Meaning, characteristics, types of debentures.

Q. Write meaning and characteristics of Debenture. Explain different types of debentures.

Ans. MEANING OF DEBENTURE: The word ‘Debenture’ is derived from the latin word ‘debere’, which means ‘taking a loan’. When a company wants to take a loan on a long-term basis so that the loan becomes the company’s capital. It issues debentures and debenture stock. By debenture is meant a ‘document that contains an acknowledgement of indebtedness’. It is issued by company under its common seal and gives an undertaking to repay the debt at a specified date (or at the company’s option), specifies the conditions related to the loan taken by the company. According to Section 2(30) of the Companies Act, 2013, ‘debenture’ includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. 

— According to Tophamn, “Debenture is a document given by a company as evidence of a debt to the holder usually arising out of loan, and most commonly secured by a charge.”

CHARACTERISTICS OF DEBENTURES: A debenture has the following characteristics:

(i) A debenture is issued by a company and is an acknowledgement of the company’s debt to the holder. 

(ii) It is issued under the company’s common seal, but need not necessarily specify the company’s capital.

(iii) A debenture is normally issued for a specified amount, but one debenture may also be issued for the total amount given by a debenture holder.

(iv) The rate of interest and the date of renewal is stated in a debenture.

(v) A debenture normally, but not always, is secured by the company’s property.

(vi) The holder of a debenture does not have a right to vote in the company’s meetings, i.e. he does not participate in the company’s management.

DIFFERENT TYPES OF DEBENTURES: Depending upon the conditions of issue, debentures may be of different types, which are as follows:

(1) Registered Debentures: Debentures that have the names, addresses and other particulars of the holder recorded in the company’s Register of Debenture-holders are called ‘registered debentures’. The interest as well as the principal amount with respect to such debentures is payable only to the registered holders. Registered debentures can be transferred only in accordance with the conditions of their issue and the transfer must necessarily be recorded in the company’s register. As such, a registered debenture is not a negotiable instrument.

(2) Bearer Debentures: Debentures that are neither recorded in the company’s register nor require the prior consent of the company for their transfer are called ‘bearer debentures’. In other words, bearer debentures are transferable by mere delivery and whoever has the possession of a bearer debenture is deemed to be its owner. Only the  holder of a bearer debenture has the right to receive the interest or the principal amount. The transfer of such debentures does not involve any legal procedure, and no stamp duty is to be paid for the transfer. The holder of bearer debentures can, on the payment of a normal fee, gets his name recorded in the company’s register of debenture-holder. 

(3) Secured Debentures: Debentures which are secured by a charge on the company’s property are called ‘secured’ or ‘mortgage’ debentures. In case the company does not make the payment of such debentures, the holders can realise the payment from the company’s property which is held in charge or mortgage.

(4) Unsecured Debentures: Debentures that are not secured by any charge or mortgage on the assets of the company are called unsecured debentures. The company does not provide any security for the payment of interest or principal amount of these debentures. The holders of such debentures are like ordinary, unsecured creditors of the company who only have a certificate that they have paid the amount of debentures to the company. In case of default on the company’s part, the holders of such debentures can sue the company. 

(5) Redeemable Debentures: When the holder of debentures is given the option that provides for the payment of the principal amount on a specified date or on demand or notice, the debentures are said to be redeemable.

(6) Irredeemable Debentures: Debentures on which the issuing company does not fix any date by which they should be redeemed, and the holders of debentures cannot demand payment from the company as long as it is a going concern are called ‘irredeemable’ or ‘perpetual’ debentures. Even though the principal amount of such debentures is paid on winding up of the company, the interest is paid regularly. In case, there is a default in the payment of interest, such debentures can be paid during the company’s lifetime.

(7) Convertible Debentures: When the holders of debentures are given the optìon that within a specified period and on fulfillment of specified conditions, they can convert either fully or partially, their debentures into equity shares, the debentures are said to be ‘convertible’.

“A company is an artificial person created by law having a separate entity with a perpetual succession and a common seal.” Explain this statement and discuss the basic features of the company.

 Q. “A company is an artificial person created by law having a separate entity with a perpetual succession and a common seal.”  Explain this statement and discuss the basic features of the company.

Ans. A company is an artificial person created by law. It has not any hand, leg, heart or physical body. Its existence comes when a company is formed and registered under company law. After coming in existence, it can do all business work like a human businessman. It can open its bank account. Company can buy or sell any asset on its own name. Company gets loan on its own name. It can sell own shares in the market. 

