Debentures

What Is a Debenture?

• A debenture is a type of bond or other debt instrument that is

unsecured by collateral. Since debentures have no collateral
backing, they must rely on the creditworthiness and reputation of
the issuer for support. Both corporations and governments
frequently issue debentures to raise capital or funds.
Sec 2(30) of Companies Act
• Debenture includes debenture stock, bonds or any other instrument
of a company evidencing a debt, whether constituting a charge on the
assets of the company or not;
Sec 44. Nature of shares or
debentures.—
• The shares or debentures or other interest of any member in a
company shall be movable property transferable in the manner
provided by the articles of the company.
Indenture, Coupon Payment defined
• Similar to most bonds, debentures may pay periodic interest
payments called coupon payments.
• Like other types of bonds, debentures are documented in
an indenture.
• An indenture is a legal and binding contract between bond issuers
and bondholders.
• The contract specifies features of a debt offering, such as
the maturity date, the timing of interest or coupon payments, the
method of interest calculation, and other features.
Kinds of Debenture
• Registered & Bearer
• The company which has issued debentures will obviously maintain a register of its debenture-
holders, as Section 88 provides that every company shall keep a register of the holders of its
debentures.
• The name of the holder is placed both on the debenture certificate and on the company's
register.
• Such a holder is known as the registered holder.
• He can transfer his debentures in the open market in just the same way as shares are transferred.
• Transfer will have to be registered with the company
• Registration of transfer can be avoided only by issuing debentures payable to bearer, as the
company has not to maintain a register of such debenture-holders.
• Such debentures are transferable, like negotiable instruments, by simple delivery and are called
debentures payable to bearer
Redeemable debentures
• Debentures are generally redeemable.
• This means that on expiry of the term of the loan the company has
the right to pay back the debenture-holders and have its properties
released from the mortgage or charge.
• This is called redemption of debentures.
Convertible debentures
• [S. 71(1)].-A company may issue debentures with an option to convert
them into shares, either wholly or partly at the time of redemption.
• Debentures with such option can be issued with the approval of a
special resolution passed at a general meeting
Perpetual debentures
• A debenture which contains no clause as to the time of payment or
which contains a clause that it shall not be paid back by a certain date
is known as a perpetual or irredeemable debenture.
Register of debenture-holders [S.
88]
• A company issuing debentures has to maintain a register of debenture-
holders in the prescribed form and manner:
• 1. the name, address and occupation of each debenture-holder;
• 2. the debentures held by each holder, showing numbers and the
amount actually paid or deemed to be paid;
• 3. the date at which each person was entered as a debenture-holder;
and
• 4. the date at which any person ceased to be a debenture-holder.
• Index.-An index should be maintained which should enable the entries
relating to a debenture-holder to be readily found.
Bond v. Debenture
Charge
• Sec 2(16) ―charge means an interest or lien created on the property
or assets of a company or any of its undertakings or both as security
and includes a mortgage;
Fixed and Floating Charge
• It is usual, though not essential, for debentures to create a charge on the company's
assets.
• The charges which a company may create on its assets are of two kinds, namely:
• 1. Fixed charge, and
• 2. Floating charge.
• The normal concept of a mortgage is that it is created on some definite or specific
assets.
• Such a mortgage is suitable for property which is more or less fixed
• But where the assets to be charged are of circulating or liquid nature, such charge is
called floating charge
• Such assets keep changing.
For example
• A company borrows money on the security of its stock in trade.
• The charge created, though present and immediate, will not,
however, get fixed on the stock Rather it will keep floating over the
changing stock in trade.
• And when the time comes for the lender to enforce his security he
will do so by seizing whatever stock is then in the company's hands.
• When this happens, the floating charge becomes fixed or crystallised
Panama New Zealand & Australia
Royal Mail Co Re 1870
• A steamship company having power to do so issued mortgage debentures, charging
the "undertaking and all sums of money arising therefrom", with repayment at a
specified time of the money borrowed with interest in the meantime.
• Before the debentures became due the company was wound up.
• The debenture-holders wanted to enforce their security.
• The unsecured creditors disputed the validity of the charge on a fluid thing like the
"undertaking of the company".
• But it was held that the word undertaking had reference to all the property of the
company, not only which existed at the date of the debenture, but which might
afterwards become property of the company.
• Debenture-holders, therefore, have a charge upon all the property of the company,
past and future
Characteristics of floating charge:
• The chief characteristics of a floating charge which distinguish it from a fixed
charge were explained with remarkable clarity by ROMER J in Yorkshire
Woolcombers Assn Ltd re 1903
• A mortgage or charge by a company which contains the three following
characteristics is a floating charge:
• 1. It should be a charge upon a class of assets both present and future.
• 2. The class of assets charged must be one which in the ordinary course of
business of the company would be changing from time to time.
• 3. It should be contemplated by the charge that until some step is taken by
