LCI Learning

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More


1. The Companies Act, 1994 (for short the Act) permits a company limited by shares, if so authorised by its articles, issue preference shares which are liable to be redeemed i.e. in light of the Act, a company cannot issue irredeemable preference share.

 

 

2. Under the Act, the share capital of the company can consist of only two types, namely, equity and preference share capital.

 

 

3. It may be that redeemable preference shares have some features which are common with debentures, but legally, they are shares.

 

 

4. As observed by the learned author in Pennigstons Company Law, 4th Edn. at page 195, if redemption would make the company insolvent, the company may not be allowed to redeem preference shares because repayment of preference capital would be a fraud upon its creditors. This would clearly indicate that the holder of preference shares is not in the same position as that of a creditor.

 

 

5. Besides, it must be remembered that a preference shareholder is only a shareholder and cannot as a matter of course claim to exercise the rights of a creditor. Preference shareholders are only shareholders and not in the position of creditors. An unredeemed preference shareholder does not become a creditor.

 

 

6. But IAS 32 termed those preference shares as liability on the part of the issuer company when the issuer company pays a fixed rate of dividend against the preference shares having mandatory redemption feature. But in light of the Act all preference shares used to be treated as share capital of the company and not as liability on the part of the company.

 

 

7. In addition, IAS 32 termed some preference shares as equity when there is option on the part of the issuer company not to make any payment against those. But the Act, make all the preference shares liable to be redeemed out of the proceeds of the company which would otherwise be available for dividend or out of proceeds of a fresh issue of shares or out of the sale proceeds of any property of the company. However, there exists no provision in the Act for the preference shares issuing company not to make any payment against the preference shares which are liable to be redeemed. 

 

 

8. Therefore, it can be said that IAS 32, which principally deals with accounting approaches, is differing with the spirit of the Act.

 

 

 

Md. Nahid Absar

 

** This article is absolutely authors own viewpoint based on the prevailing laws of Bangladesh.

 

 


"Loved reading this piece by Nahid?
Join LAWyersClubIndia's network for daily News Updates, Judgment Summaries, Articles, Forum Threads, Online Law Courses, and MUCH MORE!!"






Tags :


Category Corporate Law, Other Articles by - Nahid 



Comments


update