12.

Debentures Page 240

Ch # 12: Debentures

After going through the concepts of share capital and miscellaneous provisions related to
that, we are moving towards the Debt part (means debentures). As per the definition,
debentures are any security of a company evidencing debt.

This chapter shall be highlighting the provisions regarding debentures and different
securities provided by the company to its lenders in connection with these debentures.
This chapter shall also be highlighting the procedures to secure a loan when it’s in the
form of a series of debentures secured through (most probably) a single property.
Regarding the same issue, we shall be covering the concept of trustee and its rights &
obligations.

Moreover we shall also be covering the concept of some special form of debentures that
are not based on interest (rather they contribute in profit or loses of a company or a
venture). Whenever company issues such a debenture that is other than traditional way
of issuing, there exists a risk of miscommunication or misunderstanding regarding the
terms of these debentures. Section 66 of the Companies Act 2017 provides guidance to
secure the issuer as well as the investor in this regard.

Main Contents of the Chapter

 Introduction to Debentures
 Mortgages and Charges
 Series of debentures and the role of Trustee
 Securities Not Based on Interest

Syllabus Area Covered by the chapter

A 1.1: Companies Act, 2017 (Section 30, 63, 65, 66, 100-117)
A 1.4: Companies (General Provisions & Forms) Regulations, 2018 - Regulation 18

Level of Completeness:
100% (except transitional provisions and save as provided in a tutor note)
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Introduction to Debentures

Debenture – 2(24)
Includes debenture stock, bonds, term finance certificates or any other instrument of a company
evidencing a debt, whether constituting a mortgage or charge on the assets of the company or not;

Issue of debentures (Sec 63)

 A company may issue different kinds of debentures having different classes, rights and
privileges as may be specified.
 The rights, privileges and the procedure for the following must be specified
- Procedure for securing the issue of debentures
- Form of debenture trust deed
- Procedure for debenture holders to inspect the trust deed and to obtain a copy thereof.

Implied power to borrow (Sec 30)

MOA and AOA of a company shall be deemed to include the power to enter into any arrangement
for obtaining loans, advances, finances or credit, as defined in Banking Companies Ordinance,
1962 and to issue other securities not based on interest for raising resources from a scheduled
bank, a financial institution or general public.

Type of Securities

Mortgage or charge - 2(42)

An interest or lien created on the property or assets of a company or any of its undertakings or both as
security;

Pledge is ‘bailment’ of goods as security for repayment of a debt or performance

Moveable assets => Physical possession with lender

Mortgage is a “transfer of an interest in specific immovable property for the purpose of

Tutor securing the payment of money advanced or to be advanced by way of loan, an existing or
Note future debt or performance of an engagement which may give rise to a financial liability.
Immoveable assets =>Transfer of Title to lender
Charge is a security for payment of a debt or other obligation that does not pass ‘title of
property’ or any right to its possession to the person to whom the charge is given.
Any asset => A right to take possession in event of default to pay the loan

Fixed and Floating charge

Fixed Charge is created on specific assets (e.g Electric Motor – Model # 34658).. In this case
that particular asset cannot be sold; Floating charge is created on class of assets (e.g. stock –
not any specific item). In this case company can sell any asset that belongs to that class)
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Mortgages and Charges

Requirements to register a mortgage or charge

Certain mortgages and charges to be void if not registered (Sec 100)

 Following pledges, mortgages and charges created by Co shall be registered by filing copy of
instrument + Particulars with registrar in specified manner within 30 days after creation
- For purpose of securing any issue of debentures
- On any immovable property wherever situate/any interest therein
- On any book debts of Company
- On any movable property of Co
- Floating charge on undertaking/property of Co including stock.
- On a ship or aircraft, or any share in a ship or aircraft
- On goodwill or on any intellectual property;
- Based on agreement for the issue of any instrument in nature of redeemable capital; or
- Based on conditional sale agreement, lease financing, hire-purchase, sale and lease back,
and retention of title, for acquisition of machinery, equipment or other goods:
 Registrar shall issue a certificate of registration under his signatures or his official seal in
such form and in such manner as may be specified.
 No mortgage or charge created by a company shall be taken into account by the liquidator
or any other creditor unless it is duly registered.

