Which of the following groups is paid first when a firm liquidates?
Which of the following groups is paid first when a firm liquidates?
- A) Ordinary shareholders
- B) Preference shareholders
- C) Debentures preference shareholders
- D) Cumulative preference shareholders
Correct Answer: C) Debentures preference shareholders
Explanation
To understand the answer, let's first understand the different types of shareholders mentioned in the options.Ordinary shareholders are the regular shareholders who hold common shares in a company. They have voting rights and are entitled to dividends after all other obligations are met.
Preference shareholders are shareholders who hold preference shares in a company. These shares have certain preferential rights, such as receiving dividends before ordinary shareholders and having a fixed dividend rate.
Debentures preference shareholders are shareholders who hold preference shares that are secured by debentures. Debentures are a type of long-term debt instrument issued by a company to raise funds. In this case, the debentures preference shareholders have a higher priority in receiving payment than ordinary shareholders and preference shareholders.
Cumulative preference shareholders are preference shareholders who are entitled to receive any unpaid dividends from previous years before ordinary shareholders receive their dividends.
Based on this information, the correct answer to the question is Option C: Debentures preference shareholders. They are paid first when a firm liquidates because their shares are secured by debentures, giving them a higher priority in receiving payment.
It's important to note that the order of payment may vary depending on the specific circumstances and agreements of the company. However, in general, debentures preference shareholders have a higher priority in receiving payment compared to other shareholders. To learn more about this topic, please refer to the relevant sections of your Commerce textbooks.