Voting Rights of Preference Shareholders under Companies Act, 2013

Generally voting rights are available only to the equity shareholders of the company. Preference shareholders do not enjoy normal voting rights like equity shareholders. The basis for not allowing the preference shareholders to vote is that the preference shareholder is in a relatively secure position and therefore should have no right to vote. But under certain circumstances voting rights will also be available to the preference shareholders of the company.

Section 47(2) of the Companies Act 2013 provides that

(a) Where every member of the company limited by shares and holding any preference share capital shall have a right to vote in respect of such capital

(i) Where resolutions placed before the meeting which directly affects the rights to his preference shares and

(ii) Any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital and

(iii) his voting right on a poll shall be in proportion to his share in the paid up preference share capital of the company

(b) The portion of the voting rights of equity shareholders to the voting rights of the preference shareholders shall be in the same proportion as the paid up capital in respect of the equity shares bears to the paid up capital in respect of the preference shares.

(c) Where the dividend is not paid such class of preference shares for a period of 2 years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the meeting.

Section 47 of the companies Act 2013 provides for voting rights of the shareholders. The same deals with section 87 of the companies act 1956.

Case Law

In the case of SURYAKANT GUPTA vs RAJARAM CORN PRODUCTS (Punjab), it was held that if dividend to preference shareholders is in default for a long time, they became entitled under section 87 of the companies act 1956 for exercise voting rights on preference shares.

But the act is silent on certain matters it leads to several queries ,

(a) The act mentioned about the voting rights in failure of payment of dividend in respect of a class of preference shares for 2 years or more. Here the question arises, the period of 2 years means whether consecutive years or any two years from the issue of preference shares ?

(b) Whether the right will be a permanent or temporary? The act does not provides a clarification too.

(c) Is there any remedy available once the preference shareholders gets subsequent payment?

Exemption

Section 47(2) of the companies act 2013 shall not apply to a private company where a memorandum and articles of association of the company so provide. (Vide Notification No.461(1) dated 5th June 2015)

Conclusion

As per the language provided in section 47(2) of the companies act 2013, in our view,the period of 2 years mentioned shall be any 2 years from the date of issue and it will not be consecutive. In case of Cumulative preference shares, payment of dividend in the subsequent years after defaults may be taken as a remedial step.

Notes

(i) Dividend- Dividend includes any interim dividend.

(ii) Cumulative preference shares- Cumulative preference shares are entitled to receive the dividend for a year in which dividends could not be paid due to losses or inadequate profit in the subsequent years when there are sufficient profits.

(Author can be reached on Srinivas. Battala77@gmail.com)