Which security holders will get unfulfilled obligations of the non-installment of profits by the Company during the misfortune?
- Convertible Preference Share Holder
- Ordinary Equity Holders
- Corporate Bonds
- Cumulative Preference Share Holders
Answer: d. Cumulative Preference Share Holders
The cumulative preference shareholder has a particular right that distinguishes them from other shareholders. These shareholders have a preference in dividends or profits over ordinary equity holders and corporate bondholders. In the case that dividends are not paid in a given year, the arrears accumulate and need to be paid to Cumulative Preference Shareholders before Ordinary Equity Holders can receive dividends.
Due to this preference in dividend payments, Cumulative Preference Shareholders have a priority claim on the unfulfilled obligations of the non-installment of profits during the misfortune. Cumulative Preference Shareholders are entitled to receive their dividends in full, including any accumulated arrears, before any profits are distributed to other shareholders.
Why the other options are not correct
a. Convertible Preference Share Holder
Convertible Preference Shareholders have the option to convert their preference shares into ordinary shares at a predetermined ratio, and do not have a special preference in receiving dividends. Therefore, they do not have a priority claim on the unfulfilled obligations of the non-installation of profits during the misfortune.
b. Ordinary Equity Holders
Common shareholders are called Ordinary Equity Holders. Consequently, they do not have any priority in receiving dividends and their right to profits is contingent on the availability of funds after the payment of all other obligations, including dividends to Cumulative Preference Shareholders. Consequently, Ordinary Equity Holders have no priority claim on the unfulfilled obligations of the non-installment of profits during the misfortune.
c. Corporate Bonds
In contrast to shareholders, corporate bondholders receive fixed interest payments (coupon payments) on their bonds on a regular basis. Instead of being shareholders, corporate bondholders are debt holders. In case of bankruptcy, bondholders have a greater claim to the company’s assets, but they don’t have a claim to the nonpayment of profits during the misfortune.
When a company faces financial difficulties and cannot fulfill its obligations to pay dividends or profits, the Cumulative Preference Shareholders have the right to receive the unfulfilled obligations of the non-payment of profits during the misfortune.
As a result of their preference for dividend payments, they have priority over other types of shareholders, such as Convertible Preference Shareholders and Ordinary Equity Holders, as well as Corporate Bondholders, who do not have a claim to profits that are not paid. In order to assess the risks and potential returns of investing in a company, investors and stakeholders need to understand the rights and priorities of various security holders.