[1992] 73
COMP. CAS. 517 (MAD)
HIGH COURT of
MADRAS
LAKSHMANAN J.
Company Petitions Nos. 50 to 53 of
1991
DECEMBER 9, 1991
T. Raghavan, A.K.
Mylsamy and Murari for the petitioners.
A.S. Venkatachalamoorthy
for the Regional Director of Company Affairs, Madras.
Lakshmanan J.—These petitions were filed by
the transferors and transferee-companies to sanction a scheme of amalgamation
whereby the petitioner-company in Company Petitions Nos. 50, 51 and 53 of 1991
(hereinafter called "transferor-companies"), would get merged with
the petitioner-company in Company Petition No. 52 of 1991, the
transferee-company.
Asian investments
(petitioner in C.P. No. 50 of 1991) was registered as a limited company on
August 20, 1981. It carries on a business in investments and leasing. This
company is. the holding company of the transferee-company (petitioner in C.P.
No. 52 of 1991).
The
transferor-companies, viz., Asian Investments and Crescent Investments Limited
and Ruby Investments Limited, are the promoter companies of South Asian
Financial Exchange Limited. The directors of the three transferor-companies
were of the view that the amalgamation would enable the transferee-company to
carry on the combined business very economically and efficiently and that the
amalgamation would result in enlarging the activities of the transferee-company
which would be conducive to avoidance of duplication and reduction in
administrative and other overhead expenses and also would result in optimum
utilization of the management and other resources. According to them, the
amalgamation would, therefore, be in the best interest of all shareholders and
creditors and also be in the best interest and welfare of the employees.
The salient features
of the scheme of amalgamation of the three transferor-companies and the
transferee-company have been fully set out in paragraph 10 of the respective
petitions.
The scheme is to be
effective from April 1, 1990, and all undertakings, properties, rights and
powers, investments, inventories, and all assets of whatsoever nature including
all properties movable and immovable and assets of whatsoever nature such as
industrial and other licences and quota rights, trade marks and industrial property,
rights, leases, tenancy rights, benefits of all contracts, etc., of the three
transferor-companies shall stand transferred to and vested in the
transferee-company.
Likewise, all debts,
liabilities, duties and obligations of the transferor-companies shall stand
transferred without further act or deed to the transferee company so as to become the debts, liabilities and
obligations of the transferee-company.
In consideration of the transfers, every member
of the three transferor-companies shall, in respect of every equity share of
Rs. 10 each credited as fully paid and held by him or her in the three
transferor-companies, be entitled as of right to be issued, allotted and to
receive from the transferee-company one equity share in the capital of the transferee-company
of Rs. 10 each credited fully paid. The shares in the transferee-company held
by Asian Investments, one of the transferor-companies shall stand extinguished.
The scheme is conditional upon and subject to :
"(a) any requisite consent, approval or permission
of the Central Government or any other authority which, by law, may be
necessary, for the implementation of this scheme ;
(b) the necessary resolution by the transferee-company under section
81 of the Companies Act, 1956 ;
(c) the necessary resolution to increase the authorised capital of
the transferee-company under section 94 of the Companies Act ;
(d) The consent of the Controller of Capital Issues under the Capital
Issues (Control) Act, 1947, to the issue of shares in the transferee-company to
the shareholders of the transferor companies pursuant to the scheme of
amalgamation.
(e) the necessary sanctions and order of the High Court of Judicature
at Madras under sections 391 and 394 of the Companies Act, 1956, as aforesaid for
the amalagamation of all the transferor-companies without any exception with
the transferee-company".
Upon this scheme being effective as aforesaid,
the three transferor-companies shall stand dissolved without winding up as and
from such date as this court may direct.
Pursuant to the decision of the board, the
transferor-companies and the transferee-company filed Company Applications Nos.
281 of 1991, 280 of 1991, 279 of 1991 and 278 of 1991 on the file of this court
for necessary directions regarding the publication, convening and the conduct
of the meetings of its equity shareholders to consider the scheme of
amalgamation. This court, by order dated March 1, 1991, directed the
transferor-companies to convene a meeting of the equity shareholders on April
8, 1991, at 9.00 a.m., 10 a.m., 11 a.m. and 12 noon for the transferee-company
at No. 34, Victoria Crescent, Egmore, Madras-105. Notices of the above meetings
were sent individually to the equity shareholders of the companies with a copy of the scheme
of amalgamation. The meetings were convened on that date in accordance with the
directions of this court.
Mr. K.S. Narayanan,
Mr. V. Guruswamy, Mr. M.A. Alagappan and Mr. S. Ramanujachari who were
appointed as chairmen for the meetings presided over the meetings and submitted
the results of the meetings in their report dated April 8, 1991. Copies of the
said reports were filed in these proceedings.
The meetings were
attended by the following persons :
Asian Investments
(C.P. No. 50 of 1991) :
21 equity
shareholders entitled together to 4,99,998 equity shares of Rs. 10 each
aggregating to Rs. 49,99,980.
Crescent Investments
(C.P. No. 51 of 1991) :
20 equity
shareholders entitled to 4,99,994 equity shares of Rs. 10 each aggregating to
Rs. 49,99,940.
Ruby Investments
(C.P. No. 53 of 1991) :
18 equity
shareholders of the company entitled together to 4,99,994 equity shares of Rs.
10 each aggregating to Rs. 49,99,940.
Crimson Investments
(C.P. No. 52 of 1991) :
Four shareholders entitled
together to Rs. 3,28,002 equity shares of Rs. 10 each aggregating to Rs.
32,80,020 and two preference shares of Rs. 100 each aggregating to Rs. 200.
The salient features
of the scheme of amalgamation were read out and explained by the respective chairmen
of the above meetings to the members present at the meetings. The scheme of
amalgamation was then put to vote and all the shareholders of the above four
companies present at the meetings unanimously approved the scheme of
amalgamation. No votes were cast against the scheme of amalgamation. A
resolution was passed unanimously by all the four companies.
These four petitions
were filed praying for sanction of the scheme of amalgamation as approved by
the shareholders of the respective companies so as to bind all members of the
transferor and transferee-companies and to dissolve the three
transferor-companies "without winding up.
I have heard the
arguments of Mr. T. Raghavan, learned senior advocate on behalf of petitioners
and Mr. A.S. Venkatachalamoorthy, Additional Central Government standing
counsel on behalf of the Regional Director of Companies Affairs, Madras.
The Regional Director
of Company Affairs, Madras, has filed his representation. Though various
abjections were taken in regard to the scheme of amalgamation, at the time of
hearing on December 3, 1991, the following objection mentioned in paragraph 2
of the representation alone was pursued and argued by Mr. A.S.
Venkatachalamoorthy.
Paragraph 2 of the
representation is reproduced hereunder :
"I state from
the various returns filed by the transferee-company, viz., Messrs. Crimson
Investments Limited, that it is seen that Asian Investments Limited, one of the
transferor-companies, is holding 2,68,002 equity shares out of the total
3,28,002 equity shares which works out to more than 50% of the issued share
capital. In fact, the said company is also holding 2.11% cumulative redeemable
preference shares of Rs. 100 each issued. Accordingly, the transferee-company
is the subsidiary company of the Asian Investments Limited
(transferor-company). Clause 8 of the scheme while providing for the exchange
ratio also provides that the shares held in the transferee-company by Asian
Investments Limited shall stand extinguished. After the shares held by the
transferor-company (Asian Investments Limited) are extinguished, the share
capital of the transferee-company will be reduced to Rs. 6,00,000 divided into
60,000 equity shares of Rs. 10 each. In short, the capital of the company will
be reduced without following the procedure laid down in the matter of reduction
of capital in sections 100 to 105 of the Companies Act, 1956. Judicial
decisions have held that whenever a scheme involved reduction of share capital,
the special provisions relating to the said reduction have to be strictly
followed before the scheme, is approved. As the present scheme involves
reduction of the share capital of the transferee-company, it has to comply with
the procedure as to reduction of capital and obtain the approval of the High
Court under section 100 of the Act for the said reduction".
Thus, according to
Mr. A.S. Venkatachalamoorthy, section 100 of the Act has to be strictly
complied with. In other words, since the present scheme involves reduction of
the share capital of the transferee-company it has to comply with the procedure
as to reduction of capital and obtain the approval of this court under section
100 of the Act for the said reduction. In support of his contention, Mr. A.S.
Venkatachalamoorthy strongly relied on the Division Bench decision of the
Calcutta High Court in Hindusthan Commercial Bank Ltd. v. Hindusthan General
Electric Corporation [1960] 30 Comp Cas 367, which in turn followed Bengal Bank
Ltd. v. Suresh Chakravarthy [1951] 21 Comp Cas 315 (Cal).
Mr. T. Raghavan,
learned senior advocate, in reply to the argument, contended that, for the
reduction of capital involved under section 391 read with section 394 of the
Companies Act, 1956, the procedure laid down under sections 100 to 105 of the
Companies Act need not be followed. He also relied on my judgment, dated
September 5, 1991, in C.P. Nos. 55 to 60 of 1991.
Paragraph 1 of the
affidavit of N. Srinivasan, dated November 12, 1991, filed in reply to the
representation is also reproduced hereunder :
"With reference
to paragraph 2 of the representation of the Regional Director, I state that the
investments of the transferor and transferee-companies are correctly set out. I
state that though in terms of the scheme of amalgamation, the shares in Crimson
Investments Limited, the transferee-company, held by Asian Investments Limited,
one of the transferor companies, shall stand extinguished yet after this scheme
is approved by this honourable court, the transferee-company has to make
allotment to the shareholders of the transferor-companies and by virtue of this
allotment the share capital of the transferee-company shall stand increased. I
have been advised that for the reduction of capital involved under section 391
read with section 394 of the Companies Act, 1956, the procedure laid down under
sections 100 to 105 of the Companies Act, 1956, need not be followed. I am also
advised that this hon'ble court in Company Petitions Nos. 55 to 60 of 1991 by
its order dated September 5, 1991, has held that for the reduction of capital
involved under section 391, read with section 394 of the Companies Act, 1956,
the procedure laid down under sections 100 to 105 of the Companies Act, 1956,
need not be followed".
The only point that
may arise for consideration is whether the procedure contemplated under section
100 of the said Act has to be complied with as the present scheme involves
reduction of share capital of the transferee-company as contended by Mr. A.S.
Venkatachalamoorthy or such a procedure need not be followed as urged by Mr. T.
Raghavan.
In this connection,
clause 8 of the scheme is to be noticed. The same is reproduced under :
"8. Every member
of AIL, CIL and RIL, shall in respect of every equity share of Rs. 10 each credited
as fully paid held by him or her in AIL, CIL, RIL on the completion of
procedures date (as hereinafter defined) be entitled as of right to be issued,
allotted and to receive from the transferee-company within 30 days of the date
of completion of the procedures, one equity share in the capital of the
transferee-company of Rs. 10 each credited as fully paid. The shares in the
transferee-company held by Asian Investments Limited, one of the
transferor-companies, shall stand extinguished".
It is seen from the
above clause that the shares in Crimson (transferee-company) held by Asian
Investments (transferor-company) shall stand extinguished. This clause has
become necessary in view of the statutory prohibitions contained in section 42
and section 77 of the Act. The object of section 42 is to maintain the separate
operational identity of a holding company and its subsidiaries and thereby
preserve the respective shareholders' control over them.
Section 77 imposes a
restriction on purchase by a company of its own shares. It is not necessary
that extinguishment of shares in all cases should necessarily result in
reduction of share capital. Section 100 will not come into to play where the
scheme of amalgamation contemplates the transfer of the entirety of assets and
liabilities of the transferor-company to the transferee-company. In such a
case, in my view, there is no release of assets. The assets of the
transferor-comapny, on amalgamation, stand transferred to and vested in the
transferee-company.
Further, rule 85 of
the Companies (Court) Rules, 1959, which is part of the scheme of section 101
and section 102 of the Act, provides that where a proposed compromise or
arrangement involves reduction of capital of the company, the procedure
prescribed by the Act and the rules relating to reduction of capital shall be
complied with before the compromise or arrangement so far as it relates to
reduction of capital is concerned. It is, therefore, evident that section 101
and section 102 and rule 85 would stand attracted only to cases of compromise
or arrangement involving reduction of capital and not to cases of amalgamation
simpliciter when the entirety of the assets and liabilities are transferred and
when there is no release of any assets.
The object of asking
for confirmation by the court of reduction of capital is to safeguard the
interest of the creditors of the company. In the instant case, the resolution
approving the scheme of amalgamation was unanimous. There was no voice of
protest from any quarter. The scheme is a comprehensive and consolidated
scheme. It is a peculiar case of amalgamation where a holding company is
amalgamated with a subsidiary company. Therefore, I am clear in my mind that
the contention raised by Mr. Venkata chalamoorthy is not well-founded. As
already mentioned, this case on hand is not a case where there is reduction in
capital. Further, the procedure prescribed under sections 101 and 102 read with
rule 85 do not stand attracted to a case of scheme of amalgamation, where there
is no release of assets but which involves transfer of all the assets and
liabilities.
In this connection,
support can be derived from a Division Bench judgment
of our High Court in T. Durairajan v. Waterfall Estates Ltd. [1972] 42 Comp Cas 563 (Mad), where the
learned Chief Justice Veeraswami and Justice Raghavan have summarised the
position of law very clearly in the following terms (p. 567) :
"The object of
asking for confirmation by court of reduction of capital is to safeguard the
interests of the creditors of the company, and other obligations or rights
coming into existence in the light, or on the strength of existing capital
structure either fully paid up, or realisable at call. The scheme, in the
instant case, involves transfer of the entire assets, rights and liabilities of
the amalgamating companies to the new company which becomes, when the scheme
takes effect, liable to the creditors of the amalgamating companies to the
fullest extent. To such a case the procedure for reduction of share capital, as
provided for by sections 100, 101 and 102 is hardly applicable. Rule 85, in our
opinion, does not contemplate a compromise or arrangement in the nature of a
scheme of amalgamation, such as we have here".
The learned judges
observed as follows at page 568 :
"The context of
the decision makes it inapplicable to the facts before us. It is not every
extinguishment of shares, as we are inclined to think, that is reduction in
capital, unless the company continues to exist. Where by the process of
arrangement the company itself is dissolved without winding up, it is hardly a
case of reduction in capital as contemplated by the provisions of the Companies
Act, 1956. If the object of these provisions is to safeguard creditors who may
rely on the capital structure and take a step in advancing money, or concluding
other transactions in the company, the scheme in the instant case does not, in
any way, defeat or affect it, for, the interests of the creditors have been
fully safeguarded by the terms of the proposed amalgamation".
Learned counsel for
the Central Government would place strong reliance on the judgment of the
Calcutta High Court in Hindusthan Commercial
Bank Ltd. v. Hindusthan General Electric Corporation [1960] 30 Comp Cas 367, in support of his contention.
The said judgment relied on by learned counsel does not relate to a scheme of
amalgamation, but a scheme of arrangement between the several classes of
shareholders and, as part of the scheme a cancellation, reduction and
reorganization of the capital of the company was also recommended. The
principles laid down in the said judgment in my opinion, cannot have
application to a case as the present one where there is a scheme of
amalgamation simpliciter.
My order in Company
Petitions Nos. 55 to 60 of 1991, related to a case where a special resolution
as required under section 100 of the Act was passed. Therefore, there was no
occasion for me to consider the question whether the procedure relating to
reduction of share capital has to be followed in a case of amalgamation where
there is transfer of all the assets and liabilities and where there is no
release of assets.
In the result, all
the company petitions are ordered as prayed for. The official liquidator will
submit his report that the affairs of the companies have not been conducted in
a manner prejudicial to the interest of its members or to the public interest.
The prayer for dissolution of the transferor-companies without winding up will
be decided after receipt of the report of the official liquidator.
[1984] 56 COMP. CAS. 206
(PAT.)
HIGH COURT of
PATNA
v.
Registrar of Companies
S. SARWAR ALI AND B.P. JHA, JJ.
Letters
Patent Appeal No. 41 of 1974
FEBRUARY 14, 1984
JUDGMENT
B.P. Jha, J.—This letters patent appeal arises out of a judgment dated November
8, 1974, in Company Case No. 3 of 1971, passed by a learned single judge.
The short question for
decision is: "Whether Rs. 2,50,000 received by Rupak Co. Ltd. (hereinafter
referred to as "the company") is the share capital or not?"
The appellant, Rupak
company, "is registered under the Companies Act, 1956. There were two
groups of shareholders in the aforesaid company, namely, Misra group and Singh
group. Misra group had genuine shares of Rs. 1,00,000. Misra group also paid
Rs. 2,50,000 to the company. It is this amount which is under dispute. In this
connection Money Suit No. 35 of 1954 was filed by Misra group. The company also
filed counter-title Suit No. 55 of 1953. All these suits were tried together by
Sri T.P. Choudhary, Additional Subordinate Judge, Patna. In that case, it has
been held that Rs. 2,50,000 was received by the company. No shares were issued
in respect of Rs. 2,50,000. The learned Subordinate Judge held that in view of
the fact that this amount was received by the company, the company should
return this amount to Misra group with interest. According to the finding of
the civil court, it was clear that no share capital was issued by the company
in respect of Rs. 2,50,000.
In this connection, it is
necessary to mention that up to November 30, 1964, the company used to show Rs.
8,60,047.10 as subscribed capital in the balance-sheet. Since 1965 the share
capital of the company was reduced to Rs. 6,10,04710. In this circumstance, the
Registrar, under the Companies Act, directed the company to take necessary
steps under the provisions of ss. 100 to 103 of the Companies Act, 1956
(hereinafter referred to as "the Act"), because the subscribed
capital has been reduced from Rs. 8,60,047.10 to Rs. 6,10,047.10. It is against
this order that the company filed an application under s. 155 of the Act for
rectification of the share register. The learned Company Judge rejected the
petition filed under s. 155 of the Act on the ground that the reduction by Rs.
2,50,000 odd in the subscribed capital was the share capital. With due respect,
I may say that the learned company judge did not apply his mind to the judgment
passed by the Subordinate Judge in T.S. Nos. 55 of 1953, 35 of 1954 and
analogous cases. In the judgment, the learned Subordinate Judge held as
follows:—(a) That Rs. 2,50,000 was received by the company not as share
capital, (b) That Rs. 2,50,000 was received by the company. It is on the basis
of these findings the learned subordinate judge directed the company to return
Rs. 2,50,000 plus interest to Misra group. On the basis of these facts the
learned Subordinate Judge held that the company did not receive Rs. 2,50,000 as
share capital. If it is so, then there is no need to apply for reduction of
shares under s. 100(1) of the Act. Section 100(1) provides that the company
should file an application for the purpose of reduction of the share capital
and not for any other purpose.
Learned company judge
overlooked the compromise petition which was filed in the winding up proceeding
in Company Case No. 1 of 1959. In that case, a compromise petition was filed
before the learned company judge. In paragraphs 3 and 7 of the compromise
petition, the company was directed to pay a sum of Rs. 3,58,000 with interest.
The sum of Rs. 3,58,000 included Rs. 2,50,000 plus interest. It is better to
quote term (VII):
"(VII) The decree-holders in Money Suits Nos. 34 and 35 of 1954 have agreed to accept a sum of Rs. 3,58,000 with interest at 6% per annum in complete satisfaction of the decrees and to remit the balance on the following terms and conditions:—............"
On the basis of the compromise petition, F.A. No. 306 of 1958 and analogous cases filed by the company were withdrawn. The winding up proceeding in Company Case No. 1 of 1959 was also withdrawn by virtue of the compromise petition. It is, therefore, clear that by virtue of the compromise petition, the amount of Rs. 2,50,000 with interest was paid to Misra group. It was not treated as share capital of the company. If it is so, there was no need for the company to apply for reduction in the subscribed capital.
Learned counsel for the
company states that it is on his own admission that the company ought to have
filed an application under s. 100(1) of the Act. The reply filed by the company
in this connection was also referred to. In that reply the company agreed to
follow the procedure as laid down under s. 100(1) of the Act. It is on the
basis of this admission the learned Registrar says that the company is bound by
the admission made in that petition. Learned counsel for the appellant contends
that the admission of law is not binding on the client. In other words, the
learned counsel for the appellant says that the admission of law made by a
company is not binding upon the company unless it is an admission of fact. In
this connection reference was made to a decision in Kalidas Bhanjibhai v. Stale
of Bombay, AIR 1955 SC 62. In the said decision it has been held that a party's
opinion about the legal effect of those facts is of no consequence in
construing the section. It is further held that no estoppel has arisen.
