Asok Nadhani- Companies Act- Borrowings-Deposits

Deposits

By Asok Nadhani

9.3 Deposits

a.     Any deposit of money with a company or any amount borrowed (including unsecured debentures) by a company except the following items is termed as deposits [Sec. 58(A)]:

­    Subscription or calls in advance to shares/ Bonds/ Debentures, which are pending allotment

­    Loan from a banking company

­    Unsecured loans from promoters/any amount received from:

·         Sate/Central Government or any other source where repayment is guaranteed by State/Central Government

·         Local authority/Foreign Government/Foreign citizen

·         Loan from specified Financial Institution

·         An employee of a company as a security deposit.

­    Loans received from another company.

­    Any advance received from purchasing or selling agent or advance against orders for supplies, if it is an advance in the ordinary of business.

­    Any amount received or kept in trust.

­    Loan from a director, member or relatives: Any amount received by a private company from a person who, at the time of receipt of the amount, was a director, relative of director or member. Such person shall furnish a declaration in writing that the amount is not being given out of funds acquired by him by borrowing from others.

­    Secured debentures: Debentures secured by mortgage of immovable property if the amount of such debentures does not exceed the market value of such immovable property.

­    Money brought in by promoters: Money brought in by promoters shall not be taken as deposit in following cases:

·         The loans are given by the promoters to the company pursuant to a condition of the financial institution.

·         The loans are directly given by the promoters/their relatives, and not by the friends and business associates of promoters.

This exemption will be available till the loans of the financial institutions are not repaid.

b.    Generally, public deposits are unsecured (i.e., no charge is created when public deposits are

      accepted).

9.3.1 Applicability of the provisions of the Act [S. 58A(7)]

The provisions of (S. 58A) shall be applicable to all other company except –

­    Banking Company,

­    Companies specified by Central Government (in consultation with the RBI).

9.3.2 Invitation and acceptance of Deposit

The company can invite or allow any other person to invite on its behalf, any deposits only when it:

i.      complies with the rules (laid down by the Central Government in consultation with the RBI), relating to maximum limit, manner and conditions regarding deposit. [S. 58A (1) & (2)]

ii.    issues an advertisement in the prescribed form or manner stating about the financial position of the company

iii.   has made no default in repayment of earlier deposit

iv.   net owned fund is not less than 1 crore Rupees.

9.3.2.1 Advertisement for inviting deposits

a.     Every company shall issue an advertisement approved by the Board of directors before inviting any deposit in a vernacular and one English newspaper. Such advertisements shall remain valid till earlier of the following periods (S. 58A)

­    6 months from the date of closure of financial year in which it is issued

­    date on which the balance sheet of the company was laid in the company’s general meeting or, (when the general meeting is not yet held, the latest date on which it is proposed to be held.)

b.     Contents of the advertisement: The advertisement shall contain –

­    Name and date of incorporation of the company

­    Nature of business carried on by the company

­    Brief particulars regarding the management

­    Profits of the company for 3 preceding financial years

­    Audited balance sheets for two preceding years

­    The terms and conditions of the acceptance and repayment of deposits

­    Date of approval of the advertisement by the boards

c.     Declaration in the advertisement: The advertisement shall contain the following declaration –

­    the advertisement is issued on the authority and in the name of the Board of directors

­    the company has compiled with the provision of these rules while formulating the advertisement

­    the deposits accepted by the company are unsecured.

­    the deposits shall rank pari passu with other unsecured liabilities

­    the company is not in default in repaying back any earlier deposits or its part thereof including any of its interest.  

The advertisement should be filed with the registrar before its publication in the newspaper.

9.3.2.2 Statement in lieu of advertisement

Where deposits from public are not invited, a company can issue a statement in lieu of advertisement. It shall contain similar information as in the advertisement and shall be subject to the same terms, conditions and the provisions applicable to the advertisement.  

9.3.2.3 Application form for accepting deposits

a.     Application regarding deposits shall be made in a form supplied by the company. It shall contain the particulars specified in the advertisement, including:

1. Terms and condition of acceptance of deposit
2. A declaration by the depositor that he is depositing the money at his own will after reading and understanding the form and that the money is not being deposited out of funds acquired by him by borrowing or accepting deposits from any other person.
3. Any changes made upto the date on which the application form is issued by the company.

b.    Nomination [Sec. 58(11)]: Every depositor is entitled to make a nomination in accordance with the provisions of Sec. 109 A and 109 B.

