ACCA Applied Skills · Corporate and Business Law (Global) · Share capital
Marlow Ltd has ordinary shares and 8% cumulative preference shares of $1 each. Its articles are silent on any further rights of the preference shares. In Year 1 no dividend was paid because profits were low. In Year 2 the company has profits and the directors wish to pay a dividend to the ordinary shareholders. Which statement is correct?
Cumulative preference shareholders must receive any arrears of their fixed dividend, as well as the current year's dividend, before ordinary shareholders are paid. Missing a dividend does not extinguish the right or entitle holders to repayment, and they do not participate in surplus unless the articles provide.
- AThe preference shareholders must be paid the Year 1 arrears and the Year 2 preference dividend before any ordinary dividend is paidCorrect
- BPreference shareholders lose the Year 1 dividend because no dividend was declared, so only Year 2 is paid first
- CPreference shareholders are entitled to share in surplus profits equally with ordinary shareholders after receiving 8%
- DPreference shareholders may demand repayment of their capital because the dividend was missed
Explanation
Cumulative preference shares carry a right to have unpaid dividends carried forward and paid in later years before ordinary shareholders receive anything. Hence both Year 1 arrears and the Year 2 dividend rank first. Option B describes non-cumulative shares. Preference shares are presumed not to participate in surplus profits unless the articles say so.
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