Considering all these facts, I am of the opinion that the admission of law is
not correct. In my opinion, the client is not bound by an admission of law. A
party is bound so far as an admission of fact is concerned. Therefore, the
statement made in the reply to the case of the Registrar is based upon wrong
application of law by the company.
I am, therefore, of the
opinion that no application lay under s. 100(1) of the Act. For the reasons
given above, the appellant was only entitled to file an application under s.
155 of the Act for rectification in the share register and the same is allowed.
In the result, the appeal
is allowed, but without costs.
S. Sarwar Ali J.—I Agree.
[1957] 27 COMP. CAS. 6 (SC)
V.
RAMASWAMI AND IMAM,
JJ.
JANUARY 11, 1956
RAMASWAMI,
J. - This appeal is
presented on behalf of Homi Cawasji Bharucha and 43 other appellants against the
order of Mr. Justice JAMUAR dated the 4th January, 1956, in Company Act Case
No. 3 of 1951.
The history
of the case is important. On the 22nd of July, 1952, respondent No. 1, Arjun
Prasad, who was a shareholder of the company made an application under section
153 of the Indian Companies Act, 1913, proposing a scheme for reconstruction of
the company in liquidation. On the 6th of October, 1953, respondent No. 1 was
directed by the court to arrange for holding separate meetings of (1) the
debenture-holders and other secured creditors, (2) the unsecured creditors, (3)
the preference shareholders, and (4) the ordinary shareholders. The meetings
were fixed to be held on the 9th and 10th of November, 1953.
The first
three meetings were held on the 9th and 10th of November, 1953. But on the 10th
of November, 1953, respondent No. 1 made an application to the court that the
meeting of the ordinary shareholders be postponed because there was a dispute
between him and the Central Bank of India with regard to the title to about Rs.
8 lakhs worth of shares and also as to which party had the right of exercising
his vote. The meeting was adjourned by the court to the 12th of December, 1953,
and later on there was another order of the court dated the 12th of January, 1954,
adjourning the meeting sine die.
The dispute
between the respondent NO. 1 and the Central Bank of India as regards the
transfer of rupees eight lakhs worth of shares was decided by the Company Judge
on the 22nd of January, 1954, and that decision was confirmed by a Bench of
this Court on Letters Patent Appeal on the 8th of November, 1954. On the 6th of
May, 1955, respondent No. 1 prayed that the postponed meeting of the
shareholders may be held. The court directed that the meeting should be held on
the 26th of June, 1955, and on that date the meeting of ordinary shareholders
was duly held.
On the 14th
of October, 1955, respondent No. 1 made another application seeking the
direction of the court for holding fresh meetings of preference shareholders
and of ordinary shareholders for consideration of a modified scheme of
reconstruction. On the 18th of October, 1955, the court directed that the
meetings of the ordinary shareholders and of preference shareholders should be
held on the 27th November, 1955. There was a direction by the court that
notices should be sent under certificate of posting and that there should also
be publication of the notice in two newspapers, namely, the Indian Nation and
the Aryavarta.
But the
important point is that in this order of the 18th October, 1955, the learned
Company Judge gave no direction as to the length of the notice. It appears that
notices of the meetings were posted at Calcutta on the 10th of November, 1955.
It also appears that these notices were received by a number of shareholders at
Bombay on the 16th of November, 1955, and onwards. On the 23rd of November,
1955' an application was filed by Hariyesh Daulatjada, one of the shareholders,
challenging the validity of the meetings which were proposed to be held on the
27th of November, 1955.
It was
contended on his behalf that at least 21 days' notice was essential and in the
absence of such notice, the meetings of the shareholders could not be validly
held. There is also a letter sent to the court purporting to be signed by
twenty-five shareholders containing objection to the same effect. The matter
was heard by JAMUAR J. or the 25th of November, 1955, and he made the following
order :
"On an
application filed on behalf of Arjun Prasad, the 27th of November, 1955, was
fixed by order No. 173, dated the 18th of October, 1955, for the meeting of the
preference shareholders and of the ordinary shareholders. Two applications have
been placed before me, one by Hariyesh, son of Lallubhai Daulatjada of Bombay,
praying that the court may be pleased to adjourn the meeting for at least one
month and the other by quite a number of shareholders of the Gaya Sugar Mills
Ltd. making the same prayer.
Mr. Untwalia
states that this court need not extend the date of the meetings which has
already been fixed as the 27th November, 1955, but he says that, at the
meeting, adjournment of the meetings will be taken for a period of not less
than one month in order to enable the petitioners, who have filed petitions for
an adjournment of the meetings to attend the adjourned meetings.
Mr. Untwalia
further undertakes to send intimation under certificate of posting to the
shareholders informing them of the adjourned dated of the meeting."
The meetings
of the preference shareholders and of ordinary shareholders were accordingly
held on the 27th of November, 1955, but no business was transacted on that date
and the meetings were adjourned to the 8th of January, 1956. On the 23rd of
December, 1955, two applications were again filed before JAMUAR J., one of
behalf of appellants Nos. 1 and 2, and the other on behalf of appellants No.s 3
to 44 along with seven other persons challenging the validity of the meetings
held on the 27th of November, 1955.
It was
contended on their behalf that the meetings held on the 27th of November, 1955,
were illegal because there was an omission to serve notice of the meetings at
least twenty-two days before the date fixed for the meetings. It was pointed
out that section 81(2) of the Indian Companies Act, 1913, required that at
least 21 days' notice should be given if a special resolution was to be passed
at a meeting of the shareholders. It was complained on behalf of the appellants
that in the present case only ten or eleven days' notice was given and there
was a breach of the statutory requirement.
On behalf of
respondent No. 1 Mr. Untwalia submitted that section 81(2) of the Indian
Companies Act was not applicable and that, on the contrary, the matter was
governed by the rules framed by the High Court under section 246, and rule 127
required only seven days' notice to be given.
JAMUAR J. did
not decided the question of law but ordered that the adjourned meetings fixed
for the 8th of January, 1956, should be held and "if the validity of these
meetings be challenged, appropriate order will then be passed." This order
was passed by JAMUAR J. on the 4th of January, 1956, and the propriety of that
order is the sole question at issue in the present appeal.
In support of
this appeal Mr. Dutt put forward the submission that the proposed resolution
for consideration at the meeting of the shareholders held on the 27th of
November, 1955, was not purely a scheme for compromise falling under section
153 of the Indian Companies Act, but the question of reduction of share capital
was involved and so the special formalities prescribed by section 81 of the
Indian Companies Act should have been followed.
The opposite
view point was put forward by Mr. Lalnarain Sinha appearing on behalf of
respondent No. 1. It was contended by Mr. Lalnarain Sinha that the provision of
section 153 of the Indian Companies Act was self-contained and that it was open
to the Company Judge to give directions not only with regard to the place and
time of the meeting but also with regard to the length of notice to be given to
the shareholders.
It was
submitted that the jurisdiction conferred by section 153 was of a special
character and the orders of the court in exercise of its special jurisdiction
would override the provisions of section 55 of the Companies Act. I do not
think that this argument is right.
On the
contrary, I am satisfied that the special formalities required for a resolution
with respect to reduction of share capital under section 55 of the Companies Act
cannot be overriden by any direction of the court given under section 153 of
the Indian Companies Act. It is manifest that section 153 of the Indian
Companies Act and section 55 of the said Act deal with two separate classes of
special matters, and as a matter of construction I hold both these special
provisions are equally important and neither of the special provision can be
nullified or over ridden by each other.
It follows,
therefore, that if there is a scheme or a proposed compromise which involves a
dealing with reduction of share capital, the formalities prescribed not only by
section 153 but also by section 55 have got to be complied with. That is the
view expressed by YOUNGER J. in In re White Pass and Yukon Rly. Co. Ltd. 1.
This case has been cited with express approval in Buckley on the Companies Act,
12th Edition, page 414, where the following passage occurs :
"The
words at the end of this sub-section are taken from section 45 of the Act of
1908, repealed by the Act of 1928, which prescribed a separate and different
procedure for effecting reorganizations of share capital of the two classes
mentioned. Such reorganization can now, even if they could not whilst section
45 was in force, be effected as arrangements with members under this section,
as can also all other modes of reorganizing the share capital, even when
involving an interference with preferences or special rights attached to shares
by the memorandum, although when the arrangement involves a reduction of
capital the requirements of the Act with regard to such reduction of capital
must also be complied with. If it be desired to covert issued shares into
reedemable preference shares, the scheme should provide for a reduction of
capital by cancelling the issued shares and a reincrease by the creation of
redeemable preference shares of an equivalent amount."
It is,
therefore, clear that it is open to the parties to propose any mode of
reorganising the share capital as a part of a scheme for arrangement or
compromise under section 153 of the Indian Companies Act, but if the
arrangement or compromise involves a dealing with reduction of share capital
for which other provisions of the Act prescribe special formalities, such
special formalities must also be complied with.
The admitted
position in this case is that twenty-two days' notice was not given to the
ordinary or preference shareholders of the proposed meetings. It is said that
ten to eleven days' notice was given. Admittedly, therefore, the requirements
of sections 55 and 81 have not been complied with. Section 55 states :
"55.
Reduction of share capital. (1) Subject to confirmation by the court, a company
limited by shares, if so authorised by its articles, may by special resolution
reduce its share capital in any way, and in particular (without prejudice to
the generality of the foregoing power) may-
(a) extinguish or reduce the liability on an
any of its shares in respect of share capital not paid up ; or
(b) either with or without
extinguishing or reducing liability on any of its shares, cancel any paid-up
share capital which is lost or unrepresented by available assets ; or
(c) either with or without
extinguishing or reducing liability on any of its shares, pay off any paid up
share capital which is in excess of the wants of the company, and may, if and
so far as is necessary, alter its memorandum by reducing the amount of its
share capital and of its shares accordingly.
(2) A special
resolution under this section is in this Act called a resolution for reducing
share capital."
Section 8I(2)
is to the following effect :
"A
resolution shall be a special resolution when it has been passed by such a
majority as is required for the passing of an extraordinary resolution and at a
general meeting of which not less than twenty-one days' notice specifying the
intention to propose the resolution as a special resolution has been duly given
:
Provided
that, if all the members entitled to attend and vote at any such meeting so
agree, a resolution may be proposed and passed as a special resolution at a
meeting of which less than twenty-one days' notice has been given."
Reading
section 8I(2) and 55 together, it is manifest that a resolution which involves
a reduction of share capital can only be considered at a meeting of which not
less than 21 days' notice has been duly given. Since there has been a violation
of section 8I with regard to the period of notice, I think that the meetings
held on the 27th of November, 1955, for considering the modification of the
scheme must be held to be illegal and invalid. In support of my view, I would
refer to the decision of the Privy Council in Garden Gully United Quartz Mining
Co. v. McLister.
A point was
taken by Mr. Lalnarain Sinha that the modified scheme which was to be
considered at the meetings held on the 27th of November, 1955, did not involve
a reduction of share capital and the statutory provisions of sections 55 and 8I
of the Indian Companies Act were not attracted. I do not think that there is
any substance in this argument. The draft resolution which was to be placed at
the meetings on the 27th of November, 1955, was to the following effect :
"That
clause 6(b) of the proposed scheme of arrangements be substituted as follows :
The
preference shares will be redeemed fully by payment in cash of 40% of the face
value of the shares out of the money deposited in the bank by the preference
trustees and sale proceeds of land at Gaya and Chakand, and with regard to the
remaining 60% of the face value, the company will allot redeemable preference shares
of the face value of Rs. 100 each to the holders of existing preference shares
pro rata. The said redeemable preference shares shall be redeemed as to one-
half of their face value on or before 31st December, 1962, and the other half
on or before the 31st December, 1972, and shall confer on the holders thereof
the right to a fixed non-cumulative preferential dividend at the rate 4%
taxable per annum. In case the money in the hands of the trustees are not
sufficient to pay 40% of the face value as aforesaid, the company will meet the
deficit and in case of excess, the trustees will pay the same to the company.
the preference shareholders will forgo all claim for arrears of dividend. A
sub- committee be appointed consisting of the following of the following
persons to supervise the carrying out of the scheme on behalf of the preference
shareholders : I. Sri Jagannath Prasad Gupta, 2. Sri Sohanlal Jajodia, 3. Sri
Kishan Chand Puri. After reconstruction is effected, the preference
shareholders will be entitled to nominate two persons to the board of
directors. Provided further that the directors of the company shall not be
entitled to create a charge on the assets of the company exceeding rupees 7
lakhs without the consent of the directors nominated by the preference
shareholders. It is further resolved that subject to full payment to the
debenture holders and other secured creditors and 33% to the unsecured
creditors the 40% payment to the preference shareholders in cash must be made
within 12 months from the date of the sanctioning of the scheme of
reconstruction.
The proposal,
therefore, was that the preference shares would be redeemed fully by payment in
cash of 40% of the face value of the shares out of Rs. 10,25,000 received from
the preference trustees and with regard to the remaining 60% of the face value,
the company would agree to allot redeemable preference shares of the face value
of Rs. 100 each to the holders of the existing preference shares pro rata.
It is clear
that by payment in cash of 40% of the face value of the preference shares there
is a corresponding reduction of the share capital of the company. Section 55 of
the Indian Companies Act also contemplates that the share capital of a company
can be reduced in any way. There may be such a reduction of share capital if
the company returns part of the capital money to the preference shareholders in
cash. There is an authoritative statement of law on this point at page 155 of
Buckley on the Companies Act, twelfth edition :
"A
reduction therefore by which capital moneys are to be returned to some or one
only and not to all of the shareholders may be resolved upon and confirmed if
it be fair and equitable. To call such a transaction a purchase by the company
of its own shares within Trevor v. Whitworth which the court cannot sanction (a
view which the Court of Appeal in In re Denver Hotel Co., negatived in the
particular facts of that case, but regarded as a possible and fatal objection
if the facts had been different) is to misunderstand that decision. Every
return of capital, whether to all shareholders or to one, is pro tanto a
purchase of the shareholder's rights. It is illegal as a reduction of capital,
unless it be made under the statutory authority, but in the latter case is
perfectly valid."
There is also
authority for the proposition that the conversion of issued preference shares
into redeemable preference shares is equivalent to a reduction of share capital
and simultaneous increase of share capital. That was the view expressed by
SIMONDS J. in In re St. James Court Estate Ltd. It was held in that case that
conversion of issued preference shares into redeemable preference shares could
take place only if the steps appropriate to a reduction and simultaneous
increase of capital had been taken.
I, therefore,
consider that the argument of Mr. Lalnarain Sinha on this point is not correct
and the draft resolution which was to be placed at the meetings of the
shareholders on the 27th of November, 1955, involved a question of reduction of
share capital and so the special formalities prescribed in sections 55 and 8I
of the Act should have been adopted and complied with.
For the
reasons expressed, I hold that the proceedings of the meetings of the
preference shareholders and of the ordinary shareholders held on the 27th of
November, 1955, are illegal because of failure to comply with the statutory
provisions required under section 8I of the Indian Companies Act. I would
accordingly set aside the order of JAMAUR J. dated the 4th January, 1956, and
allow this appeal. I would not make any order as to costs in the special
circumstances of this case.
IMAM J. - I
agree.
Appeal
allowed.
[1995] 5 SCL 187 (MAD.)
HIGH COURT OF
MADRAS
Tamil Nadu Newsprint and Papers
Ltd.
v.
Registrar of Companies
JAYASINHA BABU, J.
COMPANY PETITION NO. 17 OF 1995
APRIL 24, 1995
Section 100, read with section 102, of the Companies Act, 1956 - Share Capital - Reduction of share capital - Whether petitioner-company's paid-up share capital being in excess of its needs, permission was to be given to it to reduce same as per resolution passed by majority of its shareholders and approved by major creditors - Held, yes
FACTS
The company's original issued and
paid-up share capital was Rs. 98,18,00,000 consisting of 9,81,80,000 equity
shares of Rs. 10 each. The company, by a resolution passed at a general
meeting, proposed to reduce the paid-up capital to Rs. 50 crores consisting of
5 crore equity shares of Rs. 10 each by paying off paid-up capital to the
extent of Rs. 48.18 crores divided into 4,81,80,000 equity snares of Rs. 10
each to the shareholders proportionately as the same was in excess of the needs
of the company. The payment was proposed to make partly in cash and partly by
issue of 17.5 per cent non-convertible debentures. The major creditors of the
company also approved the proposal.
On application to the company
court to confirm the proposed reduction :
HELD
The company was permitted to
reduce the share capital as proposed in the relevant resolution.
JUDGMENT
1. This company petition praying that this
Court be pleased to pass an order (a) that the reduction of capital resolved on
by the special resolution dated 5-12-1994, set out in para 10 of the petition,
be confirmed; (b) that to this end, all inquiries and directions necessary and
proper be made and given; and (c) that the proposed minute as set out in para
15 of the petition be approved.
2. Upon the petition of Tamil Nadu Newsprint and
papers Ltd. presented on 22-12-1994 upon hearing Mr. T. Raghavan, the advocate
for the petitioner herein and Mr. S.R. Sundaram, the Additional Central
Government standing counsel appearing for the Registrar of Companies, Madras
and upon reading the said petition filed on 7-2-1995, and the exhibits therein
referred to and all the major creditors of the company have conveyed that
approval for the reductions of share capital of the company, this Court Doth
Order as follows :
(1) the reduction of the share capital
of the company above-named, resolved on and effected by the special resolution
passed at General Meeting of the said company held on 5-12-1994 which
resolution was in the words and figures, (sic) set out in Schedule (A) hereto
be and the same is hereby confirmed;
(2) that
the minutes set forth in Schedule 'B' hereto, be and is hereby approved;
(3) that a certified copy of this order,
including the minute as approved be delivered to the Registrar of Companies
within 21 days from this date;
(4) that notice of the Registration by
the Registrar of Companies of this order of the minute, be published in one
issue of 'Economic Times' within 14 days of the Registration aforesaid.
SCHEDULE-A
Resolved that pursuant to section
100(1)(c) of the Companies Act, 1956 and subject to confirmation by the High
Court of Madras and other appropriate authorities in this regard, the issued
and paid-up capital of the company be and is hereby reduced from Rs.
98,18,00,000 consisting of 9,81,80,000 equity shares of Rs. 10 each fully
paid-up to Rs. 50 crores consisting of 5 crore equity shares of Rs. 10 each
fully paid-up and such reduction be effected by paying off paid-up capital of
the company to the extent of Rs. 48.18 crores divided into 4,81,80,000 equity
shares of Rs. 10 each to the shareholders proportionately as being in excess of
the wants of the company in the manner set out below :—
(a) by
repaying equity capital to the extent of Rs. 21.25 crores at par in cash;
(b) by issue of 17.5 per cent
non-convertible debentures of the amount of Rs. 26.93 crores, each such
debenture having a face value of Rs. 100 credited as paid-up and such
debentures being redeemable in cash in four equal annual instalments at Rs. 25
per debenture commencing from 1-4-1996 and such debentures shall carry a
redemption premium of 10 per cent per annum which shall be payable in four
equal instalments commencing from 1-4-1996.
Resolved
further that the number of equity shares of each existing shareholder be
rounded off to the nearest marketable lot of 50 shares.
SCHEDULE-B
The paid-up capital of Tamil Nadu
Newsprint & Papers Ltd. from the formerly capital of Rs. 98,18,00,000
divided into 9,81,80,000 equity shares of Rs. 10 each be reduced to Rs. 50
crores divided into 5 crore equity shares of Rs. 10 each. At the date of
registration of this minute, the paid-up capital is equivalent to 5 crore
equity shares of Rs. 10 each have been issued and are deemed to have been fully
paid-up on each of the said shares. The remaining shares are unissued. The special
resolution of the company has been passed to take effect upon the said
reduction of capital by repaying a sum of Rs. 48.18 crores representing
4,81,80,000 equity snares of Rs. 10 each to the shareholders proportionately :
(a) by
repaying equity capital to the extent of Rs. 21.25 crores at par in cash;
(b) by issuing 17.5 per cent
non-convertible debentures of the amount of Rs. 26.93 crores, it having the
face value of Rs. 100 credited as paid-up and such debentures are redeemable in
cash in four equal instalments of Rs. 25 per debenture commencing from 1-4-1996
and such debentures carry a redemption premium of 10 per cent per annum
repayable in four equal instalments commencing from 1-4-1996 by rounding up the
equity share to the nearest marketable lot of 50 shares.
witness
the Hon'ble Thiru Kudarikoti Andadenayya Swami, Chief Justice at Madras,
aforesaid, this the 24th day of April, 1995.
