Arrears of preference dividend after redemption

of cumulativepreference shares

1.A Section 43A company which is a joint venture of a wholly State Government owned Corporation issued 10% cumulative redeemable preference shares to that Corporation. The shares are redeemable after a period of 12years from the date of allotment. The preference shares bear cumulative dividends but there is no provision for payment of arrears of dividends at the time of the liquidation of the company either in the Articles of Association of the company or the terms of allotment. They do not also provide for redemption of these shares at a premium. The company, all these years, was incurring losses or did not have any divisible profits. No dividend could therefore be declared in any year so far.

2.The preference shares nevertheless have now fallen due for redemption due to the expiry of the 12 years period provided in the terms of allotment. When the company offered to redeem the preference shares, due to the expiry of the period, the corporation demanded, in addition to the face value of the shares, further amounts which the Corporation termed as ‘an interest incidence’ at 10% per annum on those shares, from the date of disbursement of the money to the company upto the date of actual repayment of cumulative redeemable preference shares by the company. This, the company was informed, was being done purportedly in accordance with a scheme subsequently formulated by the State Government for disinvestments of funds by the promotional institutions like the present Government Corporation. According to the company, not only that the shares could be redeemed at par as originally allotted but also that in view of the continuous losses and no dividend having ever been declared in the absence of divisible profits, there could not be any payment by way of so called “interest incidence”. There was no provision for the payment of any premium in the terms of allotment of these shares and no payment could be made by way of interest on capital as demanded by the Corporation. The company is also contending that dividend on preference shares is payable only out of profits made by the company and as no dividend was or could be declared during the tenure of these preference shares, the question of payment of the accumulated arrears of the dividend on these preference shares, after the due date of their redemption, would not arise. Nor could dividends be declared or paid by the company on any non-existing shares, once the shares fell due for redemption.

3.The terms of allotment do not provide for payment of the arrears of dividends at the time of liquidation, or after due date of redemption, even if the company starts earning profits thereafter. But the Government Corporation is insisting on the payment of 10% per annum of these shares as “interest incidence” from the dates of disbursement of the monies towards allotment of the preference shares and only then will it surrender the shares to the company for redemption.

4. The querists have sought the opinion of the Expert Advisory Committee on the following issues arising from the above:

i) Is the said Corporation entitled to demand and the company bound to pay any amounts over and above the par value of the redeemable preference shares?

ii) If the answer to the above is ‘yes’, under what provisions of the Companies Act it can be paid, and to what head of account should such payments be debited?

iii) As the terms of allotment of preference shares and also the Articles of Association of the company do not provide for payment of arrears of dividend at the time of liquidation of the company or for payment of the arrears after the due date of redemption, is the company not right in saying that the preference shareholder is not entitled to any arrears of dividends or payment by way of so-called ‘interest incidence’.

iv) Can the Corporation refuse to surrender the shares on payment at par and if it does what are the remedies available to the company?

v) When once the redeemable preference shares have fallen due for redemption, is it correct to continue to show the concerned amount under the Capital Account or should the amount be classified as current liability?

vi) Is it still necessary for the company to show in the balance sheet the cumulative amount of undeclared dividends on these cumulative preference shares, as a contingent liability, after the preference shares are redeemed and no divisible profits were available before or by the time of the due date for their redemption?

Opinion May 16, 1986

1.The Committee assumes that the company has complied with the requirements of the Companies Act, 1956, which are relevant for the purpose of redemption of preference shares.

2.The opinion of the Expert Advisory Committee, on the issues raised by the querist in para 4 of the query, is as below:

i) The preference shareholder (i.e. the Government Corporation) is not entitled to demand and the company not bound to pay any amounts over and above the par value of the redeemable preference shares, unless the terms of issue so provide, since the preference shareholder’s right is to receive preference dividend only.

ii) As the answer to (i) is not in the affirmative, this question does not arise.

iii) In view of the above, the preference shareholder will not be entitled to ‘interest incidence’. The question of whether the preference shareholder has the right to receive preference dividend after the redemption of preference shares primarily involves interpretation of law. Since the Expert Advisory Committee is prohibited from answering such questions in view of Rule 2 of the Advisory Service Rules, the Committee refrains from expressing an opinion on this question.

iv) If the Corporation refuses to surrender preference shares for repayment at par, the company is absolved of its responsibility and can show the relevant information in the annual accounts as suggested in (v) below.

v) The redeemable preference share capital should be shown under the head ‘Current Liabilities’ separately as “Unclaimed Redeemable Preference Capital” with appropriate disclosure of the reasons for non-redemption, since once the said shares become due for repayment, the preference shareholder can demand the repayment thereof at any time.

vi) The Committee refrains from expressing an opinion on this question in view of (iii) above.

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