Q.Explain the different types of debentures on the basis of security.
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Start your 14-day free trial to unlock the full solution →Whether a debenture carries any backing beyond the company's general promise to pay is the basis of one of the most important classifications a student of Secretarial Practice must know, because it directly determines what a debenture-holder can actually recover if the company fails to pay.
A secured debenture, also called a mortgage debenture, is one backed by a charge created over the company's assets in favour of a debenture trustee, held for the benefit of the debenture-holders as a class. This charge can be a fixed charge, attaching to a specific, identified asset such as a particular building or item of plant, which the company cannot deal with without the trustee's consent while the charge exists, or a floating charge, hovering over a class of the company's assets generally — such as its stock-in-trade — leaving the company free to deal with those assets in the ordinary course of business until the charge "crystallises," typically on default or winding up, at which point it fastens onto the specific assets then held. Because a secured debenture gives the holder a direct claim over particular company assets, secured debenture-holders are repaid out of those assets even ahead of most other unsecured creditors of the company if the company defaults or is wound up. …
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