There will not any effect on the company whether any shareholder will come or go. Company will live if any shareholder sells his all shares. Other person who will buy the shares will become the new owner of the company. Company will not have any personal relation with shareholder. Every shareholder’s liability upto his bought shares.

It has also its own a common seal. This seal will use in all the agreements which will done on the name of company. Company cannot sign, so it is very necessary for making common seal which company can use as showing his identity on every agreement. All the documents will only legal if authorised person’s sign will be on the document and company’s seal will be on the same document.

FEATURES OF COMPANY: The main features of a company are as follows: 

(1) Incorporated Association: A company is established by law, and can exist till such time as it is recognised by law. Under companies Act, it is necessary for a company that is formed to be registered i.e., it needs to be incorporated.

(2) Artificial Person: Another important characteristic of a company is that it is an artificial person created by law. It is called an ‘artificial person’because its birth is not a natural birth. It is invisible, intangible and immortal artificial person that has an identity only in the eyes of law. It has no body, no soul and suffers no pain and enjoys no pleasure. Being an artificial person, it cannot take an oath, be imprisoned or personally appear in a court of law. It cannot get married or become a professional like a doctor or a lawyer. But it cannot be treated as a 'fictional person' or a 'fictitious entity' because it really does exist. Like a natural person, a company can buy and sell properties, make agreements or enter into contracts and employ people on its payroll. It can also be penalised if it does not abide by law. In other words, it can be said that a company, though lifeless, enjoys the privileges of a living person.

(3) Separate Legal Entity: The most important characteristic of a company is that it is a separate legal entity. As per-law, the company acquires a separate legal entity after it is incorporated which is distinct from the entity of its members. As a result, a company can enter into a contract with any of its members, buy property in its name, borrow or lend money, open a bank account or file a suit in a court of law against a third party. Likewise, others can also file a suit against the company. In other words, a company can do all such acts which a natural person would do in the course of his business. The case of Solomon Vs. Solomon & Co. is an illustration.

(4) Perpetual Succession: Perpetual succession is another important characteristic of a company. Its existence is not dependent on that of its shareholders or directors. The shareholders or the directors might change, but the company goes on. Death, insolvency or lunacy of its members has no effect whatsoever on the existence of the company. Members may come and members may go, but the company goes on forever. 

(5) Common Seal: A company is an artificial person and, as such, it cannot put its signature on documents. That is why it is mandatory under law that every company must have a common seal with its name engraved upon it. The common seal is the symbol of the company’s identity and is as good as a signature. When it puts its seal on a document, the company becomes bound by the contents of the document.

(6) Limited Liability: The liability of the shareholders of the company is limited. In case of financial loss to the company, howsoever heavy, the liability of the shareholders is limited to the amount unpaid on their shares, and their personal property cannot be used to pay the company debts.

(7) Number of members: The minimum number of members in a public company is seven and the maximum can be as much as the shares issued by the company. In other words, the maximum number of members in a public company is indefinite and is not specified. In a private company, the minimum number of members is two, and the maximum is two hundred, excluding members who are or were employees of the company.

(8) Representative Management: A company is deemed to be an artificial and imaginary person and, as such, it cannot manage its own affairs. A company, is administered and managed by representatives appointed by the shareholders. The shareholders are too many in number and scattered far and wide– which makes it impossible for the company affairs to be controlled by them. Besides, the objective of the shareholders is to make a profit– not to run the company’s business.

(9) Limitation of Action: A company is incorporated for the realisation of a specific objective or objectives. The objectives of the company are described in its prospectus and define the limitation of the companies activities. No company can cross this 'limitation of action' and engage itself in an activity which is not listed in its prospectus. If a company does that, its actions are not recognised by law and are deemed to be beyond the sphere of its authority. A company cannot, of its own will, start a new business or change its field of activity and do something which does not conform to its objectives.

(10) Transferability of Shares: The capital of a company is made up of shares of a definite value, and is contributed by its shareholders. According to Section 44 of the Companies Act, 2013, each shareholder can freely transfer his or her shares. But in some specific situations, the company may impose restrictions on the transfer of shares.

(11) Termination of Existence: Like it is born by an act of law, a company may also be terminated by law.

(12) Company is not a Citizen: A company is, without doubt, a legal ‘person’ or entity, but under Article 19 of the Indian Constitution, it is not a citizen. It has no 'fundamental rights like a citizen has. As such, a company cannot take the recourse of law to press for its fundamental rights like a citizen can. For example, a company does not have the right to franchise.

“A company is an artificial person created by law having a separate entity with a perpetual succession and a common seal.” Explain this statement and discuss the basic features of the company.