Debentures: Meaning, Characteristics, Types, Rules for Issue of Debentures, Remedies for Debenture holders, Mortgage and Charges, Registration of Charges, Company Register of Charges, Punishment for Contravention, Rectification by Central Government in Register of Charges,
Key Points:
1.
Meaning of Debenture.
2.
Characteristics of Debentures.
3.
Types of Debentures.
4.
Rules for Issue of Debentures.
5.
Remedies for Debenture holder’s u/s (71).
6.
Mortgage and Charges.
7.
Registration of Charges u/s (77).
8. Company Register of Charges.
9. Punishment for Contravention.
10. Rectification by Central Government
in Register of Charges.
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Debentures:
1.Meaning of Debenture:
“Debentures”
means security for a loan or acknowledgement of a loan.
U/S
2 (30) - "Debentures" includes debentures stock, bonds or any other instrument of
a company evidencing a debt, whether constituting a charge on the assets of the
company or not.
Debenture
is movable property and a document which is issued by a company under its
common seal in acknowledgement of a loan to a debenture holder. It contains the
terms and conditions under which the loan is taken by the company. These terms
and conditions relate to the interest payable, redemption and securities.
2. Characteristics of Debentures:
(i)
Movable property, (ii) Acceptance of loan, (iii) Issued under common seal, (iv)
Contains terms and conditions, (v) Face value of each debenture is equal and of
a certain series, (vi) It is a contract between company and borrowee, (vii) No
right to vote, (viii) In registered office, a register of debentures is kept,
(ix) Generally, it creates change on the assets of the company.
3. Types of Debentures:
(i)
Registered Debentures:
All
the details of such debentures are written in the books of the company. Such
debentures cannot be transferred without permission of the company, are called “Registered
Debentures”.
(ii)
Redeemable Debentures:
The
debentures the payment of which may be made with in a fixed time or after
giving notice, are called “Redeemable Debentures”. Generally, the company makes
payment of such debentures from profit or reserve fund or issue of new
debentures.
(iii)
Irredeemable Debentures:
The
debentures the payment of which cannot be done during lifetime of the company
are called “Irredeemable Debentures”. These debentures are of permanent nature.
Such debentures may be paid off only on liquidation or insolvency of the
company. According to Companies Act, 2013, these types of debentures cannot be
issued.
(iv)
Mortgaged Debentures:
Debentures
issued against mortgage of some assets are called “Mortgaged Debentures”. In
case of liquidation of company, such debenture holders have first right on assets
of the company mortgaged.
(v)
Convertible Debentures:
Debenture
holders are given option to convert their debentures into shares or stock
within specific time. It is called “Convertible Debentures”.
(vi)
Simple Debentures:
If
the company does not provide any security while issuing the debentures are
called “Simple Debentures”.
(vii)
Bearer Debentures:
The
debentures which may be transferred mere by delivery, are called “Bearer Debentures”.
Name of the holders of such debentures are not mentioned in the register of the
company. The person who has such debentures, is the owner.
4. Rules for Issue of Debentures:
(i)
Right to issue debentures vests with Board of Directors –
Under
provisions of AOA, Board of Directors may pass resolution in general meeting u/s
179.
(ii)
Application in Recognised Stock Exchange –
According
to Companies (amendment) Act 1988, if the company wants to sale debentures to
the public by issuing prospectus, the company is required to apply in
recognised stock exchange (s) before issuing the prospectus u/s 40.
(iii)
Passing Ordinary Resolution in General Meeting in Specified Case –
If
total of amount of proposed debentures and other loans taken is more than the
paid up capital and free resolution, in case of public company an ordinary
resolution is to be passed in general meeting for issue of debentures.
(iv)
Passing the Resolution by Board of Directors and Appointing a Committee - Thereafter,
the Board of Directors passes an ordinary resolution in its meeting for issue
of debentures and constitutes a committee which prepares prospectus, debenture
deed and trust deed in consultation with the solicitor of the company.
(v)
Presenting the Details of Guarantee with ROC –
If
debentures create any charge or mortgage on assets of the company, a Trust deed
must be prepared and has to be submitted to the office of the ROC within 30
days for its registration.
(vi)
Presentment of Prospectus or Statement in lieu of Prospectus with Registrar –
Before
issuing the prospectus to the public, the company should file a copy of
prospectus to ROC and the statement of fact that "the one copy of prospectus
has been submitted to the ROC" should be marked on the prospectus.
If
the company has not issued prospectus, the statement of lieu of prospectus must
be presented before ROC at least before 3 days of allotment of debentures. Before
following this prospectus, the prospectus should be approved by SEBI.
(vii)
Sending Application form with Prospectus u/s (26) –
Format
of application form regarding issue of debentures must be submitted with
prospectus.
(viii)
Allotment of Debentures –
Provisions
of under section 40 should be followed for allotment of debentures.
(ix)
Preparing the Certificate –
Each
company, if not restricted, must prepare certificate of allotment within 3
months of allotment to get issued.
(x)
No right to vote.
(xi)
Entry in register of Debenture holders –
After
allotment entry is made in the register of debenture holder.
(xii)
Index of Debenture holder –
If
number of debenture holders is more than 50, a separate index of debenture holders
to be prepared.
