# Preference Share Capital

## 1. 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 — which may be:

An absolute amount, or
At a fixed rate (free of, or subject to, income tax).

(b) Repayment of capital — in the case of winding up or repayment of capital before winding up.

> The preference exists only up to the amount paid up or deemed to have been paid up on the shares, unless there is an agreement to the contrary.

## 2. Key Statutory Note

Nothing in the Act affects the rights of preference shareholders who are entitled to participate in the proceeds of winding up before the commencement of the Act. (Saving clause — protects pre-Act vested rights.)

## 3. Participation in Surplus — Two Presumptions

### Presumption 1: Participation in Surplus

Preference shareholders may also participate in the equity pool after the preferential entitlements. However, this right is not automatic — one must look within:

The four corners of the Articles of Association, AND
The terms of issue.

If the right to participate in surplus is not specified in the terms of issue, preference shares are presumed to be non-participating.

> Authority: Scottish Insurance Corpn Ltd v. Wilsons & Clyde Coal Co Ltd (House of Lords) — affirmed this principle.

### Presumption 2: Cumulative Dividend

Preference shares are always presumed to be cumulative. The accumulation of unpaid dividend can be excluded only by a clear provision in the Articles of Association.

This means:

If dividend cannot be paid in a year (due to insufficient profits), it carries forward.
The company must clear all arrears of preference dividend before paying any equity dividend.

## 4. Two Presumptions — Quick Recap

Aspect	Default Presumption	How to Rebut
Participation in surplus	Non-participating	Express terms in AoA / terms of issue
Cumulative dividend	Cumulative	Clear provision in AoA

## 5. Why These Presumptions Matter

The presumptions tilt protection towards the preference shareholder (cumulative dividend) but limit upside (non-participating) unless the company has bargained otherwise. They reflect the commercial logic of preference shares as quasi-debt instruments.

Worked example

### Example 1

Example — Cumulative Dividend:

A company issued 9% preference shares of ₹100 each. It earned no profits for three years and skipped the dividend. In Year 4, it has profits sufficient to pay equity dividend.

Analysis: Since preference shares are presumed cumulative, the company must first pay 4 years × 9% = 36% arrears of preference dividend before paying any equity dividend, unless the AoA expressly states the shares are non-cumulative.

### Example 2

Example — Participation in Surplus:

On winding up, after paying preference shareholders their capital and arrears of dividend, a surplus of ₹50 lakh remains. The AoA is silent on participation rights.

Analysis: Applying the Scottish Insurance Corpn principle, the preference shareholders are non-participating by default. The entire ₹50 lakh surplus is distributable only to equity shareholders.

⚠️ Common exam mistakes

Students often think preference shares carry a 'fixed' dividend in absolute terms only. The dividend may be either an absolute amount or a fixed rate.
Assuming preference shareholders automatically participate in surplus on winding up. They are presumed non-participating unless expressly provided.
Forgetting that the cumulative presumption can be rebutted only by a clear provision in the Articles — a clause in the prospectus alone may not suffice.
Missing that the 'preference' for repayment of capital is limited to the amount paid up (or deemed paid up), not the face value.

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

Explanation to Section 43: For the purposes of this section,— (ii) '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 Presumptions [Section 43]

Worked example

⚠️ Common exam mistakes