Debt or acknowledges it and any document which fulfills either of these conditions is a debenture

“A document which either creates a debt or acknowledges it and any document which fulfills either of these conditions is a debenture”. Explore, Explain and Illustrate.

Introduction: A debenture is an instrument of debt executed by the company acknowledging its obligation to repay the sum at a specified rate and also carrying an interest. It is only one of the methods of raising the loan capital of the company. A debenture is thus 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. The term “debenture” is not a strictly technical term but is applied to a security for money, called a debenture or a debenture deed, and providing for the payment of a certain specified sum to the owner or bearer, with interest in the meantime. It may be applied to any instrument showing that the party making it owes money and is bound to pay it. Any document which either creates a debt or acknowledges it is a debenture: Levy v. Abercorris Slate Co. (1888)

A debenture may be a mere promise to pay or a promise to pay secured by mortgage or charge, either in the debenture itself or in a covering trust deed.(Refer to observations of Lindley J. in British India Steam Navigation Co. v. I.R.C. 1881 as to what various classes of instruments are entitled to be described as debentures) and Edmonds v. Blaina Furnaces Co. (1887), 36 Ch. D. 215 at 219 where Chitty J. said: “The term itself imports a debt – an acknowledgement of a debt – and, … generally, if not always, the instrument imports an obligation or covenant to pay. This obligation or covenant is in most cases at the present day accompanied by some charge or security.”

“An ordinary mortgage of freehold property is a debenture within the English Companies Act”: Knightsbridge Estates Trust Ltd. v. Byrne, [1940] A.C. 613.[1]

Features of ‘Debentures’: A debenture is a debt instrument evidencing the holder’s right to receive interest and principal installments from the named obligor. The term applies to all forms of unsecured, long-term debt evidenced by a certificate of debt. When investors loan funds to a business, the company may issue a debenture so that repayment of the debt is guaranteed by the overall capital value of the company under certain specific terms.

A debenture generally is considered more secure than shares of stock or general bonds. A denture is a bond backed by the general credit of the issuer rather than any specific collateral. The issuer is required to pay a fixed sum annually until maturity and then a fixed sum to repay the principal.The features of debenture are given bellow:

1. Each debenture is numbered.

2. Each contains a printed statement of the terms and conditions, viz, the rate of interest, the time of payment of interest, the security against which the debenture is issued and what steps, the debenture holder can take in case of non-payment of his dues.

3. A debenture usually creates a floating charge on the a of the companies, e.g. ,a charge which is enforceable upon payment of the interest or principal on the due dates.

4. A debenture may create a fixed charge instead of charge.

5. Sometimes debenture holders are given the right to appoint a receiver in case of non-fulfilment of the terms of t by the company.

6. Sometimes a series of debentures are issued with a trust deed by which trustees are appointed to whom some or all the properties of the company are transferred by way of security for the debenture holders.

The attributes of debenture :

The power to issue debentures can be exercised on behalf of the company at a meeting of the Board of Directors {Section 292(1)(b) of the Companies Act}. A public company may, however, require the approval of shareholders to borrow money in excess of the aggregate of its paid up capital and free reserves.{Section 293 (1) (d)}. Consent of the shareholders would also be required for selling, leasing or disposing of the whole or substantially the whole of the undertaking of the company under section 293 (1) (a). Debentures have been defined under Section 2 (12) of the Act to include debenture stocks, bonds and any other securities of the company whether constituting a charge on the company’s assets or not.[2]

The attributes of a debenture are:
a. A movable property.
b. Issued by the company in the form of a certificate of indebtedness.
c. It generally specifies the date of redemption, repayment of principal and interest on specified dates.
d. May or may not create a charge on the assets of the company.

Section 372 A of the Companies Act also regulates inter-corporate loan and investments and stipulates the ceiling limits on investments and the amount of loan that can be borrowed by a company. The explanation clause of this section states that the loan shall include debentures.

Section 117 to Sections 123 of the Companies Act, 1956 regulate the provisions relating to debentures, appointment of debenture trustees, their duties, creation of Debenture Redemption Reserve Account, liability of trustees etc.

The debentures issued under the Act shall not carry any voting rights. In the case of public issue of debentures, there would be a large number of debenture holders on the register of the company. As such it shall not be feasible to create charge in favour of each of the debenture holder. A common methodology generally adopted is to create Trust Deed conveying the property of the company. A Trust deed is an arrangement enabling the property to be held by a person or persons for the benefit of some other person known as beneficiary. The Trustees declare the Trust in favour of the debenture holders. The Trust Deed may grant the Trustees fixed charge over the freehold and leasehold property while a floating charge may be created over other assets. The Company shall allow inspection of the Trust Deed and also provide copy of the same to any member or debenture holder of the company on payment of such sum as may be prescribed. Failure to provide the same would invite penalties by way of fine under the Act. Any provision contained in the Trust Deed, which exempts a Trustee from liability for breach of Trust, is void.

