Why is it necessary to convert partly paid up preference shares into fully paid up shares before redemption?

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thetall eNotes educator| Certified Educator

Partly paid up preference shares are shares that the shareholder has not entirely paid for either at the time of incorporation or issuance. During incorporation and issuance, the shareholder is allowed to pay an amount less than the face value of the share. However, the company expects the remainder of the cost at face value to be paid at some point in the future. Fully paid up preference shares are shares that have their face value paid up in full by the shareholder.

In most jurisdictions, the Companies Act requires partly paid up preference shares be paid up in full before they are redeemed by the shareholder. The logic behind the concept holds that the firm cannot pay for what the shareholder does not completely own. The shareholder of partly paid up preference shares is considered to be in debt, and it is only after they completely service the debt that they can claim the full value of the shares. It is also important to note that the price to be paid by the company at redemption is established during issuance and is based on the face value.