1

PROJECT

ON

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
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INTRODUCTION The word ‘debenture’ means to borrow or that which is due and has been
derived from a Latin word ‘debere’.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, whether
constituting a charge on the assets of the company or not”. 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. It’s
not a technical term and the definition provided does not describe the nature of
debenture. 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. Any document which either creates a debt or acknowledges it is a
debenture.2 Section 117 to Sections 123 of the Companies Act, 1956 regulate the
provisions relating to debentures, appointment of debenture trustees, their duties,
creation of Debenture Redemption Reserve Account, 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, 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,1956 (the Act).3 Consent of the shareholders would also be required for
selling, leasing or disposing of the whole or substantially the whole of the
undertaking of the company under section 293 (1) (a). The attributes of Debentures
A movable property Issued in the form of a certificate of indebtedness by the
company.
Victor E. Cappa, The Corporate Debenture System of South American Countries, The
Yale Law Journal, Vol. 43, No. 4 (Feb., 1934), pp. 571-598 2 See Chitty J. in Levy
v. Abercorris Slate Co. (1888), 37 Ch. D. 260 at 264 3 This article says: 293.
Restrictions on powers of Board - (1) The Board of directors of a public company,
or of a private company which is a subsidiary of a public company, shall not,
except with the consent of such public company or subsidiary in general meeting,-
(d) borrow moneys after the commencement of this Act, where the moneys to be
borrowed, 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), will exceed the aggregate of the paid-up capital of the company and its
free reserves, that is to say, reserves not set apart for any specific purpose;
1

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Topic: Debentures and Debenture Holders

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Generally it specifies the date of redemption, repayment of principal and interest

A charge on the assets of the company may or may not be created.

Kinds of debentures Debenture can be classified as under: Secured debentures refer

to those debentures where 1. 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. 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 charge is produced on the assets of the company
for the use of disbursement in case of defaulting which may be fixed or floating. A
fixed charge is produced on a specific asset while a floating charge is on the
general assets of the company.4 In India, debentures must be secured which can be
of two types: a. 1st mortgage debentures: The holders have a 1st claim on the
assets charged. b. 2nd mortgage debentures: The holders have a 2nd claim on the
assets charged. 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. 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.
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. These can be redeemed by
annual drawings or by purchasing from the open market. 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. It is also known as Perpetual Debentures because no
undertaking is given for the repayment of money borrowed by issuing such
debentures.

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.

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Topic: Debentures and Debenture Holders

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3. 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, addresses and particulars of holding of the debenture
holders are entered in a register kept by the company. 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. These are
transferrable merely by delivery. Interest is paid to person who produces the
interest coupon attached to such debentures. 4. 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. The term
and conditions of conversion are generally announced at the time of issue of
debentures and are either fully convertible or partly convertible. Non-convertible
debentures: The debenture holders of such debentures cannot convert their
debentures into shares or in any other securities of the company. Most debentures
issued by companies fall in this category.

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.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. The documents states that the debenture trustees have consented to be
appointed as such as required by section 117B of the Act. 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.
117A. 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. (2) A copy of the trust deed shall be open to inspection to any member.
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. (3) If a copy of
the trust deed is not made available for inspection or is not given to any member
or debenture holder, the company and every officer of the company who is in a
default, shall be punishable, for each offence, with fine which may extend to five
hundred rupees for every day during which the offence continues.
5

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Topic: Debentures and Debenture Holders

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I.

DEBENTURE HOLDERS

Debenture holders are not the members but the creditors of the company. The legal
relationship between the company and the debenture holder is simply that of a
contractual relationship of debtor and creditor. If the debt is secured on some or
all of the company’s assets then the relationship is that of mortgager and
mortgagee. Registration of a charge for issue of debentures is obligatory as per
Section 125 (4) of the Companies Act. 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. Rights of the debenture holders

Following rights are available to the Debenture Holders: 1. 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. 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. To get the copy of
trust deed prescribed fee is needed to be submitted. 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.500 and then with a further fine up to Rs.200 for every day
default is levied. Debenture holders have a right to inspect the trust deed under
clause (4) of s.118. 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. In Narotamdas T. Toprani v. Dyeing & Mfg Co. Ltd 6 this right is
examined by Justice Sujata Manohar of the Bombay High Court. In this case a company
proposed to issue a new series of debentures. The validity of the proposal was
questioned and a stay order on the proposal was sought in the court. 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. 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. 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

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Topic: Debentures and Debenture Holders

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holders or otherwise. 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. The annual reports, copies of certificates,
other documents the register of members and of the debenture holders can be
inspected and copies obtained by the provisions of section 163. 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. 2. 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, for instance) of them,
and that this consent shall bind all the 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. 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, but among only those willing to accept the lowest price for their
debenture.8 3. Right to get notice before confirming the alteration of Memorandum
of Association [sec.17 (3) (a)]: As mentioned under sec 17(3) (a) of the Act,
before confirming the alteration, the central government must be satisfied that
sufficient notice has been given to every holder of the debenture of the company,
and to every other person or class of persons whose interests will be affected by
the alteration of the memorandum.9 4. 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. Justice Harman in the case of Four-
Maids Ltd v. Dudley Marshall(properties) Ltd.,10 gave a proper insight in this
matter. 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. The execution of a decree is only complete after
attachment and sale. Until then the property remains that of the execution debtor
and the title does not pass to execution creditor. Thus although in the case the
goods were, at the time of appointment of the receivers, under the

7 8

Sneath v. Valley Gold Co. Ltd.,(1893) 1 Ch 477 New York Taxi Cab Co., Re, (1913) 1
Ch 1 9 Orient paper mills Ltd., Re, (1958) 28 Com Cases 523,529 10 (1957) Ch 317 at
320