9.3.2.4 Acceptance of deposits

The acceptance of deposits is subject to Companies (Acceptance of Deposits) Rules 1975,

a.     The company has a minimum net owned fund (an amount reached after reduction of accumulated losses and miscellaneous expenditure from the aggregate of paid up capital and free reserve) of Rs. 1 crore.

b.     Maturity period of deposits accepted shall be minimum 6 months and maximum 3 years. However, deposits for less than 6 months may be accepted if such deposits do not exceed 10% of the aggregate of paid-up capital and free reserves.

c.     Rate of interest can be maximum of 12.5% per annum

d.     If a company accepts deposits in contravention of the rules it shall repay within 30 days of acceptance or any extended time as the Central Government may allow.

e.     Ceiling on deposits: the aggregate amount of deposit shall not exceed –

i.      In case of Government company: 35% of its paid up capital and free reserves, irrespective of the nature of deposits.

ii.    In case of other company:

§  From Shareholders: 10% of aggregate of paid up capital and free reserves.

§  From Others: Upto 25% of aggregate of paid-up share capital and free reserves.

f.      Ceiling on brokerage

A company may pay brokerage for procurement of deposits only to a broker, (whose business is to solicit and obtain deposits for company). The maximum rate of brokerage is 1% for deposit of upto 1 year, 1.5% for deposit of upto 2 years and 2% for deposit of more than 2 years.

9.3.2.5 Maintenance of liquid assets

  i.    The company must maintain liquid assets for repayment of deposit, as per following rules:

−      At least 15% of the amount of deposits maturing upto 31st march of the following year must be invested by the company in the form of liquid assets.

–         The investment in liquid assets shall be made on or before the 30^th day of April of each year.

–         The liquid assets shall not, at anytime, fall below 10% of the deposits maturing till the 31^st March of the following year.

–         The amount invested in the liquid assets shall be utilized only for the purpose of repayment of the deposits.  

 ii.    Following are the permitted investments for maintenance of liquid assets.

−      Deposits held with a scheduled bank, free from lien or charge.

−      Unencumbered securities of Central or State Government.

–         Unencumbered securities approved under Indian Trusts Act, 1882.

–         Unencumbered bonds issued by Housing Development Finance Corporation Ltd.

9.3.3 Receipt of deposits

On acceptance or renewal of deposit, the company should furnish a receipt within 8 weeks from the date of the amount received, to the depositor or his agent. It should be signed by an officer authorised in this behalf stating the name and address of the depositor, date of deposit, maturity amount, percentage of interest and details of amount received.

9.3.3.1 Register of deposit

Every company should maintain a register of deposits containing the prescribed particulars at its Registered Office and such register should be preserved for 8 years from the end of the financial year in which the latest entry is made in the register.

9.3.3.2 Return of Deposit

Every company which has accepted deposits shall file a Return of deposits with the Registrar, containing the information as on 31^st March of the year, on or before 30^th June of every year, certified by the auditor of the company.

9.3.4 Repayment of deposits

a.     Every company which accepts deposits is liable to pay back the principal amount with interest to the depositor within the stipulated time or the extended time (not exceeding 30 days) as the Central Government may allow.

b.     If the company fails to repay the amount in its extended time the company shall be liable to pay an interest @ 18% p.a. on the overdue amount and may be subject to the penal provisions as per rules and Act.

c.     Premature repayment: Premature repayment of deposits are allowed subject to the following conditions:

­    It can be made only after expiry of 3 months from the date of deposit.

­    The rate of interest on such premature deposit shall be reduced by 1% from the rate applicable (no interest of withdrawn before 6 month of deposit).

  

9.3.4.1 Consequences for contravention

For any contravention of any rule or provision of the Act relating to acceptance and repayment of deposits, the company shall be subjected to the following penal provisions:

a.     Penalty for contravention with the provisions as to invitation and acceptance

­    For contravention of invitation, a fine which shall not be less than the amount of deposit accepted.

­    For contravention of acceptance, a fine which shall range between Rs. 50, 000 to 10 lakhs.

