The relevant sections of the companies act 1956 dealing with the procedure for the issue of debentures are 56(3), 60, 64, 67, 70-74,108-13,117-23,128-29,133-34,143,152-54,292 and 293.
Debentures are issued in accordance with the provisions of the articles, usually by a resolution of the board of directors. Debentures may be issued at par, at a premium, or at a discount if permitted by the articles of the company. Debentures unlike shares may be issued at a discount without any restriction. The reason is that they do not form part of the capital of the company. Particulars of any commission, discount or allowance paid either directly or indirectly to any person for his subscribing or procuring subscription for debentures of the company must be filed with the registrar.
Debentures may be redeemable at par or at premium but their redemption at a discount is not permitted.
Section 117 provides that no company shall, after the commencement of the act issue debentures carrying voting rights at any meeting of the company.
The legal provisions as to prospectus, allotment, issue of certificates etc. applicable to shares also apply to debentures, but the condition of minimum subscription is not applicable to the issue of debentures.
Re-issue of redeemed debentures:
Debentures which have been redeemed may be re-issued by a company. Section 121 authorizes the companies to keep alive and re-issue debentures which have been first redeemed by the company unless the articles provide otherwise or the company has shown an intention to cancel the debenture. Such re-issue may be of the same redeemed debentures or new debentures in place of the redeemed ones. On such re-issue the debenture-holders will get the same rights and priorities as any debenture-holder will get the same rights and priorities as any debenture-holder had before the redemption. Thus, the date of redemption of re-issue debentures cannot be later than that of the original debentures.
Re-issued debentures are treated as new debentures are treated as new debentures for the purposes of stamp duty. The company’s balance sheet must give particulars of any redeemed debentures which the company has power to issue.
A contract to subscribe for debentures can be specifically enforced.
Transfer and transmission of debentures:
Bearer debentures are transferable by simple delivery. Registered debentures are transferred in the same manner in which the shares of a company are transferred. A duly filled in and properly stamped instrument of transfer to get her with the certificate relating to debentures or with the letter of allotment must be delivered to the company either by the transferor or by the transferee. Company may, if so authorized by the articles, refuse to register the transfer. If transfer is refused notice of refusal must be given to the transferor and the transferee within two months from the date on which the instrument of transfer was delivered to the company. An appeal lies to the central government within two months from the date of the receipt of notice of refusal.
The legal representative of a deceased debenture-holder may transfer the debentures by executing an instrument of transfer.
Register and index of debenture-holders:
Every company shall maintain a register of its debenture-holders and enter therein the following particulars:
i) The name, address and occupation of each debenture holder.
ii) The debentures held by each holder with their distinctive numbers, amount paid or considered as paid on them.
iii) The date on which each person was entered in the register as a debenture-holder.
iv) The date on which any person ceased to be a debenture holder.
Every company having more than fifty debenture-holders will maintain index of debenture-holder unless it is maintained in the form of an index. Any alteration in the register shall be entered in the index within fourteen days.
Debenture trust deed:
Where secured debentures are issued by a company, it is usual to execute a trust deed conveying property to the trustees in trust for debentures-holders. Security is enforced or action is taken thereafter by the trustees instead of individual debenture-holders. The trust deed contains provisions about the respective right of the company and the debenture-holders.
The following are the advantages of having a trust deed.
1. In case of a default by the company, the trustees are there to take the necessary steps instead of leaving to the initiative of individual debenture-holders.
2. The trustees will have a legal mortgage of the property and will also hold the title deeds. So the persons who lend subsequently, cannot gain priority over the debenture-holders.
3. The debenture-holders can through the trustee sell the property charged, and thus, realize the security without the aid of the court.
4. The trustees are empowered to see that the property is kept insured and properly maintained.
5. The trustees are authorized to appoint a receiver out of the court or to enter into the possession of the property any carry on the business of the company in case of urgency.
Section 118 of the act requires every company to give to every debenture-holder or any member of the company a copy of any trust deed in respect of debentures. Such a copy shall be given within seven days from the date of request on payment of the specified fees. The trust deed shall be open for inspection by any member or debenture-holder on payment of fees as if it were the register of members.
Trustees for debenture-holders must exercise care and caution in exercising the powers which the trust deed confers on them otherwise they would be guilty of breach of trust. Any provision contended in a trust deed exempting a trustee from liability for breach of trust or negligence would be void. Section 119 nullifies clauses whereby the trustee is exempted from or indemnified against a liability for breach of trust. However, a release given after the liability has arisen and a provision in a trust deed for giving such a release by a majority of not less than three-fourths in value of the debenture-holders present and voting in person or by proxy at a meeting for this purpose, is not void.