What Is a Debenture Trustee Agreement?
A debenture trustee agreement involves two parties, the company, and the debenture trustee. A debenture is an instrument used for raising debt. A debenture trustee is someone who’s entrusted with the trust deed for securing the debentures for any company. This debenture trustee may be a scheduled bank, an insurance company, or anybody corporate
The responsibility of the debenture trustee is to ensure that the interests of the debenture holders are protected. The debenture trustee acts as a liaison between the company and the holder of the debentures.
The agreement should be drawn in accordance with debenture trustee regulations.
When Do You Need a Debenture Trustee Agreement?
When a company intends to raise capital from the market through debentures, this agreement is required. The agreement will denote the nature of the debentures, whether they are convertible or not. The agreement will also mention the coupon rate of the debentures and the frequency of payment of interest.
The debenture trustee will ensure that the company has followed all the norms required to protect the investment made by the debenture holders. A debenture trustee can only be a scheduled bank involved in any commercial activity, an insurance company, or another body corporate.
The duties of a debenture trustee have been laid out exhaustively. Some of them are
- Calling for reports from the company issuing the debentures
- Manage the property that is part of the trust deed
- Ensure that the body corporate and the trust deed complies with all the relevant provisions of the companies acts and the rules laid down by the securities exchange commission.
- Ensure that the value of the property on which debenture holders have a charge is available and meets the value of the collateral at all times
- Provide necessary disclosures as mandated by the capital market federal agencies from time to time.
Inclusions in Debenture Trustee Agreement
The debenture agreement will include the following information:
- Names of the parties to the agreement
- The effective date of the agreement
- Debenture type: Rate of interest, denomination and the tenure
- Governing law which needs to be followed
- The rights and obligations of the debenture trustee
- Documents to be submitted to the debenture trustee
- Deadline by which the debentures should be listed in a recognized stock exchange
How to Draft a Debenture Trustee Agreement?
A debenture agreement pdf can be used as a reference while drafting the agreement. The following points need to be considered:
- The payment that would be made to the debenture trustee
- The duties and obligations of the trustee with respect to the dealings with the debenture holders
- Acknowledgment of the responsibility of compliance with the relevant acts and rules by federal agencies by the company
- Tenure of the trustee and the events that constitute the completion of the agreement
- The list of documents that the company needs to furnish to the trustee and the time within which that should be furnished
- Obligations of the company towards the trustee
- Responsibility of the payment of expenses incurred by the trustee for maintaining the trust
- Confidentiality and non-disclosure clauses
- Waivers of liability
- Governing laws and jurisdiction
- The laws of the state in which the agreement is being drafted should be followed
- The class of debentures being issued and the coupon rate
- Amount of capital being raised
- Method of resolving disputes, sharing of attorney fees and the jurisdiction
- Events which will lead to termination of the agreement
- Should be fair to all concerned parties
- Other boilerplate clauses
Benefits of a Debenture Trustee Agreement
When there is a debenture agreement, the debenture holder is assured of the protection of their rights as there is a debenture trustee who is part of the agreement.
The agreement is drafted as per statutory regulations, and any violation will result in stringent action against the company issuing the debentures. The issuing company also needs to ensure that the debenture holders are paid the interest on time and the principal invested on maturity.
Key Terms/Clauses in Debenture Trustee Agreement
A standard debenture agreement includes the following terms/clauses:
- Authorizations and consents: All actions required by the company to be authorized to issue debentures are complete as per applicable law
- Expenses: The debenture trustee needs to be reimbursed with the agreed fee
- Stamp duty: The stamp duty required to be paid for this agreement should be paid in full
- Confidentiality: No information contained in this agreement should be shared with any third party
- Waivers of liability
- Governing laws and Jurisdiction
- Termination of the agreement
- Events that conclude the agreement
- Documents required by the trustee and the duration that they have to be furnished by
What Happens in Case of Violation?
When there is a violation of the debenture agreement, there are certain remedies available for the affected party. They are:
- Monetary damages: The affected party can claim monetary damages including lost profits in case of total breach of contract
- Restitution: The affected party has to be returned the money paid and restored to the original position held before entering into the contract
- Rescission: The contract can be cancelled if fraud is detected by any party and no party has any contractual obligation
- Reformation: A fresh contract is drawn by the court if fraud is involved
- Specific performance: The affected party can ask the other party to fulfil the contractual obligation and money damages will not be accepted
A debenture agreement ensures that the debentures secured from a company are held legally for administering. This ensures that the liability of administering those debentures is removed from the shoulders of the company.
[Also Read: Debenture Conversion Agreement]
Sample Debenture Agreement
Download the Debenture Trustee Agreement Sample.