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CS Executive · Company Law and Practice · Debt Instruments - Concepts

A trust deed for Orbit Power Ltd.'s debentures contains a clause exempting the debenture trustee from all liability, even where the trustee fails to show due care and diligence. Debenture-holders holding 80% in value of the total debentures later meet and agree to certain exemptions from the trustee's liability. What is the legal position?

The blanket clause is void, because a trust deed cannot exempt a trustee from liability for breach of trust where due care and diligence is not shown. However, exemptions agreed by debenture-holders holding at least three-fourths in value at a meeting held for that purpose are permitted.

  1. AThe clause is void, but exemptions agreed by holders of at least three-fourths in value at a meeting held for the purpose are permittedCorrect
  2. BThe clause is valid because the trust deed is a contract between the parties
  3. CThe clause is void and no exemption can ever be agreed, even by debenture-holders
  4. DThe clause is valid only if approved by a simple majority of the debenture-holders present

Explanation

Section 71(7) makes a trust deed provision void to the extent it exempts or indemnifies the trustee against liability for breach of trust where due care and diligence is not shown. The proviso allows the trustee's liability to be subject to exemptions agreed by debenture-holders holding not less than three-fourths in value at a meeting held for the purpose. Here 80% exceeds three-fourths, so such agreed exemptions are permitted, while the blanket clause stays void.

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