­    Every Officer of the company in default shall be liable to an imprisonment upto 5 years and fine.

b.     Penalty for contravention with the provisions as to repayment

­    The company shall be punishable with fine which shall not be less than twice the amount of deposits remaining unpaid.

­    Every Officer of the company in default shall be liable to an imprisonment upto 5 years and fine.

9.3.4.2 Consequences on default on repayment of deposits

When a company makes a default in repayment of deposit or interest thereon:

a.     The company cannot buy-back its own shares till the default in repayment of deposits or interest payable continues. (Sec. 77B).

b.     The company cannot issue shares with differential voting rights (Sec. 86).

c.     A director of a public company shall be disqualified from being appointed as a director in any public company, if the public company of which he is a director fails to repay the deposits or interest thereon on the due date, and such default continues for one year [Section 274(1)(g)].

d.     The company cannot make any intercorporate loan, investment, guarantee or security, till the default in repayment of deposits or interest payable thereon continues. (Section 372A).

e.     A public company cannot pay minimum remuneration (i.e., as specified under Section II of Part II of Schedule XIII) to its managing director, whole time director and manager, if it has made a default in repayment of public deposits or interest payable thereon for a continuous period of 30 days in the preceding financial year, before the date of appointment of such management person.

9.4 Small depositors

The following rules apply to Depositors who has invested a sum not exceeding Rs. 20,000 in a financial year (termed as small depositors) [S. 58AA]:

a.     Intimation to the Tribunal

Every company, which accepts deposits from small depositors, shall intimate within sixty days to the Tribunal for any default made by it in repayment of any such deposits (or its part) thereof or any interest thereupon. Such intimation shall contain particulars regarding the names and addresses of each small depositor, the principal sum of deposits due to them and interest accrued thereupon.

b.     Advertisement and Application form

In addition to the other content in the advertisement and  application form, the company should also state in its every future advertisement and application form inviting deposits from the public about its every past default in repayment of the deposits or interests thereon and waiver of interest and reason therefore. [S. 58AA(5)]

c.     Restriction on Acceptance

No further deposits can be accepted by the company unless the matured amount is repaid along with its interest to the depositors, except in following cases:

­    voluntary renewal of deposits by the small depositors

­    ineffectiveness of repayment due to death of a small depositors

­    a competent court or authority has stayed its repayment 

d.     Utilisation of funds obtained by taking loan

Where a company has accepted deposits from small depositors and subsequently it obtains working capital loan from any bank, it shall first utilize the funds so obtained for repayment of the small deposits and interest thereon before applying such funds for any other purpose. [S. 58AA(7)]

e.     Penal rate of interest

The Company shall be liable to pay a penal rate of interest @ 20% p.a. compoundable on annual basis on any matured small deposits claimed but not paid.

f.      Applicability of rule of under section 58A

Provisions contained in Section 58A, shall, as far as may be, apply to the deposits made by the small depositors also. [S. 58AA(11)]

9.4.1 Penalty for contravention

i.      For any default in complying with the provisions of 58AA, every director shall be deemed to be guilty and shall be punished with an imprisonment upto 3 years with a fine Rs.500 or more for every day during which such non-compliance continues. [S. 58AA(9)]

ii.    Default in acceptance or refund of deposits to a small depositor shall be a cognizable offence under the court of criminal procedure (S. 58AAA).

Examples:

Floating Charge

Ex.9.1 On January 10, 1998 a company, in consideration of a past debt of Rs.2 lakhs and a future advance of Rs.1 lakh, issued debentures to a creditor accompanied by a floating charge over its assets. On June 25, 1998 an order for the winding up of the company was passed.

Held, the charge is void as to the past debt of Rs.2,00,000, and is valid as to the fresh advance of Rs.1,00,000 (Sec.534). [Ref. 9.2.4.2]

For more details, refer to Business & Corporate Laws, by Asok Nadhani, BPB Publications-ww.bpbonline.com, bpbpublications@gmail.com

Asok Nadhani- Companies Act- Borrowings-Debentures- Charges on Debenture

Charges on Debenture

By Asok Nadhani

9.2.4 Charges on Debenture

i.      Charge means a security created in favour of a creditor at the time of taking loan. Charge may be created by Mortgage, hypothecation or pledge. The expression Charge includes a mortgage (Sec. 124).

ii.    As a company has the power to borrow, it has a power to give security for the debt by a mortgage or charge on all or any of its property.

iii.   A charge may be of 2 kinds:

a.     Fixed Charges

b.    Floating Charges

9.2.4.1 Fixed Charges:

The characteristics of a fixed charge (i.e., specific charge) are as follows: [Climex Tissues Limited]

a.     The asset on which the charge is created is identifiable and definite.

b.    Without obtaining the consent of the chargeholder, the company cannot deal in such asset in the ordinary course of business, e.g. cannot sell or create a subsequent charge having priority.

c.     Fixed charge is generally created on fixed assets, like land and building, plant and machinery.

