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2. LLB


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I. Debentures:

The word 'debenture' is derived from the Latin term 'debere' which means 'to borrow'. A debenture is a certificate of loan issued by a Company to the holder of the debenture. It is undoubtedly a kind of security.

II. Definitions:

The term 'debenture' has been defined in s.2(30) of the 2013 Act which states- "Debenture includes debenture stocks, bonds and any other securities of a Company, whether constituting a charge on the Company's assets or not."

Case: United Dominion Trust Ltd. v. Kinkwood

Held: Receipt or a certificate for a deposit made with a Company when the deposit was repayable at a fixed period after it was made, was held to be a debenture.

III. Characteristics of a Debenture:

1. Debentures are generally issued in a series, but a single debenture may be issued in case of sole-lender of the Company.

2. Debenture is usually in the form of a certificate issued under the seal of the Company.

3. Debenture is an acknowledgement of indebtedness.

4. It generally creates a charge on the undertaking of the Company or on some of its assets.

5. The holder of debentures is the creditor of the Company and not its members.

6. A debenture carries no voting rights at any meeting of a Company.

IV. Kinds of Debentures:

1. Registered and Bearer Debentures:

From point of view of transferability of ownership, debentures may either be registered or they may be bearer debentures. Registered debentures are payable to a registered holder and are transferable in the same manner as shares. The bearer debentures are payable to bearers and are transferable like negotiable instruments by mere delivery.

2. Redeemable and Irredeemable Debentures:

From the point of view of redeemability, debentures are generally redeemable as they are issued on the terms that the Company is bound to repay the amount of debenture at a fixed date, or upon demand or after notice, or under a system of periodical drawings. An irredeemable debenture is also known as a perpetual debenture and no time is fixed for the Company to repay the loan, although it may choose to pay it back any time it likes.

3. Secured and Unsecured Debentures:

On the basis of security, when debentures are secured by a mortgage or a charge on the property of the Company, they are called secured debentures, but when they are not so secured, they are called unsecured or naked debentures, containing a mere promise to pay.

4. Convertible Debentures:

A convertible debenture contains an option entitling the holder to convert the whole or part of his debts, on certain dates or during certain period, into shares of the Company at stated rates of interest.

5. Rights Debentures:

Offer debentures to existing equity shareholders on right basis, in proportion to their shareholding, subject to a minimum of 1 debenture to each equity shareholder.

V. Contents of Debentures:

1. A promise by the Company to repay the principal amount on a certain fixed date.

2. A promise to pay interest at a fixed rate.

3. A charge on the Company's assets.

4. A provision that the debenture is issued subject to conditions which are endorsed on it.

VI. Debenture Stock:

Companies desiring to raise larger sums of money from the public may decide to issue debenture stock instead of debentures. Debentures are issued when the amount borrowed consists of a number of separate debts of equal amount, whereas in case of debenture stock, the whole amount borrowed is regarded as consolidated into on single composite debt, each debenture stockholder receiving a debenture stock certificate testifying the amount of his contribution or holding.

VII. Issue of Debentures:

The power to issue debentures is usually set out in the memorandum of association. The debentures can be issued in the same manner as shares in the Company. But unlike shares, they can be issued at a discount, if the articles of association so authorise. Debentures can also be issued at a premium. The interest payable on debentures is debt and can therefore, be paid out of the capital.

VIII. Debenture Trust Deed:

S.71(7) of the 2013 Act provides for a debenture trust deed for securing any issues of debentures which shall be open for inspection to any member or debenture holder of the Company and he shall be entitled to obtain copies of such trust deed on payment of prescribed fees.

S.71(10) provides that in case of failure to pay, the Company is liable to pay interest on the debenture when it is due and the Tribunal, after hearing the parties, may order the Company to pay the principal with interest.

IX. Debenture Trustees:

S.71(5) provides for the appointment of debenture trustees and enumerates the duties of such trustees. It provides that no Company shall issue a prospectus or a letter of offer to the public for subscription of its debentures, unless the Company has, before such issue, appointed one or more debenture trustees for such debentures and the trustees have given their consent to the Company to be so appointed.

X. Liability of the Company to Create Security and Debenture Redemption Reserve:

After issuing of debentures, the Company shall create a debenture redemption reserve and adequate amounts shall be credited from out of its profits every year until such debentures are redeemed. Where the Company fails to redeem the debentures on the date of maturity, the Tribunal may direct the Company to redeem the debentures with interests due thereon. In case of default in complying with the order of the Tribunal, the officer in charge shall be punishable with imprisonment of upto 3 years and a fine not less than Rs. 2, 00, 000 and not exceeding Rs. 5, 00, 000.

XI. Re-issue of Redeemed Debentures:

A Company which has redeemed some of the debentures of a series to reissue the redeemed debentures unless-
i. the articles of association or the conditions of issue otherwise provide,
ii. the Company is under a contract not to reissue the redeemed debentures, or
iii. the Company has, by resolution or otherwise manifested an intention to cancel the redeemed debentures.

XII. Register of Debenture Holders: S.88(5)

A Company issuing debentures has to maintain a register of debenture-holders just as it maintains a register of members of the Company.

XIII. Remedies Available to Debenture Holders against Non-Payment:

1. A debenture holder may either sue the Company for non-payment of principal and interest or in the alternative, file a petition to the Tribunal u/s.272 for winding up of the Company for its inability to pay off its debts.

2. A debenture holder can act as a debenture trustee, appoint a receiver or sell the Company's property.

3. In case of non-payment by the Company due to insolvency, the debenture holders may ask for valuation of security pledged by the Company and get payment of principal. They shall not be entitled for payment of interest after the date of liquidation of the Company.

4. The secured debenture holder can apply to the Tribunal to foreclose the interest of the Company in the assets charged.

5. Since the debenture holders are beneficiaries under the debenture trust deed, if it is executed, the remedy to enforce the debenture securities may vest in the trustees. [Narotoma Das Topani v. Bombay Dyeing & Manufacturing Co. Ltd.]

Submitted by Pallav Tarnekar


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