Dividends, Debentures & Floating Charge
Dividends
One of the main objectives of commercial enterprises is to earn profits that are disturbed among shareholders by way of ‘dividend’. In commercial usage, ‘dividend’ is the share of the Company’s profits distributed among the members. Under Section 2(14A) of the Companies Act, 1956, ‘dividend’ includes any interim dividend.
In Commr. Of Income-tax v Girdhadas & Co, it was observed that the term ‘dividend’ has two meanings:
- as applied to a company that is a going concern, it ordinarily means the portion of the profits of the company which is allocated to the holders of shares in the company
- in the case of a winding-up, it means a division of the realized assets among the creditors and contributories according to their respective rights
Rules regarding dividend
- Resolution at the annual general meetings-the dividend is declared by a company by a resolution passed at the annual general meetings. The Board of directors determines the rate of dividend. The rate determined by the Board is to be sanctioned by the members of the company in a general meeting. The members may reduce the rate recommended by the Board but they cannot increase it.
- Payment of dividend in proportion to paid-up capital (Section 93)-a company may, if authorized by its Articles, pay dividends in proportion to the amount paid-up on each share. In the absence of such a clause in the Articles, members are entitled to dividends in proportion to the nominal value of the shares and not in proportion to the amounts paid thereon.
- Dividend to be paid only out of profits( Section 205)–the dividend can be declared or paid by a company for any financial year only-
- (a) out of profits of the company for that year arrived at after providing for depreciation in the manner laid down in the Act, or
- (b) out of the profits of the company for any previous financial year or years arrived at after providing for depreciation and remaining undistributed, or
- (c) out of both, or
- (d) out of money provided by the Central Government or a State Government for the payment of dividends in pursuance of a guarantee given by the Government
- Unpaid dividend to be transferred to special dividend account-(Section 205-A)– where a dividend has been declared by a company but has not been paid to or claimed by any shareholder within a period of 30 days from the date of declaration, the company shall, within 7 days from the date of expiry of the 30 days, transfer the unpaid or unclaimed dividend to a special account with any scheduled bank to be called “unpaid dividend account of….company limited/company private limited”
- If any amount remains unpaid or unclaimed for 7 years from the date of such transfer, it should be transferred to “Investor Education & Protection Fund”
- Dividend to be paid to the registered shareholder-Section 206– the dividend shall be paid only to
- (a) to the registered shareholder or to his order or to his bankers,
- (b) in case a share warrant has been issued, to the bearer of such warrant or to his bankers.
7. Penalty for defaulting directors-section 207–every director, who is knowingly a party to the default, is punishable with simple imprisonment up to 3 years and liable to a fine of Rs. 1000 for every day during which such default continues ad the company shall be liable to pay interest @ 18% p.a during the period of default.
Debentures
The most usual form of borrowing by a company is by the issue of debentures. According to Section 2(12), ‘debenture’ includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. Section 2(12) however does not explain as to what a debenture really is.
‘Debenture’ means a document that either creates a debt or acknowledges it.-Levy v Abercorris Slate & Slab Co.
Kinds of debentures
Classification according to negotiability
- Bearer debentures/unregistered debentures-these debentures are payable to the bearer. These are regarded as negotiable instruments and are transferable by delivery and a bona fide transferee for value is not affected by the defect in the title of the prior holder.
- Registered debentures-these are debentures that are payable to the registered holders. A holder is one whose name appears both on the debenture certificate and in the company’s register of debentures.
Classification according to security
- Secured debentures-debentures which create some charge on the property of the company are known as secured debentures. The charge may be a fixed charge or floating charge.
- Unsecured or naked debentures.-debentures which do not create any charge on the assets of the company are known as unsecured debentures. The holders of these debentures like ordinary unsecured creditors may sue the company for recovery of debt.
Classification according to permanence
- Redeemable debentures-debentures are usually issued on the condition that they shall be redeemed after a certain period. Such debentures are known as redeemable debentures. They may be re-issued after redemption in accordance with the provisions of Section 121.
- Irredeemable or perpetual debentures-when debentures are irredeemable, they are called perpetual debentures.
Classification according to convertibility
- Convertible debentures-these debentures give an option to the holders to convert them into preference or equity shares at stated rates of exchange, after a certain period.
- Non-convertible debentures-these debentures do not give any option to their holders to convert them into preference or equity shares. They are to be duly paid as and when they mature.
Classification according to priority
- First debentures-these are the debentures that are to be repaid in priority to other debentures which may be subsequently issued.
- Second debentures-these are the debentures that are to be paid after the ‘first debentures’ have been redeemed.
Remedies of debenture holders
The remedies of a debenture-holder of a company vary according to whether he is secured or unsecured. An unsecured debenture-holder is in exactly the same position as an ordinary trade creditor. Like any other unsecured creditor he has two remedies-
- He may sue for his principal and interest
- He may, if he wishes, a petition under Section 439 for the winding up of the company by the Court on the ground that the company is unable to pay its debts.
A secured debenture-holder has both the above remedies in addition to the following-
1. Debenture-holder’s action-he may sue on behalf of himself and all other debenture-holders of the same class to obtain payment and enforce his security by sale. If several debenture holders sue separately, the Court can consolidate their suits into one.
2. Appointment of receiver-he may appoint a receiver if the conditions which give him power to do so are fulfilled or apply to the Court in a debenture-holders action to appoint one.
3. Foreclosure-he may apply to the Court for foreclosure of the company’s right to redeem the debentures. Foreclosure is a process by which the mortgagor, failing to repay the money lent on the security of property, is compelled to forfeit his right to redeem the property.
4. Sale-he may sell the property charged as security if an express power to do so is contained in the terms of issue of debentures. He may also have the property sold through trustees if such power is given by the debenture trust deed.
5. Proof of balance-if the company is insolvent and his security is insufficient, he may value his security and prove the balance. In the alternative, he may surrender his security and prove the whole amount of his debt.
Floating Charge
A floating charge is an equitable charge which is created on some class of property that is constantly changing, e.g, a charge on stock-in-trade, trade debtors, etc. The company can deal in such property in the normal course of its business until the charge becomes fixed on the happening of an event. The main idea behind the floating charge is to allow the company to carry on its business in the ordinary course as if no charge had been created.
Debentures usually create a floating charge on the assets of a company.
Characteristics
In Re Yorkshire Woolcombers’ Ass. Ltd-
- it is a charge on a class of assets of the company both present and future
- that class of assets is one which, in the ordinary course of the business of the company, is changing from time to time
- It is contemplated by the charge that, until some steps are taken by or on behalf of those interested in the charge, the company may carry on its business in an ordinary way.
Consequences of a floating charge
The company can-
- deal in the property on which a floating chare is created, till the charge crystallizes
- notwithstanding the floating charge, create specific mortgages of its property having priority over the floating charge
- sell the whole of is undertaking if that is one of its objects in the Memorandum, in spite of the floating charge on the undertaking.
Crystallization
Crystallization gets fixed when
- the company goes into liquidation
- the company ceases to carry on business
- a receiver is appointed
- default is made in paying the principal and/or interest and the holder of the charge brings an action to enforce his security.
Keywords: Kinds of Share Capital, Dividends in India, Dividends under Companies Act, Kinds of Dividends, Bonus Shares, Share Capital, Floating Charge
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