9.2.4.2 Floating Charge (Sec. 123):

i.      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-process, stock-in-trade, trade debtors, etc).

ii.    The company can deal in such property in the normal course of its business until the charge becomes fixed on the happening of an event (called crystallisation of charge).

iii.   Debentures usually create a floating charge on the changing assets of a company. [Valletort Sanitary Steam Laundry Co. Ld.], [Maturi U. Rao v. Pendyala], [Government Stock Co.v.Manila Railway.] Ex.9.1

9.2.4.2.1 Characteristics of a floating charge

a.     It is a charge on a class of assets of the company both present and future, on a class of assets of the company which changes from time to time. [Indus Film Corporation Limited]

b.    The charge does not impose any restriction on the company to carry on its business in the ordinary way unless the interested parties take some steps. 

9.2.4.2.2 Consequences of a floating charge

In a floating charge, the Company can :

a.     Deal in the property on which a floating charge is created, till the charge crystallizes.

b.    Create specific mortgages of its property having priority over the floating charge.

c.     Sell the whole of its undertaking if that is one of its objects specified in the Memorandum, in spite of the floating charge on the undertaking.

9.2.4.2.3 Crystallisation of Floating Charge

i.      Crystallisation is the conversion of a floating charge into a fixed charge on the assets charged, at the time:

a. company goes into liquidation.

b.    company ceases to carry on business.

c.     receiver is appointed.

d.    holder of the charge brings an action to enforce his security on default in payment of principal or interest.

e.     When the company commits a breach of any condition contained in the charge deed.

f.      Happening of any such event that causes crystallization of change as per the terms and conditions of the charge deed.

ii.    On crystallization of floating charge, the right of the company to deal in the asset charged shall come to an end.

9.2.4.2.4 Distinction between fixed charge and floating charge

Fixed Charge	Floating Charge
i.      A specific charge is ascertained on definite property (or property capable of being ascertained and defined)	i.    The charge is ambulatory, shifting & hovering over the constantly changing property, until some act or event causes it to settle and fasten on the subject of the charge
ii.     The company cannot deal in the asset charged.	ii.   The company can deal in asset charged in the ordinary course of business.
iii.    There is no question of crystallisation of a fixed charge.	iii.  Crystallises when the right of the company to deal in the asset charged comes to an end.
iv.    Any person can create a fixed charge on any asset owned by it.	iv.  Only an incorporated body (e.g., a company) can create a floating charge.
v.     Fixed charge is generally created on fixed assets, like land and building, plant and machinery.	v.   Floating charge is generally created on circulation assets stock, work-in process, debtors.

9.2.4.2.5 Rights of chargeholder

i.      Generally, the debentures are secured on a charge on the assets of a company.

ii.    In case of default in repayment of the loan, the lender (i.e., the chargeholder) shall have the following rights:

a.     The lender may approach the Court for a decree that such an asset be sold and repay the lender. [State Bank of India v. Viswaniryat Private Limited]

b.    The right to sell such asset of the company and retain the sale proceeds.

i.      Any excess money realised by sale over the normal due shall be handed over to the company.

ii.    Any deficiency by sale of such asset may be recovered from the company by the lender.

9.2.4.2.6 Appointment of Receiver

In case of default made by the company:

a.     Where the charge deed empowers the charge holder to appoint the receiver: The creditor may appoint the receiver without obtaining any approval of the Court and give a notice of this fact to the Registrar within 30 days of appointment of Receiver.

b.     Where the charge deed does not empower the chargeholder to appoint the receiver: The chargeholder may apply to the Court for obtaining an order of appointment of a receiver.

i.      Within 30 days of order of appointment of the receiver, chargeholder must give a notice of this fact to the Registrar.

ii.    If a receiver so appointed ceases to act, he shall, within 30 days, give a notice of such fact to the Registrar.

