The correct option is B. Debenture holders. Detailed Explanation: When a firm goes into liquidation, it means that the company is unable to pay its debts and is in the process of selling off its assets to pay creditors. The order in which different groups of stakeholders are paid during this process is determined by the legal hierarchy of claims. Here’s a step-by-step breakdown of why debenture holders are paid first:

1. Understanding Liquidation:
2. Liquidation involves selling off a company's assets to pay off its liabilities. The process is governed by laws that dictate the order of payments to creditors and shareholders.
3. Hierarchy of Claims:
4. In liquidation, creditors are prioritized over shareholders. Within creditors, there is a further hierarchy:
   • Secured Creditors: These are creditors who have a legal claim to specific assets of the company. Debenture holders typically fall into this category, especially if their debentures are secured against the company's assets.
   • Unsecured Creditors: These creditors do not have specific claims to assets. They are paid after secured creditors.
   • Preference Shareholders: They have a higher claim than ordinary shareholders but are below creditors in the hierarchy.
   • Ordinary Shareholders: They are the last to be paid and only receive payment after all debts and obligations have been settled.
5. Debenture Holders:
6. Debenture holders are typically lenders to the company who have provided funds in exchange for a promise of repayment with interest. If the debentures are secured, they have a claim on specific assets, which gives them priority in the liquidation process.
7. Cumulative Preference Shareholders:
8. Cumulative preference shareholders are entitled to receive dividends before ordinary shareholders, and if dividends are in arrears, they must be paid before any distribution to ordinary shareholders. However, they are still below debenture holders in the payment hierarchy.
9. Preference Shareholders:
10. While preference shareholders have a claim to dividends and capital before ordinary shareholders, they are still subordinate to all creditors, including debenture holders.
11. Ordinary Shareholders:
12. Ordinary shareholders are the last in line to receive any payments during liquidation. They only receive funds after all debts and obligations to creditors and preference shareholders have been satisfied.

Why Other Options Are Incorrect:

• A. Preference Shareholders: They are paid after all creditors, including debenture holders. Therefore, they do not have priority in liquidation.
• C. Ordinary Shareholders: They are the last group to be paid in the liquidation process, receiving any remaining funds only after all debts and obligations have been settled.
• D. Cumulative Preference Shareholders: Similar to preference shareholders, they are paid after all creditors, including debenture holders. They do have a claim to unpaid dividends, but this does not place them above debenture holders in the payment order.

Summary of Key Points:

• In liquidation, the order of payment is crucial: secured creditors (like debenture holders) are paid first.
• Debenture holders have a legal claim to specific assets, giving them priority over other stakeholders.
• Preference shareholders and ordinary shareholders are paid only after all debts to creditors are settled.
• Understanding the hierarchy of claims is essential for grasping the liquidation process and the rights of different stakeholders.

This structured approach to understanding the liquidation process and the payment hierarchy will help you in your revision and preparation for professional exams in commerce.