6.3 Company debentures

Types of debentures

Secured debentures

These are secured by some charge on the property of the company. This charge may be fixed or floating hence there may be fixed or floating charge debentures.

Unsecured debenture (naked)

They are not secured by any charge on the assets of the company. The holders of such debentures are like ordinary unsecured creditors of the company

Registered debentures

These are debentures that are payable to the registered holder. A registered holder is one whose name appears both on the debenture certificate and in the company’s register of debenture holders. The holders of such debentures can transfer them like shares but such transfer must be registered. A registered debenture contains the following clauses:

• A covenant to pay the principal sum
• A covenant to pay interest
• A description of the charge on the company’s undertaking or assets
• A statement that it is issued subject to the conditions endorsed off it.

Redeemable debentures

This provides for the repayment of the principle sum on a specified date or on demand.

Irredeemable (perpetual) debentures

In this case, the issuing company does not fix a date by which they should be redeemed and the holder of such debenture s cannot demand payment from the company so long as it is going concern. They are normally payable on winding up or some serious default by the company.

Bearer (unregistered) debentures

These are debentures which are payable to bearer. They are regarded as negotiable instruments and are transferable by delivery and therefore a bona fide transferee for value is not affected by the defect of title of the previous holders.

Convertible debentures

They contain an option entitling the holder to convert his debt at times stated in the debenture to ordinary or preference shares of the company at a stated rate of exchange. If the holder exercises this right he ceases to be a lender of the company and becomes a member.