UNIT – 3
BORROWINGS & DEBENTURES
DEBENTURES (Sec. 71)
Sec 2(30) ‘Debenture’ includes debenture stock, bonds or any other
instrument of a company evidencing a debt whether constituting a
charge on the assets of the company or not.
TYPES OF DEBENTURES
DEBENTURES
On the basis On the basis On the basis On the basis
of Security of Registration of Redemption of Convertibility
Non-Convertible
Secured Registered Redeemable
Partly Convertible
Un-Secured Bearer Irredeemable Fully Convertible
Optionally
Convertible
Debentures (Sec.71):
Can issue convertible or non-convertible debentures
No voting rights
Creation of DRR A/c
Limitation on issue of prospectus
Debenture trustees to protect the interest of the debenture holders
Liability of Debenture trustees
To pay interest and redeem the debentures
Filing of petition with the tribunal
Failure to redeem the debentures/pay interest
Default in compliance of order of the tribunal – Imprisonment of 3 years or fine of
Rs. 2 lakhs to Rs. 5 Lakhs.
Specific performance of the contract
Procedure to be prescribed by the central government
POWER TO NOMINATE (Sec.72)
DEBENTUREHOLDERS vs SHAREHOLDERS
BASIS DEBENTUREHOLDER SHAREHOLDER
1. Status Creditor to the company Owner of the company
2. Return Gets a fixed interest as a Entitled to receive dividend
ROI
3. Control No right to control the Has a right to control over
activities of the company as the working of the company
they don’t have voting rights by attending and voting the
general meeting
4. Risk Whether it generates profits Despite generating profits, a
or not, a company is company may choose not to
obligated to pay interest to pay dividends to its
its debenture holders. shareholders.
ACCEPTANCE OF DEPOSITS
PROHIBITION OF ACCEPTANCE OF DEPOSITS FROM PUBLIC (Sec.73)
All the companies governed under Companies Act, 2013 can invite, accept or renew
deposits from the public, only by adhering to the following process.
1. The Company should pass a special resolution.
2. Issuance of circular to its members
3. Filing the circular with the registrar
4. Requirement of Deposit Repayment Reserve Account
5. Certification as to no default in repayment
6. Provision of Security
7. Repayment of deposit
REPAYMENT OF DEPOSITS – ACCEPTANCE BEFORE COMMENCEMENT OF
COMPANIES ACT, 2013 (Sec. 74)
Filing of Statement of Deposits with the registrar of Companies and repayment thereafter
within 3 years.
Extension of Time for Repayment of Deposits by the Tribunal.
Punishment of Non-Repayment of Deposits: Fine – Rs.1crore to Rs.10 crores and every
default officer with imprisonment upto 7 years and/or fine Rs.25 lakhs to Rs.1 crore
ACCEPTANCE OF DEPOSITS FROM PUBLIC BY CERTAIN COMPANIES (Sec.76)
Eligible Companies:
It should be a Public Company
Net Worth minimum – Rs.100 Crores or a Turnover of minimum – Rs.500 Crores
Obtained prior consent to invite for deposits from public, by passing Special
Resolution in General Meeting
The Special Resolution has been filed with the Registrar of Companies.
Within 30 days of acceptance of deposits, company must create a charge on its
asset for an amount not less than the deposit accepted.
BORROWING POWERS OF A COMPANY
All trading companies have an implied power to borrow funds for the
purpose of business.
A Non-Trading company does not have an implied power to borrow funds.
It should be explicitly declared in their MOA and AOA.
ULTRA VIRES BORROWING
Ultra Vires the Company Intra Vires the Company but Ultra Vires the Directors
1. ULTRA VIRES THE COMPANY
If a company borrows money beyond its power, the borrowing is Ultra Vires
the company and its is Void ab initio.
Lender’s Rights when borrowing is Ultra Vires:
1. Injunction
2. Subrogation
3. Restitution
2. ULTRA VIRES THE DIRECTORS
FIXED AND FLOATING CHARGES
The power of a company to borrow includes the power to create charge
upon its assets.
This charge can be classified as
Fixed Charge – Fixed specific property
Floating Charge – Continuously changing class of assets
Characteristics of Floating Charges:
Charge on class of assets of the company both present and future.
That class of assets, is the one that in ordinary course of business,
keeps fluctuating.
The company can deal in such property in the normal course of
business until the charge crystallizes.
Consequences of Floating Charge:
The company can carry on its ordinary course of business.
Create specific mortgages over its property.
Sell whole of its undertaking, if its one of the objects in MOA.
Crystallization of Floating Charge:
Company goes into Liquidation.
Company ceases to carry on its business
Receiver is appointed
Default in payment.
MORTGAGES AND CHARGES
Mortgage can be on any property of the company, unless the same is
excluded in the MOA/ AOA.
Charge can also be on the uncalled capital of the company, if there is
nothing in contrary in the MOA/AOA.
Company cannot create charge on the Reserve Capital of the company.
DUTY TO REGISTER CHARGES (Sec. 77)
Duty of the company to register the particulars of charge with signature
of the charge-holder, by paying the prescribed fees with the Registrar
within 30 days of its creation.
(i) Incase of charges created before Companies (Amendment), 2019 – 300
days of such creation with Additional Fees
(ii) Incase of charges created after Companies (Amendment), 2019 – 60
days of such creation with Additional Fees
DUTY TO REGISTER CHARGES (Sec. 77)
Registrar shall issue a certificate to both the company as well as to the
charge-holder.
Without valid registration and certificate of charge issued by the
registrar, no charge created by the company shall be taken into account
by the liquidator.
Application of Registration of Charge ( Sec. 78)
Section 77 to apply for Certain Matters (Sec. 79)
Register of Charges to be maintained by the Registrar (Sec. 81)
Company to Report Satisfaction of Charge (Sec. 82)
Power of Registrar to make entries of satisfaction (Sec. 83)
Intimation of appointment of receiver or manager (Sec. 84)
Company’s Register of charges (Sec. 85)
Punishment for Contravention (sec. 86)
Company – minimum Rs. 1 Lakh upto Rs. 10 Lakhs.
Default Officer – Imprisonment of upto 6months and/or fine between
Rs. 25,000 to Rs. 1 Lakh
Rectification by Central Government in Register of Charges (Sec. 87)
EFFECTS OF NON-REGISTRATION OF A CHARGE:
The Charge is Void
The money becomes immediately payable
No right of lien on the documents of title
Penalties