Lending, Investments, and Contracts
Image source - https://bit.ly/2ObWMtF

This article is written by Shriya Sehgal, a first-year student pursuing BBA.LLB. from Symbiosis Law School, Noida. This is an exhaustive article dealing with the nuances of borrowing, lending and investment made by the company under the light of the Companies Act, 2013 and related Acts.

Table of Contents

Borrowing

Borrowing is an external source of raising money. A company cannot borrow money until it is so authorised by its memorandum.

Under Section 179 of the Companies Act, 2013, the directors have the power to pass a resolution to borrow money and the power to borrow money can be delegated only by passing a resolution.

Under Section 180 of the Act, the directors are restricted from borrowing temporary loans that are obtained from the company’s banker. This section also defines temporary loans as the loans which are repayable on demand within 6 months from the date.

Unauthorised Borrowings

It refers to those borrowings which are made without the authority or beyond the amount prescribed in the article. Thus, borrowings beyond the prescribed authority are ultra vires (here, the authority can be either expressed or implied).

Consequences of unauthorised borrowings are:

  1. No Loan: An ultra vires lender has no legal debt against the company. Such borrowings are forbidden on the grounds of public policy.
  2. Injunction: If the money advanced by the lender to the company has not been spent then the lender can obtain an injunction to restrain the company from spending it.
  3. Subrogation: The total indebtedness of a company remains unaffected when a lawful debt has been paid off with an ultra vires loan. In this way, the ultra vires lender is protected against the loss and the burden of the company is not increased.
  4. Identification and Tracing: If the money of the ultra vires lender is with the company in its original form and is still capable of identification, then he can claim the money from the company.

Types of Borrowings

  1. Long term Borrowing: The funds are borrowed for a period of five years or more.
  2. Short term Borrowing: The funds are borrowed for a short period of up to one year. Meeting the working capital needs is the main purpose of these funds.
  3. Medium-term Borrowing: The funds are borrowed from a period of two to five years.
  4. Secured Borrowing: Under this, if a creditor has the re-course of assets of the company then a debt obligation is considered as a security.
  5. Unsecured Borrowing: Under this, the debt consists of financial obligation.
  6. Syndicated Borrowing: Under this, a group of leaders provides a large fund to the borrowers.
  7. Bilateral Borrowing: Under this, the borrowing is made from a particular financial institution, by a particular company. It is the opposite of syndicate borrowing.
  8. Private borrowing: Under this, the company takes a loan from the bank of a financial institution. It consists of bank loan obligations.
  9. Public Borrowing: Under this, all financial institutions are freely tradable on a public exchange.

Registration of mortgages and charges

The power to mortgage the company’s assets or to create a charge on them is included in their power to borrow. This is done to give some security to the lenders as they always insist on some type of security against the loan granted by them.[1] “Charges” have been defined under Section 2(16) of the Companies Act, 2013 as an interest that is created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage. Chapter VI (Section 77 to Section 87) of the Act deals with the ‘Registration of Charges’.

Registration of Charges

Section 77(1), Section 78 and Section 79 of the Companies Act, 2013 deals with the registration of charges. The application for registration of charges should be submitted to the Registrar of Companies (ROC) in a manner prescribed in the Companies (Registration of Charges) Rules, 2014.

Under this, a company creating a charge should register the particulars of the said charge together with a copy of the instrument, if any, creating or modifying the charge within thirty days of its creation or modification. The fee, Form No.CHG-1, in case of other than Debentures, or Form No.CHG-9, in case of debentures including rectification, signed by the company as well as the charge holder. This charge can be on the company’s property, assets or any of its undertakings. This charge can either be tangible or intangible situated in or outside India. 

