PREFERANCE SHAREHOLDERS

1 – undeclared dividends? Even though preference shares carry a fixed rate of dividend, for that dividend to be recognised as an appropriation of the year’s profits, it must be declared by the directors and normally passed by ordinary resolution of the company’s shareholders in general meeting (I believe , though, that it may be approved simply by directors’ resolution at a board meeting … but don’t worry about that. As a question in a law exam, that particular point has around a million : one chance of appearing!)

2 – preference shareholders first to be paid in a liquidation? NO!!!! I think that you are confusing preferential creditors with preference shareholders. ALL the company’s creditors must be paid in full in a company liquidation (other than the exempted part, see course notes!) before ANY shareholder receives a cent. The preference shareholders do have a preferential entitlement in that they must be paid in full before the equity shareholders receive anything, but they (pref shs)are quite low in the sequence of distribution of a company’s assets in a liquidation

3 – cumulative preference dividends? As answered in note 1 above, yes, the preference dividend is an appropriation of company profits and is cumulative (unless stated otherwise in the terms of issue of that class of shares) But, also as stated in answer 1 above, it’s not an appropriation unless and until it is declared by the directors. If the directors fail to declare the year’s preference dividend, then it’s not payable and it’s not an appropriation of this year’s profits. And therefore isn’t payable in a liquidation. And as-yet-unpaid DECLARED preference dividends from earlier years would be classed as payable

Does that make it any clearer?

(In future, please post in lower case. Using upper case feels like you’re shouting at me!)

You’re verrrrry welcome! 🙂