Special Case Duty to register it within 30 days after:

Mortgage / charge created outside Date on which instrument or copy could, in due course
Pakistan comprising property of post, and if dispatched with due diligence, have been
situated outside Pakistan received in Pakistan
Mortgage / charge created in Pak Creation; despite further proceedings may be
comprising property outside Pak necessary to make it valid according to law of that
country
Co acquires property (subject to a Date of acquisition
charge and charge not registered)

 Where a negotiable instrument has been given to secure the payment of any book debts,
Deposit of instrument to Co shall not be treated as a mortgage/charge on those debts
 Where any mortgage/charge is registered; any person acquiring such property/any part
/any share or interest therein, shall be deemed to have notice of mortgage/charge
 Any subsequent registration of a mortgage or charge shall not prejudice any right acquired
in respect of any property before the mortgage or charge is actually registered.
 This section shall not prejudice any contract or obligation for repayment of money secured.
On any modification in such mortgage or charge, it is duty of Co to send registrar particulars
of such modification + copy of instrument evidencing modification (Sec 106)
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Duty of company and right of interested party as regard registration (Sec 105)

 Prime responsibility of registration with registrar is on Co

 However registration may be effected on application of any person interested therein.
 Such person entitled to recover from Co the amount of any fees properly paid by him

Rectification of register of mortgages (sec 108)

 SECP may (on application of Co/interested person) on terms and conditions seem just and
expedient, order for extension in time of registration or rectification on being satisfied that:
- Omission to register a mortgage/charge within 30 days, or
- Omission or mis-statement of any particular, or
was accidental or due to inadvertence or to some other sufficient cause, or is not prejudicial
to creditors/shareholders, or any other grounds just and equitable
 Certified copy of order of SECP shall be filed with registrar within 7 days of such order
 Extension in time shall not prejudice any rights acquired in respect of property concerned
prior to the time when the mortgage or charge is actually registered.

Payment or Satisfaction of Debenture

Company to report satisfaction of charge (Sec 109, 111)

 Duty of Company to give intimation to registrar of payment/satisfaction, in full, of any
registered charge or mortgage within 30 days from date of payment /satisfaction.
 Registrar shall then sent notice to holder of charge/mortgage to show cause, within fixed
time ≤ 14 days, why payment or satisfaction of charge/mortgage should not be recorded
- If no cause shown; Registrar shall order that a memorandum of satisfaction be entered in
register and shall furnish Co with a copy (if required by it)
- If cause is shown; Registrar shall record a note to that effect in register, and shall inform
Company about it
 Registrar shall not send above notice, if a No Objection Certificate (NOC) on behalf of the
holder of the mortgage or charge is furnished by the company
 If a company fails to file the particulars of satisfaction of mortgage or charge within 30 days,
required particulars may be submitted with the additional fee + Level 1 penalty

Power of registrar to make entries in absence of intimation from Company (sec 110)

 Registrar may, if satisfied by evidence (without intimation by company) make entries in

register that
- Debt has been paid or satisfied in whole or in part, or
- Part of the property or undertaking charged has been released from charge or has ceased
to form part of Co's property or undertaking
 Registrar shall also inform the parties concerned
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Register and records of mortgages and charges

Maintained by Registrar (Sec 102 & 103)

 Registrar shall, in respect of every company, keep a register containing particulars of the
charges registered in such form and in such manner as may be specified.
 Register shall be open to inspection by a person on payment of prescribed fees
 Registrar shall keep chronological index, in specified form containing specified particulars

Maintained by the Company (sec 112)

 Every company shall maintain a register of mortgages and charges in specified manner
 Register and copies of instrument, creating any mortgage and charge or modification thereof,
shall be open to inspection of:
- Any member or creditor of the company without fee; and
- Any other person on payment of such fee as may be fixed by company
 Non compliance of this section shall attract a penalty of level 1
 In addition to above penalty, registrar may by order compel an immediate inspection

Every company shall keep at registered office, a copy of every instrument creating any mortgage
or charge or evidencing modification of the terms or conditions thereof (Sec 107).
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Series of debentures and the role of Trustee

