It is significant to know that many companies in India are completely under IBC (Insolvency and Bankruptcy code). The shareholders of these companies are looking for the best way to acquire an excellent deal to make their shares secure. When it comes to preference shares, they appear as the quasi-debt instruments as they merge the features of both debt and equity. If you want to know about the Rights of Preference Shareholders, you can read this article.
What are preference
Preference shares are the shares
present in company equity which entitle the owner to the fixed dividend rate to
be successfully paid by an issuer. The dividend amount must be remunerated
earlier to the businesses can issue the dividends to their common shareholders.
In addition, if the businesses are
dissolved, the holders of the preference shares are remunerated back before the
owner of the common stock. Though, the owner of these preference shares never
has the voting control over certain affairs of the businesses, as so the owners
of the common stock.
What are the Rights of
The Rights of Preference Shareholders are explained based on Companies
Preference Shareholders can enjoy the preferential right in dividend payment
during an entire lifetime of a business.
dividend amount is predetermined for preference shareholders, if or not the
business generate revenue.
claim Preference shareholder’s claim is entirely prior to a claim of all Equity
shareholders or other kind of shareholders.
any instance, if the business will skip the preference dividends for roughly
about 3 years, it provides the voting right for preference shareholders.
shareholders will receive the certified offered by the business based on the
“Preference Shares Act 1960”.
the business is fully wound up, the capital repayment will successfully be paid
immediately to preference shareholders. It is prior to equity shareholders or
other kinds of shareholders.
Redemption of the
When it comes to Section 55 of the
Companies Act, 2013, it deals with both the redemption and issue of the
After the establishment of this Act, No
business restricted by the shares shall issue the preference shares that are
irredeemable. The businesses restricted by the shares may, whether approved by
its individual articles, issue the preference shares that are accountable to be
fully redeemed within a certain time duration not exceeding 20 years from the
exact date and time of the issue subject to some conditions.
It may be fully prescribed A Business
can issue the preference shares for the period exceeding 20 years for the
infrastructure projects. They are actually subjected to the redemption of
certain percentages of the shares when may be prescribed on a yearly basis at
the choice of certain preferential shareholders.
Redemption source of
preference shares are redeemed simply out of their profits obtainable for the
distribution to the shareholders in the form of Dividend.
preference shares are redeemed only new proceeds of the shares issued only for
funding this redemption of the preference shares.
What are the conditions
for the Redemption of Preference Shares?
must be approved by its AoA (Articles of Association).
Business may redeem all its preference shares simply on certain terms on that
they are issued or when varied fully after the due authorization of the
preference shareholders under the section 48 of Act as well as preference
shares are redeemed
such kind of shares is redeemed if not they are completely paid up. When it
comes to the partially paid-up shares, they are not redeemed. When they are
partially paid in this case a conclusion is made for converting them from
partially paid to completely paid only after that the redemption processes are
instant at the option of a company
instant at the option of the shareholder
a fixed instant or on the occurring of a specific event
proper understanding of Rights of
Preference Shareholders aids companies in handling everything in a
NCLAT analysis on
Redemption of the Preference Shares with no prior agreement of Shareholders
The NCLAT (National Company Law
Appellate Tribunal) in Brij Bhushan Singhal v Bhushan Steel Ltd. Permitted the
preference shares to be fully redeemed outer side the section 55 purview of
Companies Act, 2013 while required by a resolution plan.
- As a resolution candidate, an appellant, the preference shareholder of the Bhusan Steel, filed the appeal that a resolution plan actually sought to redeem as well as cancel the preference share automatically, in contravention of section 55 of Companies Act, 2013.
- This kind of provision mandates that the preference shares can be only redeemed in a manner, as well as after execution of certain conditions, mentioned in the issue terms. Based on section 30(2)(e) of IBC (Insolvency and Bankruptcy Code), 2016, the resolution plan is not authorized if it breaks any law provision.
- Though, the NCLAT, with no consideration of certain queries, rose about the section 55 of Companies Act, 2013, supported the impugned order of NCLT (National Company Law Tribunal) that approved a resolution plan on the date 17th April 2018.
- Every decision which is considered a resolution plan to be a proposal which never affects the position of the preference shareholders of Bhusan Steel until it is authorized by a committee of the creditors as well as adjudicating authority. Though, for it to be authorized by an adjudicating committee, the resolution strategy never contravenes the law position.
- Hence, it is important for NCLAT to smartly decide over the implementation of section 55 of Companies Act, 2013 for a resolution strategy to be accepted in the initial place. Consequently, the infringement of section 55 of the Companies Act, 2013 is permitted with no consideration.
Based on section 30(2) of Insolvency
and Bankruptcy Code, 2016, the resolution plan need to satisfy the below-listed
it comes to resolution professionals, they shall test every resolution strategy
received by them for ensuring that every resolution strategy:
for payment of debts of the operational creditors in a certain way when may be mentioned by Board that never
less than the rate to be actually paid to operational creditors in the instant
of the liquidation of a corporate debtor under the section 53
for payment of the insolvency resolution procedure cost in a way mentioned by
Board in precedence to the payment of remaining debts of the corporate debtor
for management of affairs of the corporate debtor after the authorization of
supervision and implementation of the resolution strategy
to some other needs when may be mentioned by the Board
contravene the provisions of law for certain time period being in force.
The Rights of Preference Shareholders are important because they help to receive several benefits. It also shares you the details of section 55 of the Companies Act, 2013 with Rule 9 of the Companies (Share Capital) Rules, 2014 and explanation to section 30(2) of Insolvency and Bankruptcy Code, 2016. It helps you to know the preference shares are redeemed without receiving the authorization of shareholders.
For more information, please contact the expert team of Enterslice.