DEBT CAPITAL

 BY SUSHMA GOWDA

 INTRODUCTION

All the companies are given power to borrow by their articles of association which fix the maximum limit of borrowing. The power to borrow monies and to issue debenture can only be exercised by the directors at a duly convened meeting.

If company borrows without authority confers on Articles of Association or beyond will be considered as Ultra Vires and hence it is void.

In case of Ultra Vires following remedies are available such as 1) Injunction & Recovery 2) Subrogation 3) Suit against Directors.

DEBENTURE

Debenture is the document given as an evidence to debt to holder usually arise out of loan and commonly secured by charge. As per section 2 of clause (30) instrument as per chapter III-D of reserve bank of India shall not be considered as Instrument.

KINDS OF DEBENTURE

There are various kinds of debenture such as redeemable debenture, registered/unregistered/ bearer/ unsecured/ naked debenture.

Debenture stock is borrowed capital consolidated into one.

DEBENTURE TRUSTEE

Debenture Trustee is appointed to protect the interest of debenture holder The Rights of Debenture Trustee is to have a possession of the instrument and title of deed

Power of debenture trustee is that he can sell the property subject to agreement, trustee can vary in investment, in case of death of trustee other can continue to be the one unless and until it is stated some objection in the instrument.

If the debenture trustee hold the shares of the company he/she will be disqualified from being the debenture trustee of the company, It will be considered as an disable if company pays money to the debenture trustee, the debenture trustee is relative of any promoter or any person who is in the employment will be considered as disability of debenture trustee.

Debenture holder is only creditor of company without voting rights, interest of debenture payable even if no profit is earned by the company.

DEBENTURE TRUST DEED

Debenture Trust Deed is a document created by Company, Debentures can be issued at a discount. While borrowing above paid up share capital and capital reserve company should convene a general meeting  and pass a special resolution as state by ministry of Corporate affairs.

COMPLIANCES

Company shall not issue debenture unless it comply with the provision of the rules and regulation made thereunder.

1) Company engaged in the setting up of infrastructure projects may issue secured debenture for the period exceeding 10 years but not exceeding 30 years

2) issue of Debenture shall be secured by creation of charge on assets which will be sufficient for repayment of due

3) Debenture trustee shall be appoint not exceeding the period 60 days after the allotment of debenture.

4) The security for debenture by way of charges are specific movable property of company, specific immovable property or any interest thereon.

As per section 71(4) of the act every company must create debenture redemption reserve account to which amount should be credited out of its profit available for the payment of dividend until such debentures are redeemed