BORROWING
POWER OF COMPANY
DEBENTURE AND CHARGE
Debenture : Meaning
ü As per section 2(12) of Companies Act 1956, “Debenture includes debenture
stock, bond and any other securities of the company whether constituting a
charge on the company’s assets or not”.
ü A Debenture is a unit of loan amount. When a company intends to raise the
loan amount from the public it issues debentures. A person holding debenture or
debentures is called a debenture holder. A debenture is a document issued under
the seal of the company. It is an acknowledgment of the loan received by the company equal to the
nominal value of the debenture. It bears the date of redemption and rate and
mode of payment of interest. A debenture holder is the creditor of the company.
Features
ü Moveable property
ü Issued in the form of
certificate of indebtedness
ü Creates a charge on the
undertakings of the Company
ü The terms ‘pari passu’
used in the terms and condition sof debentures
means all debentures of a particular class will receive money
proportionately in case of Company’s inability to discharge the whole
obligation.
Debenture
stock- A
Company may create one loan fund known as ‘debenture stock’ divisible among a
class of lenders each given a debenture stock certificate. It is analogous to
loan stocks of govts, local and public authorities.
Imp= while debenture may or
may not be fully paid, debenture stock must be fully paid.
Debenture- Kinds
ü Registered Debentures:
These are those debentures which are registered in the register of the company.
the names, addresses and particulars of holdings of debenture holders are
entered in a register kept by the company. Such debentures are treated as
non-negotiable instruments and interest on such debentures are payable only to
registered holders of debentures. Registered debentures are also called as
Debentures payable to registered holders.
ü Bearer Debentures: These are
those debentures which are not registered in the register of the company.
Bearer debentures are like a bearer check. They are payable to the bearer and
are deemed to be negotiable instruments. They are transferable by mere
delivery. No formality of executing a transfer deed is necessary. When bearer documents
are transferred, stamp duty need not be paid. A person transferring a bearer
debenture need not give any notice to the company to this effect. The
transferee who acquires such a debenture in due course bonafide and for
available consideration gets good title not withstanding any defect in the
title of the transfer-or. Interest coupons are attached to each debenture and
are payable to bearer.
ü Secured Debentures: These are
those debentures which are secured against the assets of the company which means
if the company is closing down its business, the assets will be sold and the
debenture holders will be paid their money. The charge or the mortgage may be
fixed or floating and they may be fixed mortgage debentures or floating
mortgage depending upon the nature of charge under the category of secured
debentures. In case of fixed charge, the charge is created on a particular
asset such as plant, machinery etc. These assets can be utilized for payment in
case of default. In case of floating charge, the charge is created on the
general assets of the company.
ü The assets which are available with the company at present as
well as the assets in future are charged for the purpose. A mortgage deed is
executed by the company. The deed includes the term of repayment, rate of
interest, nature and value of security, dates of payment of interest, right of
debenture holders in case of default in payment by the company. The deed may
give a right to the debenture holder to nominate a director as one of the Board
of Directors. If the company fails to pay the principal amount and the interest
thereon, they have the right to recover the same from the assets mortgaged.
ü Unsecured Debentures: These
are those debentures which are not secured against the assets of the company
which means when the company is closing down its business, the assets will not
be sold to pay off the debenture holders. These debentures do not create any
charge on the assets of the company. There is no security for repayment of
principal amount and payment of interest. The only security available to such
debenture holders is the general solvency of the company. Therefore the
position of these debenture holders at the times of winding up of the company
will be like that of unsecured debentures. That is they are considered with the
ordinary creditors of the company.
ü Convertible Debentures: These
are those debentures which can be converted into equity shares. These
debentures have an option to convert them into equity or preference shares at
the stated rate of exchange after a certain period. If the holders exercises
the right of conversion, they cease to be the lender to the company and become
the members. Thus convertible debentures may be referred as debentures which
are convertible into shares at the option of the holders after a specified
period. The rate of exchange of debentures into shares is also decided at the
time of issue of debentures. Interest is paid on such debentures till its
conversion. Prior approval of the shareholders is necessary for the issue of
convertible debentures. It also requires sanction of the Central
Government.
ü Non-Convertible Debentures: These
are those debentures which cannot be converted either into equity shares or
preference shares. They may be secured or unsecured. Non-convertible debentures
are normally redeemed on maturity period which may be 10 or 20 years.
ü Redeemable Debentures: These
debentures are issued by the company for a specific period only. On the expiry
of period, debenture capital is redeemed or paid back. Generally the company
creates a special reserve account known as "Debenture Redemption Reserve
Fund" for the redemption of such debentures. The company makes the payment
of interest regularly. Under section 121 of the Indian Companies Act, 1956,
redeemed debentures can be re-issued.
