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ACCA Applied Skills · Corporate and Business Law (Global) · Share capital

Delta Co issues 10,000 preference shares of $2 each. The terms give the holders a fixed 6% dividend each year, payable before any ordinary dividend, but no right to share in surplus profits beyond that. In a later year the company has insufficient profit to pay the dividend, and the terms say nothing about arrears. Which statement is correct?

The preference shareholders lose that year's dividend. Preference shares are presumed non-cumulative unless their terms provide otherwise, so unpaid dividends do not accumulate. Nor can dividends be paid out of capital, so the holders cannot compel payment from it.

  1. AThe holders are presumed to have cumulative rights, so the unpaid dividend must be carried forward
  2. BThe holders are presumed to have non-cumulative rights, so the unpaid dividend is lost for that yearCorrect
  3. CThe holders may force the company to pay the dividend out of capital

Explanation

Under the general legal presumption, preference shares are non-cumulative unless the terms say otherwise. If no dividend is declared for a year, the right to that year's dividend lapses. Dividends cannot be paid out of capital, so the third option is wrong, and the cumulative presumption in the first option is the opposite of the rule.

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