Debentures: Meaning, Features and Kinds

By | October 5, 2019
Meaning, features and kinds of debentures.

This article deals with the meaning, features and kinds of debentures. The term debenture does not have any precise legal meaning. The term has an extremely elastic character when it is used in the normal parlance of a layman.

Introduction

A single section i.e. Section 71 is used by the legislature to cover all the 3 topics related to debentures in the Companies Act, 2013. Companies are required to borrow a huge amount of money very frequently. Pursuant to this reason, the requirement of loan by the company might not be fulfilled by a single money lender. Several units have to come together to provide a huge amount of loan to the company.

Borrowing money by the method of issuing debentures, thus, becomes one of those ways that are very convenient for the company.

For instance, if a company is willing to borrow a sum of Rs. One lakhs. It can divide this huge amount into one thousand units, where each unit may amount to a sum of rupees hundred only and it is upon the discretion of the lender to buy as much as units as he is willing to lend to the company. The company will be then certifying the number of units held by the lender and this process of lending and certification is known as debentures. Henceforth, a debenture is nothing but a certificate of loan that is provided by the company. It is a form of security.[1]

However, it has been found very difficult by the scholars to provide the definition of debentures. Sec 2(30) of the companies act, 2013 provides the definition of the debentures. It has been defined by Chitty J. in the following words:

A document can be regarded as a debenture if it is capable for either creation of a debt or acknowledgement of it, and any other document that is able to fulfil either of these conditions can be termed as debentures.[2]

However, as per Topham, a debenture is nothing but a document that is provided by the company as an evidence of the debt given by the holder to the company, which usually do arise out of the loan and it is most commonly gets secured by the charge.[3]

As a matter of fact, the term debenture does not have any precise legal meaning. The term has an extremely elastic character when it is used in the normal parlance of a layman. Indeed there can be no definition that can provide help in all cases in order recognize whether a particular document that is issued by the company is debenture or not. Further, one must have a look at the substance of the instrument itself and even without any sort of assistance of any legal definition, is able to form one of the best opinions about any instrument being a debenture or not.[4]

Usual Features

As it appears from the above discussion, the usual features of the debentures can be pulled out in the following form:

Firstly, a debenture can be understood to be in the form of a certificate that gets issued under the seal of the company.[5] In the second place, the certificate issued must be able to acknowledge the indebtedness of the company.

Pollock MR, in his striking words, said: But one may be looking for any kind of features in the debentures or one may except any characteristic in the debentures, the root meaning of the word is indebtedness; which implies that a debenture must be in the capacity to record an indebtedness.[6]

Further, a debenture usually prescribes for the payment of a particular amount to be made by the company at a specified date. However, this is no more an essential feature of the debenture. A company also has the capability to issue perpetual debentures without any undertaking of payment. However, sec 120 of the Companies Act, 1956 provided that there is no provision of holding that a debenture is invalid merely because they are made redeemable or irredeemable only on the condition of happening of a contingency, however long, or remote depending on the expiration of a period.[7]

Again, a debenture normally provides the option of payment of interest till the time the principal sum is paid back to the lender. However, this feature is also not a hard and fast rule of the essentials of the debentures. Interest can be made payable depending on the various contingencies of several uncertain nature.[8]

Thirdly, a debenture is a rule one of the series, though the single debenture is not very uncommon. However, it is a possibility that a single debenture might get issued to more than one person. Lastly, a debenture is able to create a charge on the undertaking of the company or on some part of the profit generated by the company or on some class of the assets possessed by the company. Again, this is also not an essential feature of defining debentures. A debenture which cannot create any such charge was also held valid.[9]

KINDS OF DEBENTURES

1. Redeemable 

Most of the debentures are redeemable in nature. This means that when the term of the loan gets expired, the company has the right to pay the whole amount back to the debenture holders and have its properties released from the charge or any kind of mortgage. This is termed as redemption of debentures.

Another feature of redeemed debentures is that they are subject to be issued again. If there is no provision that is contrary to those contained in the conditions of the issue of debentures or articles of association or if there is no such resolution that shows any sort of intention to cancel the redeemed debentures, the company has been provided with the power of keeping the debentures alive for the purpose of issuing them again.

The company is provided with the option of issuing the same debentures again or issuing any other debenture in its place. When such a debenture is re- issued, the person, who is entitled to the debentures, possesses the same rights and priorities that he would have been entitled to in the condition if the debentures have been never redeemed.

2. Convertible 

Sec 71(1) provides for the debentures that are convertible in nature. A company is entitled to issue debentures that are provided with an option that they can be converted into shares, either partly or wholly at the time of redemption. The debentures which have such options can be issued only when it is passed with the help of a special resolution at a general meeting.

