Declaring Dividends to Preference Shares
- Roger Pay
- Jul 9
- 8 min read
Declaring Dividends to Preference Shares
You can absolutely declare and pay dividends to the Redeemable Preference Shares (RPS) holders without declaring any dividends to the Ordinary Shareholders.
In fact, this is standard corporate practice. Here is how the mechanics work under Singapore and Malaysian company laws:
1. Dividend Priority is Inherent to RPS
Preference shares, by their very definition, have priority over ordinary shares when it comes to dividends. The terms of the RPS (found in the Company’s Constitution or the Subscription Agreement) almost always state that the preference shareholder must be paid their stipulated dividend before any dividend can be distributed to ordinary shareholders. There is no requirement to match or declare dividends to ordinary shareholders concurrently.
2. Board Consensus & Authority
The declaration of dividends must be initiated by a Directors' Resolution. The Board needs to formally approve:
The declaration of the RPS dividend.
The specific amount or rate (as defined by the RPS terms).
The satisfaction of the statutory requirements.
3. The Solvency Test (Critical Requirement)
Satisfying the solvency test is paramount. Before paying out any dividend, the Directors must formally declare that the company will remain solvent immediately after the payment is made.
In Singapore (Companies Act, Section 403): Dividends must only be paid out of profits. The directors must also ensure the company can pay its debts as they fall due within the next 12 months.
In Malaysia (Companies Act 2016, Section 132): The directors must authorize the distribution only if they are satisfied that the company will be solvent immediately after the distribution is made (able to pay debts as they become due within 12 months).
To keep everything perfectly compliant, we just need to ensure the Directors' Resolution explicitly captures the authorization of the dividend and includes the standard Solvency Statement signed by the directors.
Let us know if you would like us to draft the Directors' Resolution and Solvency Statement for this declaration, or if you need us to review the specific dividend clauses in Constitution first.
Even though the RPS is of an equity nature?
Even if the RPS is classified as equity in the accounts, the dividend rules remain exactly the same.
The distinction highlighted—whether an instrument is "equity nature" or "debt/liability nature"—is an accounting classification (under financial reporting standards like FRS/MFRS 132). However, company law looks strictly at the legal form of the instrument, not its accounting treatment.
Here is why the equity classification does not change the answer:
1. Legal Form Trumps Accounting Classification
For company law, corporate secretarial compliance, and dividend declarations, an instrument is governed by how it is legally registered. Because it is legally registered as a Share (specifically, a preference share) and not a loan:
It is legally subject to the dividend rules of the Companies Act.
It is meant to be paid out of distributable profits, which aligns perfectly with it being equity in nature.
2. Preference Shares Are Inherently "Different" from Ordinary Shares
The defining feature of any preference share—whether classified as equity or liability on the balance sheet—is that it has preferential rights over ordinary shares.
By law, you are permitted to treat different classes of shares differently.
Paying a dividend to the RPS holder while bypassing the ordinary shareholders is not unequal treatment; it is simply executing the specific rights attached to that class of shares.
3. Why it is classified as Equity (FRS / MFRS 132)
An RPS is typically classified as equity when the redemption is at the discretion of the issuer (the company) rather than the holder, meaning the company has no unavoidable contractual obligation to deliver cash.
Whether it sits in the Equity section or the Liabilities section of the balance sheet only affects your financial statement presentation and financial ratios. It does not change the legal mechanism of how you reward the shareholder. You still use a Directors' Resolution, you still need available profits, and you still must pass the solvency test.
Summary
You can be reassured that its "equity nature" actually reinforces that it should be paid via a standard legal dividend declaration. As long as the Board passes the resolution, profits are available, and the solvency test is cleared, declaring to the RPS holder alone is perfectly correct and legally sound.
Scaling Your Business Safely: How Bestar Singapore Guides Corporate Growth, Compliance, and M&A
In an increasingly volatile regional economy, expanding or restructuring a business requires navigating a complex maze of regulatory compliance, statutory financial obligations, and strategic deal-making. For companies operating in or expanding through Singapore and Malaysia, managing these operational layers concurrently can quickly drain executive resources.
As a premier professional services firm, Bestar Singapore serves as an end-to-end institutional partner. Bestar provides integrated corporate secretarial, statutory auditing, taxation, and specialized Mergers & Acquisitions (M&A) advisory to ensure corporate growth is legally compliant, financially optimized, and structurally sound.
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Operating a business across borders demands flawless corporate governance. Cross-border entities frequently face strict regulatory enforcement from authorities such as the Accounting and Corporate Regulatory Authority (ACRA) in Singapore and the Companies Commission of Malaysia (SSM).
Bestar’s corporate secretarial division acts as the frontline defensive shield for your enterprise. By managing statutory filings, keeping company registers meticulously updated, and handling nuanced equity restructurings, Bestar eliminates compliance friction.
Navigating Complex Share Structures & Distributions
A frequent point of friction for expanding companies is the management of diverse share classes—such as Redeemable Preference Shares (RPS). When boards decide to reward specific tiers of investors, they must navigate strict legal frameworks rather than purely accounting classifications.
Statutory Reality Check: While financial reporting frameworks like FRS/MFRS 132 often classify an RPS as a liability or equity based on redemption mechanics, company law looks strictly at its legal form.
