Page 173 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes The financial safety of the debentures was to be ensured by the company and the trustee as
creating a Debenture Redemption Reserve by transferring suitable amounts from time to
time. The proof of such transfer was to be furnished by the company to the Trustee in the
form of a certificate issued by the auditors.
The facts

The company failed to pay the interest or the redemption amount as agreed. So the
debenture holders filed complaints before various district forums, which were allowed
and the Trustee was found liable to reimburse the complainants. Appeals to the various
state commissions against these orders were dismissed. The Trustee then filed revision
petitions before the National Commission.
The Trustee contended that debenture holders, who have not paid any money for the
services of the Trustees, are not consumers. Also, there was no privity of contract between
the Trustees and the debenture holders. They claimed that their duty as Trustee ended
immediately on filing a suit against the company for recovery of the debenture amounts
on the basis of the Mortgage Deed. Thereafter no further proceedings would be
maintainable.

Findings
The National Commission overruled the arguments of the Trustee Bank. It held that the
services of the Trustee were not free but were paid for by the company to protect the
interest of the debenture holders. Hence the debenture holders were consumers and entitled
to approach the consumer fora.

The Commission relied on Halsbury’s Laws of England which state that “a higher duty of
care is due from a trust corporation which carries on specialised business of trust
management and a professional corporate trustee is liable for breach of trust if loss is
caused to the trust fund through neglect to exercise special care and skill which it professes
to have’’ . The Commission found that in the present case the Trustee Bank had not done
anything except merely write letters. Accordingly, the National Commission held Central
Bank as the Debenture Trustee liable to compensate the complainant debenture holders
for the default of Synergy Financial Exchange Ltd. The Revision Petition was thus dismissed
and the orders of the District Forum and State Commission were upheld.
The National Commission further directed that its order be sent to SEBI to consider action
against Central Bank as per the regulations governing the Code of Conduct of Debenture
Trustees.
Impact
Debenture Trustees must realise their responsibility instead of merely collecting fat fees
for services, which they fail to render. Now consumers can hold errant Trustees responsible
and recover their money even if the company defaults.

Source: http://articles.timesofindia.indiatimes.com/2008-08-04/mumbai/27909882_1_debentures-
interest-central-bank

7.6 Summary

A company may issue debentures at different terms and just as the issue can be made at par, at a
premium or at a discount, the redemption of debentures can also be made at par, at a premium
or at a discount. Combining the various conditions/terms of issue and redemption of debentures,
there may be the following six possibilities:

166 LOVELY PROFESSIONAL UNIVERSITY