Borrowing funds

Debentures
fixed mortgage charge
fluctuating charge
Registration of charge
Acceptance of public deposit
12/07/21 Small depositors 1
 Borrowing fund

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 • Pubic co. can simultaneously issue shares and
debentures just after incorporation.
• The director of a public co. shall not, except with
the consent of such company in general
meeting, borrow moneys, which together with
those already borrowed will exceed the
aggregate of the paid up capital of the company
and its free reserve.

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 Ultra Vires Borrowing (Unauthorized
borrowing)
 - Ultra Vires the company.

 -Ultra Vires the directors.

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 Remedies for lender in case 1

- Obtain the injunction order against the company.

- Tracing order for the asset
- Paying off lawful debt
- Claimed money from the director (Implied warranty of
authority)

- -

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 Debentures
 Sec. 2(12)
 Debenture includes debenture stock, bonds, and
other securities of the company whether a charge on
assets of the company or not.
 Debenture are bonds issued in acknowledgement of
any indebtedness.
 Debenture stock is a debt which carries interest at a
fixed rate.

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 Types of debenture
 Unsecured debenture
 Secured debenture
 Redeemable debenture
 Perpetual debenture
 Bearer debenture
 Registered debenture
 Fully Convertible debenture
 Non-convertible debenture
 Partly convertible debenture
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 Classification of share according to
convertibility
1) Fully convertible debenture – where the
conversion is made at or after the 18 months from
the date of allotment but before 36 months, the
conversion is optional on the part of debenture
holders in terms of SEBI guidelines. Convertible
debentures may or may not carry any interest.
2) Non- convertible debenture
3) Partly convertible debenture

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 Debenture certificate (Sec 113)
 Every company shall, within three months of allotment of any
of its shares, debenture or debenture stock and within 2
months after the application for registration of the transfer of
any such debentures or debenture stock, deliver the
certificate of all debentures and debenture stock allotted or
transferred in accordance with the procedure laid down in the
sec 53. However the CLB can extend the period within which
the debenture certificate may be delivered to be further period
not exceeding 9 months.
 A bona fide transferee for value gets a good title
notwithstanding any defect in the title of the transferor.
 Transfer of registered debenture takes place exactly in the
same way as the transfer of shares.

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 Issue of Debentures
 Power of issue of debenture vest with the directors
(BOD) of the company (sec 292).
 The legal requirements for the allotment of debenture
are similar to the allotment of shares except the
following:
1) 5% cash of the nominal value as application money.
2) Minimum subscription
3) Depositing the application money in the schedule bank.
4) No legal restriction is placed on the issue of debenture
on discount.
5) No return of allotment is required.

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 Power to reissue redeemed debentures

 If the AOA does not have any provision in contrary, the co.
has the right to keep the debenture alive for the purpose of
reissue.
 Under such reissue the holders of the debentures shall have
had the same rights and priorities as if the debentures had
never been redeemed.
 The object of keeping the debenture alive is that the
formalities for issue of debentures need not to be complied
with again and issue can be made without delay.
 The reissue will however, be treated as a new issue for the
purpose of stamp duty.

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Remedies available to a debenture holders :
Not secured:
1) To sue the company for the recovery of the money secured by the
debenture and execute the decree against the company’s property.
2) to present a petition for the winding up the company.
Secured :
1) he may sue on his own behalf and on behalf of other debenture
holders.
2) He may appoint receiver.
3) He may apply to court for closure of the company’s right to
redeem the debentures.
4) he may apply for the winding up of the company.
5) In the case of insolvency , he may realise value of security and
prove for the balance of debt.

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 Distinction between share and
debentures

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 SEBI guidelines for issue of debt instruments (updated till may 8, 2006)
• Requirements of credit rating
- Credit rating from 2 credit agencies
- All the credit obtained during the 3 years preceding the public issue of debentures
Requirements in respect of debenture trustees
• -appointment of debenture trustees
• -A trust deed shall be executed by the issuer company in the favour of the
debenture trustees within 3 months of the closure of the issue.
- Trustee to the debenture issue shall be vested with the requisite powers for
protecting the interest of debenture holders.
• Requirement of letter of option
• Roll over of Non Convertible Portions of PCD/NCD, by a company not being
in default.
• - A resolution to this effect is passed by postal ballot, having the assent from not
les than 75% of the debentureholders.
• The co. shall redeem the debenture of all dissenting debentureholders, who have
not assented to the resolution.
• Credit rating from 2 credit rating agencies.
• Fresh
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trust deed and security shall be created. 14
• Roll over of Non Convertible Portions of PCD/NCD, by a being in
default.
• In case of conversion of instruments (PCD/FCD) into equity shares
• Other requirements
- No co. shall issue of FCDs having a conversion period of more than 36
months.
- If the conversion take place at or after 18 months from the date of
allotment, but before 36 month, any conversion in part or whole of the
debenture shall be optional at the hand of the debenture holder.
- Premium amount and time of conversion shall be determined by the
issuer company and disclosed.

