Commercial Law-Company and Debentures

Book Name: Commercial Law and Industrial Law 26th Edition

Writer: Arun Kumar Sen, Jitendra Kumar Mitra



The powers of a company are determined by the memorandum and the articles of association. Therefore a company can borrow money, and if so to what extent, are matters depending upon the interpretation of these two documents. The Companies Act does not contain any section expressly empowering companies to borrow.

In some cases the memo and the articles provide that the company shall be entitled to borrow. Sometimes the power to borrow is given, subject to certain limitations. If so, the limitations must be strictly complied with. Borrowing in excess of the limits laid down or by methods not sanctioned, is ultra vires the company and not binding on it. Re Introduction Ltd.

It has been held that a trading company has an implied power to borrow, because commercial transactions necessarily involve the giving and taking of credit. General Auction Estate Co. v. Smith.-' A non-trading company has no implied powers to borrow. If the memo and the articles of such a company contain no provision empowering the company to borrow, they must be altered to give such power before the company can borrow.

 Where the memo and the articles give the power to borrow. loans may be taken in any one or more of the following ways (unless any of them is prohibited) : mortgage of immovable properties of the company ; hypothecation or mortgage of movable goods, including stock in trade and, furniture ; charge on uncalled capital ; floating charge on all the assets of the company ; mortgage of book debts ; promissory notes, hundies and bills of exchange ; debentures and debenture stock : charge on patents, licenses and copyrights and goodwill ; overdrawing the company's blanking accounts.

A company cannot burrow money on the security of its books of account because such books are required to be kept in the registered office and they are open to inspection. Also, money cannot be borrowed on the security of the reserve capital.

Statutory limitations on Borrowing

1. Sec. 293(1) (d) prohibits the directors to borrow money beyond the aggregate of the paid-up capital and its reserves.

2. Limitations as contained in the Memorandum or the Articles ultra-vires Borrowing : Borrowing by a company may be ultra-vires the Company or intra-vires the company but ultra-vires the directors.


The issue of debentures is a particular mode of borrowing money by companies. A debenture is a document which shows on the face of it, that the company has borrowed a certain sum of money from the holder thereof upon certain terms and conditions. A debenture is generally issued as a part of a series. Palmer defines a debentures as "any instrument under seal evidencing a deed, the essence of it being the admission of indebtedness". Section 2(12) of the Company Act states that a debenture, "includes debenture stock, bands and any other securities of a company, whether constituting a charge on the assets of the company or not."


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 nonfulfillment 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.


A `charge' on a property is created when it is made liable for the payment of money. A charge may be `fixed' or `floating'. A fixed charge is one which creates a legal interest of a specific property of the company or all the properties of the company. Thus a fixed charge is equivalent to mortgage. The company can sell, lease etc. of the property, subject to the right of the charge holder.

The floating charge does not amount to mortgage. The owner of such a property can deal with it and the transferee gets it, free of the charge.

"The term `floating security' and `floating charge' means a security or charge which is not to be put into immediate operation, but is to float so that the company is to be allowed to carry on its business. A specific charge fastens on ascertained and definite property or property cap4ble of being ascertained. A floating charge moves with the property which it is intended to affect, until some event occurs or some act is done which causes it to settle and faster on the subject of the charge within its reach and grasp. It is of the essence of a 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, intervenes".-Halsbury's Laws of England, Vol. 6.


A floating charge is an equitable charge. Justice Romer laid down three characteristics of a floating charge viz.,

(i) it is a charge on a class of assets of a company present and future,

(ii) in the ordinary course of the business of a company such assets would be changing from time to time ; and

(iii) until some future step is taken by or on behalf of those interested in the charge, the company may carry on the business in *the ordinary way by this class of assets. Re Yorkshire wool Combers association

When a floating charge becomes a fixed charge ?

A floating. charge becomes a fixed charge when any of the following things occur:

(i) a company is wound up

(ii)a receiver of the properties of the company is appointed ;

(iii) the company fails to pay the interest and the installment of the principal : and,

(iv) the company ceases carrying on its business.

When the above occurrences or contingencies happen, a floating charge becomes a fixed charge. This is known as crystallization of the floating charge. The crystallization occurs on the moment of crystallization.


 Debentures may be classified in different ways, some of which are mentioned below :

1. Redeemable Debentures and Perpetual Debentures: Section 120 of the Companies Act provides that debentures may be issued subject to the condition that they are irredeemable or redeemable only on the happening of the contingency, however remote, or on the expiration of a period however tong. Thus debentures may be either Redeemable or Perpetual.

2Registered Debentures and unregistered or Bearer Debentures : The money due on the debentures may be payable only to registered holders or may be payable to bearers.

