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Mohit's Company Law Project
Mohit's Company Law Project
PROJECT REPORT OF
COMPANY LAW
TOPIC - DEBENTURES
Acknowledgement
I am equally grateful to my teacher Mrs. Alamdeep Kaur. She gave me moral support and
guided me in different matters regarding the topic. She had been very kind and patient while
suggesting me the outlines of this project and correcting my doubts. I thank her for all support.
Last but not the least, I would like to thank my parents and my partner who helped me a lot in
gathering different information, collecting data and guiding me from time to time in making this
project. Despite of my parent's busy schedules; they gave me different ideas in making this
project unique. I and my friend put a team effort to complete this project.
Thanking you
2
Table of Contents
I. Introduction to Debentures
Debenture is most important instrument and method of raising the loan capital by the company.
A debenture is like a certificate of loan or a loan bond evidencing the fact that the company is
liable to pay a specified amount with interest and although the money raised by the debentures
becomes a part of the company's capital structure, it does not become share capital.
Section 2 (30) of the Companies Act, 2013 define inclusively debenture as "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.
The power to issue debentures can be exercised on behalf of the Company as a meeting of the
Board under the provisions of Section 179 (3) of the Companies Act, 2013. Further Section 71 of
the Companies Act, 2013 deals with the provisions relating to the issuance of debentures along
with the penalties for no- compliance of the same.
Section 71 of the Act enables that a company may issue debentures with an option to convert
such debentures into shares, either wholly or partly at the time of redemption. The issue of
debentures with an option to convert such debentures into shares, wholly or partly, shall be
approved by a special resolution passed at a general meeting. The section prohibits issue of
debentures carrying voting rights.
I. A Definitions of Debenture
In LaxmanBharamji v. Emperor2 the Bombay High Court observed that debentures normally
indicate the security against the loan taken by the company and contain the conditions of
repayment, date, rate of interest payable to the holder. They may even create a charge on the
1
Tophams Company Law (12th Ed.) 168.
2
AIR 1946 Bom. 18.
4
companys property but it is not always necessarily so. Briefly speaking, debentures are the
acknowledgement of debt, the promise to return it.
I. B Characteristics of Debentures
1. Debentures are generally issued in series but a single debenture may be issued in case of a
sole-lender of the company.3
2. Debenture is usually in the form of a certificate issued under the seal of the company.
4. Debenture generally creates a charge on the undertaking of the company or on some of its
assets. This is, however, not an essential characteristic and a debenture creating no charge is
also perfectly legal.5
5. The holder of debentures is the creditor of the company and not its member anda
debenture carries no voting right at any meeting of the company.6
3
Robson v. Smith (1895) 2 Ch. 118
4
Knightsbridge Estates Ltd v. Byrne, (1940) AC 613.
5
Seva Singh v. Mukta Singh AIR 1936 Lah. 727
6
Calcutta Safe Deposit Co Ltd v RanjitMathuradasSampat, (1971) 41 Comp. Cas 1063.
5
III. Secured and Unsecured Debentures.On the basis of security, debentures may either
be secured or unsecured. 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.9
7
Gower: Modern Company Law (3rd Ed) p 343
8
Paranjape N.V. The New Company Law, 2013 (6th Ed) p. 241
9
Ibid p.242
6
10
Supra Note 8 p.242
7
the whole amount borrowed is regarded as consolidated into one single composite debt, each
debenture-stockholder receiving a debenture stock certificate testifying the amount of his
contribution or holding. Thus while debenture is the description of an instrument the
debenture stock contains description of debt.11
Where the company has not issued any prospectus, an allotment of debentures cannot be
made unless a statement in lieu of prospectus is filed with the Registrar of Companies at least
three days before the first allotment.13
11
Supra note 8 p.243
12
Section 25 of Companies Act, 2013.
13
Section 71 (11).
8
Tribunal after hearing the parties, may order the Company to pay the principal with
interest.14
14
Supra note 9 p.244
15
Section 71 (11)
9
The object of this section is to override the principle according to which a debenture once
paid off was extinguished, and could not be reissued.
When a company has power to reissue debentures which have been redeemed, particulars of
the redeemed debentures which can be reissued must be stated in every balance sheet.
The holders of reissued debentures have the same rights and priorities as if the debentures
had never been redeemed, i.e. they rank paripassu with the debentures left unredeemed. A
company cannot reissue redeemed debentures containing provisions as to redemption
different from those of the original issue.
Debentures deposited to secure advances on current account or otherwise are not deemed to
have been redeemed only by reason of the account having ceased to be in debit. Thus where
such an account is temporarily in credit and again in debit, the debentures deposited as
security are not deemed to have been redeemed and reissued so as to require re-stamping.16
16
Supra note 8 p.245
17
Section 88 (5)
10
2. The debentures held by each holder, showing numbers and the amount actually paid or
deemed to be paid;
3. The date at which a person's name was entered in the register as a debenture- holder; and
4. The date when a person ceased to be a debenture-holder.
The company has to maintain an index containing all relevant entries regarding debenture-
holders for the sake of convenience. Any change in the particulars of the register should be
reflected in the Index. The register of debenture holders may be closed in the same manner as
the register of members. The provisions relating to inspection or making extracts or taking
copies of the register of debenture-holders are similar as those for a register of members of
the company.
