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IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies

In a winding up of an Indian company, where preference shares are participating only in the sense of a fixed dividend and carry no right to surplus, which feature best describes how they rank?

Preference shareholders rank after all creditors, secured and unsecured, but before ordinary shareholders when capital is returned in a winding up. Their preferential right is over ordinary equity, not over debt claims.

  1. AAhead of debenture holders secured by a charge
  2. BAhead of ordinary shareholders but behind all creditorsCorrect
  3. CEqually with unsecured trade creditors
  4. DBehind ordinary shareholders for return of capital
  5. Ahead of employees' dues and taxes

Explanation

Preference shares are equity-type capital, so creditors are paid first. Preference holders then get their capital back before ordinary shareholders. They do not rank with creditors.

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