the mortgagee, the company shall have the right to use the assets in ordinary
course of business.
Indus Film Corpn re AIR 1939 Sindh
100
• A film company borrowed sum of money and declared a lien "on all
our assets, including machinery, etc, now lying or that may be bought
hereafter until repayment".
• This was held to be a floating charge as it covered assets, present and
future, of extremely fluctuating nature and imposed no restriction on
the use of them
FD Jones & Co Ltd v Ranjit Roy AIR 1927
Cal 782
• By a deed a company had charged all its machinery, stock in trade and
moveable effects, present and future.
• The deed provided that the "properties shall be in the lender's
possession" which was actually given to him.
• This was held to be no floating charge as it took away the company's
right to use the assets charged in the ordinary course of its business.
Subsequent mortgages or charges
• A floating charge also leaves the company at liberty to create subsequent
specific mortgages of the same assets and ranking in priority to the floating
charge.
• Even if the creditor who takes subsequent specific mortgage has knowledge
of the floating charge, he may have priority.
• The company, may, however, be prohibited from creating subsequent
specific mortgages.
• In such a case a creditor who takes a subsequent specific mortgage with
notice of the prohibition shall not have priority over the floating charge.
• Registration of the charge with the Registrar amounts to constructive notice
of the charge under Section 80.
Effect upon charge in case of
winding up
• Section 332 imposes an important condition for the validity of a
floating charge.
• It provides that a floating charge created within twelve months
immediately preceding the commencement of winding up shall be
invalid, except in the following cases:
• (a) if the company immediately after the creation of the charge was
solvent;
• (b) to the extent to which any cash was paid to the company under
the charge
Crystallization of floating charge
• Debentures generally contain an undertaking to pay the principal sum
at a specified date with interest in the meantime.
• When the company makes a default or when it comes to be wound
up, the debenture-holders should take steps to enforce their security
by seizing the assets over which the charge was until then floating
• When they do this the charge is said to crystallise
• But even after the default the charge keeps floating until the
debenture-holders intervene.
REGISTRATION OF CHARGES Sec 77
• 77. Duty to register charges, etc.—
• (1) It shall be the duty of every company creating a charge within or outside India, on its
property or assets or any of its undertakings, whether tangible or otherwise, and situated in or
outside India, to register the particulars of the charge signed by the company and the charge-
holder together with the instruments, if any, creating such charge in such form, on payment of
such fees and in such manner as may be prescribed, with the Registrar within thirty days of its
creation:
• Provided that the Registrar may, on an application by the company, allow such registration to
be made within a period of three hundred days of such creation on payment of such additional
fees as may be prescribed:
• Provided further that if registration is not made within a period of three hundred days of such
creation, the company shall seek extension of time in accordance with section 87:
• Provided also that any subsequent registration of a charge shall not prejudice any right
acquired in respect of any property before the charge is actually registered.
• (2) Where a charge is registered with the Registrar under sub-section (1),
he shall issue a certificate of registration of such charge in such form and
in such manner as may be prescribed to the company and, as the case
may be, to the person in whose favour the charge is created.
• (3) Notwithstanding anything contained in any other law for the time
being in force, no charge created by a company shall be taken into
account by the liquidator or any other creditor unless it is duly registered
under sub-section (1) and a certificate of registration of such charge is
given by the Registrar under sub-section (2).
• (4) Nothing in sub-section (3) shall prejudice any contract or obligation
for the repayment of the money secured by a charge.
80. Date of notice of charge.—
• Where any charge on any property or assets of a company or any of
its undertakings is registered under section 77, any person acquiring
such property, assets, undertakings or part thereof or any share or
interest therein shall be deemed to have notice of the charge from
the date of such registration.
81. Register of charges to be kept
by Registrar.—
• (1) The Registrar shall, in respect of every company, keep a register
containing particulars of the charges registered under this Chapter in
such form and in such manner as may be prescribed.
• (2) A register kept in pursuance of this section shall be open to
inspection by any person on payment of such fees as may be
prescribed for each inspection.
85. Company‘s register of charges.
—
• (1) Every company shall keep at its registered office a register of charges in such
form and in such manner as may be prescribed, which shall include therein all
charges and floating charges affecting any property or assets of the company or any
of its undertakings, indicating in each case such particulars as may be prescribed:
• Provided that a copy of the instrument creating the charge shall also be kept at the
registered office of the company along with the register of charges.
• (2) The register of charges and instrument of charges, kept under sub-section (1)
shall be open for inspection during business hours—
• (a) by any member or creditor without any payment of fees; or
• (b) by any other person on payment of such fees as may be prescribed,
• subject to such reasonable restrictions as the company may, by its articles, impose.
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