Borrowing Powers

[Debentures and Charges]

Dr. Bharat G. Kaurani

Asstt. Professor
N.B. Thakur Law College, Nasik.

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 Borrowing Powers
[Debentures and Charges]
 INTRODUCTION:
 Any company running a business can raise either share capital or debt to
meet its fund requirements.

 A trading company has implied power to borrow but it is not so with

companies which are non-trading. Such companies should have power to
borrow in their memorandum of association.

 A public company, which is collecting debt from the public through the issue
of debt securities i.e. debentures, has to meet listing requirements along
with the compliance of Company law provisions.

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 Debentures

 A company can borrow by splitting the loan amount into several

units for the ease of borrowing large sum. The company may
do so by issuing debentures. A debenture is a certificate of
loan issued by a company. It is a type of security.

 Definition: Section 2(30) of the Companies Act 2013

“Debenture” includes debenture stock, bonds and any other
instrument of a company evidencing debt, whether constituting
a charge on the assets of the company or not.

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Contd…

 According to Topham, ‘debenture is a document given by a company

as an evidence of a debt to the holder usually arising out of loan and
most commonly secured by a charge’.

 In Laxman Bharamji v. Emperor, AIR 1946 Bom 18:

the Bombay High Court observed that debentures normally indicates the
security against the loan taken by the co. and contain the conditions of
repayment, date, rate of interest payable to the holder. They may even
create a charge on the company’s property, but it is not always
necessarily so.

 Briefly speaking, debentures are the acknowledgement of debt, the

promise to return it.

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 Characteristics/Features of Debentures

 (i) debentures are generally issued in series but a single debenture may be
issued in case of a sole lender of the company.

 (ii) it is usually in the form of a certificate, which is an acknowledgement of

indebtedness;

 (iii) it usually specifies a particular period or date as the date of repayment of

principal along with interest.

 (iv) debentures generally creates a charge on the undertaking of the co. or on

some of its assets. However, there may be debentures without charge.

 (v) the holder of debentures is the creditor of the company and not its member,

 (vi) a debenture carries no voting rights at any meeting of the co.

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 Distinction between Debenture and Share

 1. A debenture-holder is a creditor of the company, whereas a shareholder is

its member.

 2. A debenture-holder does not have a right to vote at any meeting of the

company, whereas a shareholder has a voting rights.

 3. A debenture-holder is entitled to a fixed rate of interest on his investment,

whereas a shareholder gets dividend out of profits and the rate of dividend
depends on the amount of profits. In case of preference shares, however,
fixed rate of dividend may be payable.

 4. Shares (except preference shares) cannot be paid back, or redeemed.

Debentures can be redeemed.

 5. Debenture-holders get priority in payment over the shareholders at the

time winding up of the company.
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 Kinds of Debentures: Section 71:

 1. Registered Debentures & Bearer Debentures:

 In case of registered debenture, the name, address, number of debentures
and other details pertaining to holding are entered by the company in the
register of debentures.
 Such debentures are transferable just like shares, by executing the instrument
of transfer. The transfer of registered debenture is required to be registered
with company.

 Bearer debentures: These debentures, also known as unregistered

debentures, are payable to its bearer. Unlike registered debentures, the
company does not maintain the records of such debentures and the principal
amount and the interest is paid to the bearer of the instrument.

 These are regarded as negotiable instruments and are transferable by

delivery.
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2.Redeemable & Irredeemable/Perpetual Debentures:

 Redeemable Debentures:
These debentures are issued for a specified period of time. On the expiry of that
specified time the company is legally bound to return the amount to the
debenture holders and have its properties released from the mortgage or charge.

 Irredeemable Debentures :
An irredeemable debenture is also known as a perpetual debenture and no time
is fixed for the company to repay the loan, although it may choose to pay it back
anytime it likes. Thus the holder of an irredeemable debenture cannot demand
repayment of his money so long as the company is a going concern and does not
make default in payment of interest.

However, all the debentures whether redeemable or irredeemable, become

payable in the event of winding up of the company.

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3.Secured and unsecured Debentures:

 Secured Debentures :
When the debentures are issued by way of creation of charge over the
assets of the co., then such debentures are called as secured debentures.
The charge created over the debentures may be fixed or may be floating.
Such charge created has to be registered with the Registrar within 30 days
of such creation.

