Fintech Insolvency and Bankruptcy

Rights of Preference Shareholders under the Insolvency and Bankruptcy Code, 2016

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 shares?

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 that can issue 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 Preference Shareholders?

The Rights of Preference Shareholders are explained based on Companies act, 2013.

• All Preference Shareholders can enjoy the preferential right in dividend payment during an entire lifetime of a business.
• The dividend amount is predetermined for preference shareholders, if or not the business generate revenue.
• The claim Preference shareholder’s claim is entirely prior to a claim of all Equity shareholders or other kinds of shareholders.
• In any instance, if the business will skip the preference dividends for roughly about 3 years, it provides the voting right for preference shareholders.
• All shareholders will receive the certified offered by the business based on the “Preference Shares Act 1960”.
• When 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 Preference Shares

When it comes to Section 55 of the Companies Act, 2013, it deals with both the redemption and issue of the Preference Shares.

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: 

• The preference shares are redeemed simply out of their profits obtainable for the distribution to the shareholders in the form of Dividend.
• The 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?

• Business must be approved by its AoA (Articles of Association).
• A 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
• No 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 carried out
• Any instant at the option of a company
• Any instant at the option of the shareholder
• At a fixed instant or on the occurring of a specific event
• The proper understanding of the Rights of Preference Shareholders aids companies in handling everything in a hassle-free manner.

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 is considered a resolution plan to be a proposal that 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.

Major conditions

Based on section 30(2) of Insolvency and Bankruptcy Code, 2016, the resolution plan need to satisfy the below-listed conditions:

• When it comes to resolution professionals, they shall test every resolution strategy received by them for ensuring that every resolution strategy:
• Offers for payment of debts of the operational creditors in a certain way  when maybe 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
• Offers 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
• Offers for management of affairs of the corporate debtor after the authorization of resolution plan
• The supervision and implementation of the resolution strategy
• Confirms to some other needs when may be mentioned by the Board
• Never contravene the provisions of law for a certain time period being in force.

Conclusion

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.