Madras High Court
[2004]
56 scl 34 (mad.)
Parrys Confectionery Ltd., In re
S.
Ashok Kumar, J.
Company Petition No. 269 of 2003
September 23, 2003
Section 78, read with section 101 of the
Companies Act, 1956 - Shares - Application of premiums received on issue of -
Petitioner-company made large investments in setting up a factory - However, as
factory operations proved unviable due to several reasons, petitioner closed
down said factory - It proposed to apply amount standing in its security
premium account to set off loss suffered in said process - Shareholders of
company, unanimously, approved said proposal by passing a special resolution in
extraordinary general meeting - Thereafter, petitioner filed application under
section 101 seeking confirmation of reduction of share premium account - It was
seen from records that proposed reduction did not involve either diminution of
any liability in respect of unpaid capital or payment to any shareholder of any
paid-up capital - Further, there was no reduction in amount payable to any of
creditors and neither was any compromises nor arrangement contemplated with
such creditors - In recognition of aforesaid position, all such secured
creditors had also signified their consent to proposed restructuring - Whether
in view of aforesaid circumstances, it could be concluded that proposed
restructuring was in accordance with sound commercial and accounting practice
to benefit of petitioner’s shareholders and investors and, therefore, proposed
reduction in securities premium account of petitioner was to be confirmed -
Held, yes
Facts
A large amount was standing to the credit of securities
premium account of petitioner company. The company had made large investments
in setting up a factory. However, as the factory operations proved unviable due
to several reasons, it took a business decision to close the said factory after
following the requisite procedures. In the said process, the petitioner-company
suffered a loss. It, thus, proposed to apply the amount standing in its
security premium account to set off the aforesaid loss. Therefore, the
petitioner convened an extraordinary general meeting of its shareholders for
transacting two items of business, the first being, for modification of the
articles of association of the company providing for reduction in its share
capital, its capital redemption reserve fund/account and securities premium
account. The second resolution was for passing another special resolution for
giving effect to the reduction in the securities premium account as aforesaid.
In the meeting, both the resolutions were approved unanimously by the
shareholders. Thereafter, the petitioner-company filed petition under section
101 for confirming the reduction of share premium account. It also sought the
liberty of the Court for dispensing with the words ‘and reduced’ as contemplated
in section 102(3).
Held
The special resolution passed by the company clearly showed
that the restructuring would not be prejudicial to the interest of the
petitioner’s creditors as the reduction did not involve either the diminution
of any liability in respect of unpaid capital or the payment to any shareholder
of any paid-up capital. Further, there was no reduction in the amount payable
to any of the creditors and neither was any compromises nor arrangement
contemplated with such creditors. The asset cover ratio as covenanted by the
petitioner in their agreement with various secured creditors would continue to
be maintained even after such restructuring. In recognition of that position
all such secured creditors had signified their consent to the restructuring.
Thus, it was purely a business decision arrived at by the shareholders on the
basis of the commercial principles as the restructuring did not involve any
cash outflow, the same would not affect the normal operations of the petitioner
or its ability to honour its commitments and to pay its debts, in the
ordinary course of business and the restructuring was in accordance with sound
commercial and accounting practice and would enable the petitioner to project a
more realistic picture of its operations, which would be to the benefit of its
shareholders and investors. In recognition of that position, the shareholders
of the petitioner had unanimously approved such restructuring. [Para 14]
Section 100
empowers a company limited by shares, if so authorised by its articles, to
reduce its share capital by special resolution. The circumstances mentioned in
section 100(1) (a) (b) and (c) are only illustrative and not exhaustive and it
is open to a company covered under section 100 to reduce its securities premium
account. As far as the facts of the instant case were concerned, clause 45 of
the articles of association empowered the company to reduce its securities
premium accounts by passing a special resolution subject to the provisions of
sections 100 to 104. It was seen from records that the resolution for the
proposed reduction had been passed by more than the required majority to pass
special resolution and the resolution had been passed unanimously. [Para 15]
The next
question that arose for consideration was whether the procedure prescribed
under section 102 should be complied with by the petitioner in its entirety.
Section 101(2)(b) provides that the Court shall settle a list of creditors who
are entitled to object to the reduction proposed by the petitioner. Since all
such secured creditors had signified their consent to the proposed reduction,
the Court had dispensed with the drawing up of list of creditors and notice to
such secured creditors. In such circumstance, it was viewed that it was not
necessary to follow the procedures prescribed in rules 49 to 60 of the
Companies (Court) Rules, 1959. [Para 16]
The next
question that arose was whether the words ‘and reduced’ would be added to the
name of the petitioner-company from the date of the order. Since there was no
cash flow from the petitioner-company to the shareholders and the secured
creditors of the petitioner had given their consent to the proposed reduction,
the words ‘and reduced’ need not be added to the name of the petitioner-company
from the date of this order. Therefore, the requirements to comply with the
provisions of rule 62(b) and (c) of the Rules were dispensed with. The
adjustment in question would not have any impact on the book value of the
shares to the extent of losses written off as the net worth calculations
required adjustment of losses towards the capital and reserves of the
petitioner-company. The proposed adjustment was not prejudicial to the interest
of the creditors, as there was no reduction in the amount payable to them. The
proposed adjustment would not adversely affect the ordinary operations of the
petitioner company or the liability to honour its commitments or pay its debts
in the ordinary course of the business. [Para 17]
For the
foregoing reasons, the special resolution passed by the shareholders of the
petitioner-company was approved and as such, the proposed reduction of the
petitioner’s securities premium account was confirmed. The words ‘and reduced’
need not be added to the name of the petitioner-company from the date of this
order and the same was dispensed with.
In the result,
the instant petition was to be allowed. [Para 19]
R. Murari for
the Petitioner. M.T. Arunan for the Registrar of the Companies.
Order
1. In
this Petition, the Petitioner Company seeks an order of this Court for
confirming the reduction of share premium account under sections 78 and 101(1)
of the Companies Act, 1956 read with Rules 46 & 47 of the Companies (Court)
Rules.
2. The case of the Petitioner
is that the Petitioner has as on 31-3-2002, a sum of Rs. 3319.51 lakhs standing
to the credit of its Securities Premium Account. The Petitioner had made large
investments in setting up their factory at Manappakkam. However, as the factory
operations proved unviable due to several reasons, the Petitioner took a
business decision to close the said factory in August, 2002, after following
the requisite procedures. The Petitioner has also identified the surplus assets
relatable to such Manappakkam Unit and has taken a decision to sell such assets
for which purpose they have obtained the valuation of an independent valuer. On
this basis, the Petitioner estimates, that as on 31-3-2003, they would suffer a
loss not exceeding Rs. 700 lakhs in the process.
3. The further case of the
Petitioner is that the Petitioner has as on 31-3-2003, an accumulated loss of
Rs. 1642.20 lakhs which includes a one time expenditure of Rs. 1456 lakhs
incurred towards product withdrawal and the expenditure relating to the business
method restructuring costs for the year ended 31-3-2000. Further, the
Petitioner also has a balance of deferred Voluntary Retirement/Separation
Expenditure, incurred at Manappakkam to the extent of Rs. 73 lakhs as on
31-3-2003. For the reasons set out in para 8 of the Petition, namely to
undertake a financial restructuring the Petitioner proposed to apply its
Securities Premium Account and to utilize an amount not exceeding Rs. 2500
lakhs out of such account to set-off the above three heads of losses/expenditures.
The Petitioner has also explained in para 10 of the Petition, how this would
enhance shareholder value while not affecting the Petitioner’s operations. The
Petitioner therefore convened an Extraordinary General Meeting of its
Shareholders on 23-6-2003 for transacting two items of business, the first
being, for modification of Article 45 of the Articles of Association of the
Company, providing for Reduction in its Share Capital, its Capital Redemption
Reserve Fund/Account and Securities Premium Account. The Second Resolution was
for passing another Special Resolution for giving effect to the reduction in
the Securities Premium Account as aforesaid.
4. The Notice for the
meeting was accompanied by an Explanatory Statement as contemplated by section
173(2) giving full details of the proposed reasons thereof. The meeting was
attended by 60 shareholders in person and by 166 Shareholders by Proxy and both
Resolutions namely for the amendment of the Articles and for the reduction of
the Securities Premium Account, were put to vote and approved unanimously by
the Shareholders. The following is the text of the resolution so carried and
relating to the Petitioner’s Securities Premium Account :
“Resolved that pursuant to the provisions
sections 78, 100 and other applicable provisions if any, of the Companies Act,
1956 and Article 45 of the Articles of Association of the Company and subject
to the confirmation of the Hon’ble High Court of judicature at Madras and/or
other Tribunal or Authority empowered for this purpose under the Companies Act,
an amount not exceeding Rs. 2500 lakh standing to the credit of the Securities
Premium Account of the Company be utilized for adjustment against an estimated
loss not exceeding Rs. 700 lakh as on 31-3-2003 by reason of the diminution in
value of the Plant and machinery held for disposal at the Company’s Manappakkam
location (being an extraordinary item on Capital Account), as also a sum of Rs.
73 lakh being the balance of the deferred voluntary retirement/separation expenditure
as on 31-03-2003 incurred at Manappakkam, and the Accumulated loss of the
Company of Rs. 1642.20 lakh as on 31-3-2003.
Further Resolved that for the purpose of
giving effect to the above Resolution and for removal of any difficulties or
doubts, the Board of Directors of the Company, (hereinafter referred to as “the
Board” which term shall be deemed to include any person or committee which the
Board would have authorized/may authorize or nominated/may nominate to exercise
its powers, including the powers conferred under this Resolution) be and is
hereby authorised to do all such acts, deeds, matters and things as it may, in
its absolute discretion, deem necessary, expedient, usual or proper and to
settle any question or difficulty that may arise with regard to
utilization/adjustment of the Securities Premium Account including passing of
such accounting entries and/or making such other adjustments in the books of
account as considered necessary to give effect to the above Resolution,
finalizing the amounts involved or to carry out such modifications/directions
as may be ordered by the Hon’ble High Court of Judicature at Madras to
implement the aforesaid Resolution.”
5. The petition further
averred that the requisite form 23 reflecting the above special resolution has
been filed with the Registrar of Companies, Chennai.
6. The Petitioner further
states that the form of minute proposed to be registered under section
103(1)(b) of the Companies Act is as follows :
“Pursuant to the provisions of sections 78, 100
and other applicable provisions, if any of the Companies Act, of 1956 and
Article 45 of the Article of Association of the Company, the expected loss as
on 31-3-2003 arising out of the Plant and Machinery held for disposal at
Manappakkam location not exceeding Rs. 700 lakh, the accumulated loss as on
31-3-2003 (which includes the one time expenditure of Rs. 1456 lakh incurred
towards product withdrawal and expenditures relating to business method
restructuring cost in the year ending 31-3-2000) and totalling to Rs. 1642.20
lakh and the balance of deferred voluntary retirement/separation expenditure
incurred at Manappakkam location as on 31-3-2003 amounting to Rs. 73 lakhs,
which figures are as per the petition’s books of account subject to audit, are
adjusted against the balance standing to the credit of the Securities Premium
Account for an amount not exceeding Rs. 2,500 lakh in the books of the
Petitioner as at March 31, 2003 as per the terms of the Special Resolution
passed at the Extraordinary General Meeting held on 23-6-2003.
The balance standing to the credit of
Securities Premium Account as on 31-3-2003 after the aforesaid adjustments
shall not be less than Rs. 819.51 lakh.”
7. The Petitioner also
seeks the liberty of this Hon’ble Court for dispensing with the words “and
reduced” as contemplated in section 102(3) of the Act. The Petitioner therefore
has filed the above Petition under section 101 of the Act for confirming the
Reduction.
8. The Assistant Registrar
of Companies has now filed an affidavit in this C.P. on 11-9-2003 and in turn
the Petitioner has also filed rejoinder for the same on 16-9-2003.
9. In para 5 of the
affidavit filed by the Assistant Registrar of Companies, he has extracted
section 78(2) of the Act, and has sought to contend that the Share Premium
Account can be used only for a specific purpose. He further states, on the
basis of the above provision that there is no reduction in actual share capital
in real terms but the entire adjustment is made against the Securities Premium Account,
and that while there may not be any objection to utilize reserves created out
of profit generated over a period of time, for writing off losses, deferred
revenue expenditure etc., the Securities Premium Account cannot be used for the
purpose and that this is available only to meet the expenses or losses or
providing premium on share or debenture related activities.
10. For which, the learned
Counsel for Petitioner contends that section 78(1) of the Act, specifies that
the provisions of the Act relating to Reduction of share Capital of the Company
shall, except as provided in that section, apply as if the Securities Premium
Account were the paid up share Capital of the Company. Section 78(1), the
Securities Premium Account may be applied by the Company for the purposes set
out therein, which are the purposes extracted in the affidavit of the Asstt.
Registrar of Companies. Therefore, while reading the two sub-sections together,
the conclusion that would follows would be that where a Company proposes to
apply its Securities Premium Account in the manner provided for in sub-section
(2), the provisions relating to reduction of Capital would not be attracted and
the Company can do so without either being required to pass a special
resolution or seek the confirmation of Court. Section 78(2) is however not
exhaustive of the methods in which the Securities Premium Account can be
applied by the Company and is only exhaustive of the methods in which such
application can take place without following the reduction procedure. Where
however, a Company proposes to apply its Securities Premium Account in a manner
other than that contemplated in sub-section (2), then the provisions relating
to Reduction of Share Capital would have to be followed in respect of such application.
11. The Learned Counsel for
Petitioner further contends that the further contention of the R.O.C. that the
adjustment proposed by the Petitioner can only be effected out of the Reserves
created out of profits and not out of the Securities Premium Account would
again not represent the correct position. Apart from the fact that section 78
permits such adjustments, it can also be seen that the losses and expenses
against which such adjustments are to be made, are primarily one-time losses
and expenses and are not of a recurring nature. These losses and expenses
represent the value lost to the Petitioner and the exercise is being undertaken
in the interest of and for the benefit of the shareholders. It may be pointed
out that the credits in the Securities Premium Account represents amounts
received by the Petitioner, from its shareholders. The shareholders of the
Petitioner have unanimously approved the Application of the Securities Premium
Account in the manner proposed by the Petitioner.
12. By order dated
24-7-2003, this Court directed the publication of the Petition in one issue of
English Daily and in one issue of Tamil Daily giving 10 clear days from the
date of publication to the date of hearing. This Court has also directed notice
to be issued to the Registrar of Companies, Chennai, and to the Public
Prosecutor, High Court, Madras and the notices were also served on them and Mr.
M.T. Arunan is appearing for the Registrar of Companies.
13. The short question that arises
for consideration is whether this Court should grant approval for the reduction
of the Petitioner’s Securities premium Account as resolved by the Shareholders
of the Petitioner in the Special Resolution at the meeting held on 23-6-2003 as
set out in para 13 of the Petition.
14. The Special Resolution
passed by the Company clearly shows that the restructuring will not be
prejudicial to the interest of the Petitioner’s creditors as the reduction does
not involve either the diminution of any liability in respect of unpaid capital
or the payment to any shareholder of any paid-up capital. Further, there is no
reduction in the amount payable to any of the creditors and neither is any
compromises or arrangement contemplated with such creditors. The asset cover
ratio as covenanted by the Petitioner in their agreement with various secured
creditors will continue to be maintained even after such restructuring. In
recognition of this position all such secured creditors have signified their
consent to the restructuring. I find that it is purely a business decision
arrived at by the shareholders on the basis of the commercial principles as the
restructuring does not involve any cash outflow, the same will not affect the
normal operations of the Petitioner or its ability to honour its commitments
and to pay its debts, in the ordinary course of business and the restructuring
is in accordance with sound commercial and accounting practice and would enable
the Petitioner to project a more realistic picture of the Petitioner’s
operations, which would be to the benefit of the Petitioner’s shareholders and
investors. In recognition of this position, the shareholders of the Petitioner
have unanimously approved such restructuring.
15. Section 100 of the
Companies Act empowers a Company Limited by shares, if so authorised by its
articles to reduce its share capital by special resolution. The circumstances
mentioned in section 100(1) (a), (b) and (c) of the Act are only illustrative
and not exhaustive and it is open to a company covered under section 100 of the
Companies Act to reduce its Securities Premium Account. As far as the facts of
the case are concerned, clause 45 of the Articles of Association empowers the
Company to reduce its Securities Premium Accounts by passing a Special
Resolution subject to the provisions of sections 100 to 104 of the Act. I have
held that the resolution for the proposed reduction has been passed by more
than the required majority to pass special resolution and the resolution has
been passed unanimously.
16. The next question that
arises for consideration is whether the procedure prescribed under section 102
of the Act should be complied with by the Petitioner in its entirety. Section
101(2)(b) of the Act provides that the Court shall settle a list of creditors
who are entitled to object to the reduction now proposed by the Petitioner.
Since all such secured creditors have signified their consent to the proposed
reduction, this Court has dispensed with the drawing up of list of creditors in
C.A. No. 1216/2003 and notice to such secured creditors. I am of the view that
it is not necessary to follow the procedures prescribed in rules 49 to 60 of
the Companies (Court) Rules, 1959.
17. The next question that
arises is whether the words “and reduced” shall be added to the name of the
Petitioner company from the date of the Order. Since there is no cash flow from
the Petitioner Company to the shareholders and the Secured Creditors of the
Petitioner have given their consent to the proposed reduction, I am of the view
that the words “and reduced” need not be added to the name of the Petitioner
company from the date of this Order. Therefore, I dispense with the
requirements to comply with the provisions of rule 62(b) and (c) of the Rules.
I hold the said adjustment will not have any impact on the book value of the
shares to the extent of losses written off as the net worth calculations
required adjustment of losses towards the capital and reserves of the
Petitioner Company. The proposed adjustment is not prejudicial to the interest
of the creditors, as there is no reduction in the amount payable to them. The
proposed adjustment will not adversely affect the ordinary operations of the
Petitioner Company or the liability to honour its commitments or pay its debts
in the ordinary course of the business.
18. For the foregoing
reasons, the Special Resolution dated 23-6-2003 passed by the shareholders of
the Petitioner Company is approved and as such the proposed reduction of the
Petitioner’s Securities Premium Account is confirmed. The form of Minute set
out in para 18 of the Petitioner is also approved as per rule 63 of the Rules.
The Words ‘and reduced’ need not be added to the name of the Petitioner Company
from the date of this Order and the same is dispensed with. The Petitioner is
directed to advertise the notice of Registration Order and the minutes as
approved by this Court in the same newspapers in which notice of the Petition
was advertised within four weeks from the date of receipt of a copy of the Order.
The Additional Central Government Standing Counsel is entitled to fees of Rs.
5,000. The Company Petition stands allowed.
[2004]
50 SCL 387 (Bom.)
High
Court of Bombay
Birla
Global Finance Ltd., In re
D.G.
Karnik, J.
Company Petition No. 228 of 2002
and Company Application No. 149 of 2002
November 18, 2003
Section 100, read with section 80 of the
Companies Act, 1956 - Share capital - Reduction of - Whether preference shares
can be redeemed either out of proceeds of a fresh issue of capital or out of
profits of a company which would otherwise be available for payment of dividend
- Held, yes - Whether a company may redeem its preference shares by following
procedure laid down under section 80 which is a special provision meant for
redemption of preference shares or it may take recourse to general provision
under section 100 which is applicable for reduction of any capital, including
preference capital, in any manner - Held, yes - Articles of association of
petitioner-company authorised it to reduce share capital - Petitioner passed a
special resolution in general meeting of members of company for redemption of
preference shares by refunding to preference shareholders amount paid up
thereon subject to confirmation by High Court - Terms of issue of preference
shares showed that preference shares were redeemable at option of directors of
petitioner-company or preference shareholders - Preference shareholders had
recorded their consent for redemption of preference shares and consequent
reduction in capital - Whether in circumstances of case, sanction to proposed
reduction in share capital was to be granted - Held, yes
Facts
The petitioner
was incorporated under the provisions of the Act and the authorised share
capital of the petitioner was rupees one hundred and twenty-five crores divided
into five crore equity shares of Rs. 10 each and seventy-five lakhs preference
shares of Rs. 100 each. As on the date of filing of the petition, the
subscribed and paid-up share capital of the petitioner was Rs. 43,25,04,390
consisting of 1,57,50,439 equity shares of Rs. 10 each fully paid-up and
27,50,000 fully paid-up preference shares of Rs. 100 each. By a resolution
passed in the meeting of the board of directors of the petitioner-company, the
petitioner resolved to redeem all 27,50,000 redeemable cumulative preference
shares subject to the special resolution to be passed by the shareholders in
the extraordinary general meeting to be convened for that purpose and subject
to confirmation by the High Court at Bombay. Accordingly, an extraordinary
general meeting of the members of the petitioner-company was convened to
consider the redemption of preference shares. The preference share- holders had
also consented to the redemption of the said preference shares and consequent
reduction in the capital. Thereafter, the petitioner-company filed the
application for dispensation of the procedure under section 101(1). The Bombay
High Court by its order dispensed with the procedure under section 101(1). Thereafter,
the instant petition had been filed seeking approval and sanction of the Court
for redemption of aforesaid preference shares and consequent reduction in the
share capital by Rs. 27,50,00,000.