When declaring dividends to RPS holders independently of ordinary shareholders, corporate boards must meet rigid statutory benchmarks to prevent personal liability for directors:
Board Authorization: Formulating exact Directors' Resolutions that align precisely with the priority rights embedded in the Company's Constitution.
The Solvency Test Margin: Under Section 403 of the Singapore Companies Act and Section 132 of the Malaysian Companies Act 2016, directors must formally declare and prove that the company will remain solvent—fully capable of paying its debts as they fall due within the next 12 months—immediately after the distribution is made.
Bestar directly mitigates this regulatory risk by auditing the constitutional clauses, drafting the necessary resolutions, and verifying the underlying financial data to back the formal Solvency Statements.
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Growth without financial transparency limits access to institutional capital, banking facilities, and clean exit valuations. Bestar’s statutory auditing and tax advisory services transform mandatory compliance into strategic assets.
Automated, AI-Driven Statutory Auditing
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Strategic Cross-Border Tax Optimization
Expanding operations between Singapore and Malaysia exposes a corporate group to differing tax regimes, transfer pricing scrutiny, and double taxation risks. Bestar’s tax planners structure cross-border transactions to maximize incentives, utilize appropriate double taxation treaties (DTAs), and maintain absolute compliance with both IRAS and IRB frameworks.
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True corporate scaling often requires inorganic growth—acquiring market share, buying out regional competitors, or orchestrating a lucrative corporate exit. Through its specialized arm, Gold House M&A, Bestar provides full-spectrum business brokerage and corporate advisory services.
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Partner with Bestar Singapore
Whether your company is currently clearing a statutory solvency test for a complex dividend distribution, deploying AI-driven compliance controls, or preparing for a cross-border corporate acquisition, Bestar provides the professional framework required to execute safely.
Would you like to speak with a corporate secretarial expert regarding an upcoming share restructuring or dividend declaration?
How can Bestar Singapore assist with drafting Directors' Resolutions and executing Solvency Tests for cross-border companies?
To execute cross-border dividend distributions or capital reductions cleanly, corporate actions must satisfy both Singapore and Malaysia company laws simultaneously. Bestar Singapore manages this regulatory overlap by acting as a single, coordinated corporate secretarial and legal compliance partner.
Here is exactly how Bestar structures and executes this process to insulate your board from personal statutory liability:
1. Pre-Resolution Constitutional Verification
Before a single document is drafted, Bestar’s corporate secretarial team audits the company’s underlying legal framework across both jurisdictions.
Class Rights Alignment: For complex distributions (such as paying dividends to Redeemable Preference Shares without declaring them to ordinary shareholders), we verify that the priority rights are explicitly protected in the Company’s Constitution or Subscription Agreement.
Accounting vs. Legal Form Analysis: We ensure that even if an instrument is classified as equity or a liability under financial reporting standards (FRS 132 / MFRS 132), it is handled via the correct legal mechanism required by company law.
2. Drafting Precision: Directors' Resolutions
Bestar drafts dual-compliant circular resolutions or minutes of board meetings that provide an ironclad paper trail for regulatory inspectors.
Singapore Compliance: For Singapore entities, the resolutions are drafted to comply strictly with Section 403 of the Companies Act, ensuring dividends are paid strictly out of available profits and are explicitly authorized by the board.
Malaysia Compliance: For Malaysian subsidiaries or sister companies, the documentation is mapped to Section 132 of the Companies Act 2016, capturing the mandatory formal authorization criteria before any distribution is executed.
3. Executing the Statutory Solvency Test
This is the most critical risk-mitigation step. Directors face severe civil and criminal penalties if a company falls into insolvency within 12 months of a distribution. Bestar provides the financial and legal scaffolding to back your directors' signatures:
[Financial Data Review] ➔ [Cash Flow Modeling (12-Mo)] ➔ [Solvency Statement Drafting] ➔ [Board Execution]
Financial Substantiation: Bestar’s accounting and audit teams review the company's current balance sheets and aging accounts payable to verify that the company can pay its debts as they fall due.
The 12-Month Cash Flow Window: We assist management in verifying cash flow projections to prove that the entity will remain fully viable immediately after the capital or dividend is paid out, covering the statutory 12-month look-ahead period required by both ACRA (Singapore) and SSM (Malaysia).
Drafting the Solvency Statement: We prepare the formal statutory Solvency Statement (or Declaration of Solvency) required to be signed by the directors, ensuring the language perfectly mirrors the strict legal templates mandated by regional regulators.
4. Cross-Border Lodgment and Record Keeping
Once the board signs off, Bestar handles the administrative completion:
Filing any necessary updates or returns with ACRA and SSM within the mandated statutory windows.
Updating the internal Register of Members and Minutes Book across both jurisdictions.
Coordinating with your corporate bankers to ensure the physical cross-border remittance matches the declared resolution amounts perfectly, preventing any transfer freezes or regulatory inquiries.
By routing both the legal drafting and the financial verification through Bestar, your board gains the assurance that the solvency test is not just a signed piece of paper, but a thoroughly audited corporate action.
Would you like a template or a checklist of the financial data needed to satisfy a standard statutory Solvency Test?
How would you like to proceed with dividend declaration:
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