In case of default by the company in repayment, the remedies
of a debenture holder vary according to whether he is secured or unsecured.
An unsecured debentureholder is in exactly the same position
as a creditor and he
has the same remedies. Thus, (1) he may sue for the principal
and interest; or (2) he may present a petition for the winding up of the
company and prove his debt as unsecured creditor.
A secured debentureholder has both the above remedies, but
in addition he has
the following courses also open to him:
(I) Where a trust deed has been executed
(I) Where a trust deed has been executed
1.
Sale of assets. The power of
sale by trustees is one of the express powers usually
contained in the debenture or debenture trust deed. If no such power is given, an application may be made to the
Court for an order to sell.
2. Foreclosure.
The trustees may make an application to the Court for an order of foreclosure, the effect of which is
that the borrowers' interest in the assets
charged is completely extinguished and the lender becomes the owner of them. For an action of foreclosure, it is
necessary that all debentureholders of
the class concerned join hands [Wallance v. Evershed (1899) 1 Ch. 891].
3. Appointment
of a receiver. Where there is a trust deed, it often provides that the trustees may appoint a
receiver. If no such power is given, application to appoint one may be made to the Court in a debentureholders'
action. On the appointment of a Receiver,
the assets become specifically charged in favour of the debentureholders and the power of the company to deal
with them in the ordinary course
of business ceases, although the company continues to exist until it is wound up.
(II) Where no deed has been executed
(II) Where no deed has been executed
Debentureholders'
action: Where no trust deed had been executed in favour of debentureholders,
a debentureholder may, on default in payment of principal or interest, bring an
action (called a debentureholders' action) on behalf of himself and other
debentureholders of the same class asking for: (i) a declaration that the debentures
have a charge on the assets; (ii) an account of what is owed to the
debentureholdes; the amount of assets; prior claims, etc; (iii) an order of
foreclosure or sale; (iv) the appointment of a Receiver.
If a debentureholder owes a debt to the company which is
insolvent, the holder cannot set off his debt against the liability he owes to
the company. The rule is that a person who claims a share in a fund must first
pay up every thing he owes to the fund before he can claim a share [Re Borwn and Gregory Ltd. (1904) 1 Ch.627].
SEBI has also issued guidelines for disclosure and
investor protection pertaining to debentures.
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