Page 267 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes either along with, or after payment of a certain rate of dividends on equity shares, (ii) to
participate in the surplus assets at the time of winding up [s.85]. Thus, if a preference share does
not carry either of these rights, then it will be known as non-participating share. It should be
remembered that preference shares are always presumed to be non-participating unless expressly
described as participating.
Cumulative and non-cumulative. If a preference share carries the right for payment of arrears in
dividend from future profits, then such a share is known as cumulative preference share. Thus,
dividends not paid in any year or years accumulate and are paid out whenever profits are
available. If a preference share does not carry the right to dividend in arrears, then such a
preference share is known as non-cumulative or simple. Thus, if no profits are available in a
year, the holders get nothing nor can they claim unpaid dividend in subsequent years. It should
be remembered that preference shares are always presumed to be cumulative unless expressly
described as non-cumulative.

Redeemable and irredeemable. A preference share which can be redeemed upon the resolution of
the Board of Directors, if the articles so provide, is known as redeemable preference share (s.80).
A company can issue redeemable preference shares if it complies with the following
requirements:
(i) such shares are to be issued as redeemable preference shares; shares issued earlier cannot
be converted into redeemable preference shares;
(ii) there must be authority in the articles to issue redeemable preference shares;
(iii) the shares can be redeemed only when they are fully paid up;

(iv) the shares may only be redeemed: (a) out of profits of the company which would otherwise
be available for dividend, or (b) out of the proceeds of a new issue of shares – not necessarily
of redeemable preference shares made for the purpose of redemption;
(v) if there is a premium payable on redemption, it must have been provided out of profits or
out of the share premium account before the shares are redeemed;

(vi) where the shares are redeemed out of profits, a sum equal to the nominal amount of the
shares redeemed is to be transferred out of profits to the “Capital Redemption Reserve
Account.”
The redeemable preference shares can be redeemed by the company either at a fixed date, or
after a certain period of time, or at the option of the company. But redemption of such shares
shall not be taken as reducing the nominal capital of the company.
The Companies (Amendment) Act, 1999 amended s. 80 to the effect that for the words “share
premium account”, the words “security premium account” shall be substituted.
Irredeemable preference shares. No company limited by shares can issue any preference shares
which are irredeemable or are redeemable after the expiry of ten years from the date of issue.
Also, once the company has redeemed the shares, or it is about to redeem them, it may issue new
shares up to the same nominal amount and it will be presumed that the preference shares were
never redeemed. In such a situation the company’s capital is not deemed to be increased and,
therefore, no stamp duty is to be paid. This privilege is available only if the redemption takes
place within one month after the making of the fresh issue [s.80 (4)].
Non-compliance with the provisions of s.80 will render the company and every officer of the
company who is in default liable to a fine up to ` 10,000.
Voting rights of preference shareholders. The preference shareholders will vote only on matters
directly relating to preference shares. Section 87 (2) mentions the following matters which relate

260 LOVELY PROFESSIONAL UNIVERSITY