Held
A company
having share capital, if so authorised by its articles, by a special resolution
and subject to confirmation by the Court is entitled to redeem the share
capital in any way. The three methods mentioned in clauses (a), (b) and (c) of
sub-section (1) of section 100 are only illustrative and are not exhaustive. A
company may seek to redeem the share capital in any way and even in a manner
not covered by clauses (a), (b) and (c) of sub-section (1) of section 100.
Clauses (a), (b) and (c) of sub-section (1) are only illustrative of the modes
of reduction. The redemption of preference shares is nothing but repayment of
the preference capital and amounts to reduction in share capital. The words
‘pay off any paid-up capital’ appearing in clause (c) of sub-section (1)
indicate that even the preference share capital can be paid off subject to the
conditions laid down in section 100. [Para 11]
A company
though a legal person in the eye of law is an abstract entity. In case of a
company limited by shares, the liability of the members is limited to the
extent of the share capital subscribed by them. The members are not personally
liable for the dues of the company. Any person dealing with the company,
therefore, only has to look to the capital of the company for repayment of his
dues. A stranger dealing with the company and giving it credit does so, at
least in theory, on the assumption that the capital of the company as
represented by its assets including cash, would be available to him for
recovery of all his dues though in practice he may look beyond the capital to
the other things such as commercial solvency, liquidity and reputation of the
company. Since the liability of the members is limited to the extent of the
capital, a creditor cannot look beyond the capital of the company. Hence, law
requires that the capital of the company should be preserved and maintained.
The Act, therefore, imposes severe restrictions on the reduction of the
capital. The capital is not allowed to be reduced without permission and
sanction of the Court under section 100. Section 100 applies to reduction of
any type of capital. Under section 86 the share capital of the company can
consist of only two types, namely, equity and preference share capital. By the
Companies (Amendment) Act, 2000 equity capital is permitted to be of two types.
Section 100 applies for reduction of any type of the capital of the company.
Section 100 makes no distinction between the preference share capital and the
equity share capital. Thus, the equity share capital as well as the preference
share capital of a company can be reduced in any way, if authorised by the
articles, by a special resolution of the company subject to sanction of the
Court. The preference share capital of a company is generally redeemable and
after introduction of section 80A by the Companies (Amendment) Act, 1988, even
irredeemable shares issued prior to the amendment are made redeemable and have
to be redeemed by the company within the time prescribed therein. A stranger
dealing with the company, therefore, knows and understands that the preference
share capital would be redeemed in accordance with the terms of its issue and
would be available for repayment of his dues of credit. It is for this reason
that permission of the Court is not made necessary when preference shares are
to be redeemed in accordance with section 80. Money required for redemption of
preference shares can be obtained out of two sources under section 80. The
first source is out of the proceeds of a fresh issue of shares made for the
purpose of redemption and the second source is out of profits of the company
which would otherwise be available for dividend. In the former case, where
preference shares are to be redeemed out of the proceeds of a fresh issue of
shares made for the purpose of redemption, there is no reduction in the capital
of the company for an amount equivalent to or more than the amount to be
utilised for the purpose of redemption is raised by the company out of fresh
issue of shares. Thus, the capital of the company is maintained and the
creditors are not affected. In the latter case, where shares are to be redeemed
out of profits of the company which would otherwise be available for dividend,
the creditors can be affected because existing money goes out of the company.
It is for this reason that proviso (d) to sub-section (1) of section 80
requires the company to create a capital redemption reserve account and
transfer thereto a sum equivalent to the nominal amount of the shares to be
redeemed. The proviso further provides that the provisions of the Act relating
to the reduction in the share capital of the company shall, except as provided
in the section, apply as if the capital redemption reserve account were the
paid-up capital of the company. Thus, the sanction of the Court under section
100 would be necessary even where preference shares are to be redeemed out of
capital redemption reserve account created out of the profits of the company.
Again the principle of maintenance of the capital is preserved for the
protection of the creditors of the company and sanction of the Court is
necessary for reduction of the capital even for redemption of preference shares
out of capital redemption reserve account. [Para 12]
Section 80
operates in a limited field. It covers only the case of reduction of share
capital arising out of redemption of preference shares. Preference shares can
be redeemed either out of proceeds of a fresh issue of capital or out of the
profits of a company which would otherwise be available for payment of
dividend. In the former case, as the capital of the company is maintained, no
permission of the Court is necessary. In the latter case, provisions as to the
reduction of the share capital are made applicable by virtue of proviso (d) to
sub-section (1) of section 80. [Para 13]
Under clause
(c) of sub-section (1) of section 100, a company can pay back to the
shareholder any paid-up share capital which is in excess of needs of the
company. Redemption of the preference shares is nothing but paying back to the
shareholders their preference share capital. This can be done subject to
confirmation by the Court if the capital is in excess of the needs of the
company and the company is so authorised by its articles and the company passes
a special resolution to that effect. Therefore, preference shares can be
redeemed not only in accordance with section 80 but, also in accordance with
the provisions of section 100. If the shares are to be redeemed not out of the
fresh issue of shares made for that purpose nor out of the profits which would
otherwise be available for dividend as required under section 80, provisions of
section 100 would have to be complied with. Two independent procedures are
available to a company for redemption of preference shares. It may redeem the
shares by following the procedure laid down under section 80 which is a special
provision meant for redemption of preference shares or it may take recourse to
the general provision under section 100 which is applicable for reduction of
any capital, including preference capital, in any manner. [Para 14]
Article of
association of the petitioner authorised the company to reduce the share
capital. The petitioner had passed a special resolution in the general meeting
held for redemption of the preference shares by refunding to the preference
shareholders the amount paid up thereon subject to confirmation of the High
Court. The terms of the issue of the preference shares showed that the
preference shares were redeemable at the option of the directors of the
petitioner-company or the preference shareholders. The preference shareholders
had recorded their consent for redemption of preference shares. In the
circumstances, sanction to the proposed reduction was granted. The petition
was, accordingly, allowed. [Para 15]
S.A. Diwan,
S. Purohit and Mona Bhide for the Petitioner.
Order
1. A short question of law
that arises for consideration in this petition is :
(1) Whether the preference shares can be redeemed otherwise than out of
the profits of the company which would otherwise be available for dividends or
out of the proceeds of the fresh issue of shares made for the purpose of
redemption ?
The relevant facts are stated below :
2. The petitioner was
incorporated on 26th June, 1986 under the provisions of the Companies Act, 1956
(for short, ‘the Act’) and the authorised share capital of the petitioner is
rupees one hundred and twenty-five crores divided into five crore equity shares
of Rs. 10 each and seventy-five lakhs preference shares of Rs. 100 each. As on
the date of filing of the petition (i.e. on 10th February, 2003) the subscribed
and paid up share capital of the petitioner was Rs. 43,25,04,390 consisting of
Rs. 1,57,50,439 equity shares of Rs. 10 each fully paid up and Rs. 27,50,000
fully paid up preference shares of Rs. 100 each.
3. The Balance sheet of the
petitioner company as of 31st March, 2002 (annexed as Exhibit C-1 to the
petition) shows that the petitioner has issued four types of preference shares
as detailed below :
|
Type |
Nos. |
Total value |
|
|
|
(Rupees) |
|
(1) 10.5% redeemable cumulative preference
shares of Rs. 100 |
2,50,000 |
2,50,00,000 |
|
(Series N Preference shares) |
|
|
|
(2) 10.75% redeemable cumulative preference
shares of Rs. 100 |
25,00,000 |
25,00,00,000 |
|
(Series M Preference shares) |
|
|
|
(3) 11.50% redeemable cumulative preference
shares of Rs. 100 |
1,38,000 |
1,38,00,000 |
|
(4) 12.5% redeemable cumulative preference
shares of Rs. 100 |
30,000 |
30,00,000 |
4. During the period
between 1st April, 2002 and 30th September, 2002 the petitioner has redeemed
1,10,000 numbers of 11.5 per cent redeemable cumulative preference shares (i.e.
part of shares mentioned at Sr. No. 3 above) and 30,000 numbers of 12 per cent redeemable
cumulative preference shares (i.e. all of the shares mentioned at Sr. No. 4
above). As per the affidavit dated 8th July, 2003 sworn in by Mr. Arun Bhatt,
Manager (Secretarial) of the petitioner company, the redemption mentioned above
was made out of fresh issue of redeemable cumulative preference shares namely
25,00,000 number of 10.75 per cent redeemable cumulative preference shares
issued on 11th August, 1999 (mentioned at Sr. No. 2 above). Copy of the
resolution passed at the meeting of the Board of Directors of the petitioner
company held on 10th September, 1999 shows that the proceeds of the issue of
2,50,000 numbers of 10.75 per cent redeemable cumulative preference shares of
(series M) were to be utilised for the purpose of part or full redemption of
the preference shares issued earlier by the company. Learned counsel for the
petitioner submits that no time limit is prescribed under section 80 of the Act
within which the proceeds of fresh issue of preference shares can be utilised
for redemption of preference shares issued in the past. As such, the proceeds
of the preference share issued on 11th August, 1999 have been utilised between
1st March, 2002 and 30th September, 2002 for the purpose of redemption of 11.5
per cent and 10.5 per cent redeemable preference shares in the manner mentioned
earlier. Learned counsel further submits that the said shares were redeemed in
the manner laid down under section 80 of the Act and hence no permission of the
Court was obtained for the said redemption. The said shares have been redeemed
prior to the filing of the petition and are not the subject-matter of this
petition.
5. The entire lot of
25,00,000 numbers of 10.75 per cent redeemable preference shares (hereinafter
referred to as “series M preference shares”) were allotted to Hindalco
Industries Ltd. on 11th August, 1999 and are continued to be held by it. All
the shares are comprised in one share certificate bearing share certificate No.
P/M/1 and stand in the name of Hindalco Industries Ltd. under Folio No.
PREF/M/1. A copy of the share certificate is annexed as Exhibit F2 to the
petition. The terms and conditions of the issue of the preference shares
printed on the reverse side of the preference share certificate show that
maturity period of the preference shares is 10 years from the date of
allotment. On or after 30th September, 2002 the petitioner company as well as
the preference share holder have an option of early redemption which can be
exercised by giving one month’s notice to the other party.
6. 2,50,000 numbers of
10.5 per cent redeemable preference shares of series N (hereinafter referred to
series N preference shares) were issued and allotted to Excell Mines and
Industries on 16th September, 1999. All the shares are comprised in one share
certificate bearing No. P/N/1 and stand in the name of Excell Mines and
Industries Limited under Folio No. PREF/N/1. Copy of the said share certificate
is annexed as F3 to the petition. The terms and conditions of the issue of the
preference shares printed on the reverse side of the share certificate show
that they have maturity period of 10 years from the date of allotment. On or
after 30th September, 2002 the petitioner company as well as the or the share-
holders have an option of early redemption to be exercised by giving one
month’s notice to other party.
7. From the terms of issue
of series M and N preference shares, it is clear that the said shares are
redeemable after 30th September, 2002 at the option of the petitioner or the
shareholders by giving one month’s notice. By a resolution passed in the
meeting of the Board of Directors of the petitioner company held on 31st
October, 2002 the petitioner company resolved to redeem all the 27,50,000
redeemable cumulative preference shares of series M and N as referred to above
subject to the special resolution to be passed by the shareholders in the
extraordinary general meeting to be convened for that purpose and subject to
confirmation by the High Court at Bombay. Accordingly, an extraordinary general
meeting of the members of the petitioner company was convened on 29th January,
2003 to consider the redemption of series M and N preference shares. Both of
preference shareholders namely Hindalco Industries Limited and Excell Mines and
Industries Limited, who belong to Aditya Birla Group to which the petitioner
company also belongs, have also consented for the redemption of the said
preference shares. The said two companies have by their letters dated on 28th
January, 2003 and 30th January, 2003 respectively conveyed their consent for
the redemption and consequent reduction in the capital. Copies of the said
letters are annexed at Exhibits F1 and F to the petition.
8. Armed with the special
resolution for reduction of the share capital and having obtained consent of the
preference shareholders, the petitioner company filed the Company Application
No. 139 of 2003 for dispensation of the procedure under section 101(1) of the
Companies Act. By an order dated 29th April, 2003 this court dispensed with the
procedure under sub-section (1) of section 101 of the Act. Thereafter, the
present petition has been filed seeking approval and sanction of the court for
redemption of series M and N preference shares and consequent reduction of the
share capital by Rs. 27,50,00,000.
9. Section 80 of the Act
permits a company limited by shares, if so authorised by its Articles, to issue
preference shares which at the option of the company are liable to be redeemed.
After addition of section 80A in the Act, the company cannot issue irredeemable
preference shares and all the preference shares issued prior to the amendment
of the Act, by Companies (Amendment) Act, 1988 have also to be redeemed within
a period specified. Section 80 of the Companies Act, 1956 which lays down
conditions of redemption, reads as under :
“80. Power to issue redeemable preference
shares.—(1) Subject to the provisions of this section, a company limited by
shares may, if so authorised by its articles, issue preference shares which
are, or at the option of the company are to be liable to be redeemed :
Provided that—
(a) no such shares shall be redeemed except out of profits of the
company which would otherwise be available for dividend or out of the proceeds
of a fresh issue of shares made for the purposes of the redemption;
(b) no such shares shall be redeemed unless
they are fully paid;
(c) the premium if any, payable on redemption shall have been
provided for out of the profits of the company or out of the company’s security
premium account before the shares are redeemed;
(d) where any such shares are redeemed otherwise than out of the
proceeds of a fresh issue, there shall, out of profits which would otherwise
have been available, for dividend, be transferred to a reserve fund, to be
called the capital redemption reserve account a sum equal to the nominal amount
of the shares redeemed; and the provisions of this Act relating to the
reduction of the share capital of a company shall, except as provided in this
section, apply as if the capital redemption reserve account were paid up share
capital of the company.
(2) Subject to the provisions of this section, the redemption of
preference shares thereunder may be effected on such terms and in such manner
as may be provided by the articles of the company.
(3) The redemption of preference shares under this section by a
company shall not be taken as reducing the amount of its authorised share
capital.
(4) Where in pursuance of this section, a company has redeemed or is
about to redeem any preference shares, it shall have power to issue shares up
to the nominal amount of the shares redeemed or to be redeemed as if those
shares had never been issued; and accordingly the share capital of the company
shall not, for the purpose of calculating the fees payable under section 611 be
deemed to be increased by the issue of shares in pursuance of this sub-section
:
Provided that, where new shares are issued before the redemption of the old
shares, then new shares shall not so far as relates to stamp duty, be deemed to
have been issued in pursuance of this sub-section unless the old shares are
redeemed within one month after the issue of the new shares.
(5) The capital redemption reserve account may, notwithstanding
anything in this section, be applied by the company, in paying up unissued
shares of the company to be issued to members of the company as fully paid
bonus shares.
(5A) Notwithstanding anything
contained in this Act, no company limited by shares shall, after the
commencement of the Companies (Amendment) Act, 1996, issue any preference share
which is irredeemable or is redeemable after the expiry of a period of twenty
years from the date of its issue.
(6) If a company fails to comply with the provisions of this section,
the company, and every officer of the company who is in default shall be
punishable with fine which may extend to ten thousand rupees.”
Proviso (a) to sub-section (1) of section 80 makes it clear that
preference shares can be redeemed only—
(i) out of profits of the company which would otherwise be
available for dividend; or
(ii) out of the proceeds of a fresh issue of shares made for
the purpose of redemption.
9A. In the present case,
the petitioner is not seeking to redeem the shares either out of the
accumulated profits which would otherwise be available for dividend nor out of
the fresh issue of shares. In the circumstances, the petitioner company is not
entitled to redeem the shares by following the procedure under proviso (a) to
section 80 of the Act. Is there any other mode or manner in which the
preference shares can be redeemed? Mr. Diwan submitted that redemption of
preference shares amounts to a reduction of capital and can also be undertaken
following general provisions for reduction of capital of any type equity or preference
by following the provisions of section 100 of the Companies Act. According to
Mr. Diwan, section 80 is a special provision which does not exclude general
provisions relating to reduction contained in sections 100 to 104 of the Act.
10. Section 100 of the
Companies Act reads as under :
“100. Special resolution for reduction of
share capital.—(1) Subject to confirmation by the Court, a company limited by
shares or a company limited by guarantee and having a share capital, may, if so
authorised by its articles, by special resolution, reduce its share capital in
any way; and in particular and without prejudice to the generality of the
foregoing power, may—
(a) extinguish or reduce the liability on any of
its shares in respect of share capital not paid-up;
(b) either with or without extinguishing or reducing liability on
any of its shares, cancel any paid up share capital which is lost, or in
unrepresented by available assets; or
(c) either with or without extinguishing or reducing liability on
any of its shares, pay off any paid up share capital which is in excess of the
wants of the company;
and may, if and so far as is necessary, alter
its memorandum by reducing the amount of its share capital and of its shares
accordingly.
(2) A special resolution under this section is in this Act referred to
as ‘resolution for reducing share capital’.” [Emphasis supplied]
11. A company having a share
capital, if so authorised by its articles, by a special resolution and subject
to confirmation by the court is entitled to redeem the share capital in any
way. The three methods mentioned in clauses (a), (b) and (c) of sub-section (1)
of section 100 are only illustrative and are not exhaustive. A company may seek
to redeem the share capital in any way and even in a manner not covered by
clauses (a), (b) and (c) of sub-section (1) of section 100. Clauses (a), (b)
and (c) of sub-section (1) of section 100 are only illustrative of the modes of
reduction. The redemption of preference shares is nothing but, repayment of the
preference capital and amounts reduction of share capital. The words “pay off
any paid up capital” appearing in clause (c) of sub-section (1) of section 100
indicate that even the preference share capital can be paid off subject to the
conditions laid down in section 100 of the Act.
12. A company though a legal
person in the eye of law is an abstract entity. In case of a company limited by
shares, the liability of the members is limited to the extent of the share
capital subscribed by them. The members are not personally liable for the dues
of the company. Any person dealing with the company, therefore, only has to
look to the capital of the company for repayment of his dues. A stranger
dealing with the company and giving it credit does so, atleast in theory, on
the assumption that the capital of the company as represented by its assets
including cash, would be available to them for recovery of all his dues though
in practice he may look beyond the capital to the other things such as
commercial solvency, liquidity and reputation of the company. Since the
liability of the members is limited to the extent of the capital, a creditor
cannot look beyond the capital of the company. Hence, law requires that the
capital of the company should be preserved and maintained. The Act therefore,
imposes severe restrictions on reduction of the capital. The capital is not
allowed to be reduced without permission and sanction of the court under
section 100 of the Act. Section 100 applies to reduction of types of capital.
Under section 86 of the Act, the share capital of the company can consist of
only two types namely equity and preference share capital. By the Companies
(Amendment) Act, 2000 equity capital is permitted to be of two types. Section
100 applies for reduction of any type of the capital of the company. Section100
makes no distinction between the preference share capital and the equity share
capital. Thus, the equity share capital as well as the preference share capital
of a company can be reduced in any way, if authorised by the articles, by a
special resolution of the company subject to sanction of the court. The
preference share capital of a company is generally redeemable and after
introduction of section 80A by the Companies (Amendment) Act, 1988 even
irredeemable shares issued prior to the amendment are made redeemable and have
to be redeemed by the company within the time prescribed therein. A stranger
dealing with the company therefore knows and understands that the preference
share capital would be redeemed in accordance with the terms of its issue and
would be available for repayments of his dues or credit. It is for this reason
that permission of the court is not made necessary when preference shares are
to be redeemed in accordance with section 80 of the Act. Money required for
redemption of preference shares can be obtained out of two sources under
section 80. The first source is out of the proceeds of a fresh issue of shares
made for the purpose of redemption and the second source is out of profits of
the company which would otherwise be available for dividend. In the former
case, where preference shares are to be redeemed out of the proceeds of a fresh
issue of shares made for the purpose of redemption, there is no reduction in
the capital of the company for an amount equivalent to or more than the amount
to be utilised for the purpose of redemption is raised by the company out of
fresh issue of shares. Thus, the capital of the company is maintained and the
creditors are not affected. In the latter case, where shares are to be redeemed
out of profits of the company which would otherwise be available for dividend,
the creditors can be affected because existing money goes out of the company.
It is for this reason that proviso (d) to sub-section (1) of section 80 of the
Act requires the company to create a capital redemption reserve account and
transfer thereto a sum equivalent to the nominal amount of the shares to be
redeemed. The proviso further provides that the provisions of the Act relating
to the reduction of the share capital of the company shall except as provided
in the section, apply as if the capital redemption reserve account were the
paid-up capital of the company. Thus, the sanction of the Court under section
100 of the Act would be necessary even where preference shares are to be
redeemed out of capital redemption reserve account created out of the profits
of the company. Again the principal of maintenance of the capital is preserved
for the protection of the creditors of the company and sanction of the Court is
necessary for reduction of the capital even for redemption of preference shares
out of capital redemption reserve account.
13. In my opinion, section
80 of the Act operates in a limited field. It covers only the case of reduction
of share capital arising out of redemption of preference shares. Preference
shares can be redeemed either out of proceeds of a fresh issue of capital or
out of the profits of a company which would otherwise be available for payment
of dividend. In the former case, as the capital of the company is maintained,
no permission of the court is necessary. In the latter case provisions as to
the reduction of the shares capital are made applicable by virtue of proviso
(d) to sub-section (1) of section 80.
14. Under clause (c) of
sub-section (1) of section 100, a company can pay back to the shareholder any
paid up share capital which is in exercise of wants of the company. Redemption
of the preference shares is nothing but paying back to the shareholders their
preference share capital. This can be done subject to confirmation by the court
if the capital is in excess of the wants of the company and the company is so
authorised by its Articles and the company passes a special resolution to that
effect. In my opinion, therefore preference shares can be redeemed not only in
accordance with section 80 but, also in accordance with the provisions of
section 100 of the Act. If the shares are to be redeemed not out of the fresh
issue of shares made for that purpose nor out of the profits which would
otherwise be available for dividend as required under section 80, provisions of
section 100 of the Act would have to be complied. Two independent procedures
are available to a company for redemption of preference shares. It may redeem
the shares by following the procedure laid down under section 80 of the Act
which is a special provision meant for redemption of preference shares or it
may take recourse to the general provision under section 100 of the Act which
is applicable for reduction of any capital, including preference capital, in
any manner.
15. I would now consider
whether court should sanction the present redemption which is by way of
redemption of preference share capital should be sanctioned in its discretion
under section 100 of the Act.
Article No.
65 and amended Article No. 4 of the Articles of Association of the petitioner
authorise the company to reduce the share capital. The petitioner has passed a
special resolution in the general meeting held on 29th January, 2003 for
redemption of the preference shares by refunding to the preference shareholders
the amount paid up thereon subject to confirmation of the High Court. The terms
of the issue of the preference shares show that the preference shares are
redeemable at the option of the directors of the petitioner company or the
preference shareholders. Both the preference shareholders have recorded their
consent for redemption of preference shares. In the circumstances, I do not see
any reason not to grant sanction to the proposed reduction. The petition is
accordingly allowed in terms of prayers clauses (a) and (b).
[1987] 61 COMP. CAS. 92 (BOM)
HIGH COURT of BOMBAY
Investment Corporation of India
Ltd., In re
N.K. PAREKH, J.
Company Petition No. 165 of 1985
(connected with Company
Application No. 385 of 1984)
AUGUST 19, 1985
V.V. Tulzapurkar and Miss R. Aiyar for the petitioner.
J.M. Chagla and C.M. Corde for the intervener.
K.R. Bulchandani for the Regional Director of Company Law
Board.
Parekh, J.—This is a petition under section 101 and section 391 of
the Companies Act, 1956.
The facts that give rise to
this petition are that the petitioner-company was incorporated on March 5, 1957.
Its authorised share capital stood divided into ordinary shares, preference
shares and unclassified capital. The preference shares are of one category,
viz., 5,000, 7¾% preference shares of Rs. 1,000 each. The bank rate having
risen considerably, the preference shareholders made requests to the company to
remedy the situation by increasing the rate of the dividend payable and more
particularly as the terms of the issue of the said preference shares did not
provide for the redemption thereof. The board of directors of the
petitioner-company thereupon decided to cancel the said preference shares and
instead issue to the members of the petitioner-company holding preference
shares, secured non-convertible debentures of Rs. 100 each bearing interest at
the rate of 12% per annum payable half-yearly. They also decided to draw up a
scheme of arrangement between the petitioner-company and its shareholders to
the said effect. The proposed scheme of arrangement was then drawn up, inter
alia, providing (a) for the reduction of capital, (b) for the intended issue of
the debentures on the cancellation of the preference shares, (c) that ten
debentures of the face value of Rs. 100 would be given to the holder of each
preference share, (d) that interest payable on the said debentures would be at
12%, and (e) that these debentures would be secured by a floating charge on the
petitioner-company's assets. A meeting was then held on December 4, 1984, when
a special resolution was passed touching on matters of reduction of capital and
the cancellation of the preference shares and for issue of debentures in lieu
thereof. Thereafter, the petitioner-company filed Company Application No. 385
of 1984. On December 12, 1984, the petitioner-company obtained orders to
convene separate meetings of its members holding preference shares and ordinary
shares. Meetings were accordingly held when the scheme of arrangement was
placed before the meeting of the preference shareholders as also before the
meeting of the ordinary shareholders. In both the meetings, resolutions were
passed approving the reduction. The chairman then filed his report. The
petitioners thereupon presented this petition under section 101 and section 391
of the Companies Act.
On this petition being
filed, an application was made to this court that in view of the Sachar
Committee's Report and in view of the meetings held of the shareholders and in
view of the balance-sheet of the company, the court may dispense with the
procedure under section 101 of the Companies Act and approve the reduction of
capital. On this application, this court examined the fiscal health of the
company by scrutinizing the balance-sheets and took into consideration the
resolutions passed both by the company's preference shareholders and the
company's ordinary shareholders as also the fact that the issue of the intended
debentures was subject to the sanction and approval of the Controller of
Capital Issues and subject to the petitioner company obtaining orders from all
the authorities concerned with the issue of debentures. Orders were then passed
on March 27, 1985, dispensing with the procedure under section 101 of the
Companies Act. The petition has now come up for hearing for sanctioning the
scheme of arrangement. The same is, however, opposed by the Registrar of
Companies and/or the Company Law Board.
Mr. Bulchandani, learned
counsel appearing on behalf of the Company Law Board, urged that in seeking a
reduction of capital, it was incumbent on the company to follow the procedure
laid down in section 101 of the Companies Act. That this was all the more
necessary to guard against any unfairness to some class or the minority
shareholders and to establish that the reduction sought is fair. In support of
this contention, Mr. Bulchandani relied upon a passage in Palmer's Company Law
(23rd edition), at page 375, reading as follows :
"The court will likewise refuse to confirm
a reduction which is unfair to some class or minority of shares. If the
reduction of a class of preference shares is resolved and the minority, when
voting at the separate class meeting, was guided by its own interests and did
not take into account the interests of the preference shareholders as a class,
the onus of proving that the reduction is fair falls on the majority; prima
facie the reduction of capital by cancellation of redeemable preference shares
having a fixed date of redemption in exchange of unsecured loan stock
redeemable at a much later date is unfair. The objecting shareholders must show
prejudice to their interests. The court cannot confirm a conditional
reduction."
Mr. Bulchandani submitted
that in this case the petitioner company had failed to follow the procedure
under section 101 and was hence not entitled to relief for the reduction of its
capital.
I am unable to accept this
contention. The said section itself provides that the procedure may be
dispensed with by the court if it thinks fit and proper. In the present case,
as stated earlier, it was only after scrutinizing the fiscal health of the
company and considering the ramifications of the scheme and considering the
resolutions passed by the shareholders that an order was passed dispensing with
the procedure under section 101. Furthermore, barring making a submission, Mr.
Bulchandani has not been able to state as to who has complained of any
prejudice being caused or to whom it is caused or as to who has complained of
the reduction of capital being unfair or, if the Company Law Board finds it
unfair, and in what manner. The contention canvassed by Mr. Bulchandani must
now be negatived.
Mr. Bulchandani has next
argued that section 391 of the Companies Act contemplates that where a
compromise or arrangement is arrived at between the company and its creditors
and/or the company and its shareholders, it may approach the court for the
sanction of the same. The expression "arrangement" has been defined
in section 390, sub-clause (b), which reads as follows :
"390. In sections 391 and 393 ......
(b) the expression 'arrangement' includes a
reorganisation of the share capital of the company by the consolidation of
shares of different classes, or by the division of shares into shares of
different classes or, by both those methods ; and..."
The proposed scheme does
not contemplate a reorganisation of the share capital of the company by the consolidation
of shares of different classes. On the other hand, the scheme contemplates an
adjustment or modification of rights, and if this be so, then it cannot fall
within the ambit of the expression "arrangement" used in section 390.
In support of his contention as to the import of the word
"arrangement" in section 390 of the Act, Mr. Bulchandani relied upon
the observations in Hindustan Commercial Bank Ltd. v. Hindustan General
Electrical Corporation Ltd. [1960] 30 Comp Cas 367 (Cal); AIR 1960 Cal 637, and
the observations in another case in In re Chowgule & Co. P. Ltd. [1972] TLR
2163. Mr. Bulchandani urged that in view of this, the petitioner would not be
entitled to come under section 391 and hence no relief can be granted on this
score.
I am unable to accept this
contention. The word "arrangement" as set out in section 390(b) is an
inclusive definition and contemplates all arrangements and not only
reorganisation of the share capital. This is all the more clear, because the word
used is "includes".
Coming
to the case of Hindustan Commercial Bank Ltd. v. Hindustan General Electrical
Corporation Ltd. [1960] 30 Comp Cas 367 (Cal); AIR 1960 Cal 637, I do not see how this case can assist Mr.
Bulchandani, for in paragraph 27 it has been stated as follows (page 381 of 30
Comp Cas) :
"The word 'arrangement' in section 391 is
of wide import. By section 390, 'arrangement' includes reorganisation of the
share capital of the company by the consolidation of shares of different classes
or by the division of shares into shares of different classes or by both those
methods. The court has the power to sanction a scheme of arrangement though the
scheme modifies the special rights attached to a class of shares."
(Underlining
supplied)
These observations on the
contrary support the position that the word "arrangement" used in
section 391 is inclusive and that a scheme of arrangement which modifies rights
of the shareholders can be brought under this section.
As regards the other
citation in In re Chowgule and Co. [1972] TLR 2163, Mr. Bulchandani has
stressed the observations appearing in para 8 and reading as follows :
"As for the argument that the present
application had to be made under section 391, Shri Palkhivala contends that
this section was not attracted for two reasons, the first being that there was
in the present case no arrangement between the petitioner and their creditors
or any class of them or between the petitioner and its members or any class of
them, and the second being that the petitioner is not liable to be wound up
under the Act. Indeed, after reading the special resolution dated September 30,
1971, and the petition for confirmation of conversion, I do not see how the
entire scheme could be regarded as a compromise or arrangement between the
petitioner and its creditors or between the petitioner and its members. It is
true that in view of the provisions of section 390(b) of the Act, the
expression 'arrangement' occurring in section 391 includes a reorganisation of
the share capital of the company by the consolidation of shares of different
classes, or by the division of shares into shares of different classes, or by
both those methods, but the word 'arrangement' used in the section means
something analogous in some sense to a compromise and a compromise necessarily
implies two parties. In the instant case, there is only one party to the
proceeding."
With respect to the learned
judge, in view of what is aforesaid, I am unable to agree with his
observations.
Apart from all this, I had
asked Mr. Bulchandani if the "arrangement" was not to be the
subject-matter of section 391, then under what procedure should the petitioner
proceed. I am afraid, Mr. Bulchadani was unable, to point out any other
provisions. In view of this, Mr. Bulchandani's contention must be negatived.
Mr. Bulchandani then argued
that the Companies Act itself provides for issue of debentures. That it was for
the Controller of Capital Issues and other authorities to sanction and approve
the issue of debentures. That if this court sanctions the scheme of
arrangement, it must mean that the court had decided the issue of debentures
bypassing the Controller of Capital Issues and all other authorities concerned
with the issue of capital. That it was not open to the company to shortcircuit
the procedure for obtaining permission from the authorities prescribed for the
issue of debentures in this manner.
As regards this argument,
it must be stated that prayer (g) itself provides that the scheme is
conditional and subject to the requisite sanction or approval, if any, of the
Controller of Capital Issues under the Capital Issues Control Act, 1947, and of
any other concerned authorities being obtained and granted in the matter in
respect of which such sanctions or approvals shall be required. Hence, if such
sanctions are not granted, the proposed scheme must fail. The question of the
petitioner-company shortcircuiting the procedure for issue of debentures does
not survive.
In view of this discussion,
what comes about is that there is no reason why this petition should not be
made absolute.
In the result, the petition
is made absolute in terms of prayers (a), (b), (c), (d), (e), (f), (g), (h),
(i) and (j) of the petition. Form of minute set forth in the schedule is hereby
approved. The petitioner to pay the costs of the Regional Director of the
Company Law Board at Bombay, quantified at Rs. 300.
[1938] 008 COMP. CAS. 314 (PESHAWAR)
JUDICIAL COMMISSIONER'S COURT OF PESHAWAR
Khattar
Electrical Engineering and General Supply Co. Ltd.
MIR AHMAD, J.
JUNE 13, 1938
Mr. Belt Ram, for the Petitioner.
Mr. Jiwan Lal Kapur, for the legal representatives of Rochi Ram Khattar.
ORDER
Ahmad, J.—The Khattar Electrical Engineering and General Supply Co., Ltd., Dera Ismail Khan, is a private limited liability company. It was first founded by R. B. Rochi Ram Khattar and about the year 1921-22 it was decided to convert it into a limited liability company. R. B. Rochi Ram alleged that he had borrowed ten lakhs for initiating the concern and therefore wanted to transfer it to the company for that sum. It appears that the persons who agreed to take shares were not prepared to pay that amount. Consequently a reference to arbitration was made to which R. B. Rochi Ram Khattar and the proposed share-holders of the new company were parties. The arbitrator, R. S. Gopi Chand, valued the assets of the company at about Rs. 9,21,000. The shareholders paid this amount to R. B. Rochi Ram and the company came into existence. R. B. Rochi Ram became its chairman. It so happened that R. B. Rochi Ram Khattar could not pay off the loan of about Rs. 92,000 which according to the arbitrator's decision was left for him to pay. He therefore asked the company to lend his some money. The company advanced a lakh of rupees to him to pay off the debt. The company seems to have thereafter begun to lend money freely to its share-holders and the share-holders continue to be indebted to it to the present day. In 1930, 10 per cent. of the capital was reduced by the company and was. confirmed by this Court. On December 16, 1936, a meeting of the directors took place. The following two resolutions were passed at this meeting:
"(a) Definite proposal regarding the reduction of the assets and capital of the company be placed before the share-holders by the chairman.
(b) That a loan up to the extent of 45 per cent. of the share money be advanced to each share-holder at the rate of 1 per cent. per annum with a view to ultimate reduction of the share capital to the same extent. The previous advances paid to the shareholders to the extent of 30 per cent. be deducted with interest up to March 31, 1937, from this 45 per cent."
On December 21, 1936, a notice was issued for the meeting of the share-holders to be held on December 30, 1936. The notice purported to call an ordinary general meeting of the share-holders. Amongst others the following items were on the agenda :
"(5) Proposal of R. B. Rochi Ram Khattar regarding his loan account submitted for consideration.
(6) Definite proposal by the chairman of the company regarding the reduction of assets and capital of the company for consideration.
(9) R. B. Rochi Ram Khattar submitting the explanation and the claim in writing regarding dead account of Rs. 14,798-9-11 is put up with the objection- No. 15 of the auditor for disposal".
Eight out of the nine share-holders of the company were present at this meeting. The ninth was L. Sundar Das who had died before the notice was issued and whose legal representatives had not yet obtained a succession certificate in order to entitle them to take part in the proceedings. An objection was taken that the balance sheet, which was also to be considered at the meeting, had not been properly circulated. As a result the meeting was adjourned to February 21, 1937. Another notice was issued on February 6, 1937, to convene the adjourned meeting on February 21, 1937. In this notice the meeting was designated as an extraordinary general meeting of the share-holders of the company. Practically the same agenda was repeated.
The same eight share-holders were present at this meeting Lala Dharam Chand Khera, however, walked out soon after because be raised an objection to the balance sheet and wanted the objection to be recorded but the chairman would not do so. The remaining share-holders continued the meeting. The following proposals were passed unanimously by them :
"(1) That the share capital of the company be reduced by 45 per cent. of the share capital and the same should come for confirmation before the extraordinary meeting of the share-holders.
(2) That the total loan of Rs. 74,400 against
R.B. Rochi Ram Khattar be discharged against reduction
of his shares by that amount.
(3) That
the company's claim for Rs. 14,798-9-11 against R. B. Rochi Ram Khattar
regarding the account named as dead account be settled by reducing the share
money of R. B. Rochi Ram Khattar to the extent of Rs. 4,800".
By a notice date February 23, 1937, another extraordinary general meeting of the share-holders was called for March 10, 1937. It was summoned in order to confirm the reduction of capital agreed upon by the meeting of February 21, 1937. Seven shareholders were present on March 10, 1937 ; Lala Dharam Chand Khera had absented himself. The reductions proposed were confirmed subject to the sanction of the Court of the Judicial Commissioner. It was also resolved that the re-valuation of the assets of the company be carried out in consultation with the Electrical Inspector, Waziristan District. In pursuance of these proceedings this application has been presented to this Court by the company far sanction to be accorded to the three proposals passed by the meeting of the share-holders on February 21, 1937, and confirmed by a second meeting of the share-holders held on March 10, 1937. The re-valuation of the assets of the company was also carried out with the assistance of the Electrical Inspector, Waziristan District. The usual notices were issued by this Court and a date fixed for settling the list of creditors.
Mr. Baldev, who represented one of the share-holders, appeared on the date fixed to contest the application. He took the objection that there were no valid resolutions before the Court. An issue was framed and another date fixed for evidence. On that date Mr. Baldev withdrew his objections. The list of creditors was therefore sanctioned and the creditors were called upon to show cause why the petition should not be accepted. On the adjourned date Mr. Dharam Chand Khera and Sh. Ram Kaur on her own behalf and on behalf of her son Kishori appeared to contest the application. The following issues were framed by the Court:
"(1) Is the resolution valid ? Onus of Proof on petitioner.
(2) Does the proposal to cancel 45 per cent. of the capital amount to refund of capital under Section 55, Companies Act, and is it therefore not permissible under the law ? Onus of Proof on respondents.
(3) Is Lala Dharam Chand estopped from raising the objection taken by him ? Onus of Proof on petitioner.
(4) Has Mussammat Ram Kaur no locus standi to question the application ? Onus of Proof on petitioner.
(5) Is it permissible for the company to make additional reduction in the share capital of the late Rai Bahadur Ch. Rochi Ram Khattar to the extent of Rs. 70,000 ? Onus of Proof on petitioner."
The evidence of Mr. A. N. Ghosh, Engineer-in-charge of the company, was taken in part on April 20, 1938, and L. Ganpat Rat, one of the directors of the company, was also examined on that date. The case was adjourned to May 27, 1938, for completing the statement of Mr. A. N. Ghosh and for recording the other evidence in the case. However, on that date Counsel for L. Dharam Chand Khera and Mussammat Ram Kaur withdrew from the case. On the other hand Mr. Baldev, the share-holder, who had previously objected and then withdrawn his objection, again appeared with an application for stay of proceedings. He alleged that the company had been guilty of misconduct and that he had given application to the Registrar of Joint Stock Companies under Sections 137, 138, 166 and 282-A, Companies Act, against it. He requested that the case should be kept pending till the dosal of that application by the pegistrar. The application mane to the Registrar having no concery with the groceedings before me, the application of Mr. Baldev was rejected. Mr. A. N. Ghosh was further examined by Counsel for the petitioner and also by Counsel for the legal representatives of R. B. Rochi Ram Khattar. The case was closed by the company. Mr. J. L. Kapur, Counsel for the representatives of R. B. Rochi Ram Khattar, addressed the Court and very ably explained the facts and the law bearing on the application. Section 55, Companies Act, permits the reduction of capital by a company and clause (c) of the section applies to the present application. Article 8 of Articles of Association of this company also runs thus:
"The company, from time to time (may) by special resolution, reduce its capital in any manner for the time being authorised by law and in particular, capital may be paid off on the footing that it may be called up again or otherwise. This article is not to derogate from any power this company would have if it were omitted."