ü Irredeemable Debentures: These
debentures are issued for an indefinite period which are also known as
perpetual debentures. The debenture capital is repaid either at the option of
the company by giving prior notice to that effect or at the winding up of the
company. The interest is regularly paid on these debentures. The principal
amount is repayable only at the time of winding up of the company. however, the
company may decide to repay the principal amount during its lifetime.
CHARGE
S. 124 For the purposes of
registration, ‘charge includes mortgage’
·
Fixed Charge:
A fixed charge is created on certain specified assets generally immovable such
as land and building, plant and machinery, long term investments and the like.
So it is equivalent to mortgage. When the charge is fixed, the company can only
deal with the property subject to the charge, that is, a fixed charge allows
the company to retain possession of the assets but prevents the company from
selling, leasing etc., of the assets without the consent of the charge holders.
The property identified remains so identified during the period for which the
charge is created.
·
Floating Charge : Such a charge
is available only to companies as borrower. A Floating charge does attach to
any definite property but covers the property of a circulating and fluctuating
nature such as stock-in-trade, debtors, etc. It attaches to the property
charged in the varying conditions in which happens to be from time to time. A
floating charge on crystallization becomes a fixed charge.
Charges requiring registration : S.125
A company must file within 30 days of
creation of a charge with the Registrar complete details of the charge together
with the instrument of charge or its verified copy in respect of certain
charges. Otherwise the charge will be void. This does not mean that the
creditors cannot recover their dues. It merely means that the benefit of the
charged security will not be available to them. The following charges are
compulsorily registrable :-
i.
A charge
for the purpose of securing any issue of any debentures
ii.
A
floating charge
iii.
A
charge on uncalled share capital
iv.
Charge
on calls made but not paid
v.
A
charge on any immovable property
vi.
A
charge on ship
vii.
A
charge on book debts of the company
viii.
A
charge on goodwill or on patent or on license under the patent or on trademark
or copyright or on the license under the copyright
ix.
A
charge other than a pledge on any movable property of the company.
Effects of Registration :
Once a charge is registered, it acts as
a notice to the public at large that the charge holder has an interest in the
charged property. No person can take a defense against the charge holder that
he was not aware that a charge was created against the property. That person
will be entitled to the property subject to the interest of the charge holder.
Once certificate of charge is issued by the Registrar, it is conclusive
evidence that the document creating the charge is properly registered.
Consequences of Non-Registration :
1.
A
charge which is compulsorily registerable but which is not registered is void.
This does not mean that the creditors cannot recover their dues. It merely
means that the benefit of the charged security will not be available to them.
2.
Although
the security becomes void by non-registration, it does not affect the contract
or obligation of the company to repay the money thereby secured.
3.
Omission
to registrar particulars of charge is required punishable with fine. A company
or every officer of company is in default shall be liable to fine upto Rs 500
for each day of continuing default. A further fine of Rs. 1000 may be impose on
the company and every officer for other defaults relating to registration of
charges.
Modification of Charge : Wherever the terms and conditions or
the extent of the operation of any registered charge is modified , the company
is required to file the particulars of modification within 30days thereof with
the Registrar of Companies.
Particulars
to be filed with registrar
i.
Date and description of investment creating charge;
ii.
Amount secured by charge;
iii.
Particulars of property charged
iv.
Terms and conditions and extent of operation of charge
v.
Name, address and description of investment modifying the
charges.
vi.
Particulars of modification.
Government
Stock and Investment Company v. Manila railway Company
In Government Stock Investment Co. Ltd. v. Manila
Railway Co. Ltd., (1897) A.C. 81, the debentures created a floating charge.
Three months’ interest became due but the debenture holders took no steps and
so the charge did not crystallize but remained floating. The company then made
a mortgage of a specific part of its property. Held, the mortgagee had
priority. The security for the debentures remained merely a floating security
as the debenture holders had taken no steps to enforce their security.
CHARITABLE CONTRIBUTIONS
Political Contributions :
DIVIDEND
BORROWING POWER OF COMPANY DEBENTURE AND CHARGE
Allotment of shares
LAW OF PROSPECTUS IN COMPANY LAW
Relationship between MOA and AOA.
DOCTRINE OF ULTRA VIRES
CONVERSION OF PRIVATE Company TO PUBLIC Company
KINDS OR TYPES OF COMPANIES
COMPANY LAW:-Characteristics of Company