Charges Requiring Registration

  1. A charge created for the purpose of securing any issue of the debenture.
  2. A charge on the uncalled share capital of the company.
  3. A charge on any immovable property. Such property can be situated anywhere or have an interest therein..
  4. A charge on any book debt of the company.
  5. A charge on any movable property of the company which is not a pledge.
  6. A floating charge on the undertaking or any property of the company including stock-in-trade.
  7. A charge on calls made but not paid.
  8. A charge on a ship or any share in a ship.
  9. A charge on intangible assets including goodwill, patent or trademark. [2] 

Extension of Time for Registration

Section 77(1) of the Act deals with the extension of time for filing particulars for registration of charge. The ROC may allow the registration within 300 days on the application of the company along with the payment of additional fees. Rule 4 provides that the application shall be made in Form No.CHG-1 and together with a declaration from the company signed by its secretary or director. 

In case the registration is not made within 300 days of such creation, the company can seek an extension of time for filing of the particulars for the registration of the charge from the Central Government under Section 87 of the Act and Rule 12. The Central Government can provide for an extension of time if the omission to register such charge, was accidental or due to some other sufficient cause. It is considered to be just and equitable to grant relief in this case.

Effects of Non-Registration of Charge

Section 77(3) of the Act deals with the effect of non-registration of charges. In case a charge is not registered with the Registrar of Companies then the charge shall not be taken into account by any creditor. However, nothing in this Section shall affect any obligation for the repayment of the money secured by a charge.

Therefore, it is advisable to make an application for registration of charges to avoid the unforeseeable hurdles.

Debentures

A debenture is an important tool for raising loan capital for a company. Although the money raised by a debenture becomes a part of the capital structure of the company but it doesn’t become a part of the share capital. It is in the form of a loan certificate which serves as evidence that the company is liable to pay a specified amount with interest. 

Debentures have been defined under Section 2(30) of the Act. It states that a debenture is inclusive of debenture stock, bonds or any other instrument of a company which cannot be used as evidence against a debt, whether constituting a charge on the assets of the company or not. Section 179 (3) of the Companies Act, 2013, gives the power to the board of directors to issue debentures on behalf of the company. Section 71 of the Companies Act, 2013, deals with the issuance of debentures along with the penalties for non-compliance of the same. 

Kinds of debenture

Basis of Convertibility

Non-convertible debentures

Non-convertible debentures refer to those debentures in which the debentures cannot be exchanged for equity shares in the company.

Partly convertible debentures

Partly convertible debentures can be divided into two portions, that is, convertible and non-convertible. The convertible portion can be converted into equity shares of the company at the expiry of the specified period whereas the non-convertible portion can be redeemed at the expiry of the specified period in terms of the issue.

Fully convertible debenture

Convertible debentures refer to those debentures in which the debenture-holders are given an option to exchange their debentures for equity shares in the company. Certain conditions and limitations are imposed on the period during which this option may be exercised.

Optionally convertible debentures

Optionally convertible debentures refer to those debentures which can be converted into shares at the option of the debenture-holder. The issuer decides the price for such conversion which is consented upon by both parties at the time of issue of the debenture.

Basis of Security

Secured debentures

Secured debentures refer to those debentures which are secured as there is a charge on the fixed assets of the company. The purpose of this instrument is to secure the debenture-holder in case of default made by the issuer for the payment of either the principal or interest amount. He can sell the assets of the issuer to recover the amount.

Section 71(3) of the Act provides that a company has the right to issue such an instrument subjected to the conditions of the government of India.

Unsecured debentures

Unsecured or naked debentures refer to those debentures which are unsecured in case there is a default in the payment of the principal or interest amount. The debenture-holder can not sell any assets for repayment.

https://lawsikho.com/course/diploma-advanced-contract-drafting-negotiation-dispute-resolution
             Click Above

Basis of Redeemability

Redeemable debentures

Redeemable debentures refer to those debentures which are issued with an option of redemption on demand or by a system of periodical drawing or by serving notice at a fixed date. Generally, debentures are redeemable in nature and after redemption, they can either be cancelled or can be reissued. The rights of the person who reissued the debentures shall remain the same as before.

