The right of a redeemable preference shareholder to enforce payment of the redemption amount : a nebulous right!

• Author: Milton Seligson
• Date: 01 June 2018
• Pages: 1-8
• Published date: 01 June 2018
• Record Number: btclq_v9_n2_a2
• DOI: 10.10520/EJC-f566bf141

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© Siber ink

The Right of a Redeemable

Preference Shareholder to

Enforce Payment of the

Redemption Amount:

A NEBULOUS RIGHT!

MILTON SELIGSON SC*

AbstrAct

The issue of redeemable preference shares is a common source of funding for

companies in South Africa and is also frequently resorted to by the banking

sector to raise capital. It has the advantage of being less costly than direct

loan funding and also of providing a source of tax-free dividends for investors.

The issue by companies of longer-term redeemable preference shares which

do not trigger the anti-avoidance provisions of the Income Tax Act aimed

at preference share investments that are regarded as essentially short-term

loans, is therefore still widely used to provide access to funding.

This article explores the enforcement rights of the holders of redeemable

preference shares against companies that issued them, by investigating the

limitations imposed on such instruments under the pertinent provisions of

the Companies Act 71 of 2008 (‘2008 Companies Act’) and the previous

Companies Act 61 of 1973 (‘1973 Companies Act’), and examining the true

legal nature of such shares with reference to relevant case law.

The article discusses typical redeemable preference share terms in relation

to redemption. It then analyses the relevant provisions of the 2008 Companies

Act. These include: section 4, which creates the solvency and liquidity test

and specif‌ies how it is to be applied for purposes of the 2008 Companies

Act; paragraph (a) of the def‌inition of ‘distribution’ in section 1; the require-

ments of section 46 in respect of the application of the solvency and liquidity

test which have to be satisf‌ied to permit a valid distribution by the company,

which the def‌inition of that term extends to the redemption of redeemable

preference shares; and the provisions of section 37, which reinforce the prohi-

bition on distributions under section 46 if its requirements are not satisf‌ied.

The article then discusses the legal nature of a redeemable preference

share and discusses court decisions that differentiate it from debt and conf‌irm

the limited remedies available to the holder of such a share under the 1973

Companies Act — specif‌ically the requirements of section 98, which prohib-

ited the redemption of preference shares except from available prof‌its or from

the proceeds of the issue of new shares of the company.

The article concludes that, although the provisions of section 98 of the

1973 Companies Act have not been retained in the 2008 Companies Act,

the effect of the requirements imposed by section 46 of the latter Act on any

* Senior Counsel, former member Cape Bar.