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

Kaveri Textiles Ltd has 8% preference shares that carry a preferential right to a fixed dividend and to repayment of capital on winding up. The articles also give these shares a right to share with equity shares in any surplus remaining after all capital is repaid on winding up. How are these shares classified?

The shares remain preference shares. The Act deems capital to be preference capital even where, besides the preferential dividend and repayment rights, it also participates with other capital in any surplus left after the entire capital is repaid on winding up.

  1. AEquity shares, because they participate in the surplus
  2. BPreference shares, despite the right to participate in surplusCorrect
  3. CA third class of shares, neither equity nor preference
  4. DPreference shares only if the surplus right is waived

Explanation

Under the Explanation to section 43, capital is deemed to be preference capital even if, in addition to its preferential rights, it can participate in the surplus after all capital is repaid. Option one is wrong because participation does not remove the preferential character. The Act recognises only equity and preference share capital.

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