Perpetual debentures

Perpetual or irredeemable debenture refers to those debentures in which there is no fixed time for the issuer to repay the amount. The debenture-holder cannot demand the payment of principal amount provided the company does not default in making payment of the interest regularly. 

Basis of Registration

Registered debentures

Registered debentures refer to those debentures which are made in the name of an individual who is registered in the register of debenture-holder and his/her name appears on the debenture certificate. Section 56 of the Act provides that these debentures can be transferred in a similar way as shares are transferred with necessary formalities.

Bearer debentures

Bearer debentures refer to those debentures which are negotiable and are made out to bearer. They are transferable by delivery like share warrants and the person to whom it is transferred becomes a ‘holder in due course’. Such a person has a right to recover and receive the principal and interest amount.

Register of debenture-holders

Section 88 of the Companies Act, 2013 provides for registration of members, etc.

Every company shall maintain a register of debenture-holders as well as a register of any other security holders. Rule 4 of the Companies (Management and Administration) Rules 2014 elaborates on the particulars in the register of debenture-holders and register of any other security holders.[3]

Every company which issues debentures or any other security should maintain a separate register of debenture-holders or security holders and for each type of debentures or other securities. It should be done in Form MGT – 2.

Index of Names

Rule 6 provides that every register maintained under Section 88(1) shall include an index of the names entered in the respective registers. The index should contain sufficient indication to enable the entries relating to a particular folio to be readily found. The company shall make the necessary entries in the index simultaneously with the entry for transfer or allotment of any security in such Register.

In case the number of members is less than fifty then the maintenance of the index is not necessary.

Authentication

The entries in the registers and the index included therein must be authenticated either by the company secretary of the company or by any other person who is authorised by the Board for the purpose. The date of the board resolution authorising the same shall be mentioned. 

Shareholder compared with debenture-holder

Chapter IV (Section 43 to Section 72) of the Act provides for share capital and debentures. The difference between a shareholder and a debenture-holder can be understood with the help of the following comparative table:

BASIS

SHAREHOLDER

DEBENTURE-HOLDER

Position in the company

They are the owners of the company.

They are the creditors of the company.

Obligation for payment

The dividend is paid only in case of profits.

Payment of interest on debenture is compulsory. It is to be paid irrespective of the profits.

General Meeting

They are authorised to attend the general meetings.

Generally, they have no right to attend the general meeting.

Security 

They are unsecured in nature.

They are secured and usually carry charges on assets of the company.

Payment 

They are paid at the last. They cannot be paid as long as the company is Going Concern.

They are paid before the shareholders.

Repayable or not

Share capital is not repaid provided legal formalities are done.

Exception: Redeemable preference shares. 

They are repayable in accordance with the terms of the issue. A fixed-rate of interest is to be paid.

Issuance at discount

There are restrictions on the issue of shares on discounts.

There are no restrictions on the issue of shares on discounts.

Control 

They have control over the administration of the company. 

They don’t have control over the administration of the company.

Forfeiture 

They can be forfeited for non-payment of calls.

They cannot be forfeited for non-payment of calls.

Floating charge

A floating charge can be understood as a security undertaken on the entire business’s assets, in respect of a particular debt by a creditor. This type of charge allows a business to borrow even in cases when it does not own a particular asset such as premises, which can act as a security. But a business can borrow against its assets such as plant and machinery, stock in trade, vehicles, etc. A company may also dispose of these assets without the permission of the creditor. So floating charges are not constant and the creditor is left with only the remaining assets of the business after all the sales/transactions.

The existence of floating charges is necessary to allow businesses to buy and sell business inputs and stocks without affecting their day-to-day operations. In this way, their business operations remain uninterrupted while they obtain funding by keeping a charge on their inventories as collateral. 

