Theory question 102
Business FinanceCommerce 2 (essay)
(a) State three differences between:
(i) Shareholders and debenture holders.
(ii) Ordinary shares and Preference shares.
(b) Explain four reasons for winding up a public limited company.
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(a)(i) Any three: shareholders are owners, debenture holders are creditors; shareholders get dividends, debenture holders get fixed interest; shareholders vote, debenture holders do not; debenture interest is paid before dividends and whether or not there is profit; debentures are usually secured and repaid on winding up before shareholders.
(ii) Any three: ordinary shares earn variable dividends, preference shares a fixed rate; preference shares are paid dividends (and capital on winding up) first; ordinary shareholders vote, preference shareholders usually do not; ordinary shares carry the greatest risk; preference shares may be cumulative or redeemable.
(b) Any four, explained: members pass a special resolution to wind up; insolvency – inability to pay debts; court order on a creditor's petition; objects achieved or becomes illegal; fraud or illegal operations; members fall below the legal minimum; failure to start business within a year of incorporation; continued losses.
Owners versus creditors is the key difference in (a)(i).