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CA Intermediate · Corporate and Other Laws · Share Capital and Debentures

Orchid Foods Ltd issued 10,000 debentures of Rs 1,000 each to the public, secured by a charge on its factory. The company has not appointed a debenture trustee, saying that the issue was made to fewer than 500 persons. Debenture holders are unhappy as interest has not been paid for 8 months. Which statement reflects the correct legal position?

The company must appoint a debenture trustee before opening a public issue of secured debentures and execute the trust deed within the prescribed period. The number of subscribers does not exempt it, and the duty exists before any default. Failure to appoint a trustee breaches the Companies Act.

  1. AA public issue of secured debentures requires the company to appoint a debenture trustee before the issue is opened for subscription, and the trust deed must be executed within the prescribed timeCorrect
  2. BAppointment of a trustee is optional where fewer than 500 persons subscribe
  3. CA trustee is needed only for unsecured debentures
  4. DDebenture holders alone may appoint a trustee after default occurs, and the company has no duty before default

Explanation

Under the Companies Act, a company offering debentures with a prospectus must appoint a debenture trustee before issue invitation, and execute a trust deed within the prescribed time after allotment. The 500-person test applies for different purposes, not for exemption from trustee appointment. Trustee requirement concerns secured debentures, so options B, C and D misstate the law.

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