Chief characteristic

  • The value of the assets changes with the change in the value of the charge. Thus, it is a cover against all the assets of the business. 
  • The consent of the lender is not required to be obtained by the borrower. 
  • The floating charge allows unrestricted use of the asset held as security. The company can buy or sell the charged asset freely in the normal course of business. [4]

Floating Charge v Fixed Charge

The difference between floating charge and fixed charge can be understood with the help of following comparative table:

BASIS 

FLOATING CHARGE

FIXED CHARGE

Creation 

It is created on the entire company’s property whether present or future.

It is created on a particular asset.

Sale of asset under the charge

The assets subject to floating charges can be sold or disposed of.

The assets subject to a fixed charge cannot be dealt with by the business.

Conversion 

Floating charge may become a fixed charge under certain circumstances.

A fixed charge cannot become a floating charge in any case.

Against tangible/current asset

It is made against a current asset; the size and value of which keeps fluctuating like inventory etc.

It can be made against tangible assets like land, building, etc.

Crystallisation of floating charge

The process of conversion of floating charge security into fixed charge security is called the crystallisation of floating charge. The floating charge becomes a fixed charge under the following circumstances:

  1. The company is about to wind up.
  2. Non-payment of debts, that is, the debtor is unable to pay the debts.
  3. The business cannot be carried on if the creditor takes an action against the debtor for non-payment of debts and other circumstances mentioned under the provisions of the Companies Act, 2013.

Once the property is crystallised, the creditor (lender) obtains the right to possession of the crystallised security. The debtor (borrower) cannot dispose of crystallised security.

Debenture trust deed

Debenture trust deed refers to the document created by the company, where trustees are appointed to protect the interest of debenture-holders before they can be offered for public subscription. Section 71 of the Companies Act, 2013, provides for the debentures. 

When the debenture-holders don’t have the time to look after their interest in the properties mortgaged to them, they may appoint someone among themselves as the trustee for the supervision of their common interest. A trust deed is made under which some of them are appointed as trustees. The deed contains various details including rights and duties of the debenture-holders as well as the company. It is beneficial as it is the function of the trustees to watch the interest of the debenture-holders. The trustees are expected to act honestly and with due care and diligence.

The company offering debentures should abide by the following conditions

(i) No public issue of debt instruments should be prepared. But in the case of credit rating, the credit rating group is acquired and revealed in the tender deed.
(ii) The offer deed should consist of credit ratings for the last three years.
(iii) Requisite powers should be granted to debenture trustees. In this way, they can protect the interest of debenture-holders.
(iv) The creation of Debenture Redemption Reserve should be ensured by debenture trustees. [5] 

Form of a trust deed

The trust deed has to be in such form and executed within such time as may be prescribed. The Central Government may prescribe and regulate the above-mentioned things.

Supply of copies and inspection

Section 71(13) of the Companies Act, 2013 provides that the Central Government may prescribe for a procedure for debenture-holders to inspect the trust deeds and obtain copies of the same.

In other words, a copy of the trust deed should be available for inspection to the debenture-holders as well as other members. They can also get copies of the same on payment of prescribed fees.

Penalty

In case of unavailability of a copy of trust deed for inspection to a debenture-holder or any member, every officer in default shall be punishable for a certain amount of fine. The fine is imposed on an everyday basis.

Appointment of debenture trustees and their duties

Section 71(5) of the Companies Act provides for the appointment of debenture trustees. The appointment of debenture trustees should be made before making the debenture issue. The fact of the appointment and their consent to act as a trustee should be mentioned in the letter of offer or prospectus.

Person not qualified

(i) A person who favorably has possession of company shares.
(ii) If the person is beneficially entitled to the money, which is to be compensated by the company to the debenture trustees.
(iii) If the person has entered into any agreement of guarantee in respect of principal debts protected by the interest or debentures thereon.