 Unsecured Debentures:
Unlike secured debentures, unsecured debentures or naked debentures are
issued by the company without creation of charge over the assets of the
company.
They are mere acknowledgment of a debt due from the company, creating
no rights beyond those of unsecured creditors.

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4. Convertible and Non-convertible Debentures:

 Convertible Debentures : These debentures gives an option to the

holders to convert them into preference or equity shares at stated rates
of exchange, after a certain period. If the holders exercise the right of
conversion, they cease to be lenders to the company and become
members instead.

 Section 71(1) of the Companies Act permits the conversion of

convertible debentures into shares by special resolution of the company.
The convertible debentures may be fully convertible [FCD] or partly
convertible [PCD].

 Non-convertible debentures: These debentures do not give any

option to their holders to convert them into preference or equity shares.
They are to be duly paid at the time of maturity.
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Rights Debentures:

 Rights Debentures means to offer debentures to the existing equity

shareholders on right basis, in proportion to their shareholdings subject
to a minimum of one debenture to each equity shareholder.

 The debenture-holders are usually given option to apply for additional

debentures in addition to the number of debentures they are entitled to
subscribe. The allotment is, however, made on equitable basis with
reference to equity shares held by the applicants.

 The shareholders may renounce the offer of rights debenture in favour

of some other person or persons.

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Creation of Charges:

 A charge may be defined as a security given for securing loans or

debentures by a mortgage on the assets of a company.

 A charge is created when a property, whether existing or future, is

agreed to be made available as a security for the re-payment of debt.

 However, the creditors gets no legal right over the property so charged
but only gets a right to have the security made available by an order of
the tribunal in the event of non-payment of debt.

 Such charge may be fixed charge or floating charge and are classed as
secured creditors.

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Fixed Charge:

 A fixed or specific charge is created on some specific and definite

assets of the company, e.g., land, buildings, heavy machinery,
Intellectual property, etc. A fixed charge is therefore against
security of certain ascertainable specific property.

 The company’s right to dispose off the property is temporarily

suspended during the period it is charged or encumbered.

 In the event of winding up of the company the holder of

debenture secured by a fixed charge ranks as a secured creditor
and gets priority in repayment of debt over the other creditors.

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Floating Charge:

 A floating charge is an equitable charge, which is created on some class of

property, which is constantly changing, e.g., a charge on stock in trade,
trade debtors, investments, etc.

 It means all the property, present or future, of the company, since it is an

unstable property, a charge created thereon will be floating.

 The main idea behind a floating charge is to allow to the company to carry
on its business in the ordinary course as if no charge had been created.

 The company can use such assets in the usual way until the charge
becomes a fixed charge or crystallizes.

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Crystallisation of Floating Charge:

 A floating charge generally remains dormant till it crystallises or becomes a

fixed charge. A floating charge crystallises into a fixed security under the
following circumstances:
 (i) when company goes into liquidation,

 (ii) when company ceases to carry on business,

 (iii) when debenture-holders or creditors take steps to enforce this security,
 e.g. by appointing a receiver to take possession of the charged property;
i.e. when the company makes a default in the re-payment of loan, the
debenture holder could enforce the security for the recovery of the amount
due, by seizing the assets which are subject to the floating charge. When
this happens the charge crystallises and becomes a fixed charge.
 (iv) on happening of an event specified in the deed.

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Effect of winding up on floating charge (Sec. 332):

 A floating charge gets priority over the unsecured creditors of the company,
whether there is winding up or not.

 Section 332 however, provides that a floating charge which has been
created within 12 months immediately preceding the commencement of
winding up shall be invalid, except in the following cases:

 1. When it is proved that immediately after the creation of the charge the
company was solvent, in spite of its having been created within 12 months
immediately preceding the commencement of winding up.

 2. If any cash has been paid to the company under the charge, the charge
would be valid in respect of such amount and interest thereon @5% p.a. or
such other rate as may be notified by the Central Government.

