ACCA Applied Skills · Corporate and Business Law (Global) · Loan capital
Kestrel Ltd issued a debenture secured by a charge over its factory, with a term that the holder may, at its option, exchange the debenture for ordinary shares at a set ratio in five years. Which statement is correct?
The debenture is a convertible debenture. The holder has an option, not an obligation, to exchange it for ordinary shares at the agreed ratio, and this can sit alongside security over the factory. It does not convert automatically and is not invalid.
- AThe debenture is a convertible debenture, and the conversion right is a term of the loan that gives the holder an optionCorrect
- BThe debenture is invalid because a secured debenture cannot contain a right to shares
- CThe debenture automatically becomes shares after five years whether or not the holder wishes
Explanation
A convertible debenture lets the holder choose to convert into shares on set terms. Security and convertibility can coexist. The conversion is at the holder's option, so it is not automatic.
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