ACCA F4 - Corp and Business Law (ENG)

Part E Capital and the financing of companies  16: Loan capital 247

2.6 Rights of debentureholders

The position of debentureholders is best described by comparison with that of shareholders. At first
sight the two appear to have a great deal in common.

 Both own transferable company securities which are usually long-term investments in the
company.

 The issue procedure is much the same. An offer of either shares or debentures to the public is a
prospectus as defined by the Act.

 The procedure for transfer of registered shares and debentures is the same.

But there are significant differences.

Differences Shareholder Debentureholder

Role Is a proprietor or owner of the

company

Is a creditor of the company

Voting rights May vote at general meetings May not vote

Cost of

investment

Shares may not be issued at a discount

to nominal value

Debentures may be offered at a

discount to nominal value

Return Dividends are only paid

 Out of distributable profits

 When directors declare them

Interest must be paid when it is due

Redemption Statutory restrictions on redeeming

shares

No restriction on redeeming

debentures

Liquidation Shareholders are the last people to be

paid in a winding up

Debentures must be paid back before

shareholders are paid

From the investor's standpoint debenture stock is often preferable to preference shares. Although both
yield a fixed income, debenture stock offers greater security.

2.6.1 Advantages and disadvantages of debentures (for the company)

Advantages Disadvantages

Easily traded May have to pay high interest rates to make them

attractive

Terms clear and specific Interest payments mandatory

Assets subject to a floating charge may be traded Interest payments may upset shareholders if

dividends fall

Popular due to guaranteed income Debentureholder's remedies of liquidators or

receivers may be disastrous for the company

Interest tax-deductible Crystallisation of a floating charge can cause

trading difficulties for a company

No restrictions on issue or purchase by a

company