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Debentures and Charges

Debentures are a document issued by a company as evidence of debt from a loan. They typically carry a charge on company assets in case of default. Characteristics include a promise to repay the loan at face value by a set maturity date, with interest paid at a fixed rate. A trust deed signed by the company assures repayment to debenture holders, who have secured interests but no voting rights. Companies issuing debentures must be listed on a stock exchange. Companies provide security for loans through charges on assets. A fixed charge applies to specific fixed assets, preventing their sale until repayment. A floating charge covers current assets like stock, changing as the assets are sold. It can crystallize into a

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88 views2 pages

Debentures and Charges

Debentures are a document issued by a company as evidence of debt from a loan. They typically carry a charge on company assets in case of default. Characteristics include a promise to repay the loan at face value by a set maturity date, with interest paid at a fixed rate. A trust deed signed by the company assures repayment to debenture holders, who have secured interests but no voting rights. Companies issuing debentures must be listed on a stock exchange. Companies provide security for loans through charges on assets. A fixed charge applies to specific fixed assets, preventing their sale until repayment. A floating charge covers current assets like stock, changing as the assets are sold. It can crystallize into a

Uploaded by

Anshuman Chakraborty
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Debentures and Charge

Debentures

Debenture holders are the creditors of the company. A debenture is a document given by a company as
an evidence of debt to the holder, usually arising out of loan and most commonly secured by charge.
This means a charge can be placed on assets in case of failure to repay the loan.

Characteristics

1. Promise

A company promises that it will pay the amount within a fixed period of time on a certain interest. It is
an agreement.

2. Face Value

It is 100 or multiples of 100. It is the amount of the debenture written on the debenture certificate.

3. Time of Repayment

The year of purchase and maturity is mentioned in the certificate. The company needs to pay the
amount at the time of maturity.

4. Interest

Interest is at a fixed rate.

5. Assurance of Repayment

A trust deed is signed and given to the debenture holder assuring the debenture holder that if money is
not paid back, he has a charge on the assets.

6. Parties to the debenture

Company, trustee who witnesses signing of the trust deed, debenture holder who is a creditor.

7. Right of debenture holder

Does not have voting rights in meetings. If it is a matter that concerns them, they can vote.

8. Security

Their interests are secured. They will receive payment of assets in lieu of payment.

9. Listing

Any company issuing debentures needs to be listed in a stock exchange.

10. Terms of Issue of Debentures

Company can decide what type of debentures it wants to issue.


Charges

Whenever a company takes out a loan from the bank, financial institution or debentures, it generally
provides a security of its assets i.e. creates a charge on its assets (mortgage)

Types of charge

1. Fixed charge

This is the first preference and is done on fixed assets or ascertainable assets e.g. Land, building,
machinery. Fixed assets with a charge cannot be sold until the creditors are paid back.

2. Floating charge

Floating charge is the second preference and is done on current assets or unascertainable assets e.g.
Stock. Floating charge keeps on changing because it is put on assets whose value keeps on changing. E.g.
stock will be sold on a daily basis and new stock will be bought/manufactured.

Crystallisation of floating charge

1. Company goes into liquidation- A liquidator is appointed. He/she gets control over assets and
liabilities of the company and has the responsibility of paying off creditors.
2. Company ceases to carry on business- Creditors will cease all assets and sell them to recover the
loan.
3. Creditors and debenture holders exercise their rights- They may want their loan to be repaid in
full and ask for repayment.
4. Happening of event specified in a deed- Deeds are contracts and as such they have conditions
and clauses which may specify contingencies that can occur. E.g. If the deed states that a loan
has to be repaid if there are 3 defaults, floating charge gets converted.

An asset can have multiple charges. E.g. Hotel is mortgaged with Bank 1 and then can be mortgaged
simultaneously with Bank 2 and Bank 3. When the asset is sold, the bank that has first charge gets
money and then the second bank followed by 3rd bank. Money is returned in the order in which it was
borrowed.

Registration of charges needs to be done with the ROC (Registrar of Companies). Sec 77. Limit of 30 days
from the date of creation of charge. Registration of charges is done so that banks can check existing
charges on a mortgaged asset before sanctioning more loans. A certificate of registration of charges is
given by ROC.

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