Tuesday, March 2, 2010

Signing Authority of Debenture Certificate

Clause (12) of Section 2 of the Companies Act, 1956 defines “debenture” as follows:

“Debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.”

In Narendra Kumar Maheshwari v. Union of India, AIR 1989 SC 2138, the Supreme Court of India cited with approval the meaning of the term ‘debenture’ as stated in Palmer’s Company Law, 24th Edition at p. 672 as under:

“A debenture has been defined to mean essentially as an acknowledgement of debt, with a commitment to repay the principal with interest.”

A similar definition was arrived at by the MRTP commission in Director-General of Investigation & Registration v. Deepak Fertilisers & Petrochemicals Corpn. Ltd.[1994] 15 CLA 31 wherein it was held that a ‘debenture' is simply an "acknowledgement of debt by the company whereby it undertakes to repay the amount covered by it and till then it undertakes further to pay interest thereon to the debenture holder".

"Any document which is a debenture in the common acceptance of the term or has the same legal effect" See: Halsbury's Laws of England, Vol. 4(1), Para 655, at p. 302.

Section 54 of the Companies Act, 1956 provides in respect of ‘Authentication of documents and proceedings’ which reads as follows:

“Save as otherwise expressly provided in this Act, a document or proceeding requiring authentication by a company may be signed by a director, the manager, the secretary or other authorised officer of the company, and need not be under its common seal.”

A debenture is generally understood to be a document usually but not necessarily under seal, acknowledging a debt and securing repayment thereof by mortgage or charge on the company’s property or undertaking, and providing that until repayment, interest will be paid thereon at a fixed rate payable usually, either half-yearly or yearly on fixed dates. See: Laxman Bharmaji v. Emperor, (1946) 16 Comp Cases 31; Also See: Edmonds v. Blaina Furnaces Co., (1887) 36 Ch 215. However, in British India Steam Navigation Co. v. Commissioners, (1881) 7 QBD 165, it was considered that a seal is not necessary. There, a debenture certificate which was merely signed by two directors and did not bear the company’s seal was held valid.

Regulation 84 of Table A of Schedule I to the Companies Act, 1956 reads as follows:

(1) The Board shall provide for the safe custody of the seal.

(2) The seal of the company shall not be affixed to any instrument except by the authority of a resolution of the Board or of a committee of the Board authorized by it in that behalf, and except in the presence of at least two directors and of the secretary or such other person as the Board may appoint for the purpose; and those two directors and the secretary or other person as aforesaid shall sign every instrument to which the seal of the company is so affixed in their presence.

In view of the above legal position, it can be deciphered that the questions as to who shall sign the debenture certificate and whether such certificate needs to have company’s seal would depend on what is provided in the articles of association of a company and further whether the Board or the duly constituted committee of the Board while passing any resolution for signing any Debenture certificate has also approved the affixation of the seal thereunto in terms of the articles of association. Therefore, if the company adopts Table A of Schedule I to the Companies Act, 1956, then Regulation 84 becomes applicable. Similarly, in the event that the company does not adopt Table A or Regulation 84, as the case may be, nor the company addresses the issue relating to the signing and sealing of debenture certificate in its articles, then Section 54 of the Companies Act, 1956 would be applicable.
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