Debentures, charges and acceptance of deposits

1. Meaning of debenture

Under section 2(30), “debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether or not it creates a charge on the company's assets; instruments under Chapter III-D of the RBI Act and others prescribed are excluded. The definition is inclusive; Chitty J. said in Levy v. Abercorris Slate and Slab Co. (1887) that a debenture means a document which either creates a debt or acknowledges it. The power to borrow is exercised by the Board at a meeting (section 179(3)(c), (d)), subject to the limit in section 180(1)(c).

2. Kinds of debentures

• Secured and unsecured (naked): secured debentures create a fixed or floating charge (section 71(3) and the Rules).
• Redeemable and irredeemable (perpetual): redeemable at a fixed date or on notice; the company must redeem according to the terms of issue (section 71(8)).
• Convertible and non-convertible: an option to convert into shares, wholly or partly, needs a special resolution in general meeting (section 71(1)).
• Registered and bearer: registered debentures are payable to the holder on the register and transferable by instrument; bearer debentures by delivery. Listed debentures are now held in demat form.
• First and second: by order of priority of charge.

3. Fixed and floating charges

A charge is an interest or lien created on the property or assets of a company as security, and includes a mortgage (section 2(16)). A fixed charge attaches to specific, ascertained property (land, machinery), which the company cannot dispose of without the charge-holder's consent.

A floating charge is an equitable charge on a class of assets present and future, which in the ordinary course of business changes from time to time, and which the company may continue to deal with until the charge crystallises. Romer L.J. gave its three marks in Re Yorkshire Woolcombers Association (1903): a charge on a class of assets present and future; a class that in the ordinary course changes from time to time; and the company is free to carry on business with them until some step is taken by the chargee. Lord Macnaghten in Illingworth v. Houldsworth (1904) described it as ambulatory and shifting, hovering over the property until some event occurs that causes it to settle and fasten on the subject of the charge.

Crystallisation: the floating charge becomes fixed on the assets then held when the company goes into winding up, ceases business, or the debenture-holders intervene on default (by appointing a receiver or taking possession). Until then a later fixed charge on particular assets has priority, unless the floating charge expressly prohibits it and the later chargee has notice.

4. Debenture trustees

A company issuing a prospectus, or inviting the public or more than five hundred of its members to subscribe for debentures, must first appoint one or more debenture trustees (section 71(5)). The trustee holds the security in trust for the holders, must take steps to protect their interests and redress their grievances (section 71(6)), and must call meetings, monitor the security and the debenture redemption reserve, and act on default, as the Rules require. A clause in the trust deed exempting the trustee from liability for breach of trust where he fails to show due care is void, except so far as three-fourths in value of the holders agree (section 71(7)). If the trustee concludes that the company's assets are or are likely to become insufficient, he may petition the Tribunal to restrain the company from incurring further liabilities (section 71(9)).

5. Redemption and remedies of debenture-holders

The company must create a debenture redemption reserve out of profits available for dividend, to be used only for redemption (section 71(4)), subject to the exemptions in the Rules. The remedies of debenture-holders on default:

• Suit for principal and interest as creditors.
• Application to the Tribunal by any holder or the trustee for an order directing the company to redeem forthwith with interest (section 71(10)).
• Enforcement of the security: sale or appointment of a receiver under the trust deed or by court; for secured creditors that are banks or financial institutions, enforcement under the SARFAESI Act, 2002.
• Insolvency: as financial creditors, an application under section 7 of the Insolvency and Bankruptcy Code.
• Specific performance of a contract to take up and pay for debentures (section 71(12)).

6. Shareholder and debenture-holder distinguished

• Status: owner and member, against creditor.
• Return: dividend only if profits exist and it is declared, against fixed interest payable whether or not there are profits.
• Voting: equity shareholders vote; debentures cannot carry voting rights (section 71(2)).
• Security: none, against a charge on assets if secured.
• Repayment: share capital is repaid only on reduction, buy-back or winding up; debentures are redeemed according to their terms.
• Winding up: shareholders rank last; debenture-holders rank as secured or unsecured creditors (section 53 of the IBC).
• Issue at discount: prohibited for shares (section 53), permitted for debentures.
• Purchase by company: a company may buy its own debentures freely; its own shares only by buy-back.

7. Registration of charges: sections 77 to 87

Every company creating a charge on its property, in or outside India, must register its particulars with the Registrar within thirty days of creation (section 77(1)). The Registrar may allow registration within sixty days on additional fees, and a further sixty days on ad valorem fees (provisos substituted in 2019). The Registrar issues a certificate of registration (section 77(2)). An unregistered charge is not taken into account by the liquidator, under the Act or the IBC, or by any other creditor (section 77(3)), though the debt itself remains payable as an unsecured debt (section 77(4)). The company reports satisfaction of the charge within thirty days (section 82), keeps its own register of charges (section 85), and the Central Government may permit rectification of omissions (section 87).

8. Acceptance of deposits

“Deposit” includes any receipt of money by way of deposit or loan or in any other form, excluding categories prescribed in the Rules, such as loans from banks, money from directors, and security deposits in the course of business (section 2(31)). Under section 73(1) no company may invite, accept or renew deposits from the public except as Chapter V provides; banking companies and NBFCs are outside the Chapter.

• Deposits from members (section 73(2)): with a resolution in general meeting, a circular to members showing financial position and credit rating filed with the Registrar thirty days before issue, a deposit repayment reserve of at least twenty per cent of deposits maturing next year kept by 30 April, a certificate of no default (or five years since any default was made good), and security if any; unsecured deposits must be described as such.
• Deposits from the public (section 76): only by a public company with the net worth or turnover prescribed, with an annual credit rating, and a charge on assets within thirty days for secured deposits.
• Remedies: a depositor may apply to the Tribunal for repayment and damages (section 73(4)); officers are liable for fraud in inviting deposits (section 75); and section 76A punishes contravention with fine on the company of at least one crore rupees or twice the deposit, whichever is lower, up to ten crore, and imprisonment up to seven years with fine for officers in default.

How this is examined

June 2025 asked “Define debenture. Explain its kinds” for 10 marks; January 2026 set “Distinguish between shareholder and debenture holder” as the 6-mark alternative. Earlier papers set notes on the floating charge, debenture trustees, remedies of debenture-holders and registration of charges. For the essay: section 2(30), the kinds, fixed and floating charges with Yorkshire Woolcombers, trustees, redemption and remedies. For the distinction: part 6 as a point-by-point list.