As per Section 125 (4) of the Companies Act, registration of a charge for purpose of issue of debentures is mandatory. Section 128 stipulates that where a company issues series of debentures which is secured by charge, benefit of which will be available to all debenture holders pari passu, the company shall file the prescribed particulars in Form 10 and 13 with the Registrar of Companies for registration of charge. These forms shall be filed within 30 days after the execution of the deed.[3]

Types of Debentures:

Debentures are categorized into the following types:

§         Convertible Debentures: This is a debenture which can be converted into some other type of securities (for example stocks).

§         Corporate Debentures: Corporate Debentures are Debentures issued by companies and they are insecure in nature.

§         Bank Debentures: This type of Debentures is issued by banks.

§         Government Debentures: These include Treasury bond (T-Bond) and Treasury bill (T-Bill) issued by the government. They are usually regarded as risk-free investments.

§         Subordinated Debentures: This is a particular type of Debenture, which ranks below regular Debentures, senior debt, and in some instances below specific general creditors.

§         Corporation Debentures: Corporation Debentures are issued by various corporations.

§         Exchangeable Debentures: They are like Convertible Debentures, but this Debenture can only be converted to the common stock of a subsidiary company or affiliated company of the Debenture issuer.

There are some other types of Debentures such as Senior Debentures, Secured Debentures, Exchange Debentures, Secured Convertible Debentures, Convertible Senior Debentures, Unsecured Convertible Debentures, Subordinated Convertible Debentures, Senior Secured Convertible Debentures, Junior Subordinated Debentures, Senior Subordinated Debentures, and Senior Secured Debentures etc.

Agreement to issue debentures :

An agreement for consideration to issue debentures charging property constitutes a present charge of such property and the proposed debenture holder is thereby protected against An execution creditor who intervenes before the debentures are actually issued: Simultaneous Colour Printing Syndicate v. Foweraker, [1901] I K.B. 771; So also if a winding-up occurs before the debentures are issued the lender will be secured: Tailby v. Official Receiver (1888), 13 App. Cas. 523; Re Hampshire Land Co., [1896] 2 Ch. 743.

[4]While these are true statements of the law in England I query given the statutory requirements in the Companies Act 1991 relating to registration which I have previously referred to, whether the principles stated in these cases can be of practical assistance.

Irregularity in issuance

Debentures must be issued in accordance with any requirements of the by-laws, and subject also to the provisions, if any, of the articles of the corporation. See, for example, Anderson Lumber Co. v Canadian Conifer Ltd., [1977] 5 W.W.R. 41 (Alta. C.A.); where debentures were held to be invalid as the articles of association required the authorization of a general meeting and this was never held. The holder of the debentures was deemed to know of the irregularity.

Where the issuance of debentures has been duly authorized, the form of the debenture may be left to be determined by the officers of the corporation without approval by a meeting of the board. If debentures are irregularly issued the rule that a bona fide holder for value without notice of the irregularity is protected applies : Duck v. Tower Galvanizing Co., [1901] 2 K.B. 314; but, of course, if he has notice he will not be protected. (Note the practice in Guyana where a resolution of the Board of the corporation attesting to their intention to grant the debenture for the specific sum to the specific lending agency is required to be filed with the debenture).

Irregular and insufficient debentures for which a lender has bona fide advanced money may be evidence of an agreement on the part of the corporation to issue valid debentures, so that the holder may have a good equitable debenture on the principle laid down in Re Strand Music Hall Co. (1865), 3 De G. & Sm. 147, where Lord Justice Turner said: I apprehend, however, that where this Court is satisfied that it was intended to create a charge, and that the parties who intended to create it had power to do so, it will give effect to that intention, notwithstanding any mistake which may have occurred in the attempt to effect it.”

RULES RELATING TO DEBENTURES:

The Companies Act of 1956 lays down the following rules regarding debentures : –

1. No debenture holder is to have any voting rights in company meetings-Sec. 117. This applies to debentures issued after the commencement of the Act of 1956.[5]

2. If there, is a trust deed securing the issue of. debentures, every debenture holder can have a copy of it on payment of a small fee.-Sec. 118.

3. The trustees in a trust deed securing the issue of debentures must exercise due care and diligence in the performance of their duties. Any provision in the deed exempting them from liability on this account is void.-Sec. 119.

