Non redemption of preference shares

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

07 February 2012 If a company fails to redeem its pref. shares after the pass of time period about 25 years since issue.
and now company wants to correct its mistake.
what action the company should take to avoid the heavy penilites against it...?

Ajay Mishra

Ajay Mishra (Expert)
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09 February 2012 Hi

I think you will covered under sub section (3) of Section 80A of the Companies Act, 1956.

Regards
CS Ajay Mishra

Querist : Anonymous

Querist : Anonymous (Querist)

09 February 2012 Thank u Ajayji... bt U/S 80A(3) punishment may be extended to rs. 10,000 every day or imprisonment extended upto 3 years.
and the delay for reedemption of those shares is about 6 years.. so is there any way to avoid or reduce the fine...?

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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03 August 2024 If a company has failed to redeem its preference shares within the stipulated time period (in this case, 25 years), and it now wishes to correct this mistake, there are several steps it should take to rectify the situation and mitigate potential penalties. Here’s a detailed approach:

### **1. **Understanding the Legal Framework**

**a) **Provisions Under the Companies Act, 2013:**

1. **Section 55 of the Companies Act, 2013:** This section deals with the redemption of preference shares. It mandates that preference shares must be redeemed as per the terms specified in the Articles of Association or as agreed upon.

2. **Section 80A(3):** This section specifies the penalties for non-compliance with the redemption of preference shares, which can include a fine of up to ₹10,000 for each day of delay or imprisonment of up to 3 years.

### **2. **Immediate Actions to Take**

#### **a) **Resolve the Redemption Issue**

1. **Hold a Board Meeting:** Convene a Board meeting to discuss the non-redemption of preference shares and decide on the course of action.

2. **Prepare Redemption Plan:** Formulate a plan to redeem the preference shares, including the amount to be paid and the method of redemption. Ensure compliance with the terms originally set out for redemption.

3. **Seek Shareholder Approval:** If required, obtain approval from the shareholders for the redemption plan. This may involve passing a special resolution in a general meeting.

4. **Notify Authorities:** File the necessary forms with the Registrar of Companies (RoC) to update the records regarding the redemption.

#### **b) **Legal and Compliance Review**

1. **Consult a Legal Expert:** Engage with a legal advisor or a company secretary to review the compliance and to guide you through the redemption process, including drafting resolutions and filing with the RoC.

2. **Prepare Documentation:** Gather and prepare all necessary documentation, including the resolution passed, proof of payment to shareholders, and any other relevant documents.

### **3. **Mitigating Penalties**

#### **a) **Mitigation Steps**

1. **Prompt Compliance:** Address the issue as soon as possible. The sooner you complete the redemption, the better your chances of mitigating penalties.

2. **Voluntary Disclosure:** Disclose the non-compliance and the steps being taken to rectify the situation to the authorities. Transparency can sometimes lead to a more lenient view from regulatory bodies.

3. **Penalty Negotiation:** While the Companies Act provides specific penalties, negotiating with the RoC or seeking a reduction in penalties based on your compliance efforts and the steps taken to rectify the situation can be beneficial.

#### **b) **Application for Compounding**

1. **Compounding of Offense:** Apply for compounding of the offense under Section 441 of the Companies Act, 2013. Compounding is a process where a company can seek to settle the matter by paying a fine, without the case going through a court trial. This process might be available for the offense of non-redemption.

2. **Form and Procedure:** File Form GNL-1 with the RoC, providing details of the offense and the proposed settlement amount. This application should include a statement of facts and reasons for non-compliance.

### **4. **Preventive Measures**

1. **Review and Update Policies:** Ensure that company policies are updated to prevent such occurrences in the future. Regularly review the status of share capital and compliance requirements.

2. **Internal Controls:** Strengthen internal controls and compliance mechanisms to ensure timely action on such matters.

### **5. **Summary**

- **Immediate Redemption:** Take steps to redeem the preference shares as per the company’s policies and legal requirements.
- **Consult Professionals:** Work with legal and compliance experts to ensure proper handling and to seek advice on reducing penalties.
- **Compounding and Negotiation:** Explore options for compounding the offense and negotiate with the RoC if necessary.
- **Preventive Actions:** Implement preventive measures to avoid future issues.

By promptly addressing the redemption of preference shares and taking steps to mitigate penalties, the company can manage the situation effectively and reduce the risk of heavy fines or legal consequences.

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