It follows, therefore, that the company is well within its rights in resolving to reduce its capital. The only questions which arise for decision, however, are : (1) Whether the company has by a valid resolution resolved that the reduction should be carried out, and (2) whether the Court should accord its sanction to the proposed reduction. As regards the fact that the resolutions were passed by the share-holders who were present at the meeting, there is no quarrel. The minutes show that except Sunder Das who is dead and Dharam Chand who walked out, all the other shareholders of the company unanimously passed the proposals both on February 21, 1937, and March 10, 1937. The objection taken by the contesting share-holders, who withdrew later, was that no valid notice was given for convening the two meetings. It was contended that the Amending Act came into force on January 15, 1937, that the meeting of February 21, 1937, should therefore have been convened under the provisions of the Amended Companies Act, that under Section 81 as amended a notice of 21 days was necessary for the meeting and that full 21 days' notice having not been given, the meeting was not validly held and the resolutions were ultra vires. It was also pointed out that the first meeting of December 30, 1936, was designated as an "ordinary meeting" in the notice while it should have been called "an extraordinary meeting".
On the other hand, it was urged by the Counsel for the petitioner and the Counsel for the representatives of R. B. Rochi Ram Khattar that the meeting of February 21, 1937, was only a continuation of the meeting of December 30, 1936 which was held when Section 81 of the old Act was in force. Counsel pointed out that 21 days' notice was not necessary under Section 81 of the old Act which only enjoined that the meeting should be called by giving a notice as prescribed by the Articles of Association. He adverted to Article 63 of the Articles of Association of the company which lays down that seven days' notice should be given for holding a meeting of the shareholders. He argued that more than seven days' notice having been given, the meeting dated December 30, 1936, was properly convened. He then referred to Art. 67 of the Articles of Association which runs thus :—"The chairman, with the consent of the meeting, may adjourn any meeting from time to time and place to place in Dera Ismail Khan" and contended that the meeting of February 21, 1937, was a continuation of the meeting of December 30, 1936, and was valid. He cited Neuschild v. British Equitorial Oil Co., and Subramania Iyer v. United India Life Insurance Co,, Ltd., to show that on general principles also when a meeting is called to transact business for which proper notice had been given and that meeting is adjourned to a subsequent date, the adjourned meeting is a continuation of the previous meeting although fresh notices with the agenda had been sent round.
In the alternative Counsel took up the position that all the share-holders except Sundar Das deceased having been present at the beginning of the meeting of February 21, 1937, and no one having objected to the validity of the meeting the right to object had been lost. He asked the Court to consider Sundar Das nonexistent. He quoted Allen v. Gold Reefs of West Africa, Ltd., in support of this allegation. It lays down that no notice need be sent to the representatives of a deceased share-holder of a company when their names have not been entered in the register of members. Counsel emphasized the facts that all the share-holders present knew full well the purpose for which they had assembled and unanimously passed the resolutions put before them. He maintained that in the circumstances the criticism that the meeting of December 30, 1936, was called as an ordinary meeting and that due notice was not given for convening the meeting of February 21, 1937, lost all importance and pressed that it should be presumed that the share-holders present had impliedly condoned the irregularities, if any. He relied on Henderson v. Bank of Australia, In re Express Engineering Works Ltd., In re Oxted Motor Co. and Brown v. La Trinidad in support of this proposition. After carefully considering the facts in the light of the authorities referred to by Counsel, I have come to the conclusions : (1) that the meeting of December 30, 1936, was regularly called because seven days' notice was given for it and this was all that was required to be done by the law then in force (Section 81 of the old Act read with Art. 63 of the Articles of Association of the company); (2) that the meeting of February 21, 1937, was clearly a continuation of the meeting of December 30, 1936, because the latter meeting had been validly adjourned to the former date under Art. 67 of the Articles of Association of the company; (3) that the fact that Section 81, Companies Act, was amended in the meantime had no effect on the meeting of February 21, 1937, so far as the procedure for convening it was concerned, and (4) that the resolutions passed at the meeting of February 21, 1937, were, therefore, in order.
The argument that the meeting of December 30, 1936, was summoned as an ordinary meeting and was, therefore, not one called under Section 81 of the Act has no substance in it. The agenda clearly indicated the object of the meeting and the share-holders understood full well that they had met to consider the reduction of capital. No objection was raised at the meeting on the ground that it was an ordinary meeting and not an extraordinary meeting. It follows that the omission to name it as an extraordinary meeting in the notice dated December 21, 1936, has no importance at all and cannot vitiate the proceedings. The only question which remains for consideration is whether the meeting of March 10, 1937, was necessary, and if so, was it regularly summoned. If Section 81 of the old Act be kept in view, the meeting of March 10, 1937, was necessary because Section 81 of the old Act required a confirmatory meeting to be held not less than 14 days after the meeting in which a special resolution had been passed so that the resolution should be ratified by it. On the other hand, if Section 81 of the Amended Act be taken to apply, no such confirmatory meeting was necessary. The meeting of March 10, 1937, would have been necessary if the old Act remained in force. But it is apparent that the old Act was no longer the law when the meeting of February 21, 1937, was held. Consequently I hold that the confirmatory meeting was unnecessary, and the logical result of this finding is that the decision of the meeting of February 21, 1937, became final on that very day. Now I will turn to the second question relating to the reduction of capital. I understood from the learned Counsel who argued the case that there is no reported Indian authority on this point. The English authorities which were quoted by the learned Counsel may, for convenience, be grouped together as follows :
Buckley, 1930 Edition, p. 120, British & American Trustee and Finance Corporation v. John Couper, In re Credit Assurance & Guarantee Corporation Ltd., In re Welsbach Incandescent Gas Light Co. Ltd., Poole v. National Bank of China, Ltd., In re Louisian & Southern States Real Estate & Mortgage Co., Neal v. City of Birmingham Tramways Co., In re De La Rue & Co. Ltd., and In re Barrow Hasmatite Steel Co.
These authorities lay down the following principles : 1. That a company has the power to reduce its capital much more so if the power is conferred by the Articles of Association. 2. Subject to confirmation by the Court which is the safeguard of the minority, the question of reducing capital is a domestic one for the decision of the majority. 3. The company is to determine the extent, the mode and incidence of the reduction. 4. The Company may reduce the share capital of all its share-holders pro rata or may reduce the shares of any individual share-holder or any class of share-holders wholly or in part. 5. That the Court has to see that interest of the minority have been protected and no unfairness has been shown to it. 6. That in doing so the Court should keep in view the consideration that the decision has been arrived at by businessmen who are fully cognisant of their necessities and are the best custodians of their interests and should therefore be slow to interfere.
I will first take up the question of the general reduction of the capital by 45 per cent. In this connection a reference to the report of the Electrical Inspector, Waziristan District, will be useful. He was unfortunately away from India and could not be examined. His report has, however, been proved by Mr. A. N. Ghosh. Although the assets of the company were held by the arbitrator to be worth about nine lakhs in 1921-22, the Electrical Inspector of Waziristan District has actually found them to be of the value of Rs. 2,52,000. He has remarked that the company has been presenting its assets at an inflated figure and therefore had been paying heavy depreciation charges thereon. The Inspector was also of the opinion that the company should reduce their share capital and approve of the reduction by 45 per cent. capital. In his opinion this would lead to the following results: (1) satisfactory dividend will be declared : (2) a reserve fund will be formed, and (3) the charges for electricity will be reduced.
Mr. Ghosh has also told us that the reduction would be useful. He stated that since the foundation of the company dividend has been declared only once. In his opinion dividend could be declared if the depreciation charges were reduced and the amount of the dividend to be distributed is also decreased by reduction in the share capital. A further advantage indicated by Mr. Ghosh is that the old debts from the share-holders will all be wiped out with the exception of those due from R. B. Rochi Ram Khattar and L. Ganpat Rai. R. B. Rochi Ram will owe only Rs. 10,000 more than which is a part of a loan raised after this application was filed (he died during the pendency of these proceedings), and L. Ganpat Rai will remain a debtor only to the extent of about Rs. 11,000. The letters from the Punjab National Bank produced by Mr. Ghosh show that the company has got enough money in that bank to meet its requirements. A sum of Rs. 39,785-13-1 was in the floating account on April 26, 1938, and a sum of Rs. 22,000 which was in the fixed deposit became payable on May 29, 1938. The reduction of 45 per cent. capital does not appear therefore to be likely to have any disturbing effect on the equilibrium of the company's finances. For the reasons given above, I have no objection to the reduction of the company's capital by 45 per cent. and hereby accord my sanction to the proposal. I must note, however, in passing that Art. 13 of the Articles of Association of the company lays down as follows : "None of the funds of the company shall be applied in the purchase of or lent on the share of the company." I therefore take this opportunity of expressing my strong disapproval of the conduct of the company in lending money to its share-holders from time to time as if it were a money-lending concern and particularly in allowing the share-holders to withdraw the amounts equal to 45 percent. of their share capital in anticipation of the sanction of the meeting of the share-holders and of this Court. I would recommend that in view of the past conduct of the company and the attitude of at least three of the share-holders during these proceedings, the Registrar, Joint Stock Companies, should keep an eye on its future dealings so as to make sure that no irregularities occur.
Now I turn to the proposal to reduce the share money of R. B. Rochi Ram by Rs 74,000 due from him and by Rs. 4,800 which the company has accepted in satisfaction of its claim against him for Rs. 14,798-9-11. Lala Ganpat Rai has said that R. B. Rochi Ram had openly declared in the meeting in which the question of his loan was discussed that he was unable to pay this amount. R. B. Rochi Ram is dead and it appears to me that there is very little likelihood of such a large amount being realized from his assets. I feel therefore that the company has acted bona fide in resorting to this form of recovery. I may note that the company could have easily written off this sum altogether and the fact that they have decided to reduce his share by this amount appears to have been adopted in the best interest of the institution. It is obvious that by recovering the debt in this way, the burden of the company will also be reduced, for lesser dividend will have to be paid to the heirs of R. B. Rochi Ram. I have therefore no objection to this reduction also and sanction the proposal. As a result, the petition succeeds. No serious opposition having been offered, there shall be no order as to costs.
[1949] 19 Comp Cas 202 (SC)
in the house of lords (sc)
Scottish Insurance Corpn. Ltd.
v.
Wilsons and Clyde Coal Co., Ltd.
viscount maugham, lord simonds, lord normand,
lord morton of henryton
march 1,2,3; may 6, 1949
Sir Cyril Radcliffe, K.C. (of the
English Bar), Morison K.C and William Grant (both of the Scottish Bar), for the
appellant company.
Cameron, K.C. (Dean of Faculty),
J.F. Gordon Thomson K.C and C.J.D. Shaw (all of the Scottish Bar), for the respondent company.
Viscount Maugham. —The facts in this case are sufficiently stated
in the speech of my noble and learned friend Lord Simonds which I have had the
advantage of studying in print, and I see no benefit to be gained by reputing
them. I also agree with, the conclusions which he has reached, and if I think
it is desirable to express my own opinion on the construction of the articles
of association so far as they bear on the question whether the proposed
reduction of capital is fair and equitable as between the ordinary shareholders
and the preference shareholders, it is because there has been a difference of
opinion in the First Division of the Court of Session and your Lordships have
listened to the citation of a large number of authorities which are thought to
bear upon the matter in debate. I should perhaps add that I have arrived at my
conclusion by somewhat different considerations from those upon which Lord
Simonds prefers to lay stress.
I will begin by treating the
matter as if Section 25 of the Coal Industry Nationalisation Act, 1946, did not
enter into the case. The company as a matter of law is not in liquidation and I
agree with the view that the circumstance that liquidation is contemplated in
the near future ought not to affect the construction of the terms on which the
preference shares were issued, that is, in this case the articles of
association which are to be found set out in Lord Simonds' speech. We are not
therefore entitled in considering the question of fairness to shut our eyes to
the fact that the directors still have their powers as such and that they and
the shareholders at any time before liquidation cad exercise their rights under
articles 139 and 141 (a).
If I am right so tar I can see no
great difficulty in the present ease. We must first have regard to the plate
terms be article 128. It is a complete statement of the rights of the
shareholders to the profits earned year by year by the company as a going
concern, subject to two supplementary articles 139 and 141 Which must be read
with it. Article 128 begins with saving the rights of members entitled to
shares issued upon special conditions. The words in the. article as to division
of "the residue" (after the word "thirdly") are perfectly
dear, and they beyond doubt show that subject ,to a reserve fund and amounts;
written off for "depreciation or otherwise" (a far-reaching phrase)
and to payment of cumulative preferential dividends due on the two issues of
preference shares the whole residue is divisible among the holders of the
ordinary share in proportion to the amounts paid up or credited as paid up on
their shares. The amounts of profits so distributed may obviously be less or
greater than the amounts paid up or credited as paid up; but the preference
shareholders have no share in the residue. So far the article has only dealt
with the rights of the ordinary shareholders to the whole of the divisible
profits (the so-called" residue") after paying the preference
dividends, and there would remain the reserve fund, and 'provision for
'depreciation and also no doubt sums carried forward which of course would come into the profit and loss account for
the next year. The ordinary shareholders for obvious reasons are not given any
immediate right to call for division of these amounts of profit but articles
139 and 141 make clear provision that the items in question are only being
retained among the company's undistributed assets so long as it is thought
expedient, and it is these articles which in my opinion clinch the matter.
Article 139, after elaborate provisions as to how the reserve fund is to be employed
and subject to a number of permissible applications for the general, benefit of
the undertaking contains the following words as to distribution, "or for
division by way of bonus to the ordinary shareholder or as to the employees of
the company or for repaying any moneys by the company or for making provision
for paying off the preference share capital or for such other purposes as the
directors shall their absolute discretion think conducive to the interests of
the company or its shareholders". I have italicised the words as to the
preference share capital. The words are none the less important because the
reduction of capital would require the sanction of the court. They show at
least that if the transaction is fair and equitable the article contemplates
that the preference shareholders can be paid off with or without their consent.
Article 141 (a) is also of great
importance and is in these terms: "The company in general meeting may, on
the recommendation of the directors, from time to time by ordinary resolution
convert any undivided profits of the company available for dividends on its
shares (whether such profits should stand to the credit of any reserve fund or
reserve account or a profit and loss account of the company or otherwise, and
including divisible profits arising by way of permanent appreciation fit value
of any of the company's assets) into capital; and appropriate and distribute
the same among the members of the company who are holders of ordinary shares
in, proportion to the amounts paid up bit, the shares held by them
respectively, by way of bonus, or they may
apply such undivided profits in or towards satisfaction of the amounts unpaid
in respect of any shares in the capital of the company allotted among such
ordinary shareholders or previously unissued". It thus provides for the
conversion into capital of undivided profits standing to the credits of a
reserve fund, or a profit and loss account or otherwise and including divisible
profits arising by way of permanent appreciation in value of any of the
company's assets and the distribution of these amounts among the members of the
company who are holders of ordinary shares. My comment on the words I have here
italicised is that if the undertaking of the company had been sold for cash (and
provision made out of a reserve fund or otherwise for payment of debts and
liabilities and for paying off the preference share capital) every penny could
be distributed among the holders of ordinary shares. I should add here that I
agree with Lord Keith that the suggestion that such a distribution is unlikely
because of the surtax, liability which might accrue to the richer of the
recipients is an accidental consideration which ought not to be considered.
For these and other reasons given
by your Lordships, my conclusion is that taking these articles together it is
reasonably clear that subject to the payment to the preference shareholders of
their capital and their preferential dividends if any not yet paid, and subject
also to discretionary applications by the directors under the terms of articles
139 and 141 as above set forth, the whole of the reserve funds and other assets
of the company, including the proceeds of sale of the capital assets, are
appropriated to the ordinary shareholders and in that sense belong to them to
the exclusion of the preference shareholders.
If, then, the question of the
approval by the court falls to be considered in the light of the present
position of the company it must follow that the main argument of unfairness
falls to the ground, but I am not prepared to deny that the admitted intention
to go into liquidation might be one of the facts which the Court ought to
consider and I will therefore state my opinion on that footing. If there is a
liquidation articles 159 and 160 will apply to the first and second issues of
the preference shareholders which are sufficiently stated in the speech of my
noble friend. Are they a complete statement of the rights attached in a
winding-up to the preference shares or should such shares also have a right to
participate with the ordinary shares in the remaining assets after payment of
the amounts called up and paid up on the ordinary shares? I am of opinion that
the articles in question must be construed as a complete statement of the
rights of the preference shares in the winding-up for the reason that the whole
of the profits and assets of the company (subject to payment of the amounts
called up and paid on the preference shares) has been appropriated before
liquidation to the ordinary shareholders, and that there is not a word to
indicate that upon liquidation the rights of the preference shareholders (if
they have not already been paid off) would be increased perhaps very materially
by attributing to them part of the profits and assets which have been
appropriated to the ordinary shareholders. There might perhaps have been some
doubt as to the compensation; payable under the Coal Act as being "surplus
assets" of the nature of capital not distributable as dividend and I will
deal later with this point.
The view which I have suggested as
to the effect of an appropriation of profits in favour of a certain class of
shareholders is supported by a decision of Lord Lindley (then Lindley, L.J.) in
the Court of Appeal (Re Bridgewater Navigation Co.), a sequel to
the important case in this House of Birch v. Cropper. The facts
were briefly these. The capital of the company was divided into preference and
ordinary shares. It was the owner of the Bridgewater and other canals which it
sold in 1887 for £1,710,000 to the Manchester Ship Canal Co. It then went into
liquidation. The liquidators paid all the debts and liabilities, and repaid to
the preference and ordinary shareholders the amount of capital paid up on their
shares. There remained in their hands a surplus of £ 550,000; and the question
arose how this sum should be distributed between the ordinary and the preference
shareholders. The latter were entitled under article 85 while the company was a
going concern to a preferential dividend of 5 per cent. and there was (in the
view of this House) no other relevant term or condition as to their rights. On
liquidation the article ceased to be applicable. Part of the £550,000 consisted
of three distinct reserve funds for river improvements, insurance and
depreciation; but none of these funds Were actually set apart from the other
assets of the company. In the books of the company they were sums deducted from
profits which the ordinary shareholders might have divided among themselves;
they were the undrawn profits of the ordinary shareholders. But the House of
Lords did not deal with these items. They decided (in the complete absence of
any such articles, as we have in this case) that subject to the payment of the
costs, charges and, expenses of the winding-up and to the costs of the
application "the assets of the company remaining undistributed other than
the reserve fund which was not the subject of the application ought to be
distributed among all the shareholders in proportion to their shares."
When the
question of the reserve funds came before the Court of Appeal it was held that
since the assets or amounts in question consisted of the undrawn profits of one
class, those profits ought to be distributed in the winding-up amongst the
members of that class in the, absence of some sufficient reason to the contrary
and there was no such; reason. In the result the ordinary shareholders were
exclusively entitled to the three reserve funds. I have no doubt that this was
a correct decision, and there was no appeal. Apart, however, from any
authority, I cannot see any sufficient reason for coming to a conclusion other
than the one I have above indicated. In my view it is a sound prima facie rule
that profits which have been appropriated, subject to possible application for
the benefit of the company, to the ordinary shareholders to the exclusion of
the preference shareholders must, in the absence of some other consideration,
remain the property of the former on a winding up. It should be observed that
in the case last cited there were no such articles as exist in the present case
which is an fortiori one.
Much reliance is placed on behalf
of the appellants on the case of re
Metcalfe & sons Ltd. I must
say that in my opinion that case was wrongly decided; and it should be noted
that it is expressly stated that the bulk of the sum of £21,000 there in
dispute was attributable to undistributed profits. It seems to me difficult to
reconcile that case with the decision of this house in Will v. United Lankat
Plantations Co.
and impossible to reconcile it on sound grounds with the decision of Re
Bridgewater Navigation Co.
