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Debentures

What is the essential difference between shares and debentures?

Shareholders own the company. The rights of different classes of share may vary, but shareholders have the possibility or probability of receiving dividends. When the company is wound up, their capital, so long as the company is solvent, is returned to them.

Debenture holders do not own the company - they lend money to it and the debenture is a secured loan. The rights of debenture holders may vary, but they are rewarded by receiving interest rather than dividends. Interest must, so long as the money is available, be paid and it ranks ahead of the payment of dividends - even dividends on preference shares. Debenture interest is a charge against profit, whereas dividends are an appropriation of profit.

What charges must be registered?

Nearly all charges must be registered with the Registrar of Companies. Section 860 of the Act states that (in England and Wales) the following types of charge must be registered:

a charge on land or any interest in land, other than a charge for any rent or other periodical sum issuing out of land,

a charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale,

a charge for the purposes of securing any issue of debentures,

a charge on uncalled share capital of the company,

a charge on calls made but not paid,

a charge on book debts of the company,

a floating charge on the company's property or undertaking,

a charge on a ship or aircraft, or any share in a ship,

a charge on goodwill or on any intellectual property.

The list is slightly different for Scotland and may be found in section 878 of the Act.

Registration must be within 21 days of the creation of the charge. Responsibility for registering the charge lies with the company that issued it. However, registration may be conducted by any party with an interest. In practice, it is nearly always done by the trustee or the debenture holder. This is because the consequences of not doing so may be awful for them.

What is the position if a charge is not registered?

If a charge is not properly registered, the trustee or debenture holder will retain rights against the company and the money becomes immediately repayable. However, the charge will not be valid against a liquidator or other creditors. There may also be the possibility of criminal charges. Proper registration with the Registrar of Companies constitutes notice to all the world and this is why the appropriate records at Companies House are examined so assiduously in search of prior charges.

Dividends

Out of what funds may dividends be paid?

Dividends must not be paid out of capital. They may only be paid out of net distributable realised profits, either made in the current year or retained from previous years. It is an important distinction which directors must observe. Section 830(2) of the Act states:

'a company's profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.'

Precise interpretation of accumulated, realised profits can be very technical, but this is the legal requirement. Section 831 of the Act gives a further and slightly more restrictive requirement for public companies.

Such companies may only pay a dividend provided that it does not result in their net assets being less than the aggregate of called-up share capital and undistributable reserves.

 
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