I. INTRODUCTION
Under the Section 71 (5) of the Companies Act, 2013, “no company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees and the conditions governing the appointment of such trustees shall be such as may be prescribed”.[1] Under the rule 18 (2) Companies (Share Capital and Debentures) Rules, 2014 the company can appoint debenture trustees if the following conditions are fulfilled-
- The rate of redemption cannot exceed 10 years from the date of issue. The company which has been engaged in setting up of infrastructure projects can issue security debentures crossing 10 years but cannot exceed 30 years.[2]
- The issue of debentures should be secured by creation of a charged.[3]
- The security of debentures by the way of charge should be treated in the favour of debenture trustee.[4]
II. DUTIES OF DEBENTURES TRUSTEES
Under section 71 (6) of the Companies Act 2013, the company must take the steps to protect the interest of the debenture holders.[5] The duties of every debenture trustees is mentioned under the rule 18 (3) of the Company’s Rule 2014. These rules are-
- There should not be something which is uncertain or inconsistent with the terms of issue debentures.[6]
- The debenture holders must be satisfied in the trust deeds and debenture Trustee should act in the interest of debenture holders.
- Debenture trustees can call for the performance report from the company. There should be a proper conversation between Debenture holder’s default regarding to the payment of interest or redemption of debentures.[7]
- A nominee director should be appointed on the board of the company in the event of-
“(i) Two consecutive defaults in payment of interest to the debenture holders
(ii) Default in creation of security for debentures
(iii) Default in redemption of debentures.”[8]
The debenture trustee must ensure that there is proper implementation of the conditions regarding the creation of security for the debentures.[9] When there is any breach of the terms of issue of Debenture the Debenture Trustee must inform immediately the debenture holders about this. The trustees of debenture must ensure that the debentures have been properly converted as per the terms of issue of debentures.[10]
III. JUDICIAL PRONOUNCEMENT ABOUT DEBENTURES
In the case of Knightsbridge Estates Trust Ltd. v. Byrne[11] it was stated that a legal mortgage consist of freehold and leasehold land. In the case of Lemon v. Austin Friars Investment Trust Ltd[12] it was stated that “A series of income-bonds by which a loan to the company was repayable only out of its profits”.[13] In the case of Security British India Steam Navigation Co. v. IRC,[14] it was stated that “a note by which a company undertook to pay a loan but gave no”.[15] In the case of Pearl Assurance Co. Ltd. v. West Midlands Gas Board,[16] it was stated that “The definition of debenture is so wide as to include any security of a company whether constituting a charge on the company’s assets or not”.[17]
IV. REGISTER OF DEBENTURE HOLDER
As stated under sub-section 8 of Section 71,[18] the company has to pay the interest and redemption of debentures should be done under the term of conditions of the issue.[19] As stated under sub-section 10 of Section 71[20] of a company fails to redeem the debentures on the date of maturity of fails to pay the interest then the Tribunal has to file an application to the directors holders for the debenture trustee under which the company have to return the debentures on the payment of the principal and interest which is due.[21]
Under sub-section 11 of section 71[22], it has been stated if any default is made in the order of Tribunal under the section, then every officer who is in the forest shall be punished with imprisonment of a term which can extend up to 3 years or with the fine that will not be less than 2 lacks and can even extend up to 5 lacks. This remedy can be made to the oldest of debentures whether they are secured as unsecured.[23]
[1] Section 71 of Companies Act, 2013, , https://www.lawnotes.in/Section_71_of_Companies_Act,_2013 (last visited Apr 9, 2017).
[2] See.G.P.Sahi, Regulation of Debentures Issue- An overview, http://www.legalserviceindia.com/articles/debentures.htm (last visited Apr 9, 2017).
[3] Id.
[4] Debentures and debenture trustee under Companies Act, 2013, (2015), https://blog.ipleaders.in/debentures-and-debenture-trustees-under-companies-act-2013/ (last visited Apr 9, 2017).
[5] A debenture trustee shall take steps to protect the interests of the debenture holders and redress their grievances in accordance with such rules as may be prescribed.
[6] Companies Act, 2013 Key highlights and analysis, https://www.pwc.in/assets/pdfs/publications/2013/companies-act-2013-key-highlights-and-analysis.pdf (last visited Apr 9, 2017).
[7] Debenture trustee, http://www.caclubindia.com/articles/debenture-trustee-27207.asp.
[8] See .Pritishree Dash, Can Debentures Be Converted Into Shares And Vice-Versa? (2016), https://blog.ipleaders.in/can-debentures-converted-shares-vice-versa/ (last visited Apr 9, 2017).
[9] Appointment of debenture trustees and duties of debenture trustees, , http://www.advocatekhoj.com/library/bareacts/companies/117b.php?%20Title=Companies%20Act,%201956&STitle=Appointment%20of%20debenture%20trustees%20and%20duties%20of%20debenture%20trustees (last visited Apr 9, 2017).
[10] FAQs on Debenture Trustee, , http://www.sebi.gov.in/cms/sebi_data/attachdocs/1431510867038.pdf (last visited Apr 9, 2017).
[11] Knightsbridge Estates Trust Ltd. v. Byrne, 1940 AC 613: (1940) 2 All 401.
[12] Lemon v. Austin Friars Investment Trust Ltd, . 1926 Ch 1 (CA).
[13] Id.
[14] Security British India Steam Navigation Co. v. IRC, (1881) 7 QBD 165.
[15] Id.
[16] Cf. Pearl Assurance Co. Ltd. v. West Midlands Gas Board, (1950) 2 All ER 844 (ChD)].
[17] Id.
[18] A company shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue.
[19] Supra note 1.
[20] Where a company fails to redeem the debentures on the date of their maturity or fails to pay interest on the debentures when it is due, the Tribunal may, on the application of any or all of the debenture-holders, or debenture trustee and, after hearing the parties concerned, direct, by order, the company to redeem the debentures forthwith on payment of principal and interest due thereon.
[21] Supra note 1.
[22] If any default is made in complying with the order of the Tribunal under this section, every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than two lakh rupees but which may extend to five lakh rupees, or with both.
[23] Supra note 1.