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 Registration of charges (sec 124)
Charge includes the mortgage (Sec 124)
Sec 125 requires the following charges when created by a company
must be registered with the registrar.
1) A charge for the purpose of securing any issue of debentures
2) A charge on the uncalled share capital of the company.
3) A charge on the immoveable property, wherever situate, or any
interest therein.
4) A charge, not being the pledge, on any moveable property of the
company.
5) A floating charge on the undertaking or any property of the
company including stock.
6) A charge on ship or any part of ship
7) A charge on goodwill, patent right or license under any patent.

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 Effect of non registration

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 Register of charges to be kept by Registrar
Sec 130

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 Company's Register of charges
(sec 143)

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 special provisions as to debentures (CO. Amendment act
2000)

 Sec 117A ( Format of Debenture Trust Deed)

 Sec 117B (Debenture Trustee)
 Sec 117C (creation of Debenture Redemption Reserve)

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 Appointment, and duties of Debenture Trustees
 Sec 117B states that before the issue of letter of offer in respect
of an issue of debenture, debenture trustees has to be
appointed and the fact of this appointment must be mentioned in
the letter of issue.
 A person cannot be appointed as trustee if
- He beneficially hold shares in the company.
- He is beneficially entitled to money which are to be paid by the
company to the debenture trustee.
- Has entered into any guarantee in respect of principal debt
secured by the debenture or interest thereupon.
- The section further states that duties and functions of the
debenture trustee shall be :
1) To protect the interest of the debentureholders.
2) To redress the grievance of the debenture holders effectively.
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- 3) To ensure that the assets of the company and each of
the guarantor are sufficient to discharge the principal
amount of the debenture at all times.
- 4) To ensure that the company does not commit a
breach of terms of the trust deed.
- 5) To file the petition before the company law board and
obtain an appropriate order therefrom in the interest of
the debenture holders.

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 Fixed and fluctuating charge
 A floating charge is an equitable charge which is not a
specified charge on any property of company. The
company may , despite the charge deal with any of the
assets in the ordinary course of business. it is essence
of floating charge that it remains dormant until the
undertaking charged ceases to be a going concern or
until the person in whose favour the charge is created,
intervene.
 Debenture holder’s right to intervene may be
suspended by agreement. But if there is no agreement
of suspension, he may exercise his right whenever he
pleases after default.
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 Statutory limitation arising out of floating
charge
1) Floating charge created within 12 months preceding the
commencement of the winding up (whether compulsory
or voluntary or subject to supervision), shall unless it is
proved that the company immediately after the creation
of the charge are solvent, be invalid except upto the
amount of any cash paid to the company at the time of,
or subsequent to the creation of and in consideration for
the change together with the interest on that amount at
5% p.a. or at any other prescribed rate.
2) floating charge crystallises, i.e. become fixed and
consequently the security ceases to be a floating
security.

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 Main characteristics of a floating charge
 it is a charge on a class of the company’s assets,
present and future, that class being one which, in
the ordinary course of the business is changing
from time to time.
 Generally it is contemplated that the company
carry on its business in an ordinary way with such
a class of assets till some event occurs on which
the charge is to settle down on the property as
then existing and the charge become fixed.

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 Pari passu clause
 It means in a debenture means that all the debentures of
the series are to be paid rateably. If therefore , security is
insufficient to satisfy the whole debts secured by the
series of debentures, the amount of debentures will abate
proportionally. If the clause is not made use of then
the debentures rank in accordance with the date of
issue and if they are all issued on the same date they
will be payable according to their numerical order. A
company however issue a new series of debenture so as
to rank paripassu with the prior series unless the power
to do so is expressly reserved and contained in the
debenture deed of the previous series.

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 In the case of paripassu clause being included in the
debentures, it is enough if the following particulars are
filled with the registrar with in 30 days after the execution
of the deed containing the charge or where there is no
deed after the execution of any debentures of the series
 The total amount secured by the whole series
 The date of resolution authorising the issue of the series
 The date of deed of any, by which security is created
 A general description of the property charged and the
name of the trustees for debenture holders, if any,
together with the deed containing the charges or a
certified copy of the deed containing the charges or a
certified copy of the deed.

