. Pharamico. The company had transferred its assets to an associated company. Submitted by Rawisen Guria (ID – 207062) Topic: Debentures and Debenture Holders .14 6. although the acceptance may be tacit. BRS Kumar Bros. Right to apply for winding up of the company if the company fails to pay its debt 11 Lochab Brothers v. Right to demand for the appointment of the receiver: Debenture holders may appoint a receiver to take charge of the assets subjected to the charge. (1985) LRC (Comm) 737 (Kenya CA). where there is a danger of property being lost or diminished in the value ii. It was arguable that the associated company was nothing more than the transferor company itself in a new guise. The circumstances under which the debenture holders can apply for the appointment of a receiver are: i.11 5. (1976) KLR 270 (kenya) 12 Lawrence v.

But in the case of any debenture where the holder of the debenture is given the right to receive or collect the interest amounts directly from the company or the debenture is a bearer bond.[1977] ASIL XIII 427 18 See Narotamdas T. But he must give a reasonable security for costs and establish a prima facie case for winding up [section 439(8)]. 499 17 Central Bank of India v. In all the cases the question will be “Is the holder of the debenture is entitled to collect the amounts or the principal sum without reference to the trustee”? If he is so entitled. unless the debenture expressly so provides. A contingent or the prospective creditor (such as the holder of a bill of exchange yet to mature or of debentures not yet payable or a guarantor of company’s debts) is also entitled to petition for winding up of the company.. but for that of all contributories and all creditors. the holder of the debenture will be entitled to a winding up petition as a creditor. Ltd. Ltd.I.17 A winding up proceeding is not merely for the benefit of the petitioner.15 A debenture holder’s petition is generally based on the ground that the company is unable to pay its debts. Bombay dyeing and Mfg. when his petition for winding up the company is already pending does not debar him from proceeding with his petition for winding up of the company. Debenture holder can present a petition for winding up as he is creditor for the amount of his principal and interest.8 Debenture holder has a right to apply for the winding up of the company if he can prove that he claims an undisputed debt and that the company has failed to discharge it. Toprani v.O. Sakhani Minning and Engineering Industries Pvt. he will be deemed to be a creditor. He will not ordinarily be heard to urge that a winding up order should be made because the substratum of the company is gone which is usually the proper concern of the company’s shareholders. Co. (1913) 82 LJ Ch 214 16 Bukhtiarpur Bihar Light Rly. U. a debenture holder as such will not be deemed to be a creditor.18 Remedies for debenture holders A debenture holder who wishes to realize his security and get his money back. Simmer and jack East ltd. but not for any premium payable on redemption.16 The mere fact that the debenture holder files a suit for the realization of the debt. v. AIR 1954 Cal. (1990) 68 Com Cases 300 (Bom) Submitted by Rawisen Guria (ID – 207062) Topic: Debentures and Debenture Holders .Co. Where there is a trustee who is given all the rights of ownership. may either exercise remedies given by the debenture trust deed without recourse to the court or take 15 Consolidated Goldfields of South Africa v.

on default in payment of principal or interest. bring an action (called a debenture holders’ action) on behalf of him and other debenture holders of the same class asking for: i. unless the debenture contains an express power of sale. iii. For the action of the foreclosure it is necessary that all debenture holders of the class concerned join hands. a declaration that the debenture have a charge on the assets. A holder of one of a series of debentures cannot sell the property charged. the effect of which is that the borrowers’ interest in the assets charged is completely extinguished and the lenders become the owner of them. an account of what is owned to the debenture holders: the amount of assets. either as a sole purchaser or jointly with others.19 The remedies which may be available to the debenture holders are as follows: 1. Herts and Essex Waterwork co.20 2. Duty to realise true market value Exercising a power of sale over charged property a chargee cannot sell to himself. Wong Chit Sen. Sale of charged property If the debenture holder is the holder of a single debenture giving a charge on assets of the company. ii. though he can sell to a company in which he is interested. Lampert(1999) BCC 507. It is not necessary to allow time to permit the borrowing company to engage in commercial transactions for the purpose of raising the money.67. it is required of the lender that he should give the borrower a reasonable opportunity to collect the money owned.22 Where no trust deed has been executed in favor of debenture holders a debenture holder may. 1882. (1983) 1 WLR 1349 (PC) 22 Wallace v. sec.. Foreclosure The trustees may make an application to the court for an order of foreclosure.21 3. 19 20 Lloyds Bank Plc. an order of foreclosure or sale. iv. (1889) 41 Ch D 399 21 Tse Kwong Lam v. Evershed(1899) 1 Ch 891 Submitted by Rawisen Guria (ID – 207062) Topic: Debentures and Debenture Holders . the appointment of a receiver. V. Where the debenture is repayable on demand.9 proceedings to enforce his rights. Blaker v. he will usually have an express power of sale or the implied power of sale given to mortgagees by the Transfer of Property Act. etc. prior claims.

23 II. For borrowing money one very handy means is through debentures. 627 Submitted by Rawisen Guria (ID – 207062) Topic: Debentures and Debenture Holders . Debenture holders play a vital role by providing money to the company by means of debentures. [1904] Ch. The rule is that a person who claims a share in a fund must first pay up everything he owes to the fund before he can claim a share. the holder cannot set off his debt against the liability he owes to the company. The loan requirement of a company may not be met by a single lender or it may have to be divided into numerous units. CONCLUSION Companies frequently need to borrow large sums of money. 23 Re Brown and Gregory Ltd. There is a need to focus more on the protection of the interest of the debenture holders in a company. In comparison with the role of debenture holders with the rights available to them we can observe that their rights are not compatible with their role. Debenture holders should be given some more rights so as to protect their interest in the company. Effective measures must be initiated for protecting the interest of the debenture holders through legal basis for a sound corporate governance practices particularly in a country like India the literacy rate is very low and a large number of literate population is also not aware of the law and procedure applicable in Company. There is a need to revamp the structure and administration of the fund and schemes should be made more comprehensive and their scope expanded to enable flow of correct information to the investors as well as their education in respect of their rights. The government has recognized that an investor culture and a protection fund for the benefit of the investors is necessary.10 If a debenture holder owes a debt to the company which is insolvent.

Company Law. Guide to the Companies Act Part I. Oxford University Press Victor E. reprint 2006. 8th Edition. Paul L Davies. Contract tort and Crime. University Edition. The Yale Law Journal. G. Cappa. 2003 Pennington’s Company Law.K. pp. Taxman’s Student Guide to Company Law. 7th Edition.11 BIBLIOGRAPHY A Ramaiya. 9th Edition. Kapoor. Vol. 571-598 Submitted by Rawisen Guria (ID – 207062) Topic: Debentures and Debenture Holders . 4 (Feb. 2005. Avtar Singh.K. 1934).. Eastern Book Company Gower & Davies. Wadhwa Nagpur A. Principle of Modern Company Law. Sweet & Maxwell. 16th Edition. 43. 14th Edition. No. The Corporate Debenture System of South American Countries. Majumdar & Dr.

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