A trading company has an implied power to borrow money as an incidental part of its day to day business. In the case of Joint Stock Company the memorandum of association may fix limits to the borrowing powers and in such case borrowing in excess of he limit will be ultra virus to the company. A company therefore generally borrows money by means of issuing documents or bonds which are know as debentures.
It may be regarded as written acknowledgment of a loan by the company conditioning for the promise of repayment of interest and the principle after the specified time, if the loan is redeemable. A debenture must be distinguished from share. While debenture creates a loan a share creates an ownership. A debenture holder is thus creditor and he is entitled to a fixed rate of interest irrespective of profit while the shareholder is the owner who is entitled to receive profits, if there are any.
CLASSES OF DEBENTURES
1. NAKED DEBENTURES
These are without any security i.e have no charge on any assets of the company. For practical purpose these are merely promissory notes. In the event of liquidation of the company the holders are ranked as unsecured creditors.
2. MORTGAGE DEBENTURES
These have certain specific rights against the assets of the company in other words the company pledges its assets to the lenders.
3. REGISTERED DEBENTURE
These are recorded in the books of company and are payable only to those who are written against them as holders. These can be transferred only by the proper transfer executed deeds.
4. BEARER DEBENTURES
The names of the holder of debentures are not registered and they are payable to those who present them. They can be transferred by means of redelivery by one person to another
5. REDEEMABLE DEBENTURES
These are repaid by the company after a specific number of years after giving the prescribed notice of redemption to the debenture holder.
6. IRREDEEMABLE DEBENTURES
These are the debentures which are not paid during life of the company but on the liquidation of company the debenture holder gets their amount back.