9.2.4.3 Registration of Charges

i.      The following charges shall be registered with the Registrar: (s.125)

a.     for securing any issue of debentures

b.    on uncalled share capital of the company

c.     on immovable property

d.    on book debt of the company

e.     A charge not being a pledge on movables

f.      Floating charge on calls made but not paid

g.    A charge created out of India on a property situated outside India

h.    A charge created in India on a property situated outside India

i.      On a property acquired already charged (s. 127)

j.      Others charges  like :

-         a charge on a ship or any share in a ship.

-         a charge on goodwill, patent, license under a patent, trade mark, copyright or a license under a copyright.

k.     A floating charge on the undertaking on any property of the company including stock-in-trade.

ii.    It is the duty of the company to register the charge. The registration of charge may also be effected on the application of any person interested in the charge, (e.g., the chargeholder). Such person may also recover the expenses lawfully incurred by him in registration of charges.

(s.134) [Eric Holmes (Property) Ltd.]

iii.    Every company shall cause a copy of every instrument creating any charge requiring registration to be kept at the registered office of the company. (s. 136)

iv.    Provision of registration of charges would apply even to charges created under previous Act. (s.145)

9.2.4.3.1 Time of Registration of Charges

  i.    The charge must be registered within 30 days of creation of charge.

ii.    The time may be extended by the registrar upto 30 days if:

a.     the company can satisfy the registrar with a sufficient cause for not filing the particulars and instrument or copy within 30 days (s. 125).

b.    the company pays additional fees (not exceeding 10 times the amount of fee specified in Schedule X).

iii.    If the charge is not registered within 60 days of creation of charge, an application may be made to the Company Law Board. The Company Law Board has the discretion to grant extension of time. 

iv.    When a charge on any property is registered, any person acquiring such property shall be deemed to have notice of the charge as from the date of such registration (s.126).

9.2.4.3.2 Effects of Non Registration of Charges

a.     Charge is void: If the charge is not registered, the charge shall be void against the liquidator and any creditor of the company. The transaction however is not void. [s. 125(1)] [TR Thaiagarajan v. Official Liquidators.]

b.    Money immediately re-payable: The Company shall be liable for repayment of charge. The money secured by the charge becomes immediately re-payable at the option of the charge holder. [s. 125(2) and (3)]

c.     No right of lien: No right of lien can be claimed on the documents of title

d.    New charge: The company may subsequently create a charge which shall have a priority over the charge which has not been registered. So, the unregistered chargeholder cannot enforce any right against other secured creditors.

e.     Liquidation: In case of liquidation, the unregistered charge holder assumes the status of an unsecured creditor. [Rajasthan Financial Corporation v. official Liquidator, Jaipur Spinning and Weaving Mills Limited (In Liquidation)]

9.2.4.3.3 Penalties for Non Registration of Charges (Sec. 142)

a.     In case of any default made in filing with the Registrar for registration, the company and every officer of the company or other person who is in default, shall be punishable with fine which may extend to Rs. 5000 every day the default continues.

b.    in case of default in complying with any of the other requirements as to registration, the company and every officer of the company who is in default, shall be punishable with fine which may extend to Rs. 10,000.

This penalty does not prejudice any other liability.

9.2.4.3.4 Certificate of Registration

  i.    On registration of a charge, the Registrar shall give a certificate of registration of the charge, stating the amount secured by the charge.

ii.    This certificate constitutes a conclusive evidence that the requirements of the Act as to registration of charge have been complied with. (Sec. 132)

9.2.4.3.5 Satisfaction of Charges

i.      A Company must pay the Principal sum due and interest secured on charge, as per Terms and condition.

ii.    If a company makes a default in such payment, the charge holder may take the steps to realize his security, through appointment of a receiver. (Sec.137)

iii.    After the debt is paid off or satisfied in full, the company shall give intimation to the Registrar within 30 days of payment or satisfaction. (Sec. 138-140)

a.     The Registrar shall issue a notice to the holder of the charge of payment or satisfaction of charge and call upon him to show cause stating his objections (within 14 days) for not recording the satisfaction of the charge.

b.    If the charge holder does not object, the Registrar shall make an entry in the register of charges a memorandum of satisfaction recording this fact.

c.     If any objection is raised by the holder of the charge then the Registrar shall record a note to that effect in the register and inform the company accordingly

iv.   Where the Registrar receives no intimation from the company about the satisfaction of any charge, he may register the fact of satisfaction of the charge if sufficient evidence is produced to him that-

o    the debt for which the charge was given has been paid or satisfied in whole or in part; or

o    part of the property or undertaking charged has been released from the charge or has ceased to form part of the company’s property or undertaking.

v.     When a charge is satisfied, it comes to an end.