Series of debentures entitling holders pari passu

Particulars in case of series of debentures (Sec 101)

 File with registrar within 30 days after execution of deed containing charge or execution of
any debentures of the series (if there is no such deed) following particulars + copy of deed
verified in prescribed manner, or one of the debentures of series (if no such deed):
- Total amount secured by whole series;
- Dates of resolutions authorizing issue of the series and date of the covering deed, if any,
by which the security is created or defined;
- A general description of the property charged; and
- Names of the trustees, if any, for the debenture-holders; together with a copy of the deed
verified in the specified manner containing the charge
 Registrar shall, on payment of prescribed fee, enter those particulars in register:
 Where more than one issue is made of debentures in series, there shall be filed with registrar
for entry in register particulars of date and amount of each issue,
(Omission to do this shall not affect validity of debentures issued)

Reg # 18 - Companies (General Provisions & Forms) Regulations, 2018

Verification of copies for purposes of sections 100, 101 and 106.
A copy of every such instrument or deed evidencing any charge or mortgage or pledge shall
be verified (to be a true copy) as follows:
For property relates, wholly or partly, to property situated in Pakistan
- By an affidavit of an authorized officer; or
- By a certification of the public officer having custody of the original document.
For property situated outside Pakistan
- By an affidavit of an authorized officer of company, or
- By an affidavit of a person interested in the mortgage or charge or pledge on behalf of any
person other than the company

Endorsement of certificate of registration on debenture or the certificate of debenture

stock (sec 104)

 The company shall cause a copy of every certificate of registration to be endorsed on every
debenture or certificate of debenture stock which is issued by company and is secured by it
 If the certificate of debenture or debenture stock is issued in book-entry form, appropriate
disclosure shall be made in the manner as may be specified
 Company not required endorsing instruments issued before mortgage/charge was created.
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Powers and liabilities of trustee (Sec 65)

 Trustee nominated or appointed under trust-deed (if empowered by deed) shall have right
to sue for all redemption monies and interest in following cases:
- Co as mortgagor binds himself to repay debenture loan or pay accrued interest, or both,
in the manner provided on the due date;
- Mortgaged property is wholly or partially destroyed or security is rendered insufficient
(other than wrongful act or default of issuer) and trustee has given Co a reasonable
opportunity of providing further security adequate to render whole security sufficient
and Co has failed to do so;
- Trustee is deprived of whole or part of security by wrongful act / default of Co
- Trustee entitled to take possession of property and same not provided by Co
 Where a suit is brought, the Court may at its discretion stay the suit and all proceedings
therein, until the trustee has exhausted all his available remedies against mortgaged
property unless trustee abandons his security and, if necessary, retransfers property.
 Trustee or any person acting on his behalf (if authorised by trust-deed) shall sell, without
intervention of Court, mortgaged property or any part thereof in default of repayment
schedule of Principal or interest on the due date by Co.

Subsections deliberately not covered in notes to section 65

Subsections 4 to 7, being mere interpretation and savings of the bare law, are not covered in
these notes. If any student wishes to ensure completeness in this section, he or she may consult
Note bare law for the same.

Moreover sec 64 has not been discussed in this chapter considering its relevance with winding
up (priority of payments)
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Receivers and Managers

Appointment of receiver or manager (Sec 113)

 In order to ensure enforcement of security of a company’s property, a receiver or manager

may be appointed by an order or under any powers contained in any instrument
 A notice of the fact shall be filed with the registrar within 7 days of order or appointment.
 Where a receiver or manager ceases to act registrar shall be intimated within 7 days.
 Registrar shall enter the same in the register of mortgages and charges.
 Any violation this section shall be an offence liable to a penalty of level 1.

Filing of accounts of receiver or manager (Sec 114)

 Every receiver who has taken possession shall within 30 days of expiry of every 180 days
while he remains in possession, and also within 30 days on ceasing to act as receiver, file
with registrar an abstract in specified form of his receipts and payments during that period
 Receiver shall also, within 15 days of ceasing to act as receiver, file with the registrar notice
to that effect, and registrar shall enter the notice in the register of mortgages and charges.
 Where a receiver has been appointed, every invoice, order for goods, or business letter
issued by or on behalf of the company or receiver, containing company’s name, shall contain
a statement that a receiver has been appointed.
 Above provisions shall apply to managers, under powers of instrument, in same manner
 Any contravention by receiver or manager shall be an offence liable to a penalty of level 1.

