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Brilliant Ltd is a private limited by shares incorporated under Cap. 622. It has firstly issued 5,000 ordinary shares, and subsequently 10,000 8% redeemable preference shares. Both types of shares are issued at $2 each. All monies have been collected for the issued shares. The articles of association of Brilliant states that the preference dividend of the preference shares is to be paid out of yearly profits, and that the holders of the shares only have the right to vote at a meeting of the company when their dividend has not been paid or their rights are being varied. Brilliant has made substantial profits in the initial years and accumulated handsome profits on reserve. In recent years it applied some profits for expansion, but its business deteriorated after expansion. Though it still has positive profits reserve, it has not generated profits for a few years until the last year. In the past three years it did not declare a dividend. The preference shareholders are unhappy about not receiving any dividend for three years. Now that Brilliant has started to make profits again, they expect dividend to be declared this year.

(a) Brilliant wishes to pay a 4% dividend to its ordinary shareholders. The directors seek your advice as to whether they can recommend a 4% dividend on all the companys shares, ordinary and preference. Do the preference shareholders have any right to the dividends in arrears? (b) The interest rates for borrowing money are currently about 4%. The directors are considering whether Brilliant should redeem its preference shares in full. Advise them.

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