4. Debenture may be irredeemable, or redeemable on the happening of a contingency.-Sec. 120,

5. Redeemable debentures can be reissued. unless there is any provision to the contrary , whether express or implied, in the articles .or in the conditions of the issue of the debentures or in any contract entered by the company or when the company has passed a resolution to that effect Sec. 121.

6. An agreement to take a debenture can be specifically enforced.-Sec. 122.

7. Debts of the company, which by the Act receive preferential payment in case of winding up, shall have priority over the claims of the debenture holders. If, by virtue of the condition of the issue, the debenture holders have taken possession of the properties of the company or have appointed a receiver who has taken possession, the claims of the preferred creditors shall be paid forthwith out of any assets coming into the hands of the receiver or other person on behalf of the debenture holders.-Sec. 123.

8. Full particulars regarding the issue of debentures in series must be sent to the Registrar.-Sec. 128. The particulars must include a statement of the commission paid.-Sec. 129.

9. There are certain limits on The amount of commission and brokerage that can be paid for the sale of debentures. (See under Commission and Brokerage for the sale of shares in p. 630)

10. Transfer of Debentures. The rules relating to transfer of shares and share certificates (Sections 108-113) apply to debentures. (See p.638)[6]

11. Register and Index of Debenture Holders. Every company shall keep a Register of debenture holders, entering therein particulars regarding the name, address, and occupation of the debenture holder and the dates on which the holding commenced or ceased.-Sec. 152(l).

Every company having more than 50 debenture holders shall keep an Index of debenture holders unless the Register of debenture holders is itself kept in the form or an index Sec. 152(2).

No notice of any trust, express, implied, or constructive, shall entered in the Register of debenture holders.-Sec. 153.

The Register of debenture holders may be closed for not ore than 45 days in the year and not more than 30 days at

a time, by giving at least 7 day’s notice through a local newspaper.–Sec. 154.

There may be a Foreign Register of debenture holders analogous to the Foreign. Register of members.-Sections. 157 and 158.

Creation of debenture Redemption Reserve:

Section 117 C of the Act casts an obligation on the company to create a Debenture Redemption Reserve. This account will be credited with proceeds from the profits of the company arrived at every year till redemption of the debentures.

The Act, however, does not stipulate the time period for creation of security. SEBI regulations provides for creation of security within six months from the date of issue of debentures and if a company fails to create the security within 12 months, it shall be liable to pay 2% penal interest to the debenture holders. If the security is not created even after 18 months, a meeting of the debenture holders will have to be called to explain the reasons thereof. Further, the issue proceeds will be kept in escrow account until the documents for creation of securities are executed between the Trustees and the company.[7]

Jeopardy

The security may also become enforceable in another type of situation. If, for example, judgments have been recovered against the corporation and executions are likely to issue, the debenture holders are entitled to have a receiver appointed even though the corporation is not in default: In re London Pressed Hinge Co., [1905] 1 Ch. 576. This is called the doctrine of “jeopardy”, and the principle on which the court intervenes is that the debenture holders need not stand by and see the assets seized by unsecured creditors. It is not sufficient for the plaintiff merely to show that the proceeds of the assets if realized would be insufficient to pay off the bonds.

“In that case, however, it was abundantly proven that the company was no longer able to carry on;  its credit was gone;  it could not get funds to carry on its business, and it was faced with the immediate prospect of having to close down with outstanding contracts unfilled. It was in a state of suspended animation. It was a case in which the business of the company had come to an end. That is not the case here. Here we have a going concern, a live corporation, operating the property, which property is not threatened by creditors.”

.RIGHTS AND REMEDIES OF DEBENTURE HOLDERS:

If the Company fails to pay the interest or principal on the due date or fails to comply with any of the terms. and conditions under, which the debenture was issued, the debenture holder can adopt any of tile following remedial measures :

1. He may file a suit for the recovery of, money by sale of the assets which were charged for the payment of the money.

2. He may file an application for the appointment of a receiver by the court.

3. He may himself appoint a receiver if the terms of the debenture entitled him to do so.

4. The trustees may sell the properties charged, if such a power is given to them, tinder the terms of the debenture.[8]

5. He may apply to the court for the foreclosure of the company’s right to redeem the properties charged for the payment of the money.

6. He may present petition for the winding up of the company.

Ratiocination: To conclude, we can say that A debenture is a document that either acknowledges a debt or creates it. The debt is usually medium to long-term and it is used by corporations to borrow money. There are some countries that refer to debenture as a bond, loan stock or note. Debentures can usually be freely transferred by the debenture holder or lender of the money. Debenture holders, however, have no voting rights. And, the interest that is accrued and paid to the holder is a charge against the company’s profits and is reflected as such on its financial statements.