Disqualification for appointment as receiver or manager (Sec 115)

 Minor;
 Person who is of unsound mind and stands so declared by a competent court;
 A body corporate;
 A director of the company;
 An un-discharged insolvent unless he is granted leave by the court by which he has been
adjudged an insolvent; or
 A person disqualified by a Court from being concerned with or taking part in management
of the company in any other way, unless he is granted leave by the Court.

Application to Court (Sec 116)

 A receiver or manager may apply to Court for directions in relation to any particular matter
 Court may give such direction or make such order as the Court thinks just.
 A receiver or manager shall, to the same extent as if he had been appointed by order of a
Court be personally liable on any contract entered into by him, except in so far as contract
otherwise provides, and entitled in respect of that liability to indemnity out of the assets;
12. Debentures Page 248

Power of Court to fix remuneration of receiver or manager (Sec 117)

 Court may, on application by receiver or manager, by order fix the remuneration

 Amount of remuneration shall not exceed such limits as may be specified.
 The power of the Court shall:
- Extend to fixing the remuneration for any period before making order or application;
- Be exercisable even if receiver/manager had died or ceased before order/application;
- Extend to requiring him, if deemed fit, to account for the excess or such part as may be
specified in the order (if receiver/manager has been paid for any period before order)
 On an application made by liquidator, receiver, manager or registrar; Court may vary or
amend an order made under this section and issue directions to the receiver respecting his
duties and functions or any other matter as it may deem expedient:
 Order shall not be varied to increase the amount of remuneration payable to any person.
12. Debentures Page 249

Securities and Redeemable Capital - Not Based on Interest (Sec 66)

 A company may by public offer or, upon terms and conditions contained in an agreement,
issue any instrument in nature of redeemable capital in consideration of funds, moneys or
accommodations, whether in cash or in specie or against any promise, guarantee,
undertaking or indemnity issued to or in favour of or for the benefit of the company.
 It can be issued to one or more scheduled banks, financial institutions or any other person
notified by SECP (see circulars) either severally, jointly or through their syndicate
 Such agreement may include (in addition to others) all or any of following matters
- Mode and basis of repayment by Co within a certain time period;
- Arrangement for sharing of profit and loss;
- Creation of "participation reserve” by Co in manner provided in agreement for issue of
participatory redeemable capital in which all financers shall participate for interim &
final adjustment on maturity in accordance with terms & conditions
- If net loss on maturity; Right of holders to convert outstanding balance of capital/ part
into ordinary shares of Co at break-up price calculated in prescribed manner.
 Terms & conditions and rights for issue of such instruments not be challenged by the
company or any of its shareholders (unless conflicting with Act/MOA/AOA/Resolutions)
 The provision of this Act relating to the creation, issue, increase or decrease of the capital
shall not apply to the redeemable capital.

Redeemable Capital – 2(55)

 Includes sukuk and other forms of finances obtained on the basis of
- Participation term certificate (PTC)
- Musharika certificate
- Term finance certificate (TFC), or
- Any other security or obligation not based on interest
representing an instrument or a certificate of specified denomination, called the face value or
nominal value, evidencing investment of the holder in the capital of the company other than share
capital, on terms and conditions of the agreement for the issue of such instrument or certificate; or
 Such other certificate or instrument as the Minister of FG may, by notification in the official Gazette,
specify for the purpose (SECP Circular - Commercial Paper specified as redeemable capital)

Here “sukuk” represents investment in certificates of equal nominal value representing undivided
shares in ownership of tangible assets of particular project or specific investment activity, usufruct and
services;

Other persons specified for purpose of issue of these securities

 TFC in nature of redeemable capital may be issued to “Pension Fund trusts”
 Investment Finance Companies granted license by FG
 Registered Corporate Brokers
 Mutual Funds
 Trusts
Circulars  Provident Funds & Gratuity Funds