Question

Debenture holders of a company are its :

• A. Share holders
• B. Debtors
• C. Creditors
• D. Directors

Answer 1

The Correct Option is C

To understand the role of debenture holders in a company, we need to clarify what debentures are and how they differ from other financial instruments like shares. 

Definition of a Debenture: A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Companies use debentures as a method to borrow money, often for capital expenses.

Role of Debenture Holders:

• Debenture holders lend money to the company when they purchase debentures. As a result, they are creditors of the company.
• The company is obligated to pay interest to the debenture holders at a fixed rate and return the principal amount upon maturity.
• They do not have ownership rights like shareholders; instead, they have a creditor relation with the issuing entity.

 

Now, let's analyze the given options:

• Shareholders: They own a part of the company through owning shares and can vote in company decisions. Debenture holders do not own part of the company.
• Debtors: Debtors owe money to the company, which is contrary to the role of debenture holders, who have lent money to the company.
• Creditors: This is the correct option. Debenture holders are indeed creditors because the company has borrowed funds from them and owes them repayment with interest.
• Directors: Directors manage the company and make significant business decisions. They are part of the company's management, unlike debenture holders.

Therefore, the correct answer is that debenture holders of a company are its Creditors.