Functions

Generally, the functions of debenture trustees are to protect the interest of the debenture-holders as well as redress their grievances. Other functions are as follows:

(i) They call for the periodic reports from the company.
(ii) They take possession of the trust property as per the conditions of the trust title deed.
(iii) They implement the safety measures in the interest of debenture-holders.
(iv) They create a charge in opposition to the assets as under debenture Trust Deed must be accomplished inside a month of the issue of allotment note and posting of debenture certificate.

NOTE: A debenture trustee may disqualify himself to act as a trustee by not abiding by the provisions of the set rules and regulations.

Duties

The duties of debenture trustees are as follows:

(i) To ensure that the assets of the company issuing debentures and of the guarantors are sufficient to discharge the principal amount at all times.

(ii) To ensure that the company doesn’t commit any breach of the debenture trust deed or covenants. 

(iii) To take reasonable and necessary steps in case of breach of covenants. 

(iv) To satisfy himself that the letter of offer or the prospectus doesn’t contain anything ‘inconsistent’ with the terms of the debenture.

(iv) To take care to call meetings of debenture-holders as and when it is required to be held.

Responsibility of company to create security and debenture redemption reserve 

The company issuing debentures has to create a Debenture Redemption Reserve. Till the time debentures are redeemed, adequate amounts have to be transferred to the fund from the profits every year. The amount so credited cannot be used for any other purpose. [6]

In the Companies (Share Capital and Debentures) Rules 2014, the requirement of creating Debenture Redemption Reserves has been changed as opposed to what was mentioned in the final rules issued by it initially. [7]

The company shall create a Debenture Redemption Reserve for the purpose of redemption of debentures, in accordance with the following conditions:

  1. The company shall create Debenture Redemption Reserve out of the profits of the company, available for the payment of the dividend.
  2. The company shall create Debenture Redemption Reserve equivalent to at least fifty percent of the amount raised through the debenture. The same should be issued before debenture redemption commences.

Remedies of debenture-holders

In case of a default by the company in repayment of the principal amount or interest amount, the remedies of a debenture-holder vary according to whether he is secured or unsecured. [8]

In case of a default, the position of an unsecured debenture-holder is the same as that of a creditor. The following remedies are available to him:

  1. He can file a suit against the company for the principal as well as for the interest.
  2. He can file a petition for the purpose of winding-up of the company and prove his debt as an unsecured creditor.
  3. If the company is under the process of winding up, they can claim their principal.

A secured debenture-holder, in addition to the above remedies has the following remedies as well:

(I) Where a trust deed must be executed

Sale of assets: The debenture trust deed or debenture provides for express powers to trustees for sale of assets. In case of the absence of such power, an order to sell can be obtained by making an application to the Court.

Foreclosure: The trustees can make an application to the Court for an order of foreclosure. It affects the borrower’s interest as the charge of the assets is completely extinguished and the lender becomes the owner of them. For an action of foreclosure, it is necessary for all debenture-holders of the class to be united.

Appointment of a receiver: the trustees may appoint a receiver as the trust deed provides so. In case of the absence of such power, an application to appoint one may be made to the Court. On the appointment of a Receiver, the assets become specifically charged in favour of the debenture-holders.

(II) Where no deed has been executed

Debenture-holders’ action: In such case, a debenture-holder can bring an action on behalf of himself and other debenture-holders of the same class, on default in payment of the principal or interest amount. They can ask for the following things in a debenture-holder’s action:
(i) a declaration that the debentures have a charge on the assets.
(ii) an account of what is owed to the debenture-holders including the number of assets, prior claims, etc.
(iii) an order of foreclosure or sale.
(iv) the appointment of a Receiver.

NOTE: If a debenture-holder owes a debt to the company which is insolvent, he cannot set off his debt against the liability he owes to the company.

Investment in other companies 

Section 186 of the Companies Act, 2013 talks about the loans and investments made by the company. Investing in other companies is one of the best ways to expand the company internationally and especially in a country like India. Buying or acquiring a company helps people to start their operations instantly as well as enables one to gain foreign expertise.

