LOAN CAPITAL

1. INTRODUCTION

Every company has borrowing powers, which is the power to issue debentures and create charges: s 19(1)(c) and Third Schedule, CA 1965.

The power is exercised by the BOD. The power should be exercised in the interests of the company subject to any limitations in the M/A and the A/A.

2. DEBENTURES

Debenture includes debenture stock, bonds, notes and any other securities of a corporation whether constituting a charge on the assets of the corporation or not: s 4(1), CA 1965.

A debenture is basically a document which acknowledges a company’s indebtedness. It should be noted that the mere holding of a debenture does not make the person a secured creditor.

If a debenture is secured by a charge, then it can be said that the debenture holder is a secured creditor.

A charge is a security created by a company in favour of a creditor.

The differences between shares and debentures are as follows.

SHARES	DEBENTURES
A shareholder is a member of a company	A debenture holder is a creditor and not a company member.
A shareholder has membership rights in the company, ie rights to attend and vote at meetings and receive dividends.	A debenture holder has no rights in the company except the rights against the company by virtue of the debenture.
A shareholder can rely on s 33(1) of CA 1965 to enforce his rights as per the A/A.	A debenture holder will rely on the debenture to enforce his rights.
A shareholder will receive dividends only if there are distributable profits.	A debenture holder is paid interest irrespective of whether the company made profits.
A shareholder cannot be paid dividends out of capital as the capital will be reduced.	A debenture holder can be paid interest out of capital.
If a company is wound up, a shareholder is only paid after a debenture holder is paid in full.	If a company is wound up, a debenture holder must be paid in full before any distribution is made to shareholders, ie the debenture holder is in priority.
Return of investment to a shareholder is subject to the availability of capital	Return of money to a debenture holder is obligatory if a company is wound up.
A shareholder cannot convert his shares to debentures.	A debenture holder can convert his debentures to shares if they are convertible debentures.
A shareholder cannot be issued shares at a discount.	A debenture holder can be issued debentures at a discount.
A company cannot buy back shares from a shareholder.	A company can buy back debentures from a debenture holder.
A shareholder can only transfer his shares subject to the BOD’s approval.	A debenture holder can freely transfer debentures to another person.
A shareholder can only be issued shares subject to the company’s authorised share capital.	There is no such limit for debentures.
A shareholder can challenge the BOD if shares were not issued to raise capital.	A debenture holder has no such rights.