UNIT 8

● DEBT CAPITAL (BORROWINGS)

● In order to run a business effectively and successfully, an adequate amount of ca[ital is
necessary.
● In some cases capital arranged through internal resources i.e. by way of issuing equity
share capital or using accumulated profit is not adequate and the organization is
resorted to external resources of arranging capital i.e. Debentures, Bank Loan, Public
Deposits, External Commercial borrowing (ECB), etc.
● Power of Companyto borrow
● The power of the company to borrow is exercised by its directors, who cannot borrow
more than the sum authorised
● The powers to borrow money and to issue debentures whether in or outside India can
only be exercised by the Directors at a duly convened meeting. Pursuant to Section
179(3)(c) & (d) directors have to pass resolution at a duly convened Board Meeting to
borrow moneys.
● The power to issue debentures cannot be delegated by the Board of directors.
● Unauthorized or Ultra Vires Borrowing
● Where a company borrows without the authority conferred on it by the articles or beyond
the amount set out, is an ultra vires borrowing.
● Any act which is ultra vires the company is void. In such a case the contract is void and
the lender cannot sue the company for the return of the loan.
● The securities given for such ultra-vires borrowing are also void and inoperative. Ultra
vires borrowings cannot even be ratified by a resolution passed by the company in
general meeting.
● If the lender has parted with his money to the company under an ultra vires borrowing,
unable to sue for its return, or enforce any security granted to him, he nevertheless has
the following remedies:
● Injunction and Recovery
● Subrogation
● Suit against Directors
● A debenture stock is called perpetual if the principal amount of debt is not payable at any
fixed time but only in the case of winding up or in case of default in paying interest.
● Debentures are secured over the assets of the company. Debentures are issued as a
series, single debentures can also be issued.
● Debentures carry no voting rights at any meeting of the company (sec 71 (2))
● Section 71 provides the manner in which a company may issue debentures.
● Section 23 also provides the ways in which a public company or private company may
issue securities.
● (a) Issue of securities by public company
(i) to public through prospectus (public offer) or
(ii) through private placement; or
(iii) through rights issue
 (b) Issue of securities by Private Company
(i) by way of rights issue or
(ii) through private placement

● Kinds of Debentures:
● Bearer Debentures : these are also known as unregistered debentures. They are
payable to the bearer. These are regarded as negotiable instruments and are
transferable by delivery.
● Registered debentures : these are debentures which are payable to the registered
holders. A registered holder is one whose name appears both on the debenture
certificate and in the company’s register of debenture holders required to be maintained
under SEc 152. The registered holder of debentures can transfer them like shares 9sec
108). Registered debentures. The charge may be a fixed discharge or a floating charge.
● Unsecured or naked debentures : debentures which do not create any charge on the
assets of the company are known as unsecured or naked debentures. The holder of
these debentures like ordinary unsecured creditors may sue the company for recovery of
the debt
● Debentures with pari-passu clause
● The expression ‘pari-passu’ implies with equal step, equally treated, at the same rate, or
at par with.
● When it is said that existing debentures shall be issued pari-passu, it implies they would
be on an equal footing as to security, and should the security be enforced, the amount
realised shall be divided pro-rate, i.e. they are to be discharged ratably. In the event of
deficiency of assets, they will abate proportionately.
● If the words pari-passu are not used, the debentures will be payable according to the
date of issue, and if they are all issued on the same day, they will be payable according
to their numerical order. However, a company cannot issue a new series of debentures
so as to rank pari-passu with prior series, unless the power to do so is expressly
reserved and contained in the debentures of the previous series.
● Debenture Trust (sec 71 (5)(6 & (7))
● Where a series of debentures are issued to numerous debenture holders, a debenture
trust normally created through a debenture trust deed.
● The debenture trustees appointed by the debenture holders administer the trust and all
the debenture holders are beneficiaries of the trust.
● The main purpose of creating a debenture trust is to enable the company to create a
charge or security in favour of the trust.
● The trustees area bound to exercise due care and diligence to protect the interest of the
debenture holder’s u/s 72(6) of the Act.
● The debenture trustees shall be liable for breach of trust and negligence and any term in
the debenture trust deed which exempts the trustee from liability in case of breach of
trust is void and will not have any legal effect.
● The debenture trust has the following advantages:
● The case of default by the company either in the payment of interest or Repayment of
principal, the trustee can directly take steps to enforce the Securities instead of leaving
the initiative in the hands of few debenture holders.
● The trustees are normally given the power to sell and realise the security without the aid
of the court.
● Since the legal estate is vested in the trustee when the charge is registered no
subsequent legal mortgage having priority can be registered
● The title deeds of the mortgage having property are kept insured and maintained in
proper condition
● The trustees ensure that the mortgaged property is kept insured and maintained in
proper condition.
● Debenture Trust Deed : (sec 71(5) & R. 18(5))
● Every company issuing prospectus or make an offer or invitation to public or to its
members exceeding 500 persons for the subscription of its debentures required to
execute the debenture trust deed and it shall be made within 60 days of allotment of
debenture. The deed shall be made in favour of the debentures trustees.
● Inspection and copy of trust deed : any member of debenture holder of the company
has the right to inspect the trust deed and obtain copies of the same of payment of
prescribed amount (R.18 (8a) & (8b))
● Appointment of Debenture Trustee : (Sec. 71(5) and R.18(2) of Companies (Share
Capital & Debenture) Rules, 2014)
● The company shall appoint a debenture trustee before the issue of prospectus or letter
of offer for subscription of its debentures.
● Appoint one or more debenture trustees.
● State in Letter offer, the names of Debentures Trustees
● Obtain written consent, before such appointment, from Debenture trustees.
● A person shall be appointed as a Debenture trustees, if he -
- Beneficially holds shares in the company
- Is a promoter, director or key managerial personal or any other officer or an
employee of the company or its holding company, subsidiary company or
associate company
- Is beneficially entitled to moneys which are to paid by the company, otherwise
than as remuneration payable to the debenture trustee
- Is indebted to the company or its subsidiary or its holding or associate company
or a subsidiary of such holding company.

● Remedies where company fails to redeem Debentures:

● When the debentures are unsecured:
● May sue the company and obtain the order of the court for attachment of company’s
property
● May file a winding up petition in a NCLT against the company for compulsory winding up
● When the Debentures are secured:
● In addition to the remedies of unsecured debenture holders, the secured debenture
holders -
● May enforce the security without even applying to the court
● Apply to the court for appointment of receiver
● Foreclose the interest of the company in the assets charged
● If the company goes into liquidation, the debenture holder can value his securities and if
it is insufficient he can prove for the balance of the debt or totally give up the security
and prove for the whole debt.