What are the remedies available for a debenture holder?

In case of unsecured debentures, the holder is an ordinary unsecured creditor. If the company defaults in the payment of principal or interest he may:

i) Sue for the principal or interest and after judgment levy execution against the company; or

ii) Petition for the winding up of the company by the court.

If the company is already in the course of winding up, he may prove for the amount due to him.

A secured debenture-holder stands in a stronger position as compared to unsecured debenture-holder. In addition to the above, two remedies available to unsecured debenture-holder, he can exercise the following remedies:

1. Sale:

If the debenture-holder is the holder of a single debenture giving a charge on the assets of the company, he will have an express or implied power of sale. If there is a trust deed, the trustees have power to sell the property of the company. Any surplus of the proceeds of sale after payment of debts due to debenture-holders is payable to the company.

2. Debenture-holder Action:

When a company commits default in payment of debts, a debenture-holder may bring an action against the company to obtain payment and to enforce the security. This is a debenture-holders action. He may sue on behalf of himself and all other debenture-holders. Where there are separate actions brought by several debenture-holders, the court may consolidate them.

3. Appointment of receiver:

The debenture-holders or the trustees may appoint a receiver or manager to take charge of the assets subject to the charge provided they are so empowered. If they lack the power, they may apply to the court for an appointment. In either case the fact of appointment must be brought to the notice of the registrar within 30 days.

4. Foreclosure:

A debenture-holder may apply to the court for foreclosure which may extend even to the uncalled capital of the company. However, for its proper exercise it is necessary for all the debenture-holders of every class to be parties to the action.

5. Valuation of security and proof of balance:

If the company is being wound up and his security is insufficient, the debenture holder may value his security and prove for the balance of his debt or give up his security and prove for the whole debt. In case a debenture-holder owes a debt to the company, he cannot set off his debt against the debenture.