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ACCA Applied Skills · Corporate and Business Law (Global) · Loan capital

Kestrel Co is in a poor year and has made no distributable profits. It has issued both preference shares and debentures. Which statement is correct?

Debenture interest remains payable because it is a contractual debt owed to a creditor, regardless of profit. Share dividends are distributions to members and can only be paid out of distributable profits, so none can be paid here.

  1. ADebenture interest must still be paid because it is a debt, whereas dividends on shares can only be paid out of distributable profitsCorrect
  2. BNeither debenture interest nor share dividends may be paid, because the company has no distributable profits
  3. CDebenture interest may be paid only if the directors first declare it as a dividend

Explanation

Interest on debentures is a contractual debt and is payable whether or not the company has profits. Dividends are a distribution to members and may only be paid from distributable profits. The second option wrongly treats interest as a distribution, and the third confuses interest with a dividend.

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