Preference shares are a flexible funding tool for Singapore private companies – they give investors a fixed return and priority on winding up, without diluting ordinary shareholder voting. But most preference share issues include a redemption feature: the company must, or can choose to, buy the preference shares back on a set date or on the happening of a specified event.
Section 70 of the Companies Act 1967 tells you exactly how to redeem preference shares lawfully. Get any element wrong – the funding source, the solvency check, the ACRA filings – and the redemption is void, the company remains liable for the redemption price plus interest, and the directors face personal liability. This 2026 guide walks through the entire process.
What Are Redeemable Preference Shares?
A preference share gives the holder a preferential right over ordinary shareholders in two areas: (1) dividend priority (fixed or floating rate, paid before ordinary dividends), and (2) return of capital priority on a winding up. They may or may not carry voting rights.
A redeemable preference share is one whose terms allow the company to buy it back at a defined price on a defined date or event. The redemption can be:
- Mandatory – the company must redeem on a fixed date (say, 5 years from issue).
- At the company’s option – callable by the company from a specified date.
- At the holder’s option – the holder can put the shares back to the company.
- Contingent – triggered by an event such as an IPO, sale of the company or breach of covenant.
The terms must be set out in the company’s constitution or in a resolution passed at the time of issue. If the constitution is silent, section 70 will not save you – the shares are simply not redeemable.
Section 70 Requirements: The Three Funding Sources
Section 70 permits redemption only if the redemption is funded from one of three sources:
- Distributable profits – retained earnings available for dividend distribution. The amount redeemed reduces distributable reserves accordingly.
- Proceeds of a fresh issue of shares made specifically for the purpose of the redemption. The new shares can be ordinary or preference.
- Capital, but only if the company satisfies the solvency requirement under section 70(4A). This is the modern, most-used route since amendments in 2005.
The company can also combine sources – for example, part-fund from profits and part-fund from a fresh issue. Whatever mix is used, the total must fund 100% of the redemption price.
Redemption Out of Capital: The Solvency Statement
Since 2005, the most flexible redemption route is section 70(4A) – redemption out of capital. This requires:
- All the directors make a written solvency statement that:
- The company is, at the date of the statement, able to pay its debts as they fall due; and
- The company will, if the redemption is carried out, still be able to pay its debts as they fall due for the 12 months following the redemption; and
- The value of the company’s assets is not less than the value of its liabilities (including contingent liabilities) at the date of the statement, and will not, after the redemption, become less than the value of its liabilities.
- The directors must have reasonable grounds for the opinion. Best practice: cash-flow forecast, balance-sheet check, review by CFO and auditor, and a board minute recording the reasoning.
- The solvency statement must be signed by all directors and dated no more than 20 clear days before the redemption.
False or unreasonable solvency statements attract criminal liability under section 70(5A) – fine up to S$100,000 or imprisonment up to 3 years, or both. This is not a formality.
The Capital Redemption Reserve
If the redemption is funded from profits (not from a fresh issue or from capital under section 70(4A)), section 70(2) requires the company to transfer to a “capital redemption reserve” an amount equal to the nominal value of the shares redeemed. This reserve is treated as share capital for most purposes – it cannot be distributed as a dividend, but can be applied in paying up bonus shares.
The rationale is simple: profits used for redemption should not later be treated as ordinary reserves available for dividend, since they have effectively been converted to capital. The capital redemption reserve replaces the redeemed share capital on the balance sheet.
Step-by-Step: How to Redeem Preference Shares
Step 1: Review the Constitution and Share Rights
Confirm the preference shares are redeemable and identify the redemption price formula, redemption date/event, and any procedural requirements in the constitution. If the constitution needs amendment, that requires a special resolution under section 26.
Step 2: Choose the Funding Source
Decide whether to fund from profits, a fresh issue, capital (with solvency statement), or a combination. This drives every subsequent step.
Step 3: Board Resolution
The board passes a resolution to:
- Approve the redemption;
- Authorise the funding source;
- Approve the solvency statement (if using section 70(4A));
- Authorise the ACRA filings and payment.
Step 4: Directors’ Solvency Statement (if applicable)
All directors sign the solvency statement in the prescribed form. Retain the underlying cash-flow forecast and balance-sheet check as supporting evidence.
Step 5: Notify the Preference Shareholders
Send formal redemption notices to the affected shareholders, specifying the redemption date, the price per share, and the payment mechanism.
Step 6: Pay the Redemption Price
On the redemption date, pay the redemption price. The shareholders are removed from the register of members and the shares are cancelled (they cannot be re-issued as the same shares – they are extinguished).
Step 7: File With ACRA
Within 14 days of the redemption, file a Notice of Redeemable Preference Shares Redeemed via BizFile+. The filing captures the number redeemed, the redemption price, and the funding source. This updates the company’s share capital record. The company also updates its register of members and the register of transfers.
Step 8: Update the Constitution and Records
If the redemption eliminates all shares of a class, the class is deemed cancelled. Update the constitution and the electronic register in BizFile+. Update the capital redemption reserve on the next set of financial statements.
Common Mistakes We See
- Redemption from insufficient profits. A company thinks it has S$500,000 in distributable reserves but a later audit adjustment wipes them out. The redemption is unlawful and must be reversed.
- Solvency statement signed by only some directors. Section 70(4A) requires all directors to sign. A resigning director’s replacement cannot sign later.
- Failure to file ACRA notice within 14 days. Attracts composition fees and calls into question the validity of subsequent share allotments.
- Confusing redemption with buyback. Redemption applies only to shares whose terms make them redeemable. Buyback (Section 76B) is the mechanism for non-redeemable shares.
- Missing the capital redemption reserve entry. If profits fund the redemption but no capital redemption reserve is booked, the financial statements are misstated and the auditor will qualify the accounts.
Tax Treatment
For the company, the payment of the redemption price is generally not a deductible expense – it is a return of capital or a distribution of profits. For the shareholder, the tax treatment depends on Section 10E of the Income Tax Act:
- Redemption at par (equal to issue price) is treated as a return of capital and is not taxable.
- Redemption at a premium is treated as a distribution of profits (if funded from profits) and may be a franked dividend. For non-resident shareholders, withholding tax under Section 45 may apply. See our withholding tax guide (2026).
- For corporate shareholders, dividends from a Singapore company are generally exempt under the one-tier system.
Preference Shares vs Debt Instruments
If your funder wants a fixed return with an exit date but does not need equity treatment, consider whether a convertible loan note, a redeemable bond or a preference share is the right instrument. Key differences:
- Preference share dividends are paid out of profits and are not deductible for the company. Interest on debt is generally deductible (subject to arm’s-length rules).
- Failure to pay preference dividends does not trigger insolvency; failure to pay interest can trigger a statutory demand.
- Preference shares rank ahead of ordinary shareholders but behind creditors in a winding up. Debt ranks ahead of both.
How Raffles Corporate Services Can Help
We handle preference share redemptions across our client base – from single-holder buyouts to complex staged redemptions on IPO exits. We draft the board resolutions, coordinate the directors’ solvency statement, prepare the BizFile+ notice, update the register of members and integrate the capital redemption reserve into the year-end financial statements. Talk to us before you agree the redemption terms – the constitution and the solvency check need to be in order well before the redemption date.
– The Editorial Team, Raffles Corporate Services