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Monday, October 18, 2010

Redemption of Debentures

Debentures may be irredeemable; but this unusual, except in companies formed under special act of parliament.

Debentures may be redeemed either at the end of a given period or by annual drawings. The trust deed, or if there is no trust deed, then the debentures themselves, will contain provision for redemption and will unusually stipulate the establishment of a sinking fund for repayment out of profits.

Alternatively a company may take out of a sinking fund policy with an insurance company for the amount of debentures.

A company which has redeemed debentures to reissue them, either by reissuing the same debentures, or by issuing other debentures in lieu; unless provision, express or implied, is contained in the articles or the conditions of issue, or unless the company has, by passing a resolution, or by some other act, shown its intention that the debentures shall be cancelled. Where a company has redeemed debentures, every balance sheet must show particulars of debentures that may be reissued. On reissue the debentures must be stamped as an original issue; they retain, however, the same priorities as the original debentures.

The company can purchase its own debentures; when debentures are purchased at below the issued price a capital profit will result from the purchase. Strict accounting demands appropriate adjustments for accurate interest included the purchase price. In practice this would frequently be ignored.

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