During liquidation, what is the repayment priority of a debenture?

In the context of liquidation, the correct approach to debenture repayment is that they are prioritized for repayment before any other obligations, including shareholder payments. This is because debentures represent a secured loan made by the debenture holders to the company. In the hierarchy of repayment, secured creditors, which include debenture holders, have a right to recover their funds from the assets of the company before any distributions are made to unsecured creditors or shareholders.

When a company enters liquidation, the assets are used to pay off debts in a specific order, and debenture holders are typically at the forefront because their loan is secured by specific assets. This means that they have a legal claim to certain company assets, which gives them a higher priority compared to other creditors and shareholders who may only receive a return if there are funds remaining after secured creditors have been paid.

Understanding this hierarchy is critical, as it influences the likelihood of different stakeholders recovering funds during liquidation. The repayment priority is designed to ensure that those who have lent money to the company with security are compensated first, reflecting the risk they take on compared to other creditors and equity holders.