ACCA Applied Skills · Corporate and Business Law (Global) · Loan capital
Marlow Co has issued debentures to Priya carrying 8% interest per year. The company makes a loss this year and has no distributable profits. What is the position regarding the interest payable to Priya?
Interest remains payable. Debenture interest is a contractual debt owed to a creditor, not a distribution to members, so the rules restricting dividends to distributable profits do not apply. The company must pay it even when it has made a loss.
- AInterest is payable only if the company has distributable profits
- BInterest remains payable because it is a debt of the company, not a distributionCorrect
- CInterest may be paid only with shareholders' approval by ordinary resolution
- DInterest is suspended until the company returns to profit, unless the debenture states otherwise
Explanation
Interest on debentures is a contractual debt and a charge against profits, not a distribution to members. Capital maintenance rules on distributable profits apply to dividends, not to loan interest. Hence the loss does not excuse payment.
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