Duties of an auditor in connection with the issue and redemption or redeemable preference shares by a limited company:
Issue and Redemption of Preference Shares: If the Articles of a company limited by shares permit, it may issue preference shares which are liable to be redeemed at the option of the company before, or on an appointed date. Section 80 of the Companies Act prescribes the following conditions:
ADVERTISEMENTS:
(1) No such shares will be redeemed unless they are fully paid.
(2) No such shares shall be redeemed except out of profits otherwise of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares for the purposes of the redemption.
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(3) The premium, if any, payable on redemption shall be provided for, either out of the “Share Premium Account” or out of profits or the company before shares are redeemed.
(4) If the shares are redeemed out of profits otherwise than out of the proceeds of a fresh issue, these shall, out of profits which would otherwise have been available for dividend, be transferred to a reserve fund to be called Capital Redemption Reserve Account.
ADVERTISEMENTS:
(5) The redemption of preference shares will not be taken as reducing the amount of the authorized Share Capital.
(6) Where in pursuance of this Section, a company has redeemed or is about to redeem any preference shares, it shall have power to issue shares up to the nominal amount of shares redeemed or to be redeemed as if those shares had never been issued; and accordingly, the share capital of the company, shall not, for the purpose of calculating the fees payable under section 611 be deemed to be increased by the issue of shares in pursuance of this Sub-section.
Provided that, where new shares are issued before the redemption of the old shares, the new shares shall not, so far as relates to stamp duty, be deemed to have been issued in pursuance of this sub-section unless the old shares are redeemed within one month after the issue of new shares.
(7) The Capital Redemption Reserve Account is a part of the Share Capital in the same way as ‘Share Premium Account’ and hence, it cannot be forfeited or applied except for paying up unissued share Capital of the company which can be issued to its members as fully paid bonus shares.
ADVERTISEMENTS:
Notwithstanding anything contained in this Act, no company limited by shares shall, after the commencement of the Companies (Amendment) Act, 1988, issue any preference share which is irredeemable or is redeemable after the expiry of a period of ten years from the date of its issue.
If a company fails to comply with the provisions of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one thousand rupees.
Auditor’s Duty:
(i) For Issue
The auditor should, first of all, examine the Articles of Association of the company to ensure such an issue is authorized by the Articles.
The issue should be vouched and he should check the necessary records made in the books of accounts in this connection.
Unless the shares are redeemed, the terms of redemption, if any, must be stated in the Balance Sheet along with the earliest date of redemption or conversion.
(ii) For Redemption
The auditor should see that the provisions of section 80 given above have been complied with.
If the shares are redeemed out of a fresh issue, he should examine the Articles and the Minutes of Directors.
He should vouch the entries passed to give effect to redemption and ensure that they are correct.
Redemption of Irredeemable Preference Shares, etc:
Under the Companies (Amendment) Act, 1988 a new section 80A has been inserted which provides as under:
(1) Notwithstanding anything contained in the terms of issue of any preference shares, every preference share issued before the commencement of the Companies (Amendment) Act, 1988:
(a) Which is irredeemable, shall be redeemed the company within a period not exceeding five years from such commencement, or
(b) Which is not redeemable before the expiry of ten years from the date of issue thereon in accordance with the terms of its issue and which had not been redeemed before such commencement, shall be redeemed by the company on the date on which such share is due for redemption or within a period not exceeding ten years from such commencement, whichever is earlier:
Provided that where a company is not in a position to redeem any such share within the period aforesaid and to pay the dividend, if any, due thereon (such shares being hereinafter referred to as unredeemed preference shares), it may, with the consent of the Company Law Board on a petition made by it in this behalf and notwithstanding anything contained in this Act, issue further redeemable preference shares equal to the amounts due (including the dividend due thereon), in respect of the (unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemable shares shall be deemed to have been redeemed.
(2) Nothing contained in section 106 or any scheme referred to in sections 391 to 395, or in any scheme made under section 396, shall be deemed to confer power on any class of shareholders by resolution or on any class of shareholders by resolution or on any court or the Central Government to very or modify the provisions of this section.
(3) If any default is made in complying with the provisions of this section:
(a) The company making such default shall be punishable with fine which may extend to one thousand rupees for every day during which such default continues; and
(b) Every officer of the company, who is in default, shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine.