Unit: Company law
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Login to Access(i) Explain the meaning of the phrase "cutting a melon".
(ii) State three reasons why a limited company might suspend issuing dividends.
The management is contemplating on whether to issue shares or debentures.
Required:
Advise the management of Baridi Ltd. the disadvantages of debentures over shares as a method of raising capital.
(i) Describe four effects of a share transfer.
(ii) Explain two consequences of a forged transfer.
(i) State four exceptions to the rule that a company should not issue shares at a discount.
(ii) Explain three roles of the court in the reduction of a company's capital.
(i) Outline four remedies of debenture holders if the company defaults.
(ii) Summarise three differences between "debentures"and "shares".
Preference shares are shares that provide holders with preferential rights to dividends and repayment of capital over ordinary shareholders. They can be classified as participating or non-participating, based on whether they share in surplus profits beyond the fixed preference dividend.
| Feature | Participating Preference Shares | Non-Participating Preference Shares |
| Right to Dividends | Entitled to fixed preferential dividend and additional dividends if the company declares surplus beyond ordinary dividends. | Entitled only to the fixed preferential dividend; no right to share in surplus profits. |
| Participation in Surplus | Shareholders participate in the distribution of remaining profits after ordinary and preference dividends are paid. | Shareholders do not participate in surplus profits; they only receive the stated dividend. |
| Capital Redemption | Rights on redemption are usually fixed as per terms of issue; may also have a bonus if specified. | Rights on redemption are limited to the nominal value or stated redemption price. |
| Risk Exposure | Higher potential reward due to participation in surplus; risk is lower than ordinary shares because of fixed dividend priority. | Lower potential reward; risk is moderate because only fixed dividends are guaranteed before ordinary shareholders. |
| Example | A company declares 10% fixed preference dividend, but also distributes additional 5% from profits; participating preference shareholders receive both. | A company declares 10% fixed preference dividend; non-participating preference shareholders receive only 10%, no extra. |
The main difference lies in sharing surplus profits:
Participating preference shares allow holders to benefit beyond the fixed dividend.
Non-participating preference shares limit holders to the fixed dividend only, without any additional participation.
Required:
(i) Highlight three legal consequences of contravening this provision.
(ii) Summarise two exceptions to the above statement.
You are required to write a report outlining methods which might be adopted to reduce the capital of the company.