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 Debenture with voting rights
permissible?

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 Right to obtain copies of trust deed

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 Question
 A charge requiring registration with the registrar
of co. was created on 1st feb 2008 by the X Lmt.
The secretary of the co. realised on 15 th march
that the charge was not filled with the registrar.
State the steps to be taken by the secretary to get
the charge registered with the registrar.

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 Acceptance of public deposits
 With a view to controlling and regulating
acceptance of deposits by companies other than
banking companies and financial companies, sec
58A confers on the central government power to
frame rules in consultation with the RBI
 Acc. to companies (amendment) Act, 2000, private
companies may accept deposits only from their
shareholders, directors and relatives of directors,
and cannot accept the deposits from the public.

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 Acceptance of Public Deposit

 Sec58B – all the provisions of the Act relating to the

prospectus will also, as far as applicable, apply to the said
advertisement for Deposits

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 Sec 58A (2) has been amended to protect the interest of those
depositors who are not aware about the default of the company.
 If the co. accept the deposit after the amendment in the contravention of
rules made by the central government then the co, has to refund the
amount with in 30 days from the date of acceptance of such deposit or within
the extended time but not more than 30 more days.
 FINE
 If the co. fails to refund the deposit then the co. will be fined not less than the
double the amount of the deposit. In case of default in the invitation then the
co. will be fined which may extend to Rs. 10 lakh but not less than 50,000.

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 Sec 58A (Deposits not to be invited without issuing an
advertisement)
 Sec 58A (2) lay down that the company could invite or accept or
allow any other person to invite or accept or allow any other
person to invite or accept on its behalf deposits only in
accordance with the rules to be framed by the government and
issuing an advertisement in the prescribed form. The company
is not in default in the repayment of any deposit or part thereof
and any interest.
 * Any deposit is accepted by the company after the
commencement of the companies (amendment) Act 1974 in
contravention of the rule made by the central government, the
deposit must be refunded with in 30 days from the date of
acceptance of such deposit or within such further time, not
exceeding 30 days, as the central government allowed.

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 Prospectus of interest of small depositors (sec 58AA)
 Small depositors:- depositor who has deposited in a financial year a sum not
exceeding Rs. 20,000 in a company and includes his successors, nominees
and legal representatives.
 In addition to provisions of sec.58A the following provisions are also applied
u/s 58AA
1) Every co. which accepts deposits from small depositors shall give an
intimation on monthly basis to the CLB of any default made by it in
repayment of any such deposits or part thereof or any interest thereupon.
Such an intimation shall be given with in 60 days from the date of default
and shall include the particulars in respect of names and address of each
small depositor, the principal sum of deposit due to them and the interest
accrued thereon.
2) The company law board shall, on its own, pass an appropriate order within
30 days from the date of receipt of intimation. It shall not be necessary for
small depositors to be present at the hearing of CLB proceeding.

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 Where a company has on any occasion defaulted in repayment
of deposit or any interest thereon to a small depositor, it shall
have to state in every future advertisement and application
form for inviting deposits from the public, the complete
details of default made including the fact of any waiver of
interest accrued on the deposits of small depositors.
 Where a company has accepted deposits from small depositors
and subsequent to this obtains funds by way of loan for working
capital from any bank, it shall first utilise such funds for the
repayment of any deposits or interest thereon to the small
depositors before applying such funds for any other purpose.
 Any person who knowingly fails to comply with the provisions of
this section or with any order of the CLB shall be punishable with
imprisonment up to 3 years and shall also be liable to fine of
atleast Rs. 500 for every days default.

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 Default in acceptance or refund of deposits to be
cognizable offence (sec 58 AAA)
 Every officer connected with or arising out of acceptance of
deposits u/s 58A or 58AA shall be cognizable offence under
criminal procedure law 1973. with a view to avoid misuse of
any power , it has further been provided that no court shall take
cognizance of the offence except on a complaint made by the
central government or any officer authorised by it in that
behalf.

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 The companies (acceptance of deposits) Rules,

1975
In exercise of the power vested u/s 58 A, the central
government, in consultation with the RBI has framed the
companies (acceptance of deposit) Rules, 1975 for
governing the invitation and acceptance of deposits by
the companies from public, shareholders or directors.

