Q.Distinguish between a shareholder and a debenture-holder of a company.

The single most important distinction in this chapter is that a shareholder owns a part of the company while a debenture-holder has merely lent money to it.

This difference in status carries through to who is paid first on winding up, and to whether the return is guaranteed or dependent on the company's profits.

A shareholder and a debenture-holder are both, in everyday speech, sometimes described as "investors" in a company, but the two occupy entirely different legal positions, and this distinction runs through nearly every other topic in Secretarial Practice.

A shareholder contributes capital to the company and, by doing so, becomes a member of the company — a part-owner who shares in the company's risks as well as its rewards. A shareholder's return, the dividend, is paid only out of profits the company has actually earned and only if the Board recommends and the company in general meeting declares it; in a loss-making year, or even a profitable year in which the Board chooses to plough profits back into the business, a shareholder may receive nothing at all. As a member, a shareholder ordinarily carries voting rights proportional to shareholding, giving a voice in the company's general meetings and, indirectly, in its management. On a winding up, a shareholder's claim is residual — paid only after every other claim on the company, including that of every creditor and every debenture-holder, has been satisfied in full, so a shareholder may recover nothing if the company's assets fall short.

A debenture-holder, by contrast, lends money to the company and remains, for the life of the debenture, a creditor of the company rather than a member of it. The return, interest, is a fixed contractual obligation that the company must pay at the agreed rate and at the agreed intervals whether or not it has made any profit at all, and failure to pay gives the debenture-holder an enforceable legal right to recover the amount due. Under Section 71(2) of the Companies Act, 2013, a debenture-holder carries no voting rights whatsoever, because the relationship with the company is that of a lender, not a member. On a winding up, a debenture-holder is paid as a creditor, ahead of every class of shareholder, and where the debentures are secured, is paid out of the specifically charged assets even ahead of most unsecured creditors of the company. In short, a shareholder is an owner sharing the company's fortunes, while a debenture-holder is a lender whose return and repayment do not depend on the company's profitability at all.