Re-issue as Collateral Security

Quite frequently debenture are issued as collateral security to creditors, bankers or other parties. The nominal value of the debentures deposited as security generally exceeds the amounts of the loan by 10 or 20 per cent. In such a case, the liability of the company being limited to the amount of the loan and
not the face value of the debentures which have been issued, only as a collateral (secondary or additional) security, the amount of debentures is shown only in an inner column in the Balance Sheet. The collateral security becomes effective only in the event of default or the loan not being repaid when due. As soon as the loan is repaid, the debentures are automatically freed. The auditor should ensure that the existence of the collateral security is disclosed against the liability concerned in the Balance Sheet. He should also examine the loan agreement and confirm that the issue has been approved by the Board of Directors and other formalities, as regards registration of the charge, etc., with the Registrar of Companies have been carried out.