Commercial Correspondence and Secretarial Practice · Ch 3 — Debenture
Debenture-Holder as a Creditor: Debenture-Holder Compared with Shareholder
Debenture-Holder as a Creditor: Debenture-Holder Compared with Shareholder
One of the most fundamental distinctions a Secretarial Practice student must be able to draw with confidence is the difference between a debenture-holder and a shareholder, because the two are frequently, and wrongly, spoken of in the same breath as "investors in the company" when their legal relationship with the company is entirely different. A shareholder contributes capital and becomes, in law, a member and part-owner of the company, sharing in its risks and its residual profits. A debenture-holder, by contrast, lends money to the company and remains, throughout the life of the debenture, a creditor of the company — someone to whom the company owes a debt, with no ownership stake in it whatsoever.
This difference in legal status carries through into every practical aspect of the two positions. A shareholder's return, the dividend, is paid only out of profits and only if the Board recommends and the company declares it, and can vary from year to year or be skipped entirely in a bad year; a debenture-holder's return, interest, is a fixed, contractual obligation of the company, payable whether or not the company has made a profit, and non-payment gives the debenture-holder an enforceable right to sue for recovery. A shareholder, as a member, ordinarily carries voting rights and a voice in the company's general meetings and, through that vote, in its management; a debenture-holder, under Section 71(2) of the Companies Act, 2013, carries no voting rights at all, because a lender's relationship with the company is contractual, not one of membership. On a winding up, a shareholder's claim is residual — paid only after every other claim, including that of debenture-holders, has been met in full, and often receiving nothing at all if the company's assets fall short; a debenture-holder, being a creditor, is paid ahead of shareholders, and if the debenture happens to be secured, is paid out of the specifically charged assets even ahead of most other unsecured creditors of the company.
| Basis | Shareholder | Debenture-Holder |
|---|---|---|
| Legal status | Owner/member of the company | Creditor/lender to the company |
| Nature of capital | Owned capital (equity) | Borrowed capital (debt) |
| Return | Dividend, paid only out of profit, if declared | Interest, a fixed contractual charge, payable irrespective of profit |
| Voting rights | Ordinarily carries voting rights | No voting rights (Section 71(2)) |
| Security | No charge on company assets | May be secured by a charge on assets, per terms of issue |
A person or entity to whom a company owes a debt — in the context of this chapter, a debenture-holder, who has lent money to the company and is entitled to receive interest and, eventually, repayment of the principal, but who holds no ownership stake or voting rig …