ICANBusiness, Management and FinanceSources of Finance2023

Under the CAMA 2020, which of the following statements regarding the redemption of preference shares by a public company is CORRECT?

APreference shares may only be redeemed out of the proceeds of a fresh issue of shares or out of distributable profitsCORRECT
BPreference shares may be redeemed out of any capital reserve including the share premium account without restriction
CPreference shares cannot be redeemed unless the company is being wound up
DPreference shares may be redeemed out of a capital redemption reserve funded from any source
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Why the answer is A, and why the others tempt you.
Section 185 of CAMA 2020 provides that redeemable preference shares may only be redeemed out of distributable profits or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. Where redemption is out of profits, an equivalent amount must be transferred to a capital redemption reserve to maintain the company's capital base. Options B and D overstate the permissible sources, and Option C is incorrect as redemption is permitted during the company's life.
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