Learn the distinction between preference share capital and preference capital with detailed explanations and examples, exploring their rights and interrelation.
To understand the difference between preference share capital and preference capital we shall first look at the meaning of both the terms. The meaning of both terms are attached as an explanation to section 43.
Explanation (ii) to the section 43 provides;
“preference share capital”, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to—
(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company;
Explanation (iii) to the section 43 provides;
Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:—
(a) that in respect of dividends, in addition to the preferential rights to the amounts specified in sub-clause (a) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid;
(b) that in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in sub-clause (b) of clause ( ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.
I believe there is a no two ways to think that there is a difference between Preference share capital and preference capital. The explanation (ii) and (iii), attached to Section 43, are very well explicated it. However, we shall try to understand the inter se relation between preference share capital and preference capital.
Every Preference capital is also preference share capital because the right available as preference capital shall be in addition to the preferential right attached to the preference share capital. It is important to note that Share Capital shall be called Preference Share Capital only when it has the preferential right over both dividend and repayment of capital in case of winding-up or repayment otherwise.
However, in the case of Preference capital, the capital shall have either or both the right over the preferential right concerning dividends or in case of repayment of capital. It is also important to note that such right over dividend or capital in case of repayment or otherwise shall be on capital which is other than capital on which preference share capital has right.