1. If the issue of debentures has not created any charge on the company's property, the
debenture-holders being unsecured creditors would be on the same footing as that of an
ordinary creditor. He may, therefore, either sue the company for payment of principal and
interest or in the alternative, file a petition to the Tribunal under Section 272 for winding up
of the company for its inability to pay-off its debts.
property; or he may apply to the Court for the appointment of a receiver or for an order for
the sale of company's property.18
3. In case of non-payment by the company due to insolvency, the debenture-holders may ask
for valuation of the security pledged by the company and get payment of principal and the
amount but 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. This order of foreclosure will terminate the interest of the
company in the property and the debenture-holder will become the owner thereof. The
foreclosure order may extend even to the uncalled capital of the company.19
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 trustees.1
The petition filed by the debenture-holder for the payment on debentures by the company
must specify the exact amount claimed. The company cannot demand extension of time-limit
for making payments on matured debentures3 and in case of default in payment by the
company the debenture holder in the capacity of mortgagor may move the Tribunal for sale
of the company's charged property and receive the amount due on debentures.
The Tribunal may appoint a receiver upon application by debenture-holders provided that
The appointment of the receiver has to be brought to the notice of the Registrar of
Companies within thirty days who shall make an entry about this appointment in the register
of charges21 on payment of prescribed fee by the person or persons at whose instance the
appointment is made. A similar notice is required to be given by the Receiver when he ceases
to act.22Failure to give notice is punishable with fine under Sec. 137(3) of the Companies
Act. The receiver should also give a notice of his appointment within thirty days of such
appointment to the Income Tax Officer who is entitled to assess the income of the company.
Failure to give such notice shall render the receiver liable to the extent to which the company
is liable to pay income tax.23
VI. B Manager
Once the receiver has taken possession of the assets of the company, they cannot be normally
used by the company for business. Sometimes it may be necessary to keep the company's
business going for the sake of its beneficial winding up. In such a case, the creditors and
debenture-holders may appoint a manager also or get him appointed by the Tribunal. The
20
Re Tilt Cove Copper Co Ltd (1913) 2 Ch 588.
21
Section 84 (1) of the Companies Act 2013
22
Section 84 (2) of the Companies Act 2013
23
Section 78 of the Income Tax Act.
13
provisions relating to appointment, rights, powers etc., of the receiver shall also apply to a
manager appointed for the purpose.
Where a receiver or manager is appointed by the Tribunal, his function as manager casts a
duty upon him to preserve the goodwill and property of the company in the interest of the
debenture-holders as also the company itself.24
24
Bishop v. Bonhama (1988) BCLC 656 (CA)
25
Vide Notification No. S-11(9)-CC(II) 84 15-09-1984 by the Ministry of Finance.
14
4. Debt-equity ratio.The debt-equity ratio shall not normally exceed 2 :1. For this purpose
'debt* will mean all term loans, debentures and bonds with an initial maturity period of five
years or more, including interest accrued thereon. It also includes all deferred payment
liabilities but it does not include short-term bank borrowings and advances, unsecured
deposits or loans from the public, shareholders and employees, and unsecured loans or
deposits from others. It should also include the proposed debenture issue.
5. Interest rate.In the case of convertible debentures issued by noncompetition and non-
FEMA26companies the rate of interest shall not exceed 14 per cent per annum. In respect of
issue of convertible debentures by companies falling within the scope of the MRTP and
FERA Acts, the maximum rate of interest shall be 12.5 per cent per annum. In the case of
non-convertible debentures, the rate of interest shall not exceed 14 per cent per annum.
1. A company will have the option of redeeming the debentures from the 5th to the 9th year
from the date of issue in such a way that the average period of redemption continues to be 7
years. While exercising such an option the small investors having debentures of the face
value not exceeding Rs. 5,000 will have to be paid in one installment only.
26
Substituted with FERA wef Feb 1 2000.
15
7. Price at the time of redemption.A premium up to 5 per cent of the face value can be
allowed at the time of redemption in the case of non-convertible debentures only.
12. Listing of shares of companies proposing debenture issue. (1) The shares of the
company proposing to issue debentures must be listed in one or more stock exchanges and
the market quotation of its shares must have been at or above par value during 6 months prior
to the date of application for the issue of debentures.
1. Simultaneous listing of shares and debentures of companies shall also be permitted.
16
2. The provision regarding listing of shares will not apply to public sector companies
provided : (a) the fair value of the shares of such companies is equal or more than the
par value; and (b) such companies have declared dividends in the year immediately
preceding the year of proposed issue
.
13. Linking of share issue with debenture issue.Linked issue of shares and debentures
may be permitted only in cases where the interest rate offered in respect of non-convertible
debentures is not more than the maximum rate prescribed for the convertible debentures.
Simultaneous issue of equity and convertible/non-convertible debentures may be permitted
provided the investors are free to subscribe to either shares or debentures or both at their
option.
14. Extra incentives.Schemes which aim at providing an interest rate exceeding 13.5 per
cent but which have built-in features of the convertible debenture issue shall not be
permitted.
17
BIBLIOGRAPHY
BOOKS
1. A.K. Majumdar Company Law & Practice ( Taxmanns) 13th Ed. 2008
2. Avtar Singh Company law 16th Ed.2009
3. D.S.R. Krishnamurti, TAXMANNS Company Law 2006
4. Dutta on company Law 4rth.Ed. 1976 .
5. Kailash Rai on Company law 9th Ed. 2005
STATUTES/ACTS/ ORDINANCES
JOURNALS
1. Company Cases
2. Company Law Journal
3. Supreme Court Cases (Journal Section
WEBSITES;-
1. http;//definitions.uselegal.com
2. Wikipedia, the free encyclopedia
3. www.acaglobal.com
4. www.answers.com
5. www.businessdictionary/definition/ultravires
6. www.citeman.com