How Does Company Insolvency Affect Preference Shares?

Preference shares and how are these important in company insolvency

In a limited company, there are two primary types of shareholders: ordinary shareholders and preference shareholders. Ordinary shareholders receive “common” stock, while preference shareholders are issued “preferred” stock. Preference shares are typically prevalent in larger companies, especially those that have secured external investments.

 

Distinctions between preferred stock and common stock

Both types of shareholders hold a stake in the company and can receive dividends. However, there are notable distinctions between them. Preferred shareholders lack the entitlement to vote at shareholder meetings, leaving key decisions about the company’s operation to be made without their participation.

 

Shareholders and dividends

Holding preferred stock comes with distinct advantages. Firstly, preferred shareholders typically enjoy a fixed dividend, unrelated to the company’s performance. This provides investors with a level of certainty regarding the dividends they can expect at specified times, although they won’t benefit from potential increases in dividends if the company thrives over an extended period.

While a fixed amount doesn’t guarantee regular intervals for dividend payouts, it’s crucial to note that preferred shareholders must receive their dividends before common stockholders. 

If no dividends are issued during a period, neither preferred nor ordinary shareholders receive anything. For cumulative preferred shareholders, missed dividends can be rolled over and paid when the next dividends are announced. However, non-cumulative preferred shareholders miss out on payments if a dividend is skipped.

 

Shareholders and company liquidation

In the event of company liquidation, the advantage of holding preferred stock becomes evident. If the company faces financial difficulties and opts for a formal liquidation procedure, preferred shareholders take precedence over ordinary shareholders when it comes to receiving payment. However, all shareholders must await payment until secured, unsecured, and preferential creditors have been settled. Unfortunately, in an insolvent liquidation, there are often no remaining funds in the company once these liabilities are cleared.

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• What is a Seized Goods Letter
• Director Duties and Responsibilities When Insolvent

 

How does Vanguard Insolvency help?

If you’re contemplating liquidation and uncertain about how the company’s structure may impact the process, reach out to Vanguard Insolvency today. We’ll guide you through the available options, collaborating to select the most suitable path for you and your business. Call our expert advisers now to schedule a free, no-obligation consultation with a licensed insolvency practitioner at one of our 100 national offices.