9.2.4.3.6 Register of Charges with the Registrar (Sec. 130, 131)

1.         Every company shall forward the following particulars to the Registrar for being entered in the Register of Charges, kept with the registrar (s. 130).

a.     In the case of a charge to the benefit of debenture holders, particulars as specified in s.128 & 129.

b.    For charge created by the company, the date of its creation (in case charge existing on property acquired by the company, the date of the acquisition of the property)

c.     The amount secured by the charge;

d.    Short particulars of the property charged

e.     Persons entitled to the charge.

 2.        A register containing the particulars in respect of charges requiring registration for each company shall be kept with the Registrar [s. 130 (1)] and an index of the register shall be kept in prescribed form (s.131).

 3.        The pages of the register shall be consecutively numbered and every page of such register shall be initialised by Registrar. [s. 130(1C)]

 4.        Any person may inspect the register on payment of prescribed fee. [s. 130(3)]

9.2.4.3.7 Register of Charges with the Company

  i.    Maintenance of Register (s. 143)

a.     Every company shall keep a register of all fixed and floating charges at its registered office, containing the following particulars:

-  a short description of the property charged

-  the amount of the charge

-  names of the persons entitled to the charge (except in the case of bearer securities)

b.     Any defaulting officer shall be punishable with fine extending to Rs. 5,000.

ii.    Inspection of Documents & Register (Sec. 144)

a.     A copy of every instrument creating any charge requiring registration (i.e., the charge deed) and the register of charges kept by the company shall be open to inspection.

b.     The inspection may be made by-

§  any creditor or member of the company, without fee;

§  any other person on payment of a prescribed fee.

c.     The inspection may be made during business hours. (at least 2 hours in each day shall be allowed for inspection).

d.     If inspection is refused:

§  the company, and every officer of the company who is in default, shall be punishable with fine upto Rs.500 plus Rs.200 per day during the period of default.

§  the company Law Board may compel an immediate inspection.

9.2.4.3.8 Priority of Charge

In case of more than one charge on same property, the priority is determined as under:

a.     Fixed charge followed by a floating charge: The fixed charge shall have the priority over the floating charge.

b.    Fixed charge is followed by another fixed charge: The fixed charge created first shall have priority over the subsequent fixed charge.

c.     Floating charge is followed by a fixed charge: The fixed charge shall have the priority over the floating charge, even though the fixed chargeholder has the knowledge of floating charge.

d.    One floating charge is followed by another floating charge: The first one created shall get priority over the subsequent floating charge.

9.2.4.3.9 Modification of Charge

i.      It means modification in the terms of charge agreement, either by mutual agreement or by operation of law (S. 141). Assigning rights of the charge holder to a third party also constitutes modification of charge.

ii.    The instances of modification are as follows:

­    varying any terms and condition of the existing charge by agreement

­    Modification of an agreement for enhancing or decreasing the limits.

­    Modification of extent or operation of a charge.

­    cessation of pari passu clause

­    change in rate of interest (other than bank rate)

­    change in repayment schedule of loan (other than loans repayable on demand)

­    Partial release of the charge on a particular asset or property.

iii.   The modification of charges needs to be registered with the Registrar and the provision of the Act relating to registration of charges shall also apply to modification of charges. (S. 135)

9.2.5 Debenture Trustees (Sec. 117B)

a.     Appointment of Trustees: The debenture trustees must be appointed before the issue of prospectus or letter of offer to public.  (S. 117B(1))

b.     Consent: The debenture trustees must give their consent to the company to act as debenture trustees and such fact of consent shall be stated on the face of the prospectus or letter of offer.

c.     Disqualifications of Trustees: To ensure that the debenture trustees are independent,  none of the following persons shall be appointed as a debenture trustee: (S. 117B(1))

i.      A person who beneficially holds shares in the company;

ii.    A person who is beneficially entitled to moneys payable by the company to the debenture trustee,

iii.   A person who has given any guarantee for repayment of principal debts secured by the debentures or interest thereon.