It is true that general principal
does not by itself apply to moneys arising from appreciations in value of
capital; but in the present case I read article 141 as showing that such
appreciations are appropriated (in the sense in which I use the word) to the
ordinary shareholders. Apart from that view it seems to me that any doubt as to
the attribution of such special assets is removed by the terms of articles 159
and 160 which refer to "the property of the company" as a whole, and
do not justify the conferring of a further right to the preference shares beyond
the amounts called up and said thereon. Such a right would require definition
and cannot in my opinion be derived as a matter of construction from the
language of the two articles. I doubt whether there exist any such assets in
the present case where the colliery assets were transferred compulsorily under
the Coal Industry Nationalisation Act. Counsel for the appellants in his
forcible argument claimed—and I think with prudence—that his clients were
entitled to share in the whole of the (so called) surplus assets; and no
distinction was drawn between different kinds of such assets.
The question that arises as to the
effect, if any, of section 25 of the Coal Industry Nationalisation Act of 1946
is due to the difficulty of appreciating its purpose or its implications. I
agree with the preliminary considerations stated by the Master of the Rolls
which are to be found in his judgment in Prudential Assurance Co. v. Chatterley
Whitfield Collieries Ltd., including
his remarks as to the drafting of the Regulations which are contemplated by the
section. In particular I agree with the following remark: "one thing the section clearly does not do.
It docs not purport expressly or impliedly to limit or affect in any way the
existing provisions of the Companies Act or the well-known practice of the
Courts thereunder or to lay down any new principles for the Court to follow.''
The regulations contemplated by the section have now been published and the
remark of the Master of the Rolls applies with additional force.
It would, I think, be going too
far to say that in confirming or refusing to confirm a reduction of the capital
of a colliery company the Court ought to act as, it the Coal Industry
Nationalisation Act had not been passed. On the other hand I think those who
oppose the reduction by founding their argument on the provisions of Section 25
are bound to indicate how, the section or the regulations which have recently
been made thereunder on any reasonable view of probability can operate in this
case to give the preference shareholders any rights to share in the assets
beyond those they now possess under the articles of association. Taking the view
I have expressed as to the position of these shareholders either now or in a
liquidation and agreeing with my noble and learned friend in the view that the
Court in the exercise of its jurisdiction should regard the provisions of
Section 25 as a factor in its consideration of the fairness of a proposed
reduction, I find myself unable to see any want of fairness in the proposed
reduction of capital. I will summarise the grounds of my decision as follows:
The case is one in which liquidation, when it comes, will have been brought
about by the action of the legislature. If there were no reduction of capital
the holders of preference shares would not, in my opinion, be entitled in a
winding-up to anything more than a return of their paid-up capital. I am quite
unable to see why they should claim more of the proposed reduction, nor why
they should object to being repaid by means of the reduction the amounts so
paid up which they would receive on the proposed liquidation. In my opinion,
the decision of the Judges of the Court of Session by a majority was right and
the appeal must be dismissed. The answers should be repelled as irrelevant and
the petition should now be remitted to a reporter. The appellants must pay the
costs of the appeal.
Lord Simonds. —On January 1, 1947,
the colliery assets of the respondent Company, Wilsons & Clyde Coal Co.,
Ltd., which I will call the respondents were in terms of the Coal Industry
Nationalisation Act, 1946, transferred to and vested in the National Coal
Board, Which was constituted under that Act. Thus the effective business of the
respondents was brought to an end and it is their avowed intention in due
course to go into voluntary liquidation. But this they will not do until the
compensation payable to them under the Act has been assessed and paid,
an event which at the hearing of this appeal in March, 1949, could not be
assumed to be immediately impending. In the meantime they have all the powers
of a company which is not in liquidation and I cannot attach any legal significance
to the description of them as "comatose," "moribund," or
"having one foot in the grave."
The respondents have had a long history. They were incorporated as a
limited company in the year 1876 for the purpose of acquiring and carrying on
certain colliery undertakings in Lanarkshire. Clause 5 of their memorandum of
association provided that their capital should be £150,000 divided into 15,000
shares of £10 each with power to the company to increase their capital by the
creation and issue of new shares either ordinary or having such preference
priority and special privileges attached thereto as might be determined by
special resolution of the company. In exercise of this power the respondents
from time to time increased or altered their capital until, at the date of the
special resolution of September 26, 1947, to which I shall refer, the nominal
capital stood at £ 850,000 and the issued capital at £ 725,000, divided into £
40,000 first preference 7 per cent. cumulative stock, £ 10,000 second
preference 7 per cent. cumulative stock and £ 675,000 ordinary stock. The first
and second preference stock represented issues of preference shares which had
been made in 1875 and 1894 respectively. In 1923 the respondents by special
resolution adopted new articles of association and, inasmuch as in one view the
rights of the parties to this appeal depend to some extent upon the meaning and
effect of these articles, I must refer to some of them in detail.
Article 11 provides that the company in general meeting may from time to
time by special resolution increase the capital by the creation of new shares
of such amount as may be deemed expedient. Article 12 provides that the new
shares shall be issued upon such terms and conditions and with such rights and
privileges annexed thereto as by the special resolution creating the same may
be directed, and, if no direction shall be given, as the directors may
determine; and in particular such shares may be issued with a preferential or
qualified right to dividends and to ranking in the distribution of the assets
of the company and with a special or without any right of voting or partly in
one of these forms and partly in another. This article is a restatement in
ampler form of part of clause 5 of the memorandum. By article 78 every shareholder
whether preference or ordinary is to have one vote for every share held by him.
Article 128 is of immediate importance. It provides that, subject to the
rights of members entitled to shares issued upon special conditions and subject
as thereinafter provided, the profits of the company, after setting aside any
amount which may be carried to any reserve fund, written off for depreciation or otherwise, shall be applied in
order of priority in manner following, viz.: Firstly, to the payment of cumulative
preferential dividend at the rate of 7 per cent. per annum on the capital for
the time, being paid up on the preference shares (First Issue); Secondly, to
the payment of a similar dividend on the capital for the time being paid up on
the perference Second Issue); and Thirdly, the residue to be divisible among
the holders of the ordinary shares in proportion to the amounts paid up or
credited as paid up on their shares.
As I have pointed out, the present
holders of first and second preference stock have succeeded to the rights of
these preference shareholders.
Article 139 empowers the directors
before recommending any dividend to set aside out of the profits of the company
such sum as they may think proper as a reserve fund and this fund they are
authorised to use for a wide variety of purposes, of which I will only mention
equalising or supplementing of dividends, the division by way of to the
ordinary shareholders, the repaying of any moneys borrowed by the company, and
the making of provision for paying off the preference share capital.
Article 141 (a) enables the
company by ordinary resolution to convert its undivided profits available for
dividends on its shares, whether such profits should stand to the credit of any
reserve fund our reserve account or a profit and loss, account of the company
or other wise, and including divisible profits arising by way of permanent
appreciation in value of any of the company's assets, into capital and
distribute the same amongst the ordinary shareholders by way of bonus. Finally,
I refer to Articles 159 and 160. These articles pro vide that in the event of
the company being wound up the preference shares (First Issue) "shall rank
before the other shares of the company on the property of the company, to the
extent of repayment of In amounts called up and paid thereon" and that the
preference share (Second Issue) shall similarly rank before the ordinary shares
but after the preference shares (First Issue).
These being the articles which
govern the rights of the ordinary and preference stockholders of this company,
at an extraordinary general meeting held on September 26, 1947, the company
passed a special resolution for the reduction of the capital of the company
from £8,50,000 (consisting of £40,000 first preference stock, £10,000 second
preference stock and 800,000 ordinary shares of £1 each, of which 675,000 had
been issued and converted into £675,000 ordinary stock), to £462,500 divided
into £337,500 ordinary stock and .125,000 ordinary shares of £1 each and
for effecting such reduction by returning to the holders of the first and
second preference stocks £1 for each unit of stock held by them and
extinguishing such stocks and by returning to the holders of the £675,000
ordinary stock capital to the extent of 10s. for each unit of such stock held
by them. It appears that not all those who voted for the resolution were
ordinary stockholders, nor did all the preference stockholders vote against it,
nor do they all now oppose the reduction. I do not think that your Lordships
can get any guidance from the way in which votes were given.
The resolution, of which the formal validity is not challenged having
thus been passed, the respondents, as the Companies Act, 1929, requires,
presented a petition to the Court of Session for confirmation of the reduction,
and on February 17, 1948, in spite of opposition by the appellants, who hold
about 45 percent. of the first and second preference stock of the company and
lodged answers, by which they averred that the proposed reduction was contrary
to law and in any event unfair and inequitable, the First Division of the Court
of Session consisting of the Lord President, Lord Russell and Lord Keith (the
Lord President dissenting) repelled the answers as irrelevant in hoc statu and
made an order for the usual procedure to follow. Against that interlocutor the
present appeal is brought.
Apart from a special factor which is introduced into it by the provisions
of Section 25 of the Coal Act, as I will call it for short, I do not entertain
any doubt about his case. The Court should in my opinion confirm the reduction
Upon which the respondents have resolved.
The Companies Act, 1929, no more than its predecessors, prescribes what is
to guide the Court in the exercise of its discretionary jurisdiction to confirm
or to refuse to confirm a reduction of capital. But I agree with the learned
Lord President that, important though its task is to see that the procedure, by
which a reduction is carried through, is formally correct and that creditors
are not prejudiced, it has the further duty of satisfying itself that the
scheme is fair and equitable between the different classes of shareholders:
See, e.g., British & American Trustee and Finance Corporation v. Couper. But what is
fair and equitable must depend upon the circumstances of each case and I
propose, ignoring for the moment the particular factor introduced by the Coal
Act, to consider the elements upon which the appellants rely for saying that
this reduction is not fair to them.
In the formal case which they have presented to the House the element of
unfairness upon which the appellants insist is that the reduction deprives them
of their right to participate in the surplus assets of the company on liquidation and leaves the ordinary share
holders in sole possession of those assets. But in their argument both in the
Court of Session and before your Lordships they have further relied on the fact
that they have been deprived of a favourable, 7 per cent. investment which they
cannot hope to replace and might have expected to continue to enjoy. They
further contend that the deprivation of these rights, which would in any case
have been an unmerited hardship, is rendered the more unfair because it is
likely to be followed at an early date by liquidation of the company or, as it
is less accurately expressed, because it is itself only a step in the
liquidation of the company. The first plea makes an assumption, viz., that the
articles gives the preference stockholders the right in a winding-up to share
in surplus assets, which I for the moment accept, but will later examine.
Making that assumption, I yet see no validity in the plea. The company has at a
stroke been deprived of the enterprise and undertaking which it has built up
over many years: it is irrelevant for this purpose that the stroke is delivered
by an Act of Parliament which at the same time provides some compensation. Nor
can it affect the rights of the parties that the only reason why there is money
available for repayment of capital is that the company has no longer an
undertaking to carry on. Year by year the 7 per cent. preference dividend has
been paid; of the balance of the profits some part has been distributed to the
ordinary stockholders, the rest has been conserved in the business. If I ask
whether year by year the directors were content to recommend; the company in
general meeting to vote, a dividend which has left a margin of resources, in
order that the preference stockholders might in addition to repayment of their
capital share also in surplus assets, I think that directors and company alike
would give an emphatic negative. And they would, I think, add that they have
always had it in their power, and have it still, by making use of article 139
or article 141 to see that what they had saved for themselves they do not share
with others. 1 observe that the learned Lord President was of opinion that such
a use of one or other of these articles would be an impropriety which would at
least be open to challenge in a court of law, but counsel for the appellants
candidly admitted that he could not support this view.
Reading these articles as a whole
with such familiarity with the topic as the years have brought, I would not
hesitate to say, first, that the last thing a preference stockholder would
expect to get (I do not speak here of the legal rights) would be a share of
surplus assets, and tint such a share would be a windfall beyond his reasonable
expectations, and, secondly, that he had at all times the knowledge, enforced
in this case by the unusual
reference in article 139 to the payment off of the preference capital, that at
least he ran the risk, if the company's circumstances admitted, of such a
reduction as is now proposed being submitted for confirmation by the court.
Whether a man lends money to a Company at 7 per cent. or subscribes for its
shares carrying a cumulative preferential dividend at that rate, I do not think
that he can complain of unfairness if the company, being in a position lawfully
to do so, proposes to pay him off. No doubt, if the company is content not to
so he may get something that he can never have expected, but, so long as the Company
can lawfully repay him, whether it be months or years before a Contemplated
liquidation; I see no ground for the Court refusing Its confirmation. To combat
the suggestion that, so far as any benefit to the preference stockholders is
concerned, the position is substantially the same whether they are now repaid
their capital or full use is made of articles 139 and 141, it was urged that
the incidence of income-tax would be a sufficient deterrent of this alternative
measure. I do not, however, consider that the court can properly have regard to
such a consideration as this in determining what is fair between the parties.
It might indeed be considered improper to do so if it drove the ordinary
stockholders to a course less advantageous to themselves but no more
advantageous to the preference stockholders.
It will be seen that, even making
an assumption favourable to the appellants, I reject their first plea. But it
is perhaps necessary, in case there should be a division of opinion which would
make this a decisive issue, that I should shortly examine the assumption.
It is clear from the authorities,
and would be clear without them, that, subject to any relevant provision of the
general law, the rights inter se of preference and ordinary shareholders must
depend on the terms of the instrument which contains the bargain that they have
made with the company and each other. This means that there is a question, of
construction to be determined and, undesirable though it be, that fine
distinction should be drawn in commercial documents such as articles of
association of a company, your Lordships cannot decide that the articles here
under review have a particular meaning, because to somewhat similar articles in
such cases as Re Metcalfe & Sons Ltd., that meaning
has been judicially attributed. I have earlier in this opinion stated the
relevant articles, and, reading them as a whole, I come to the conclusion that
articles 159 and 160 are exhaustive of the rights of the preference
stockholders in a winding-up. The whole tenor of the articles, as I situation.
If there are "surplus assets "it is because the ordinary
stockholders have contrived that it should be so, and, though this is not
decisive, in determining what the parties meant by their bargin, it is of some
weight that it should be in the power of one class so to act that there will or
will not be surplus assets.
There is another somewhat general consideration which also, I think,
deserves attention. If the contrary view of articles 159 and 160 is the right
one and the preference stockholders are entitled to a share in surplus assets,
the question will still arise what those surplus assets are. For the profits,
though undrawn, belong, subject to the payment of the preference dividend, to
the ordinary stockholders, and, in so far as surplus assets are attributable to
undrawn profits, the preference stockholders have no right to them. This
appears to follow from the decision of the Court of Appeal in Re Bridgewater
Navigation Co.
in which the judgment of the House of Lords in Birth v. Cropper is worked
out. This again is not decisive, but I am unwilling to suppose that the parties
intended a bargain which would involve an investigation of an artificial and
elaborate character into the nature and origin of surplus assets.
But apart from those more general considerations the words of the
specifically relevant articles "rank before the other shares on the
property of the company to the extent of repayment of the amounts called up and
paid thereon" appear to me apt to define exhaustively the rights of the
preference stockholders in a winding-up. Similar words, in Will v, United
Lankat Plantations Co.," rank
both as regards capital and dividend in priority to the other shares,"
were held to define exhaustively the rights of preference shareholders to
dividend, and I do not find in the speeches of Lord Haldane or Lord Loreburn in
that case any suggestion that a different result would have followed if the
dispute had been in regard to capital. I do not ignore that in the same case in
the Court of Appeal the distinction between dividend and capital was expressly
made by both Cozens-Hardy, M.R., and Farwell, L.J., and that in Re Mctcatfe
& Sons Ltd.,
Romer LJ. reasserted it. But I share the difficulty, which Lord Keith has
expressed in this case, in reconciling the reasoning that lies behind the
judgments in Will's case and Re
Metcalfe & Sons Ltd.,
respectively. In Colleroy Co. v. Giffard Astbury, J,,
after reviewing the authorities including his own earlier decision in Re Fraser
and Chalmers
said, "But whether the question affecting them [sc. capital and dividend
preference respectively] are 'entirely different' is a question of some difficulty," and approved the proposition
there urged by the ordinary shareholders that a fixed return of capital to
shareholders in a winding* up is just as artificial as a provision for a fixed
dividend and, that, if the latter is regarded as exhaustive, there is no prima
facie reason why the former should not be similarly regarded. So also that
learned judge was influenced by the consideration which appears to me to; have
much weight, that, if such an article as our article 159 is regarded as a
complete definition of the rights of the preference stockholders in a
winding-up, then there is a logical consistency between their rights before and
after the company is put into liquidation. In effect I prefer the reasoning of
Astbury, J., in the case last cited to that of Eve J., and the Court of Appeal
in Re Metcalfe & Sons Ltd. Counsel for
the appellants in. the present case sought to draw a distinction between the
right to repayment of capital and the right to some further share in surplus
assets and pointed to the fact that articles 159 and 160 said nothing about
surplus assets. But this distinction is not in my opinion in the present
context a valid one. Articles 159 and 160 are the first two in a number of
articles headed "Distribution of assets on winding-up" and there is
nothing in them to suggest a distinction between "property of the
company," the expression in fact used in articles 159 and 160 required for
repayment of capital or distributable as surplus assets. Nor, I think, is the
latter expression used through the articles: it is perhaps an expression which
is better avoided.
Finally, upon this part of the
case I ought to deal with an observation made by Lord Macnaghten in Bitch v.
Cropper,
upon which counsel for the appellants relied. "They he said [sc. the preference
shareholders] must be treated as having all the rights of shareholders except
so far as they renounced these rights on their admission to the company".
But, in my opinion, Lord Macnaghten can have meant nothing more than that the
rights of the parties depended on the bargain that they had made and that the
terms of the bargain must be ascertained by a consideration of the articles of
association and any other relevant document, a task which I have endeavoured in
this case to discharge. I cannot think that Lord Macnaghten intended to
introduce some new principle of construction and to lay down that preference
shareholders are entitled to share in surplus assets unless they expressly and
specifically renounce that right.' For these reasons I reject the assumption
upon which the appellants' first plea is founded.
I can deal shortly with the other
element of unfairness upon which the appellants rely, viz., that they have been
prematurely deprived of a
favourable investment. Much that I have already said is equally applicable
here. Funds being available for payment off of capital, the natural order is to
pay off that capital which has priority and I see no glimmer of unfairness in
the company doing so at the earliest possible moment, particularly, if their
undertaking having been wrested from them, they can no longer earn 7 per cent.
or anything like it on their money.
I am of opinion then that, apart
from the special considerations arising from Section 25 of the Coal Act, the
appellants' objections to the proposed reduction have no substance. I turn then
to this section. I will not repeat its provisions. The appellants say, (I quote
their formal reasons) that the "proposed reduction of capital unfairly and
illegally deprives the preference stockholders of their right to an adjustment
of their interest in the company's assets as affected by the payment of
compensation under Section 25" of the Act and that it "is contrary
to, or in any event frustrates, the object of Section 25 and therefore ought,
not to be sanctioned by the court." In argument it has been urged that the
preference stockholders have a statutory right to adjustment, with which the
-court either cannot or should not interfere. I dissent at once from the major
proposition that in view of Section 25 it is no longer competent for the court
to exercise its jurisdiction under Section 55 of the Companies Act, 1929, It is
impossible to read any such implication into Section 25 of the Coal Act or to
suppose that the jurisdiction of the court could have been intended to be
ousted except by express words. The greater difficulty lies in the alternative
proposition, that at least in the exercise of a discretionary jurisdiction the
court ought not to preclude any interested party from the opportunity of such
advantage as Section 25 might afford him. And in support of this view it may be
urged that until the statutory compensation has been awarded it is not possible
to predicate of any class of shareholders what is a fair way of dealing with
any of the assets of the company. I have felt the force of this argument. But,
if it is accepted, the court must in the result hold its hand in every case, in
which a company carrying on a colliery undertaking proposes either to reduce
its capital or to enter into a scheme of arrangement affecting classes of
shareholders or debenture holders, perhaps, too, even where debenture holders
take proceedings to enforce the security, upon the ground that by exercising
jurisdiction it might prejudice the inchoate rights of some person under
Section 25 of the Coal Act. I cannot think it right to accede to a suggestion
which would involve so much delay and inconvenience to companies which wish to
rearrange their affairs in view of the changes brought about, by the Act. I prefer therefore to adopt the view put
forward by the learned Dean of Faculty and to say that the court should in the
exercise of this jurisdiction regard the provisions of Section 25 as a factor
to be included in its consideration of the fairness of a proposed reduction,
but no more than that. It is in that way that I propose to examine the section
in relation to the present proposal. The section looks forward to regulations
to be made in due course, which are to provide facilities for adjusting the
respective interests of different classes in the company's assets so as to give
effect, so far as may be, to their "relative expectations of income
yield" and to their respective "rights of priority." At the date
of the proceedings in the Court of Session no regulations had been made and it
was legitimate to hope that, when they were made, they would throw further
light upon the way in which effect should be given to expectations of income
yield and rights of priority. That hope has been disappointed for regulations
have now been made, but they do not illumine the darkness. The court therefore
has on the one hand to take into account all those factors with which I have
already dealt in considering whether the proposed reduction, apart from the
Coat Act, is fair, and the further, by no means negligible, factor that the
interposition of further months and perhaps years of delay can be nothing but a
hardship to the ordinary stock holders, and on the other hand the factor that
the preference stock-holders might at long last get something better than they
are now getting, i.e., repayment in full of their capital, a possibility
resting not on any sure guidance in the section or regulations, but on the
speculative hope that, since there is no guidance, anything may happen. It does
not appear to me that there is in this latter factor such weight as to justify
the court in saying that the reduction here proposed is not fair and equitable
between the different classes of shareholders. I do not want to prejudge what
may happen in any similar case that comes before a tribunal to be set up under
this Act. But I find it difficult to conceive circumstances in which preference
stockholders, being repaid their capital in full and their claims to priority
being thus satisfied, can yet assert with any hope of success that their
expectations of income yield relative to those of the ordinary stockholders
entitle them to something more.
