Tutorial 10-Charges

Q1. What are debentures?
A1.PP7,8.
• Defined in S. 4(1) CA– a debenture to include stock, bonds, notes and other securities, whether they constitute a charge on the assets of the co. or not, but beyond this the Act does not actually state what a debenture is. Levy v Abecorris Slate and Slabs Co. (1887) 37 Ch D 260 • It is a document which acknowledges a co’s indebtedness - s. 4(5) CA. • A debenture may therefore be an unsecured promise to pay, or a promise to pay secured by a mortgage or charge.( may be paid out of capital] • If the debenture is secured by charge on the co’s property, the debenture holder is a secured creditor.

Q2.Elaborate on the title’ Fixed Charge’.
A1.PP13
• Fixed charge: a. It is attached to a specific property; b. The property is identifiable – e.g. land, building; c. The co. cannot dispose of the property subject to the charge unless with the chargee’s/creditor’s consent. • It is a mortgage of one or more specific or ascertained and definite property of the co., such as a legal or equitable mortgages on a factory or a piece of land.

Q3.List out the differences between debentures and shares.
A2.PP9,10
DISTINCTION BETWEEN SHARES AND DEBENTURES • Share Holder(SH )is a member of the co. Debenture Holder (DH) is a creditor. • SH have right to attend and vote at general meeting – they have membership rights. Not creditors. • SH will rely on S. 33(1) CA to enforce his rights pursuant to the articles. DH’s rights are contained in the debenture. • SH only receive dividends if there are distributable profits. DH are paid interest irrespective of whether the co. has made profits. • SH cannot be paid dividends out of capital. DH can be paid interest out of capital. • Co. is not obliged to declare dividends even if there are profits. It is obliged to pay interest to DH irrespective of whether co. has made profits. • If a co. is wound up, creditors must be paid in full before any distribution is made to SH. • Return of money to creditors is obligatory if co. is wound up. Return of investment to SH is subject to availability of capital. • SH cannot convert shares to debentures. DH can convert to shares if it is convertible debentures.

Q4. What are the usual provisions in the Acts and the articles regarding the payment of dividends?

A3.Zab188
The Act contains no provisions as to the arrangement of payment of dividend.
The Articles (AA) set out the power to declare a dividend and other provisions relating to declaration and payment of dividends. The AA usually provides the following:

i. the power to declare dividends lies with the general meeting but the amount of dividend to be declared must not exceed that recommended by the directors.(Dir) ii. the Dir are given the powers to declare and pay interim dividends from time to time where it is justified by the profits of the company iii. a dividend must be paid out of profits only iv. the dir are given the power to decide how much dividend to be declared.