Expert Advisory Committee
ICAI-Expert Advisory Committee
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3.3 Query:       

    Payment of preference dividend.

 

1. A public limited company is listed with Delhi and Bombay Stock Exchanges. The company was incorporated in June, 1970 and has issued equity as well as preference shares in 1970-71 and 1972-73. The preference shares were issued in two instalments as under: -

 

Ist Series

 

9,000   9.5% cumulative redeemable preference shares of Rs.100/- each, redeemable any time after 15th February, 1988, but not later than 15th February, 1991.

 

IInd Series

 

5,000   9.5% cumulative redeemable preference shares of Rs.100/- each, redeemable any time after 15th August, 1989, but not later than 15th August, 1991.

 

2.  The company has paid dividend on preference share upto 1972-73. Since 1973-74, the company is having accumulated losses continuously and, therefore, has not declared and paid any dividend on equity or on preference shares. The company has exercised its option and decided to redeem the entire preference shares during August/September, 1990, i.e., during the accounting year 1990-91. The accumulated losses as on 31st March, 1990, are to the tune of Rs. 69.94 lacs as per the audited accounts as against paid-up capital of Rs.84.20 lacs.

 

3.Two financial institutions, viz., ICICI and UPSIDC were also holding preference shares besides the public and promoters. The cheques for redemption amount were sent to all the share –holders including ICICI and UPSIDC.

 

4 Both the institutions have already got the redemption cheques cleared through their bankers. ICICI has already sent the preference share certificates for cancellation. However, UPSIDC has not so far returned the preference share certificates for cancellation. Now the above institutions are insisting that the dividend due on preference shares be paid to them. The company is of the view that in view of the accumulated losses, it cannot declare and pay dividend. So far no dividend has been declared and, therefore, nothing is due and payable. According to the querist, it has been established by different Courts that unless and until the dividend is declared, it cannot be said that the dividend is due for payment. Since 1973-74 till 1989-90, the liability for dividend on preference shares has been shown under ‘contingent liability’ in the annual reports and accounts finalised from time to time.

 

5.   The querist has sought the opinion of the Expert Advisory Committee on the following issues:

 

(a) Whether the company is liable to pay preference dividend from 1973-74 onward till redemption of preference shares, even though the company has redeemed the preference shares and no dividend on preference shares was declared from 1973-74 onward till 1989-90 on account of accumulated losses.

 

(b) While finalising the balance sheet for the year 1990-91, whether the company should show the liability towards preference dividend under contingent liability in case the Committee comes to the conclusion that the company is liable to pay dividend for the year from 1973-74 onward till the date of redemption, even after redemption of preference shares.

(c) Whether the company can declare and pay dividend for the accounting year 1990-91 on equity shares, without paying any dividend on the preference shares as the preference shares are not in existence.

 

                                                                                        Opinion                      April 24, 1991

 

1. The Committee notes that as per section 205 of the Companies Act, 1956, no dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year or out of the profits of the company for any previous financial year or years, remaining undistributed or, out of the both subject to the conditions laid down in that section.

 

2.  The Committee notes from the facts of the query that the company could not have declared or paid any dividend from 1973-74 to 1989-90 in view of the losses. 

 

3. The Committee is of the opinion that the company becomes liable to pay preference dividend on the existing preference shares only when it declares dividend.

 

4.  In view of Rule 2 of the Advisory Service Rules, the Committee offers no opinion on the issue as to whether the right to preference dividend continues even after the redemption of preference shares since the issue involves interpretation of law.

 

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