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CS Executive · Company Law and Practice · Share and Share Capital - Concepts

Kaveri Foods Ltd issues shares that carry a preferential right to a dividend at 9% and a preferential right to repayment of capital in winding up. The articles also let these shares share with equity shares in any surplus remaining after all capital is repaid. What is the status of these shares under Section 43?

They remain preference share capital. Under Section 43, capital with preferential dividend and repayment rights is deemed preference capital even if it also participates, fully or to a limited extent, in surplus after all capital has been repaid on winding up.

  1. AThey are equity shares with differential rights because they participate in surplus
  2. BThey are preference share capital, since the added right to participate in surplus does not change the classificationCorrect
  3. CThey are neither kind and must be treated as stock
  4. DThey become preference shares only if they participate fully, not to a limited extent

Explanation

Section 43 Explanation (iii) deems capital to be preference capital even if, besides the preferential rights, it can participate fully or to a limited extent in dividends or in surplus after capital is repaid. Thus participation in surplus does not convert it to equity. The last option is wrong because full or limited participation both retain preference status.

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