Under the Companies Act, 2013, preference shares carry a statutory right to priority repayment of capital upon winding-up, meaning preference shareholders rank ahead of equity shareholders by default. A similar priority framework is reflected in the IBC waterfall. That said, both these statutory positions can be modified through a company’s articles of association, and neither extends automatically to the broader, contractually defined “liquidation events” typically found in VC shareholders’ agreements.
This distinction matters. The statutory regime provides the baseline and is a key reason financial investors favour preference shares to begin with. But in practice, things get more layered. Investors holding equity shares arising from conversion of instruments like CCPS or CCDs often negotiate contractual liquidation preferences that rank above existing preference shareholders. Whether such arrangements where equity is contractually accorded superior rights over preference shares would be upheld in a formal statutory liquidation remains genuinely unsettled.
It sits at the fault line between contractual freedom and mandatory statutory provisions, and would ultimately turn on how the rights are structured in the investment documents and, if challenged, how courts choose to interpret them.