Companies invest in other companies for the following reasons:

  1. Hedging: Companies can invest in other companies to eliminate or reduce the risk of their businesses. For instance, a company of steel production can invest in iron extraction to eliminate the raw material price soaring.
  2. Liquidity management: A company generates money and wants to hold it for tax payment or until a chance is available to introduce a new product. So they can either hold it in banks or decide to buy shares for better returns and less inflation impact.
  3. Partnership on the Long-term: A company can be looking for mergers and acquisitions with other successful companies. In this way, they can gain control in the long run to form a new successful union.
  4. Eliminate Competition: A company may want to eliminate its competition by getting control of other companies. For instance, Maruti Suzuki bought shares of Hyundai in order to eliminate competition in the same sector.
  5. Speculation: A company has professional advisers and experts who think the other company’s price is undervalued so it decides to invest in that company to generate extra returns.[9]

Inter-corporate Loans and Investments

Section 186 of the Companies Act, 2013 provides for ‘Loans and Investments by a Company’ which corresponds with Section 372-A of the Companies Act, 1956. A company is entitled to provide another company with loans, investment, securities, and guarantees. The same can be done either with the consent of the board or that of the shareholders.

Register of investments-loans

Section 186(9) of the Act provides that the company has to keep and maintain a register including particulars about investments, loans, securities and guarantees as per the prescribed manner. The register should be maintained in the manner prescribed. The particulars are as follows:

  1. The name of the company.
  2. The date on which the loan or investment is made.
  3. The date on which security or guarantee has been provided against the loan or investment.
  4. The amount, purpose and terms of the loans, investment, securities, and guarantees.

The particulars should be entered in the register in chronological order within seven days of the making of the loans or investments.

Section 186 (10) of the Act provides that the register should be kept at the registered office of the company. The same should be open to inspection to members of such offices. They can also take extracts and demand copies of the same on the payment of a prescribed fee.

Rule-making power

The Central Government has the power to regulate the provisions of the mentioned Section in a prescribed manner. It is provided under sub-section 12 of the Act.

Exceptions

Section 186 doesn’t apply to certain transactions. Thus, this Section would not be applicable to any loans or guarantees given by:

  1. A banking company, an insurance company or a housing finance company for transactions made in the ordinary course of business.
  2. A company framed with the sole purpose of financing industrial enterprises or for providing infrastructure facilities.
  3. An organization that purchases the rights of shares.
  4. A company whose primary business is the acquisition of shares.
  5. A registered non-banking finance company that primarily focuses on the acquisition of securities.
  6. Unlisted companies are legally authorized by the Ministry or Department of the State or Central Government.
  7. A government company that operates defence production. [10]

Penalty provisions

There are majorly two types of default and are treated differently. One is the violation of the main provision and the second is default in maintaining the register. A very light penalty is provided in the matter of the register.

If a company contravenes or violates the provisions of the given Section, the company shall be punished with a fine of a minimum of twenty-five thousand rupees, which can be extended to five lakh rupees. The officers of the company who are in default will also be punished with imprisonment for a term of maximum two years along with a minimum fine of twenty thousand rupees, which can be extended to one lakh rupees.

Loans

For the purpose of the given Section ‘loan’ includes debentures or any other deposits of money made by one company with another company. Here, the depositee company should not be a banking company.

In case of default in payment of interest, the company is prohibited from making any inter-corporate loan, guarantee or security. Such prohibition remains effective until it is addressed by the company. 

Free reserves

Free reserves refer to those reserves which are free for distribution as a dividend, as per the latest audited balance sheet of the company. It also includes the amount of the premium received on the issue of securities but doesn’t include the share application money.

Investment in one’s own name

Section 187 of the Companies Act, 2013 deals with ‘Investment of company to be held in its own name.’ which corresponds with Section 49 of the Companies Act, 1956.