3. Perpetual

A debenture that has no clause of paying back the amount lent to the company or that contains a clause that there is no need of paying the sum back to the company can be termed as a perpetual or irredeemable debenture. However, sec 120 of the Companies Act, 1956 provided that there is no provision of holding that a debenture is invalid merely because they are made redeemable or irredeemable only on the condition of happening of a contingency, however long, or remote depending on the expiration of a period.[10]

4. Debentures to the registered holder and bearer debentures

Sec 88 of the Companies Act, 2013 provides that every company has to maintain a register of its debenture holders and therefore, a company that has issued debentures is under an obligation to maintain a register of its debenture holders. The register of the company, as well as the certificate of debenture both, possesses the name of those who are the holders of the debentures. Such a holder of debenture is known as the registered debenture holder.

A debenture holder is able to transfer his debentures with the same flexibility that is provided to a shareholder to transfer his shares.[11] This transfer is also required to be registered with the company. The title of the transferee will be subject to all the equities between the company and the transferor.[12] The only way of avoiding the registration of transfer is by issuing the debentures that are payable to the bearer, as the company is not required to maintain a register of such debenture- holders. Such debentures are subject to transfer, just like the negotiable instrument, by the way of simple delivery and are called debentures that are payable to the bearer.

The Calcutta High Court had held in Calcutta Safe Deposit Co Ltd v. Ranjit Mathurdas Sampat[13] that a person to whom it is required to transfer the bearer debenture and is entitled to recover the principal and interest whenever due. He has the right to apply for winding up as well if it is not paid back to him. Further, if the petition is competent enough, the company has no right to ask to him to give an explanation as to how he came by the debenture or as to why he did not collect the interest from a long time. The court, at this instance, pointed out to the application of the Sec 118 of Negotiable Instruments Act and henceforth, every holder of a bearer debenture is presumed to be a debenture in the due course until and unless the contrary is shown.[14]


[1] A company has the option of issuing debentures that can be converted into shares either partly (PCDs) or fully (FCDs). In order to refer to the rules and regulation with respect to the debentures, see, Section F of SEBI Guidelines for disclosure and investor protection on the issue of convertible and non- convertible debentures.

[2] In: Levy v Abercorris Slate & Slab Co., (1887) LR 37 Ch D 260, 264: 58 LT 218.

[3] 12th edn., Topham’s Company Law, 168. See also, speech given by Viscount Maugham in Knightsbridge Estate Ltd v Byrne, 1940 AC 613: (1940) 2 All ER 401: 109 LJ Ch 200: 162 LT 388: 56 TLR 652 (HL); Vyas J in Madanlal Fakirchand Dudhediya v Changdeo Sugar Mills Ltd, AIR 1958 Bom 491, 496: (1958) 60 Bom LR 254

[4] Chitty J in Levy v Abercorris Slate & Slab Co., (1887) LR 37 Ch D 260, 264: 58 LT 218, cited in Laxman Bharmaji v Emperor, ILR 1945 Bom 863: AIR 1946 Bom 18: 223 IC 110.

[5] In the case of British India Steam Navigation Co. v IRC, it was held that the seal of the company is not a requirement all the time. Even when a debenture certificate will bear the signature of any of the two directors and was not possessing the seal of the company, it was considered as the valid form of the debenture.

[6] In Lemon v Austin Friars Investment Trust Ltd., 1926 Ch 1: 133 LT 790 (CA).

[7] Knightsbridge Estate Ltd v Byrne, 1940 AC 613: (1940) 2 All ER 401: 109 LJ Ch 200: 162 LT 388: 56 TLR 652 (HL).

[8] In Lemon v Austin Friars Investment Trust Ltd., 1926 Ch 1: 133 LT 790 (CA).

[9] Sec 71(12) of the Companies Act, 2013. See also, Sewa Singh v Mukha Singh, ILR (1936) 17 Lah 270: AIR 1936 Lah 727.

[10] Knightsbridge Estate Ltd v Byrne, 1940 AC 613: (1940) 2 All ER 401: 109 LJ Ch 200: 162 LT 388: 56 TLR 652 (HL).

[11] Sec 56 of the Companies Act, 2013.

[12] In Re: Natal Investment Co., (1868) LR 3 Ch App 355: 18 LT 171.

[13] (1971) 41 Comp Cas 1063 (Cal).

[14] Calcutta Safe Deposit Co Ltd v Ranjit Mathurdas Sampat, (1971) 41 Comp Cas 1063 (Cal).


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