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 Registration of Charges:
 Duty to Register Charges, etc: 77:
 (1) It is the duty of every company creating a charge within or outside India, on its
property or assets or any of its undertakings, whether tangible or otherwise, and
situated in or outside India, -
to register the particulars of the charge signed by the company and the charge-
holder together with the instruments, creating such charge in such form, on payment
of such fees and in such manner as may be prescribed, with the Registrar within
30 days of its creation:
 Provided that the Registrar may, on an application by the company, allow such
registration to be made within a period of 300 days of such creation on payment of
additional fees.
 If company fails to register with in period of 300 days, then it has to seek extension
from Central Government (Regional Director) & file approval with the Registrar.
 If Registrar is satisfied, he shall issue a certificate of registration

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 Registration of Charges: cont..
 Application for registration of charge: Section 78:
 Where a company fails to register the charge within the period specified in sec.77,
without prejudice to its liability in respect of any offence under this Chapter,
 the person in whose favour the charge is created may apply to the Registrar for
registration of the charge along with the instrument created for the charge, within
such time and in such form and manner as may be prescribed and
 the Registrar may, on such application, within a period of 14 days after giving
notice to the company, unless the company itself registers the charge or shows
sufficient cause why such charge should not be registered, allow such registration
on payment of fees:
 Provided that where registration is effected on application of the person in whose
favour the charge is created, that person shall be entitled to recover from the
company the amount of any fees or additional fees paid by him to the Registrar for
the purpose of registration of charge.
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 Registration of Charges: cont..

 Section 81 Register of charges to be kept by Registrar:

 (1) The Registrar shall, in respect of every company, keep a register

containing particulars of the charges so registered.

 (2) A register kept in pursuance of this section shall be open to

inspection by any person on payment of such fees as may be
prescribed for each inspection.

 Rule 6.5 : The particulars of charges maintained on the MCA portal

shall be deemed to be the register of charges for the purposes of
section 81.

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 Registration of Charges: cont..

 Sec. 82 Company to report satisfaction of charge:

 A company shall intimate to Registrar about the payment or

satisfaction in full of any charge so registered within 30 days from
the date of such satisfaction.

 The Registrar shall issue notice to holder of the charge calling a

show cause why payment or satisfaction should not be recorded and
in case of no reply, the memorandum of satisfaction shall be
entered in the register of charges.

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Registration of Charges: cont..

 Sec 83: Power of Registrar to make entries of satisfaction and

release in absence of intimation from company:

 Sometime, it may be possible that company fails to send intimation of

satisfaction of charge to the Registrar but registrar receive evidence of
satisfaction from any other person i.e. charge-holder, shareholder,
purchaser or any one.

 This is a new section, which seeks to provide that the Registrar on being
satisfied may enter in the register of charges that the charges are
satisfied and also inform affected parties about the satisfaction in the
absence of intimation from the company.

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 Registration of Charges: cont..

 Sec. 85: Company’s register of charges:

 Every company shall keep a register of charges at its registered office and
this register shall be open for inspection during business hours by members or
creditors without fees and by any other person with fees as may be prescribed.

 A copy of instrument creating the charge shall also be kept at the registered
office of the company along with the register of charges.

 Rule 6.8 : The register of charges shall be in Form no. 6.7 and enter therein
particulars of all the charges registered with the Registrar as well as particulars
of any modification of charge and that of satisfaction of charge.

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 Registration of Charges: cont..

 Section 86 Punishment for contravention:

 If any company contravenes any provision of this Chapter, the company
shall be punishable with fine which shall not be less than one lakh rupees
but which may extend to 10 lakhs rupees and

 every officer of the co. who is in default shall be punishable with

imprisonment for a term which may extend to 6 months or with fine
which shall not be less than 25000/- but which may extend to 100000/-,
or with both.

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 BOOKS AND REFERENCES

1. Company Law: Dr. Avtar Singh, EBC.

2. Guide to Companies Act: Ramaiya, Lexis Nexis.
3. Principles of Modern Company Law: Gower, Sweet & Maxwell.
4. Company Law : Dr. N.V. Paranjape, Central Law Agency.
5. Bangia’s Company Law : Revised by Krati Rajoria, Allahabad Law Agency.
6. https://www.slideshare.net/Mbinani/chapter-vi-registration-of-charges-the-companies-
act-2013.
7. https://blog.ipleaders.in/different-types-of-debentures-use/

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THANK YOU

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