(xiii)
Issue at Discount –
May
be issued at discount if authorised by AOA.
(xiv)
Rating of Debentures –
After
18 months of issue of redeemable debentures, company has to get its credit
rating by CRISIL or CARE etc. Such ratings should be mentioned in prospectus as
per rule of SEBI.
5. Remedies for Debenture holder’s u/s (71):
If
the company commits any error in giving interest or returning principal amount
of debentures which had been mentioned in the debentures deed, the debenture holder
will have following remedies -
(i)
Using the rights contained in debentures deed - e.g. sale of mortgaged assets.
(ii)
Application in Tribunal –
Debenture
holders may apply before Tribunal to appoint an official receiver and to manage
the business, he can apply to appoint a Manager. The Tribunal may declare
mortgage on assets of the company and can order for sale of such assets.
(iii)
Appointment of self-receiver –
If
provided in terms and conditions of debentures, the debentures holder himself
can appoint a receiver of the company.
(iv)
Application for winding of the company –
If
company become unable to pay the principal and interest of debentures, the
debenture holder may apply in Tribunal for compulsory winding up of company
according to Section 271.
(v)
Suit for payment of principal amount and interest.
6. Mortgage and Charges:
Definition
under section 2(16) – “Charge” means an interest or lien on the property or assets
of a company or only of its undertakings both as security and includes a
mortgage.
The
words Mortgage and Charge are often used interchangeably.
Every
company depends on share capital and borrowed capital for financing their
projects. Borrowed capital is raised by issuing debentures (Secured or Unsecured)
or from banks or financial institution. The banks or Financial institution give
money only if they are sure about the repayment along with interest. To secure
the loans, they resort to creating right in the assets of the borrowing
companies, which is known as a Charge on Assets. This is done by creating loan
agreement hypothecation, agreement mortgage deeds etc.
There
are Two Types of Charge -
(i) Fixed / Specific Charge:
This
charge is a charge against any specific fixed property/assets like building,
land etc. The nature and identity cannot change during the period of charge. The
company can transfer the property subject to that charge so that the charge
holder must be paid first before transfer.
(ii) Floating Charge:
A
floating charge does not attach to any specific property but on those
properties which are circulating or fluctuating nature e.g. Stock, Debtors etc.
A floating charge may cover all the assets of the company but it may be
restricted to any specified property also. It may be on present or future
property. In such a charge, the charge holder is not the owner of that property.
The ownership of the property remains with the company. The charge may be
converted into fixed charge.
7. Registration of Charges u/s (77):
According
to Under Section 77, the following charges are to be registered necessarily -
(i)
On Issue of Debentures.
(ii)
On Uncalled up Share capital.
(iii)
On any fixed assets or interest on it.
(iv)
On Book Debts.
(v)
On Current assets.
(vi)
On Stock-in-trade.
(vii)
On Ship or it's share.
(viii)
On Goodwill, Patent, Licence subject to patent, trademark, copyright.
(ix)
Charge in abroad on the assets situated in abroad.
(x)
Charge in India for the assets situated in abroad.
(a)
Notice of Registration - It is mandatory to register the charge within 30 days
of their creation.
(b)
Consequences of Non-registration of Charge -
Charge
become void. It does not mean that the contract between the company and
borrowee becomes void. In fact, the money lender can recover his loan even if
the charge is not registered.
(i) This is to be noted that as long as the
company is solvent, the charge can be implemented without registration but not
if the company becomes insolvent.
(ii) When any charge becomes void in
absence of registration, the secured money becomes payable at once.
(iii) The company remains liable for
loan even if it has not been registered because no company can take benefits of
its own mistake.
(iv) No right of lien can be exercised
on document of ownership.
(v) Following information must be made
available to the registrar for registration -
(a) Detail of any charge created by the
company.
(b) Detail of payment of that loan for
which charge was created.
(c) Detail of series of issue of any
type of debentures, the registration of which is compulsory.
8. Company Register of Charges:
Every company shall keep a register of
charges at its registered office in such a manner as maybe prescribed, which shall
include all charges affecting any assets of the company or any of its
undertaking.
A copy of the instrument creating the
charge shall also be kept at registered office along with the register of
charges. The inspection of registers may be done by any member or creditors or
any other person on payment of prescribed fees, subject to reasonable
restrictions as the company may, by its AOA impose.
9. Punishment for Contravention:
The company shall be liable to a
penalty of minimum ₹ 1,00,000 and maximum ₹ 10 lakhs and every officer of
company who is in default shall be liable to a penalty of minimum ₹ 25,000 and
maximum ₹ 1,00,000 with punishment of up to 6 months.
10. Rectification by Central Government in Register of Charges:
The central government on being
satisfied that -
(i) The omission to give information to
the ROC of the payment or satisfaction of a charge, within the time required
under this chapter, or
(ii) The omission or mistake of any particulars
in the filing previously made to the ROC with respect to any such charge or
modification there of or with respect to any memorandum of satisfaction or
other entry made in presence of Section 82 or 83, was accidental or due to inadvertence
or some other sufficient cause of it is not of nature to the prejudice of the
position of creditors or shareholders of the company, it may, on the
application of the company or any person in interested and on such terms and
conditions as it deems just and expedient, direct that the time for the Giving
of information of payment or satisfaction shall be rectified.
