Exercise 20.1 ★ CONVERTIBLE DEBENTURES Pea Ltd establishes Soup Ltd for the sole purpose of developing a new product to be manufactured and marketed by Pea Ltd. Pea Ltd engages Mr Smith to lead the team to develop the new product. Mr Smith is named Managing Director of Soup Ltd at an annual salary of £100 000, £10 000 of which is advanced to Mr Smith by Soup Ltd at the time Soup Ltd is established. Mr Smith invests £10 000 in the project and receives all of Soup Ltd’s initial issue of 10 voting ordinary shares. Pea Ltd transfers £500 000 to Soup Ltd in exchange for 7%, 10-year debentures convertible at any time into 500 voting ordinary shares of Soup Ltd. Soup Ltd has enough shares authorised to fulfi l its obligation if Pea Ltd converts its debentures into voting ordinary shares. The constitution of Soup Ltd provides certain powers for the holders of voting common shares and the holders of securities convertible into voting ordinary shares that require a majority of each class voting separately. These include:

(a) the power to amend the corporate purpose of Soup Ltd

(b) the power to authorise and issue voting shares of securities convertible into voting shares. At the time Soup Ltd is established, there are no known economic legal impediments to Pea Ltd converting the debt. Required Discuss whether Soup Ltd is a subsidiary of Pea Ltd.