70. Redeemable preference shares Flashcards
- Redeemable preference shares
General overview
[70.01] Unlike a debenture or a loan, a share is an investment in a company and hence, may be lost through the business failure of the company. A preference share has a legal nature of a share but practically speaking, operates like a debenture or loan. Since it takes on the legal nature of a share, it can also be lost through a business failure of the company. However, the Act provides that a company may, if authorised by its constitution, issue redeemable preference shares. This means that the holder of such preference shares is entitled to have his shares redeemed on the terms of the issue. When shares are redeemed by the company, capital is returned to the shareholders and hence, the directors have to sign a solvency statement to ensure that the company is solvent and creditors are not prejudiced by the payment of capital back to shareholders.
[70.02] A company may, if so authorised by its constitution, issue redeemable preference shares on such terms as it thinks fit. Only fully paid-up shares may be redeemed by the company: s 70(3). A company is bound by an agreement to redeem preference shares issued to an investor if it does not become listed at the securities exchange: UOB Venture Investments Ltd v Tong Garden Holdings Pte Ltd & Ors [2000] 3 SLR(R) 585; [2000] SGHC 228, HC. Preference shares that are redeemed are not part of the nominal capital of the company
“redeemed out of… capital”
[70.03] No redeemable preference shares shall be redeemed out of capital unless all the directors have made a solvency statement which has been lodged with the registrar: s 70(4). See further, the cases on capital maintenance rule and the statutory exceptions under ss 76, 76B, 76C, 76D, 76DA, 76E, 78A, 78B and 78C.
Fresh issue of shares
[70.04] The new s 70(5) introduced vide Act No 36 of 2014 clarifies that shares that are redeemed out of the proceeds of a fresh issue of shares shall not be treated as having been redeemed out of capital.
Prescribed notice of redemption
[70.05] A private company shall lodge a notice of redemption with the registrar: s 70(6). A public company shall do so within 14 days after such redemption specifying the shares redeemed: s 70(8).