Debenture, however, means different things depending on the country in which you are doing business. In the United States, a debenture means an unsecured corporate bond. Or, more specifically, it is a bond that does not have a certain means of income or property to guarantee the repayment of the principal when the bond fully matures. Conversely, in the United Kingdom, a debenture is secured most of the time. And, in Asia, the repayment of the debenture is secured by a charge over land then the debenture document is referred to as a mortgage.

BIBLIOGRAPHY

§         Geoffrey Morse, 1987, 13th Edition, Charlesworth’s Company Law, Oxford University Press.

§         Company Act (1994), 18 no law,

§         BANGLAPEDIA: Companies Act 1994

§         Ashworth, A & Mitchell, B, (2000) Rethinking English Homicide Law, 1st edition, Oxford University Press.

§         Barr, Loren L, (1995) “The ‘Three Strikes’ Dilemma: Crime reduction at Any Price?”, 36 Santa Clara Law Review, 107.

§         Bedau, Hugo Adam, (1964) “The Argumentof Debenture” in Bedau (ed.), Achor, 166.

§         Bingham, Tom, (2000) “The Debeture in Business” Newsam Memorial lecture on 13 March 1998 at the Police Staff College, Bramshill, reprinted in The Business of Judging: Selected Essays and Speeches, Oxford: Oxford University Press.

§         Bottoms, A E (1998), ‘Five Puzzles in von Hirsch’s Theory of Debt’, in A Ashworth and M Wasik (eds), Fundamenatals of Sentencing Theory: Essays in honour of Andrew von Hirsch, Oxford University Press.

§         Braithwaite, J, and Pettit, P (1990), Not Just Deserts, Oxford University Press.

§         Cox, E (1877), The Principles of Debt, London.

§         Committee on the Debenture, (1993) The Report of an Independent Inquiry into the Mandatory Life Sentence for Murder, Commissioned by the Prison Reform Trust, London: Prison Reform Trust.

§         Cavadino, M and Dignan, J, (1997) The Debt System: An Introduction, Second Edition.

§         Croall, D and Tyrer, (1998),Company Law, 2nd edition, Longman.

§         Ekblom, P (1998), ‘Situational Fraud of Debt prevention: effectiveness of local initiatives’, in  G Nuttall (ed), Reducing Offending: an assessment of research evidence on ways of dealing with offending behaviour, Home Office Research Study 187, Home Office.

§         Emmerson, B, and Ashworth, A (2000), Company Law vs. Debenture, Sweet & Maxwell.

§         Eric Cullen and Tim Newell, (1999) Debenture, 1st edition, Waterside Press.

§         Farrington, D, and Langan, P (1992), ‘Changes in Company Law in England and America in the 1980s’, 9 Quarterly 5.

§         Floud, J, and Young, W (1981), Debenture Laws, Heinemann.

§         Fletcher, George P, (1998) Basic Concepts of Debt, New York: Oxford University Press.

§         Garland, D (1990), Debenture &Modern Business Laws, Oxford University Press.

§         Grossman, Steven, (1995-96) “Proportionality in Non-Capital debt:”, 84 Kentucky Law Journal, 107.

§         Hammond, W H, and Chayen, E (1963), Persistent Offenders, HMSO.

§         Heal, K, and Laycock, G (1985),Debenture : from theory into practice, HMSO.

§         Hutton, N (1999), ‘Debt AS Debenture, 8 Social and Legal Studies 233.

§         Harding, C and Koffman, L (1995), Debenture, Text and Materials, Second Edition.

§         Hudson, B,( 2003) Understanding Debenture, 2nd edition, Butterworths.

§         Henham, Ralph, (1996) “Current Company Laws: The 1996 White Paper”, 39 Modern Law Review, 861.

§         J.B.Coker and J.P.Martin, (1985) Company Law, 1st edition , Basil Blackwell.

[1] See Levy V. Abercorris Slate Co.(1888),37 Ch. D. 260 at 264. British India Steam Navigation Co. v. I.R.C. (1881), 7 Q.B.D. 165 at 172, as to what various classes of instruments are entitled to be described as debentures) and Edmonds v. Blaina Furnaces Co. (1887), 36 Ch. D. 215 at 219.

