DEBENTURE TRUST DEED

3.1 Requirements of the trust deed: Every company which issues debentures has to appoint either one or more than one debenture trustees when the prospectus is issued for debentures or when the members of the public or the companies own members exceed 500 who are invited to apply for the issue. Therefore, it is the debenture holders who will then appoint the debenture trustee. In the circumstance that the debenture holders due to lack of time to look into the charge created on the assets of the company. Then the trustee can be appointed among the debenture holders themselves. A trust deed needs to be prepared under whose authority the debenture trustees are to be appointed. The various properties of the company are then mortgaged and charged to the trustees, in favor of the debenture holders 

3.2 Rights of debenture holders: The trust deed also makes provisions for defining the various rights that the debenture holders enjoy regarding the company. The reason for this kind of setup is that the trustees are on the lookout to protect the interests of the debenture holders. All such trustees are bound to act in good faith and perform due diligence for all matters involving the interests of the debenture holders. Any provision in the trust deed that protects the trustee from any liability due to the actions taken in the capacity is void. A debenture trustee is not an employee of the company and cannot seek relief under Section 463 of the companies Act for negligence.

Further, on default of payment, the debenture trustees take action in the interests of all the debenture holders. 1 A company had proposed to issue a fresh series of debentures. Of the already existing debentures, 96% of these were held by institutions which permitted the company to issue a fresh series of debentures. The remaining 4% of the debentures were held by private individuals of which one person, a debenture holder, challenged the company’s decision to issue fresh debentures. This person wanted to examine the assets and liabilities of the company before the fresh series of debentures were issued. The High court gave the verdict in favor of the company on agreeing with the arguments raised by the counsel for the company. The court held that the debenture holder did not have a right to consider the assets and liabilities of the company beyond the books of accounts that the company provides to its shareholders. The aggrieved debenture holder could seek payment for the respective security and exit if such a debenture holder has certain apprehensions. Such a pay-out for the debenture holder could be in cash. The right of a debenture holder to demand the accounts of a company is to be considered as a very limited right. It is only under Section 118 of the Companies Act, 1956 to examine the debenture trust deed and under Section 163 of the Above act, to demand and inspect the annual report of the company. However, the companies Act, 1956 did not provide for a debenture holder to make a detailed investigation into the books of accounts of a company. Finally, the court held that mere denial to furnish the details of the books of accounts to the debenture holder does not warrant an adverse inference to be drawn against the company. It is not indicative of any wrongdoing by the company, in fact, the motives of the debenture holder in such a matter are highly questionable. However, a copy of the trust deed should be made readily available to the debenture holders of the company. Also, such debenture holders have a right to get the copies of payment of the prescribed fees.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.