d.     Functions of the Trustees

i.      Protect the interest of debenture holders. (S. 117B(2))

ii.     Registration of charges.

iii.    Redress the grievances of debenture holders. (S. 117B(2))

iv.    Remedy to any breach of covenants of trust deed or terms of issue of debentures.

v.     Call meeting of debenture holders as and when necessary.

e.     Rights & Duties of the Trustees

i.      A debenture trustee should ensure that the: [S. 117B(3)]

a.     Assets of the company and each of the guarantors are sufficient to discharge the principal amount of debentures.

b.    Prospectus or the letter of offer does not contain anything inconsistent with the terms of the debentures or with the trust deed.

c.     Company does not commit any breach of covenants and provisions of the trust deed.

ii.    If the debenture trustee believes that the assets of the company are insufficient (or are likely to become insufficient) to discharge the principal amount when due, the debenture trustee may file a petition before the Company Law Board. [S. 117B(4)]

The Company Law Board then may impose such restrictions on the incurring of any further liabilities as it thinks necessary.

f.      Benefits of appointment of debenture trustee

i.      As professionals are normally appointed as debenture trustees, they are able to exert closer watch on the working of the company.

ii.    The onerous duties and responsibilities of debenture trustees ensure protection of interests of debenture holders.

iii.   Appointment of debenture trustee results in economy to the company, as frequent meetings of debenture holders is not required.

g.     Liabilities of Debenture Trustee (Sec. 119)

If the Debenture Trustee fails to perform his functions or duties properly, it would amount to negligence on his part for which he shall be liable:  

a.     Where the trustee is guilty of breach of trust, or has failed to show the degree of care and diligence expected out of him having regard to his powers, authorities or discretions, the debenture trustee shall be liable for damages loss incurred to the debenture holders.

b.    No exemption or no indemnity can be given to a debenture trustee in respect of any liability arising under section 119.

c.     Any provision which exempts or indemnifies the debenture trustee from liability shall be void, whether such provision is contained in the trust deed or in any contract.

d.    A debenture trustee may be released from liability if:

i.      A majority of 3/4^th in value of the debenture holders agree to release the debenture trustee.

ii.    The release relates to specific acts or omissions and not a general release, or the release is given in respect of a trustee who is dead or has ceased to act.

9.2.5.1 Debenture Trust Deed  

i.      Where secured debentures are issued to numerous debenture holders, the company normally enters into a contract with a debenture trustee, in whose favour the security is created.

The debenture trustee is protect the interest of debenture holders. He is required to act on behalf of the debenture holders.

ii.    A trust deed is created for securing any issue of debentures shall be in a prescribed form and executed within specified time. (S. 117A)

iii.   Inspection and copies of trust deed: (S. 118)

a.     The trust deed shall be open to inspection. Any member or debenture holder of the company may take an extract of it, in the same manner, and on payment of the same fees, as applicable to register of members of the company under section 163.

b.    Any debenture holder or member of the company may ask for a copy of the trust deed, which shall be forwarded within 7 days of a request made by any member or debenture holder.

c.     If default is made by the company, the company Law Board may direct the company to forthwith forward the copy to the person requiring it.

iv.    Where a Debenture Trust Deed has been executed, the Debenture holder will not be considered as creditor and is not entitled to collect the amount due to him, without reference to the trustee.

9.2.5.2 Redemption on Debenture (Sec. 117C)

a.     Mandatory Creation of Debenture Redemption Reserve:

A company issuing debentures shall create a debenture redemption reserve, crediting adequate amounts every year out of the profits of the company until such debentures are redeemed. (S. 117C)

b.    Utilisation of debenture redemption reserve fund: The amounts credited to debenture redemption reserve be utilized only for the redemption of debentures.

c.     Payment of interest and principal:  

i.      The company shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue.

ii.    Where a company fails to redeem the debentures on the date of maturity, any debentureholder may make an application to he Company Law Board. The Company Law Board, on hearing the parties may direct the company to redeem he debentures forthwith.

For more details, refer to Business & Corporate Laws, by Asok Nadhani, BPB Publications-ww.bpbonline.com, bpbpublications@gmail.com