‘An acknowledgement of a debt & generally,if not always,the instrument imports an obligation or convenant to pay’or an ordinary mortgage of freehold property is a debenture within the companies.Edmonds v. Blaina Furnaces Co.(1887),36 ch. D.215 at 219 where Chitty J. said:”The term itself is a debt-an acknowledgement of a debt generally if not always the instrument imports an obligation, Tailby v. Official Receiver (1888), 13 App. Cas. 523; Re Hampshire Land Co., [1896] 2 Ch. 743. Golden West Restaurants Ltd. V. Canadian Imperial Bank of Commerce, [1989] 5 W.W.R. 471 The word “property” may be sufficient to include the goodwill or business of the corporation: Salter v. Leas Hotel Co., [1902] 1 Ch. 332.

[2] See Gartside v. Silkstone & Dodsforth Coal & Iron Co. (1882), 21 Ch. D. 762. In Guyana it is usual to insert a provision in the debenture that no other debenture shall rank pari passu with the instant one nor can any other debenture be issued at all except with the express permission of the debenture holder, Debentures must be issued in accordance with any requirements of the by-laws, and subject also to the provisions. Duck v. Tower Galvanizing Co., [1901] 2 K.B. 314; but, of course, if he has notice he will not be protected. (Note the practice in Guyana where a resolution of the Board of the corporation attesting to their intention to grant the debenture for the specific sum to the specific lending agency is required to be filed with the debenture).see Re Strand Music Hall Co. (1865), 3 De G. & Sm.pg- 147, para-2.

[3] See Simultaneous Colour Printing Syndicate v. Foweraker, [1901] I K.B. 771; So also if a winding-up occurs before the debentures are issued the lender will be secured: Tailby v. Official Receiver (1888), 13 App. Cas. 523; Re Hampshire Land Co., [1896] 2 Ch. 743. While these are true statements of the law in England I query given the statutory requirements in the Companies Act 1991 relating to registration which I have previously referred to, whether the principles stated in these cases can be of practical assistance Hodson v. Tea Co. (1880), 14 Ch. D. 859 (appointment of a receiver); in re Crompton & Co., [1914] 1 Ch.954.

[4] See In re London Pressed Hinge Co., [1905] 1 Ch. 576; or where the corporation proposed to distribute its reserve fund, which was practically its only asset, among the shareholders; Tilt Cover Copper Co., [1913] 2 Ch. 588; or where a winding-up petition is pending: In re Victoria Streamboats, Ltd.; Smith v. Wilkinson, [1897] 1 Ch. 158.pg-456

[5] See  Re Maskelyne British Typewriter Ltd., [1898] 1 Ch. 133 (C.A.). The appointment of a receiver by debenture holders under their debentures does not necessarily prevent the court from appointing a receiver: In re “Slogger” Automatic Feeder Co., [1915] 1 Ch. 478. A receiver appointed under an instrument is to act in accordance with that instrument and any direction of a court (s. 277).

[6] See Whitley v. Challis, [1892] 1 Ch. 64 (C.A.). The business of the corporation will be included in the security if the latter covers the “goodwill” of the corporation, and it is important that the trust deed should so provide. The word “property” may be sufficient to include the goodwill or business of the corporation: Salter v. Leas Hotel Co., [1902] 1 Ch. 332 The position of a receiver manager appointed by the court is thus described by Haldane L.C. in Parsons v. Sovereign Bank of Canada, [1913] A.C. 160 at 167 Parsons v. Sovereign Bank of Canada, [1913] A.C. 160. If the repudiation of a contract would destroy the goodwill of the corporation, which it is the duty of the receiver to preserve, the court will not permit the repudiation. In re Newdigate Colliery Ltd., [1912] 1 Ch. 468 (C.A.).

[7] SeeThe power to issue debentures can be exercised on behalf of the company at a meeting of the Board of Directors {Section 292(1)(b) of the Companies Act}. A public company may, however, require the approval of shareholders to borrow money in excess of the aggregate of its paid up capital and free reserves.{Section 293 (1) (d)}. Consent of the shareholders would also be required for selling, leasing or disposing of the whole or substantially the whole of the undertaking of the company under section 293 (1) (a). Debentures have been defined under Section 2 (12) of the Act to include debenture stocks, bonds and any other securities of the company whether constituting a charge on the company’s assets or not. : Moss Steamship Co. v. Whinney, [1912] A.C. 254. The appointment of a receiver will ordinarily operate as a dismissal of the corporation’s servants: Reid v. Explosives Co. (1887), 19 Q.B.D. 264pg-147

[8] See Re Vimbos Ltd., [1900] 1 Ch. 470. (debenture holders held to be personally liable for debts incurred by the receiver). If the receiver is the agent of the debenture holders he can claim remuneration from them. a debenture holder who has brought an action and obtained the appointment of a receiver is not thereby disentitled from petitioning to wind up. Re Borough of Portsmouth Tramway Co., [1892] 2 Ch. 362pg-963para-4

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