3. Debenture and Debenture Stock : The difference between Debenture and Debenture Stock is similar to the difference between shares and stock. A debenture is a document showing a particular debt. There may be a series of debentures. If the entire debt, covered by the debentures is treated as a single unit, it is called Debenture Stock. In the case of debenture stock, the company issues to each creditor a certificate showing what fraction of the entire debt is owned to him. The certificate is called the Debenture Stock Certificate.

4. Mortgage Debenture and Naked Debenture The former types of debenture is secured by whole or part of the assets of the company. The latter types of debentures are not secured by ;any of the assets of the company.


Debentures may be issued subject to the condition that they or a specified part of them, will be exchanged for, or converted into, shares of the company. The remaining part of the issue continues to be debentures at a stated interest. After a debenture is converted into share it does not yield interest but gets dividend according to the decision of the company.

Example :

A reputed company issued 7 lakhs secured convertible debentures of Rs. 200 each for cash at par aggregating nearly Rs. 15 crores. The highlights of the issue were as follows : 25% conversion in two stages-first within 6 months of the date of allotment of debentures and second Z years after the first conversion, into S equity shares of Rs. 10 each at par ; interest of 13.5% per annum payable half-yearly ; review of interest in accordance with Government guidelines ; fully secured ; liquidity through listing in Stock Exchange ; and, scheme for purchase by the company at par after 4 years.


in India this type of debenture has become very popular. It can be called convertible debenture or convertible bonds. The debenture holders may have an option to get shares in exchange of debentures. One writer says that in such debentures the holders, "have their cake and eat it too".


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.

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)

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.


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.

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.


1. A shareholder has A proprietary interest in the company. A debenture holder is only a creditor of the company.

2. Every share is included in the capital of the company. Debenture is a loan to the company.

3. Debentures generally have a fixed or floating charge upon the assets of the company. Shares do not have any charge on the asset of the company because the shareholders are the j proprietors of the company.

4. A debenture holder is entitled to a fixed interest. 'Equity v shareholder is entitled to dividends depending on and varying with the profits earned.

5. A shareholder has voting rights. A debenture holder, after 1956. cannot have voting rights. .

6. Debentures may be redeemable. Shares (except preference shares under certain circumstances) are not redeemable. Under special circumstances the court may direct the purchase of shares by the company. (Sections 397 and 398.)

7. Debenture holders get priority over shareholders when assets are distributed upon winding tip.


Subject to the exceptions and conditions noted below no company shall

(a) make any loan to or

(b) give any guarantee, or provide any security, in connection with a loan made by any other person to, or to any other person by any body corporate.- Sec. 370 :

1. Such a transaction may be entered into if previously authorized by a special resolution of the lending or guaranteeing company.

2. No special resolution is necessary in the case of loans to other bodies corporate no1 under the same management as the lending company, where the aggregate of such loans does not exceed 10% of the aggregate of the subscribed capital of the lending company and its free reserves.

3. Without the prior approval of the Central Government the aggregate of loans by one company to other bodies corporate shall not exceed the aggregate of its subscribed capital and free reserves by 30% where all such bodies are not under the same management, and 20% where they are under the same management, as the lending company.

4. The restrictions stated above do not apply to any loan made

(a) by a holding company to its subsidiary :

(b) by .r banking or insurance company, in the ordinary course of its business ;

(c) by a private company unless it is a subsidiary of a public company; and

(d) by a company established with tile object of financial industrial enterprises.

5. The restrictions do not apply to any guarantee given or security provided

(a) by a holding company in respect of a loan given to its subsidiary ; and,

(b) by a banking company in the ordinary course of its business.

6. The restrictions do not apply to a book debt, unless the transaction was from its inception in the nature of a loan.

Companies under the same management or same group

Companies are said to be under the same management, or. within the same group, under the circumstances enumerated in Sec. 370(1 I3) and Sec. 372(11) respectively.

Examples : Majority of directors same ; the same individual or body corporate exercises one-third or more of the voting power ; etc.Loans etc. coming under this section must be recorded by the lending company in a separate register. The register is open to inspection and extracts and copies thereof may be taken.


A company cannot purchase the shares and debentures of another company if both are under the same management, except to the extent noted below.-Sec. 372.

A company can invest, in the manner aforesaid, in any other company within the same group, up to 10 per cent of the subscribed capital of the other company, provided such investment is sanctioned at a meeting of the Board of directors of the investing company with the consent of all the directors present and entitled to vote. Notice of such resolution must be given to all directors. The aggregate investment of a company in other companies in the same group must not exceed 20 per cent of the subscribed capital of the investing company. The aggregate investment of a company in all other bodies corporate must not exceed 30 per cent of the subscribed capital of the investing company.

A company can invest more than the amounts mentioned above; if it is sanctioned by a resolution of the members of the investing company and approved by the Central Government.

The restrictions on, investment, mentioned above do not apply to the following cases : investments by an investing company, i.e., one whose principal business is the purchase and sale of shares, debentures and other securities ; investments by a banking or insurance company ; a private company, unless it is a subsidiary of : a- public company; investments by a holding company in its subsidiary ; and, investments in rights" shares, i.e.. purchase of further issue of shares as provided in Section 81.