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 Meeting
 Since a company is an artificial legal entity distinct from that
of its members.
 Classification of meeting
 Meeting of shareholders or members
- Statutory meeting
- Annual general meeting
- Extraordinary general meeting
- Class meeting
- Meeting of debentureholders
- Meeting of creditors and contributories in the winding up
- Meeting of creditors otherwise than in winding up
- Meeting of directors.
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 Meeting of shareholders
 Statutory meeting (Sec 165):
 It is the first official general meeting. All public co. having share
capital except unlimited companies are required to hold statutory
meeting compulsory.
 Time limit : after 1 month but with in 6 months of obtaining the
certificate of commencement of business.
 Statutory Report : In order to enable the members to make the
best use of this opportunity the directors are required to prepare
and send to every member a document known as “ statutory
report” at least 21 days before the day on which the meeting is to
be held. If it is send later then it will still be valid if it is so agreed
to by a unanimous vote of members entitled to vote.
 Report should be certified by 2 directors, one of them should be
MD if there is one and must also be certified by auditors.

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Information in Statutory repots.
 The total number of share allotted, distinguishing
those issued otherwise than cash and stating in
case of partly paid up shares.
 The total amount of cash received.

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 Annual general meeting
 Every co. must hold ANG every year in addition
to other meetings. It is held each year with a view
to reviewing and evaluation the overall progress
of the company during the year.
 Ordinary business:
 The consideration of annual accounts.
 The declaration of dividend
 The appointment of directors in the place of those
retiring.
 The appointment of and the fixation of the
remuneration of the auditors.
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 Special business
• A special resolution is required may required for
any appointment of auditors, although it is an
item of ordinary business, in the case of the
company in which not less than 25% of the
subscribed share capital is held, whether singly
or jointly, by a public financial institution or a
government co, or central government or any
state government or a nationalized bank or a
general insurance co.

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Statutory Requirments
 The first AGM must be held with in 18 months from the date of its
incorporation, and if such general meeting is held with in that
period, it shall not be necessary to hold the annual general
meeting in the year of incorporation or in the following month.
 Subsequent AGM must be held each year with in 6 months of the
end of the co’s financial year, but the interval between the two
general meeting must not be more than 15 months.
 The AGM must be held on the working day during the business
hours at the registered office of the company’
 At least 21days written notice must be send to every share holder,
directors, auditors of the company, and to every such person on
whom the shares of any deceased or insolvent member may have
devolved.
 A copy of directors’ report, audited annual accounts and auditor’s
report must be annexed to every such notice.

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Board’s Report or the director’s Report
 Sec 217 , the directors report must deal with the
following matters:
- The state of company’s affairs
- The amount, if any, which the board proposes to carry to
any reserves in the B/S
- Material changes and commitments, if any, affecting the
financial position of the company which have occurred
between the end of the financial year of the company to
which b/s related and the date of report.
- the conservation of energy, technology absorption,
foreign exchange earning.

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Extraordinary General Meeting
 All the general meeting other than the statutory
and annual general meetings are called
extraordinary general meeting.
 These meeting can be called by the co at any
time.
 All the business transacted at this meeting is
called special business.

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Who can call the meeting?
• Director
• Directors on the requisition
• Requisitionists themselves
• Company Law Board

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 Requisites of a Valid Meeting
 A general meeting of shareholder is said to be valid when it is
properly convened.
 Sec 171 to 186 of the companies Act contain the provisions
relating to the holding of valid general meeting which must be
compulsory followed by each public company.
 A private co. is free to make its own regulation by its AOA in
respect to general meeting and the provisions of sec. shall
apply to the company only if the AOA do not provide otherwise.
• Proper convening authority: Directors are the convening
authority should pass the resolution in BOD meeting for the
same.
• Proper Notice:
• 1) Notice to whom
2)Length of notice :
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 3) Content of notice
 4) Requisite quorum
 5) chairman

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 Voting(177)
 Every holder of equity shares with voting rights,
whose name appear in the Register has a right to
vote on every resolution placed before the
company at a general meeting.
 In case of voting right on poll shall be in
proportion to his share of the paid up equity
capital of the company.
 Generally preference shareholders do not posses
normal voting right but under some specific
condition they got the right of vote.

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 The above provision relating to the voting right of
preference shareholders do not apply to the private
company.
 In case of a public co. any restriction in the articles
of the company on a member’s right to vote, except
on the ground of non-payment of calls or other sum
due against him, shall be void.

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 Methods of Voting
1) Voting by show of hand
2) Voting by poll
3) Voting by the secret ballot is not allowed in the Act.
4) Voting by the show of hand (177)
• A vote on the show of hand is not allowed to the proxy
unless the articles provide otherwise.
• Each member present entitled to vote has only one vote
without regard to the number of shares.
• Even article allow proxy to vote by show of hand, a member
holding proxies f other members still only has one vote
hence a non member should be appointed a proxy in such a
case.

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