Preference shares allow companies to repay capital to shareholders before creditors but can deplete working capital and affect creditor interests. When a company redeems preference shares, it must capitalize the amount into a capital redemption reserve account which is not available for dividend distribution. This protects creditors while avoiding disruption to working capital.

1. Redemptionof preference sharesinvolvesrepaymentof capital before payingcreditorsof the
company.It mayaffectthe interestof creditors.Inadditiontothatthe workingcapital of the
companywill be depletedasaresultof outflow of cash due to redemption.The amountis
capitalizedbycreatingthe capital redemptionreserve account.Asaresultthisamountwill notbe
available fordistributionof dividend.Ithelpstoprotectthe interestof creditorsandonthe other
handit doesnot disturbthe workingcapital.