 Particulars of all investments coming within Section 372 must be entered in a separate register which: shall be open to inspection by all members of the company. Particulars of the investment shall also be included in the balance sheet.

Section 372 of the amended Act mentions that a Company by itself or .together with its subsidiaries shall not be entitled to acquire the shares of any other body corporate except to the extent, and except in accordance . with the restrictions and conditions specified in this Section.

"The Board of directors of the investing Company shall be entitled to invest in any shares or any other body corporate to such percentage of the subscribed-equity share capital, or the aggregate of the paid-up equity and preference share capital, of such other body corporate, whichever is less, as may be prescribed"

This Section shall not apply

(a) to any banking or insurance Company;

(b) to a Private Company, unless it is subsidiary of a Public Company.

(c) to any Company established in order to finance private industrial enterprises.

(d) "to investments by a holding Company in its subsidiary, other than a subsidiary. within the meaning of Clause (a) of sub-Section (1) of Section 4."


List of Mortgages and Charges

The Companies Act (Sec: 125) provides that all charges and mortgages of the kinds mentioned below, must be registered with the Registrar of Companies by filing with him all particulars concerning them together with a copy of the deed by which the charge or mortgage is created :

1. (a) a charge for the purpose of securing . any issue or debentures ;

(b) a charge – on uncalled share capital of the. company ;

(c). a charge on any immovable property, whether situate, or any interest therein ;

(d) a charge on any book debts of the company ;

(e) a charge, not being a pledge, on any movable property of the company ; ,

(f ) a floating charge on the undertaking or any property of the company including stock-in-trade ;

(g) a charge on calls made but not paid ;

(h) a charge on a ship or any share in a ship;

(i) a charge on goodwill, on a patent or license under a patent, on a trade mark, or on a copyright or a license under 3 copyright.-Sec. 125(4).

2. A charge created out of India comprising solely property situate outside India with particulars and instrument or copy.  Sec. 125(5).

3. A charge created in India but comprising property outside India, with verified copy.-Sec. 125 (6).

4. Charges on properties acquired subject to charge. Sec. 127.

For registration, the term `charge' includes 'mortgage'  Sec. 124.


All the charges listed above must be registered within 30 days of its creation (7 days more if there is sufficient cause for delay).


In case of series of debentures entitling holders pari passu to be filed to the Registrar with the following particulars :

(a) the total amount secured by the whole series ;

(b) the dates of the resolutions authorizing the issue of the series and the date of the covering deed, if any, by which the security is created or defined ;

(c) a general description of the property charged ; and

(d) the names of the trustees, if any, for the debenture holders.; together with the deed containing the charge, or a copy of the deed verified in the prescribed manner, or if there is no such deed, one of the debentures of the series .­Sec. 128.


Particulars in case of commission, etc. on debenture, are to be filed for registration

Register .

Register of charges is to be kepi by Registrar, with respect to each company, containing the following particulars.  Sec. 130 :

(a) in the case of a charge to the benefit of which the holders of a series of debentures are entitled, such particulars as are specified in Sections 128 and 129 ;

(b) in the case of any other charge

(i) if the charge is a charge created by the company, the date of its creation ; and if the charge was a charge existing on property acquired by the company, the date of. the acquisition of the property

(ii) the amount secured by the charge ;

(iii) short particulars of the property charged ; and

(iv) the persons entitled to the charge.

Certificate of Registration

The Registrar is to give a certificate of registration. All debentures must be endorsed with a copy of the certificate: of registration. The registration may be effected by the company, or by any person interested. Modification of the terms of the charge must be notified to the Registrar.-Sec. 132.

The company is to maintain a Register and Index of Charges. The Registrar also keeps a Register of Charges.-Sec. 131. The company is to give intimation to the Registrar when a registrable charge or mortgage is satisfied by payment.-Sec. 138. The Company Law Board may excuse any omission in tiling particulars etc. which was accidental or due to inadvertence. The Register may thereupon be rectified.-Sec. 141

Pending matters will continue to be under the orders of the Court.The Register and copies of instruments by which a charge is created may be inspected by members, creditors etc.-Sec. 1-h3.

Consequences of failure to register charges

If a charge or mortgage is not registered in accordance with the aforesaid provisions, the following consequences ensue .:

1. The-charge becomes void as against other creditors and the liquidator in case of winding up (i.e., the charge holder loses priority).-Sec. 125(i).

2. The debt becomes immediately payable sec125(3)

3. The officers of the company concerned are liable to punishment.

4. When a charge becomes void for non-registration no right of lien can be claimed on the documents of titles

Nothing in the above rules shall prejudice, any contract or obligation for the repayment of the money by the charge.-Sec. l25(2).