This Section requires all the investments made by a company on its own behalf to be held by the company in its own name. Where a company advances money by way of a loan to another company in order to enable the borrowing company to make investments in its shares, that doesn’t amount to investment in its shares by the lending company in another company’s name. If the company’s director or nominee becomes a director in another company and is required to hold qualification shares then they may be held jointly in the name of the company and such director. 

There are certain exceptions to this provision. These are stated as follows:

  1. The section does not apply to the investments that are made by such a company whose primary business is to buy and sell securities or shares.
  2. A company can hold shares in the name of one or more nominees in its subsidiary company if the number of members is going below the statutory minimum.
  3. A company can deposit its shares or securities with bankers for the collection of dividends or facilitate their transfer. In case the transfer is not effected within the period of six months, they should be held by the company in its own name. 
  4. A company can transfer its shares or securities for the performance of an obligation or as security for a loan to another person.
  5. A company can hold investments in the name of a depository. This can be done when the investments are in the form of securities held by the company as a beneficial owner. 

In order to enable their identification, such exceptional transactions have to be entered in a register.

If a company contravenes or violates a provision of this section:

  1. The company should be punished with a minimum fine of twenty – five thousand rupees, which can be extended to twenty-five lakh rupees.
  2. The defaulting officers of the company can be punished with imprisonment for a term of a maximum of six months or a minimum fine of twenty-five thousand rupees, which can be extended to one lakh rupees; or both.

Execution of deeds

Formal deeds can be executed only through the power of attorney. A company can appoint any person as its attorney, by writing under a common seal. The power of attorney has the power to execute deeds on behalf of the company and such deed binds the company in the same way as it were under the company’s seal. The seal is a physical impression upon the documents of the company which can be used by the authority of the directors or a committee authorised by the directors.

A company transacting business in foreign countries may have in accordance with its articles its official seal in a foreign country. Such seal is an exact copy of the common seal of the company which includes the name of the pace where it is to be used.

NOTE: Execution of deed and use of seal was mentioned under Section 48 of the Companies Act, 1956 which was repealed by the 2013 Act.

Authentication of documents and proceedings

Section 21 of the Companies Act, 2013 deals with ‘Authentication of documents, proceedings, and contracts’ which corresponds with Section 54 of the Companies Act, 1956. Also, Companies (Registration Offices and Fees) Rules, 2014, provides that the document needs to be authenticated by some professional or Individual.

Certain documents or proceedings are required to be authenticated by the company. Such documents need to be signed by any director, or secretary, or manager, or any other person who is authorised by the officer. In such cases, a common seal is not necessary. When a document is signed by an authorised officer who is acting in the course of his duties in the business of the company then his signature constitutes a representation made by the company and signed by it.

For instance, a suit for recovery of insurance money was filed by the managing partner of the complainant company. He could not produce any authentic document showing his authority to proceed on behalf of the company. Thus, the suit was not allowed. [11]

Bill of exchange and promissory note

Section 22 of the Companies Act, 2013 deals with ‘Execution of bills of exchange, etc.’ which corresponds with Section 47 of the Companies Act, 1956. The section includes the bill of exchange, hundi, and a promissory note.

BILL OF EXCHANGE

HUNDI

PROMISSORY NOTE

A bill of exchange is an instrument that creates an obligation on the debtor to pay a certain amount within a stipulated period of time. In order to call it valid or applicable it needs to be accepted. The bill of exchange is issued by the creditor.

Hundi is a negotiable instrument that is available in various vernacular languages in the country. They are somehow related to the bills of exchange, but from the shape and content, they look like promissory notes.[12]

A promissory note is a promise to pay a certain amount of money within a stipulated period of time. In order to be called valid or applicable it need not be accepted. The promissory note is issued by the debtor.