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Topic: Debentures and Debenture Holders

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control of the court broker, the goods remained subject to the floating charges
created by the debentures.11 5. 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. The circumstances under which the debenture holders can
apply for the appointment of a receiver are: i. where there is a danger of property
being lost or diminished in the value ii. where principal or interest is in arrear
or even where there is no such arrear the assets are in danger. iii. Where the
company is in liquidation or is on the point of being wound up. iv. When there are
decrees and the judgments against the company.12 v. Where the company is in a state
of suspended animation. In Bank of Credits & Commerce International SA v. BRS Kumar
Bros.Ltd.13 Administrative receivers were appointed by the court over the assets of
a company. The company had transferred its assets to an associated company. 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, though there was some evidence that the
associated company had acquired its own assets in the course of trading. The
debenture holder sought appointment of a receiver and manager for the associated
company also. The court granted the order. It was arguable that the associated
company was nothing more than the transferor company itself in a new guise. The
charge crystallized because of the transfer and the assets transferred remained
subject to the charge. The mixed individual assets of the associated company could
be ascertained when an account was taken. 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, and the receiver accepts the
proffered appointment, although the acceptance may be tacit.14 6. Right to apply
for winding up of the company if the company fails to pay its debt
11

Lochab Brothers v. Kenya Furfural, (1985) LRC (Comm) 737 (Kenya CA). The court of
Appeal followed Mackerzie (Kenya) Ltd v. Pharamico, (1976) KLR 270 (kenya) 12
Lawrence v. West Somerset Rly., (1918) 13 (1994) 1 BCLC 211 (Ch D) 14 Cripps
(pharmaceuticals) Ltd v. Wickenden( 1973) 2 All ER 606.

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Topic: Debentures and Debenture Holders

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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. 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 he
must give a reasonable security for costs and establish a prima facie case for
winding up [section 439(8)]. Debenture holder can present a petition for winding up
as he is creditor for the amount of his principal and interest, but not for any
premium payable on redemption, unless the debenture expressly so provides.15 A
debenture holder’s petition is generally based on the ground that the company is
unable to pay its debts. 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.16 The mere fact that the
debenture holder files a suit for the realization of the debt, 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.17 A winding up proceeding is not
merely for the benefit of the petitioner, but for that of all contributories and
all creditors. Where there is a trustee who is given all the rights of ownership, a
debenture holder as such will not be deemed to be a creditor. 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, the holder of the debenture will be entitled to a winding up petition as a
creditor. 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, he will 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, may
either exercise remedies given by the debenture trust deed without recourse to the
court or take
15

Consolidated Goldfields of South Africa v. Simmer and jack East ltd., (1913) 82 LJ
Ch 214 16 Bukhtiarpur Bihar Light Rly. Co. v. U.O.I, AIR 1954 Cal. 499 17 Central
Bank of India v. Sakhani Minning and Engineering Industries Pvt. Ltd.[1977] ASIL
XIII 427 18 See Narotamdas T. Toprani v. Bombay dyeing and Mfg.Co. Ltd. (1990) 68
Com Cases 300 (Bom)

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Topic: Debentures and Debenture Holders

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proceedings to enforce his rights. Where the debenture is repayable on demand, it

is required of the lender that he should give the borrower a reasonable opportunity
to collect the money owned. It is not necessary to allow time to permit the
borrowing company to engage in commercial transactions for the purpose of raising
the money.19 The remedies which may be available to the debenture holders are as
follows: 1. Sale of charged property If the debenture holder is the holder of a
single debenture giving a charge on assets of the company, he will usually have an
express power of sale or the implied power of sale given to mortgagees by the
Transfer of Property Act, 1882, sec.67. A holder of one of a series of debentures
cannot sell the property charged, unless the debenture contains an express power of
sale.20 2. Duty to realise true market value Exercising a power of sale over
charged property a chargee cannot sell to himself, either as a sole purchaser or
jointly with others; though he can sell to a company in which he is interested.21
3. Foreclosure The trustees may make an application to the court for an order of
foreclosure, the effect of which is that the borrowers’ interest in the assets
charged is completely extinguished and the lenders become the owner of them. For
the action of the foreclosure it is necessary that all debenture holders of the
class concerned join hands.22 Where no trust deed has been executed in favor of
debenture holders a debenture holder may, 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. a declaration that the
debenture have a charge on the assets; ii. an account of what is owned to the
debenture holders: the amount of assets; prior claims, etc.; iii. an order of
foreclosure or sale; iv. the appointment of a receiver.

19 20

Lloyds Bank Plc. V. Lampert(1999) BCC 507. Blaker v. Herts and Essex Waterwork co.
(1889) 41 Ch D 399 21 Tse Kwong Lam v. Wong Chit Sen, (1983) 1 WLR 1349 (PC) 22
Wallace v. Evershed(1899) 1 Ch 891

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Topic: Debentures and Debenture Holders

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If a debenture holder owes a debt to the company which is insolvent, the holder
cannot set off his debt against the liability he owes to the company. 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.23

II.

CONCLUSION

Companies frequently need to borrow large sums of money. The loan requirement of a
company may not be met by a single lender or it may have to be divided into
numerous units. For borrowing money one very handy means is through debentures.
Debenture holders play a vital role by providing money to the company by means of
debentures. 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. There is a need to focus more on the protection of the
interest of the debenture holders in a 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. The government has recognized
that an investor culture and a protection fund for the benefit of the investors is
necessary. 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.

23

Re Brown and Gregory Ltd. [1904] Ch. 627

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Topic: Debentures and Debenture Holders

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

Submitted by Rawisen Guria (ID – 207062)

Topic: Debentures and Debenture Holders