Debentures — Company Law Notes

Debentures

If a share makes you an owner of the company, a debenture makes you a lender to it. The debenture-holder does not vote or share the profits — he simply wants his interest and his money back, secured against the company’s assets. Ownership versus lending is the whole distinction.

What is a debenture?

A debenture is a document acknowledging a debt taken by the company, usually under its seal, promising to repay the principal with interest and often secured by a charge on the company’s assets. The holder is a creditor, not a member.

Section 2(30): “debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.”

Characteristics: a debt security; carries fixed interest payable whether or not there are profits; usually secured by a charge; redeemable at a fixed date; transferable; the holder has no voting rights (s.71 forbids voting debentures).

Shareholder vs debenture-holder (distinguish):

shareholder is an owner/member; debenture-holder is a creditor;
shareholder gets dividend out of profits (variable); debenture-holder gets interest (fixed, even in loss);
shareholder votes; debenture-holder does not;
on winding up, debenture-holders (creditors) are paid before shareholders.

Kinds of debentures

Secured / unsecured (naked) — with or without a charge on assets.
Registered / bearer — registered ones transfer by instrument; bearer debentures are negotiable instruments transferable by mere delivery, and a bona fide transferee for value takes free of prior defects.
Redeemable / irredeemable (perpetual).
Convertible / non-convertible — convertible into shares (fully/partly) or not.

Debenture trustees (s.71)

Where debentures are offered to the public/members beyond a threshold, the company must appoint a debenture trustee to protect the holders. Duties of a debenture trustee: to protect the interests of debenture-holders, satisfy himself that the prospectus/assets are adequate, ensure the security is maintained and interest/principal is paid, and take steps (including approaching the NCLT) on default. A Debenture Redemption Reserve must be created for redemption.

Section 71(1)/(4): a company may issue debentures with an option to convert; “the company shall create a debenture redemption reserve account… and no company shall issue any debentures carrying voting rights.”

In Simple Terms: A debenture is an IOU: you lend the company money and get fixed interest plus repayment, usually secured on its assets — but no vote and no profit-share. Bearer debentures pass by delivery like currency. A debenture trustee is the watchdog appointed to safeguard the lenders.

flowchart TD
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    ROOT --> A["Creditor, not owner; fixed interest; no vote"]:::leaf
    ROOT --> K["Kinds"]:::mid
    K --> K1["Secured / Unsecured"]:::leaf
    K --> K2["Registered / Bearer (negotiable)"]:::leaf
    K --> K3["Redeemable / Irredeemable"]:::leaf
    K --> K4["Convertible / Non-convertible"]:::leaf
    ROOT --> T["Debenture trustee (s.71): protects holders"]:::mid2
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    classDef mid fill:#DCFCE7,stroke:#166534,color:#000;
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🧩 WORKED EXAMPLE — transfer of a bearer debenture

Facts. K, holder of a bearer debenture of a company, transfers it to R by delivery. The company refuses to pay R the principal with interest.

Rule. A bearer debenture is a negotiable instrument, transferable by delivery; a bona fide transferee for value acquires a good title and can enforce payment.

Apply. R took the bearer debenture by delivery for value; he is entitled to the debt.

Conclusion. R can claim the principal and interest from the company; the company’s refusal is untenable.

Case Laws

Narendra Kumar Maheshwari v Union of India (1989) — nature of debentures and convertible debentures.
Laxman Bharmaji v Emperor (1946) — bearer debentures are negotiable, transferable by delivery.

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