The mode of authentication is considered to be necessary in the case of legal persons. Legal persons are those persons who cannot act by themselves or act only through representatives. In order to bind the company explicitly, the signature must be of an authorised person and the name of the company should be mentioned. Even implied authority is given to a person so executing the bill of exchange etc. shall also bind the company. Whether the person signing is actually authorised or not depends upon the arrangements of the company with its officers.

Liability for the dishonour of cheques

Section 6 of the Indian Negotiable Instruments Act, 1882 defines the term ‘cheque’ as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. It also includes the cheque in an electronic form.

The following individual or bodies can be prosecuted under Section 138 of the Negotiable Instruments Act, 1881 for the dishonour of the company’s cheque:

  1. The company
  2. Every person who was in charge of the company’s affairs at the time of the issue of cheque
  3. Every other officer whose negligence brought about the debacle

According to the law, not all the directors of a company are liable in case of dishonour of cheques. The burden of proof is on the complainant. He has to prove that a director is responsible for the conduct of the affairs of the company in order to hold him liable. In case of absence of a specific declaration in the complaint, no director is liable under Section 138 of the Negotiable Instruments Act, 1881 unless and until he is a Managing Director or Joint Managing Director or a signatory to the Cheque. However, the directors can either undergo a trial before the Magistrate Court or approach the High Court at the earliest before the commencement of the trial in order to quash the proceedings against him and establish the fact that they are not guilty.

The following ingredients need to be fulfilled to constitute an offence under Section 138 of the Act: 

  1. Cheque should be issued for the discharge of any debt or other liability, wholly or partly. 
  2. The cheque should be presented either within the period of six months or within the period of its validity; whichever is earlier.
  3. The payee in due course should issue a notice to the drawer within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid. The notice must be in writing.
  4. The drawer should have failed to pay the cheque amount within fifteen days of the receipt of the notice after the receipt of the said notice by the payee in due course.
  5. In case of non-payment of the amount due on the dishonoured cheque, the complaint should have been filed before a Metropolitan Magistrate or a Judicial Magistrate within one month from the date of expiry of the grace time of fifteen days. [12]

NOTE: Offences under the Act are compoundable

Conclusion

In order to survive as well as progress, a company needs to borrow, lend and invest; and to do this the company needs to follow certain rules and procedures which are governed by the Companies Act, 2013 and related Acts. These acts also prescribe the remedies in case of violation of the rules or deviation from the prescribed manner. 

References

  1. Company Law, Avtar Singh (Fifteenth Edition) 
  2. https://www.slideshare.net/Mbinani/chapter-vi-registration-of-charges-the-companies-act-2013 
  3. https://aishmghrana.me/2014/06/13/register-of-debenture-holders-etc/ 
  4. https://efinancemanagement.com/sources-of-finance/floating-charge 
  5. https://hairstylingtools.knoji.com/debenture-trust-deed/ 
  6. http://www.companiesact.in/Companies-Act-2013/News-Details/472/Provisions%20relating%20to%20creation%20of%20%20Debenture%20Redemption%20Reserve%20stand%20changed 
  7. http://www.companiesact.in/Companies-Act-2013/News-Details/472/Provisions%20relating%20to%20creation%20of%20%20Debenture%20Redemption%20Reserve%20stand%20changed 
  8. http://companylaw0.blogspot.com/2014/04/121010-remedies-of-debentureholders.html 
  9. https://www.quora.com/Why-do-companies-invest-in-other-companies
  10. https://www.indiafilings.com/learn/inter-corporate-loan-and-investment/
  11. Company Law, Avtar Singh (Fifteenth Edition), Pg. 488
  12. https://www.toppr.com/guides/business-laws-cs/negotiable-instruments-act/hundi/

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Did you find this blog post helpful? Subscribe so that you never miss another post! Just complete this form…

1 COMMENT

  1. […] [xv]https://blog.ipleaders.in/borrowing-lending-investments-and-contracts/ (last accessed on 31/01/2020) […]

LEAVE A REPLY