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.
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
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Fixed Charge
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Floating Charge
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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.
|
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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.
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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
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 India
h.
A charge created in India 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 3/4th
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
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