# Preference Share Capital — Section 43(b)

## Definition

Preference share capital is that part of the issued share capital of a company limited by shares which carries a preferential right in respect of:

### (a) Payment of Dividend

The preferential dividend may be either:

An absolute amount, or
A fixed rate (which may be free of or subject to income-tax).

### (b) Repayment of Capital on Winding Up

On winding up or repayment of capital, preference shareholders rank ahead of equity shareholders.

This preference exists only up to the amount paid-up (or deemed paid-up) on the shares, unless the terms agree otherwise.

## Three Critical Notes

### Note 1 — Saving of Pre-existing Rights

Nothing in the Act affects the rights of preference shareholders who, before commencement of this Act, were entitled to participate in winding-up proceeds.

### Note 2 — Participation in Equity Surplus

Preference shareholders may also participate in the equity pool after their preferential entitlements are paid, but only if the AoA and terms of issue so provide.

> Leading case — Scottish Insurance Corpn Ltd v. Wilsons & Clyde Coal Co Ltd (House of Lords): If the right to participate in the surplus is not specified in the terms of issue, preference shares are presumed to be NON-participating.

To determine participation, one must look within the four corners of:

The Articles of Association, and
The terms of the issue.

### Note 3 — Presumption of Cumulative

Preference shares are always presumed to be cumulative — unpaid dividends accumulate and become payable in future years. The cumulative character can be excluded only by a clear provision in the AoA.

## Common Classifications of Preference Shares (terms of issue based)

Type	Feature
Cumulative	Unpaid dividend accumulates (default presumption)
Non-cumulative	Unpaid dividend lapses (must be clearly stated in AoA)
Participating	Shares in surplus after equity dividend
Non-participating	Confined to fixed preferential dividend (default presumption)
Convertible	Convertible into equity
Non-convertible	Not convertible
Redeemable	Repayable by company within stipulated period (max 20 years; 30 years for infrastructure projects)

Worked example

### Example 1

Q. A company's AoA is silent on whether its preference shares participate in surplus on winding up. Will preference shareholders share in the residual surplus along with equity shareholders?

A. No. As affirmed in Scottish Insurance Corpn Ltd v. Wilsons & Clyde Coal Co Ltd, where the AoA / terms of issue are silent, preference shares are presumed non-participating. They will receive only their preferential capital repayment.

### Example 2

Q. XYZ Ltd. did not declare dividend for FY 2024-25 on its preference shares. The AoA is silent. Can the unpaid dividend be claimed in a later year?

A. Yes. Preference shares are presumed cumulative unless the AoA expressly states otherwise. The unpaid dividend accumulates and is payable in later years, in priority to equity dividends.

### Example 3

Q. A preference shareholder claims that under their share terms, they are entitled to participate equally with equity shareholders in winding-up surplus. Where would you look to verify?

A. Look at (i) the Articles of Association, and (ii) the terms of issue of the preference shares. Outside these 'four corners', no right of participation arises.

⚠️ Common exam mistakes

Assuming preference shares are automatically participating — they are presumed NON-participating unless AoA says otherwise.
Assuming preference shares are non-cumulative by default — the law presumes them to be CUMULATIVE.
Confusing 'preference in dividend' with a guarantee of dividend — preference shareholders still have no right to dividend unless declared by the company (subject to cumulative right to arrears).
Forgetting that the preferential right of repayment is limited to the paid-up amount on the shares, unless otherwise agreed.
Ignoring the leading case Scottish Insurance Corpn v. Wilsons & Clyde Coal Co — important for AoA silence scenarios.

Bare-Act text Section 43, Explanation (ii) · The Companies Act, 2013 · click to expand

Explanation (ii) to Section 43: 'preference share capital', with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to— (a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and (b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company.

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Preference Share Capital — Features and Rights (Section 43(b))

Worked example

⚠️ Common exam mistakes