I am therefore of opinion that the
court has properly exercised its jurisdiction in confirming the proposed
reduction and that this appeal should be dismissed with costs.
Lord Normand. —On 1st January,
1947, the colliery assets of the respondent company were by the Coal Industry
Nationalisation Act, 1946, transferred to and vested in the National Coal
Board. The immediate result was that the company could no longer pursue the
objects for which it was incorporated and that it had on its hands investments
and other assets which it could no longer employ remuneratively. It is not
intended that the company should continue to carry on business and liquidation
is inevitable. Liquidation is, how ever, postponed till the compensation
provided under the Coal Industry Nationalisation Act has been settled and paid.
In the meantime and as a preliminary step towards liquidation a special resolution
for the reduction of capital was passed by an extraordinary general meeting of
the company on 26th September, 1947. The present appeal is against an
interlocutor of the First Division of the Court of Session repelling objections
to the petition for confirming of the reduction of capital.
At the passing of the resolution
the capital of the company was £ 850,000 divided into £ 40,000 7 per cent.
first preference stock, issued and fully paid, £10,000 7 per cent. second
preference stock issued and fully paid, £ 675,000 ordinary stock issued and
fully paid, and 125,000 ordinary shares of £ 1 each unissued. By the reduction
of capital now proposed their whole paid-up capital will be returned to the
holders of the £ 50,000 preference stock and 10s. will be returned to the
holders of the £ 675,000 ordinary stock for each £ 1 unit held by them. The
appellants are certain of the preference stockholders who lodged answers to the
petition for confirmation. Their objections to the proposed reduction are that it
deprives them prematurely of the advantage of a well-secured 7 per cent.
investment; that it deprives them of a right to participate in the liquidation
along with the ordinary stockholders in the division of the property of the
company if any remains after repayment of the capital of all stockholders; and
that it deprives them of the opportunity of obtaining a favourable adjustment
of their interests under Section 25 of the Coal Industry Nationalisation Act,
1946.
I shall begin by dealing with the
first and second of these objections and it is first necessary for that purpose
to consider what are the rights of the preference stockholders under the
articles of association.
Article 17 enables the company
from time to time by special resolution to reduce its capital. Under article,
78 every share (now every unit of stock) has one vote in a poll at any company
meeting. Article 128 deals with rights to the profits of the company, and it
provide that after setting aside any amount which may be carried to any reserve
fund or written off, the profits shall be applied to the payment of a
cumulative preferential dividend of 7 per cent. to the first and second
preference stockholders in their order of priority, and that the residue of
profits shall be divisible among the ordinary stockholders. Article 139
enables the directors to set aside out of profit such sum as they may think
proper as a reserve fund which may be used for, inter alia, making provision
for paying off the preference capital; Article-141 (a) empowers the company in
general meeting by ordinary resolution to convert undivided profits, including
divisible profits arising by way of permanent appreciation in value of the
company's assets into capital and to distribute it by way of bonus among the
ordinary stockholders in proportion to the amounts paid up. Articles 159 and
160 deal with the distribution of the property of the company between
stockholders in the event of liquidation. Article 159 provides that the first
preference stock shall rank before the other stocks on the company property to
the extent of repayment of the amount paid. Article 160 confers on the second
preference stock the same priority of ranking over the ordinary stockholders.
These articles give clear notice to the preference stockholders that
there is no assured permanence of their right to a cumulative 7 per cent.
dividend, and there is no unfairness in abridging, if that were all, the brief
period now remaining before liquidation, in which dividends might still be
paid, by the use of the power to repay preference capital. The appellants'
case, indeed, was not founded so much on the loss of their expectation of
future dividends as on the deprivation of the major right which they, said they
had in the property of the company in a liquidation, and if their case on this
major ground fails, their case upon loss of expectation of dividend must fall
with it. So much is this true that there would have been, I think, no
opposition if a substantial pari passu repayment of the capital of all stockholders
had been proposed. What the appellants object to is the complete extinction of
their rights as stockholders by the repayment' of their whole capital on the
eve Of liquidation, and their main claim is that as corporators they have an
equal right with the ordinary stockholders to share in the company's property
in a liquidation, unless that right is excluded by the terms of those articles
by which their rights are conferred. The chief controversy is therefore whether
articles 159 and 160 contain an exhaustive statement of their rights in a
liquidation, excluding any further right to share in what have been called the
surplus assets of the company. But these articles can only be properly
understood if they are read in conjunction with articles 17,78, 128, 139 'and
141 (a). The cumulative effect of these articles is to give the ordinary
stockholders power until liquidation begins to distribute among themselves in
one way or another all accretions to capital which, may arise either from the
profits of the company or from the permanent appreciation of its assets, and I
find it difficult to reconcile a power so comprehensive in its scope with an intention that the preference
Stockholders should after liquidation takes place, retain an interest in the
company's property beyond what is necessary to satisfy their prior claim for
the return of their capital. The wording of articles 159 and 160 appears to be
well designed to give effect to this limitation of their rights. 'The'
appellants placed some reliance on the word "rank", which they said
implied an ulterior right to participate in the company's property after their
priority right to a return of capital and the ordinary stockholders' right to'
alike return were satisfied. In support of this view it was argued that there
were three elements to be considered, the rights of the stockholders to
dividends while the company was a going concern, and in a liquidation' their
rights first to a return of their capital arid second to '"surplus assets
". I am unable to assent to these contentions. 'The word"
ranking" may be used, and in Scottish legal practice it is habitually
used, of an absolute and exhaustive right; and it carries: no implication of an
ulterior right not included in the ranking. Moreover in article 12, which
empowers the issue of new shares "with a preferential or qualified right
to dividends and to ranking on the distribution of the assets of the company
", the word "ranking" is plainly used with reference to a right
which may be exhaustive. The rights in liquidation are not two rights but one,
a right to participate in the division of the company's property. In articles
159 and 160 the priority ranking of the preference stockholders is expressly a
ranking on "the property of the company" and there is no room for the
suggestion that these articles leave over a further unexpressed ranking also on
the property of the company. I therefore come to the conclusion that, subject
to the argument based on Section 25 of the Coal Industry Nationalisation Act,
the" preference' stockholders have no right to anything beyond what they
will receive under the proposed reduction of capital.
The same conclusion results from a
consideration of the authorities and especially of Willy. United Lankat
Plantations Co.
In that case, article 43 of the articles of association provided that new
shares should be issued with such priority as regards dividends or in the
distribution of assets as the company in general meeting might direct. The
special resolution creating new shares declared " that the holders thereof
be entitled to a cumulative preferential dividend at, the rate of 10 per cent.
per annum on the amount for the time being paid up on such shares, and that such
perference shares rank both as regards capital and dividend in priority to the
other shares ". In the Court of Appeal it was held that, the preference
shareholders were not entitled in the distribution of profits to anything more
than a 10 per cent. dividend. Cozens-Hardy, M.R., said: " Sir Frattcis Palmer in his book,
Palmer's Gompmy Precedents 11th ed., Part I, p. 814, says: It is generally
assumed that where the preference shares are given a fixed preferential
dividend at a specified rate, that impliedly negatives any right to take any
further dividend and probably this assumption is well founded'. In my opinion
that assumption is well founded". Farwell, L.J., agreed. But these learned
judges were careful to confine their judgments to preferential dividend rights,
and Farwell, L.J., said that the considerations affecting capital and dividend
were entirely different and that he did not think that you could reason from
what will happen to capital in a winding-up to what ought to happen to dividend
while the company is a going concern. This House affirmed the decision of the
Court of Appeal, and Lord Haldane, L.C. said (83 L.J. Co. at p. 199; [1914] A.C
at p. 17): "I should have thought that if we were dealing with an ordinary
ease of two individuate coming together, and if a document were produced
saying- "you are to have a cumulative dividend of 10 per cent." or
whatever might be the equivalent in the circumstances of the bargain, it would
naturally be-concluded that that was the whole of the bargain between the
parties on that point. You do not look Outside a document of this kind in order
to see what the bargain is; you look for it as contained within the four
corners of the document". later
in his judgment he adds this: " I think that Farwell, L.J., called
attention to what is really a cardinal consideration in this matter. Shares are
not issued in the abstract and priorities then attached to them; the issue of
shares and the attachment of priorities proceed uno flatu; and when you turn to
the terms on which the shares are issued you expect to find all the rights as
regards dividends specified in the terms of the issue". With this opinion
Lord Loreburn and Lord Atkinson agreed. The ratio decidendi applies with equal
force to priorities of participation in the company's property, and I see no
ground on which it may be supposed that the declaration of rights as regards
dividends is exhaustive but the declaration of rights as regards dividends is
exhaustive but the declaration of rights as regards dividends is exhaustive.
There is as good reason and it is equally easy to define exhaustively the one
set of rights as good reason other. Sargant, J. in Re National Telephone Co.
(83 L.J.Ch. at p. 558; [1914] 1 Ch. At. P. 774) said: "it appears to me that the weight of
authority is in favour of the view that either with regards to dividend or with
regard to the rights in a winding-up, the express gift or attachment of
preferential rights to preference shares, on their creation, is, prima facie, a
definition of the whole of their rights in that respect and negatives any
further or other right to which, but for the specified rights, they would have been entitled".
The decision of this House in Will's case had not been
pronounced when Sargant, J., decided the National Telephone Co.'s case, and his
opinion reflects his construction of the judgment of the Court of Appeal. The
next case is Re Fraser and Chalmers Ltd. in which
Astbury, J,. held that the preference shareholders in the company were entitled
to participate along with other shareholders in the company's property after
repayment of the capital; but he explained in the later case of Colleroy Co. v.
Giffard
that this decision was based on the particular terms of the special resolution
and he retracted what he had said in Fraser and Chalmers so far as it
controverted the opinion of Sargant, J., in the National Telephone Co. case which I have
quoted. The last case calling for consideration is Re Metcalfe & Sons Ltd. la that ease
Eve, J., repudiated the idea that an express direction as to ranking in
priority for return of capital excludes any further pari passu ranking on
surplus property, and held that the ordinary shareholders must establish that
the preference shareholders had renounced their statutory right as members of
the company to share in the company's property in a liquidation. His judgment
was affirmed by the Court of Appeal, With respect to the learned judges who
were parties to the decision, I hats felt unable to reconcile it will the ratio
of the judgment in Will's case It is
Unnecessary for me to elaborate my reasons, because they are Most clearly
stated in the opinion of Lord Keith in the present case and I could
respectfully adopt what he has there said. It is I think, not possible to
distinguish Metcatfe's case from the
present case, and I have there-fore come to the conclusion that it should be
overruled and that the ratio, of Will v. United Lankat Plantations Co. was
correctly applied in Colleroy Ltd., arid in the
National Telephone Co's case.
I must now turn to Section 25 of
the Coal Industry Nationalisation Act, and I begin with what is common ground,
that the statutory jurisdiction of the court to confirm reductions of capital
is not ousted. It was, however, said that the court should decline to entertain
applications for confirmation of a reduction of capital in the interval
between-the vesting, date and the settlement and payment of compensation under
the Act on the ground that the declared intention of Parliament is that the
interests of different classes of shareholders or stockholders shall be subject
to an adjustment under regulation made by virtue of Section 25. That I think is
in accordance with the opinion of the Lord President. I share, however, the
difficulty, which the Master of the Rolls felt and expressed in his
judgment in the Chatterley-Whit field Collieries case, In
appreciating what the declared intention of Parliament, may be. It must be
remembered that a court of "law has no discretion whether it shall
exercise its jurisdiction or not: judex tenetur impretiri judicium suum. The
court, therefore cannot be moved to suspend applications for confirmation of
reduction of capital in order to give place to a tribunal created by a statute
which has neither clearly ousted nor clearly suspended the jurisdiction. Its
duty therefore remains, to consider whether the proposed reduction of capital
is fair and equitable, but in discharging this duty it must have regard to the
provisions of Section 25. If that section opens to the preference stockholders
a prospect of advantage, of which they could be deprived only by a reduction of
capital involving the extinction of their shares before liquidation. I would be
prepared to hold that the reduction was unfair. But neither Section 25 nor the
regulations, which have been made under it since this case was before the Court
of Session, justify any firm expectation of advantage to the preference
stockholders. How the regulations will be applied by the tribunal is a matter
of doubtful speculation. The ordinary stockholders are not bound to await the
operation of the regulations before exercising powers which are committed to
them by the articles, it was conceded that the payment of a dividend which
would absorb all "surplus assets" or the distribution of a bonus
which would exhaust the undivided profits could not be met by an Interdict based
on the plea that these were oppressive abuses of powers. Why then should they
hold their hand if they desire to reduce the capital in the manner proposed
rather than to take part in the doubtful hazard of proceedings before a
tribunal constituted under Section 25? The company is not bound to satisfy the
court that its proposals are not unfair. It has brought forward proposals which
are intra vires, regular on the face of them, and in conformity with the usual
practice as laid down by Lord Wrenbury in his book on the Companies Act (11th
ed., p. 120). If the objectors can find in the provisions of Section 25 or of
the regulations anything which should stand in the way of the court's approval,
it is for them to disclose it. If they fail to do this, the court has no
material before it which would warrant a finding that the proposed reduction is
unfair.
I would dismiss the appeal.
Lord Morton of Henryton. —The respondent company (hereafter called
"the company") seeks to effect a reduction of its capital, by returning
to the holders of its £ 40,000 first preference stock and £10, 000 second preference stock capital to
the full extent of £1 in respect of each £1 of such stock held by them
respectively and thereby extinguishing
these two stocks, and by returning to the holders of its £675, 000 issued
ordinary stock capital to the extent of 10s. in respect of each £1 of such
stock held by them respectively.
This reduction can only be carried
out subject to confirmation by the court and the court will not confirm the,
reduction unless it is "fair and equitable". It is this discretion,
vested in the court, which "properly safeguards the interests of a
dissenting minority", see British and American Trustee & Finance
Corporation v, Couper (63 L. J. Ch. at pp. 428, 429; [1894] A.C. at p. 406).
The words "fair and equitable" arc not used with any technical
meaning, but "in the ordinary sense of these words" (per Lord
Macnaghten, 63 L. J. Ch. at p. 432; [1894] A.C. at p. 413).
The appellants are a dissenting
minority, of no fewer than seventy- one preference stockholders, holding among
them about 45 per cent. of the preference capital, and there can, I think, be
no doubt that the proposed reduction is detrimental to the preference
stockholders and beneficial to the ordinary stockholders. Moreover, there is no
reason for the proposed reduction, at this stage in the company's history,
other than the desire of the ordinary shareholders to obtain a benefit for
themselves, at the expense of the preference shareholders. It is for your
Lordships to determine whether, notwithstanding these facts, the pro posed
reduction is fair and equitable in. all the circumstances of the present case.
In agreement with the Lord
President of the Court of Session, but in disagreement with the majority of the
First Division, I have reached the conclusion that it is neither fair nor
equitable. I shall first state my reasons and shall then proceed to expand them
and to consider the arguments advanced at the hearing in favour of the proposed
reduction. For the sake of brevity, I shall refer to the proposed reduction as
"the scheme" and shall use the phrase ''surplus assets" as a
convenient phrase to describe the assets which remain, in the winding-up of a
company, when all its creditors have been paid and all the members have been
repaid the amounts paid up on the capital held by them. In so using the phrase
I do not forget Lord Macnaghten's observation that the "surplus
assets" are "part and parcel of the property of the company— part and
parcel of the joint stock or common; fund—which at the date of the winding-up
represented the capital of the company. It is through their shares in the
capital, and through their shares alone, that members of a company limited by
shares become entitled to participate in the property of the company"
My reasons for the conclusion
already stated are as follows: (1) In my view the preference stockholders have,
under the company's memorandum and articles, a right to share in the surplus
assets in a winding-up. (2) The company's substratum is gone and it winding-up
is inevitable. Thus the scheme does not serve any useful business purpose
connected with the carrying on of the company. The only results which will
follow from it are (a) the preference stockholders will cease to receive their
interest at 7 per cent. forthwith, instead of continuing to receive it until
winding-up, (b) the preference stockholders will be excluded from any share in
the surplus assets on a winding-up. The ordinary shareholders have used their
voting power in order to secure these results, and for no other purpose; there
is no other reason why the company should not proceed to liquidation without
taking this preliminary step-(3) The apposition to the scheme does not come
from a small or factious minority, but from a substantial minority who have
excellent reasons for wishing to oppose the scheme. (4) It is possibly of some
importance that the scheme cuts out the preference stockholders from any chance
of getting favourable adjustment of their interests in the company's assets
under Section 25 of the Coal Industry Nationalisation Act, 1946. As will appear
hereafter, however, I attach very little weight to this point.
My first reason is of great importance. If the preference stockholders
are not entitled to share in the surplus assets, the scheme at once assumes a
different aspect. In the Court of Session Lord Keith thought that they were not
so entitled, and the question is of course one of construction. The respective
rights of preference and ordinary stockholders depend entirely upon the
company's memorandum and articles of association, to which I now turn. By
clause 5 of the memorandum the company has power increase its capital "by
the creation and issue of new shares, either ordinary, or having such preference,
priority and special privileges attached thereto as may be determined by
special resolution of the company". It is, I think, unnecessary to trace
the stages by which the company's capital reached its present amount. In the
year 1923 the company by special resolution adopted new articles of
association. Before that date, all the preference stock had been issued, and in
my view no other document is material for determining the present rights of all
classes of stockholders.
The articles must of course be reads
as a whole, and in reading them it is important to bear in mind that (to quote
Lord Macnaghten in Birch v. Cropper),
"Every person who becomes a member of a company limited by shares of equal
amount becomes entitled to a proportionate part in the capital of the company,
and, unless it be otherwise provided by the regulations of the company,
entitled, as a necessary consequence, to the same proportionate part in all the
property of the company ". Thus in the present case the preference
stockholders are entitled, to share in the surplus assets with the ordinary
stockholders in proportion to their respective holdings, unless the articles of
the company otherwise provide. I turn first to articles 159 and 160, since they
are the only articles which deal directly with the matter in issue, though of
course they must be read in conjunction with all the other articles, in order
to get a complete picture. I shall quote these two articles although they have
already been read: 159. In the event of the company being wound up, the
preference shares (First Issue) shall rank before the other shares of the
company on the property of the company, to the extent of repayment of the
amounts called up and paid thereon. 160. In the event of the company being
wound up, the preference shares (Second Issue) shall rank before the ordinary
shares but after the said preference shares (First Issue) on the property of
the company to the extent of repayment of the amounts called up and paid
thereon.
As these two articles are similar
in their terms, mutatis mutandis, it will be sufficient to examine one of them
in detail. Certainly neither of them contains any words which expressly exclude
the preference stockholders from sharing in the surplus assets, although such
words are very commonly found in a company's articles, and they appear, for
instance, in the articles of Chatterley-Whitfield Collieries, Ltd., the
respondent company in the next appeal before this House. Are there any words
which raise an implication of such an exclusion? I cannot find them. Article
159 is concerned simply with the order in which shares shall rank "on the
property of the company" and the extent to which the first preference shares
(now stock) shall rank before the other shares of the company. They are to rank
before the other shares, on that property, to the extent of repayment of the
amounts paid up. Surely the implication is that, except to the extent just
stated, the preference shares are to have no priority, but are to rank equally,
on any property of the company which is left after the paid-up capital has been
repaid? If, however, there is no such implication, there is not a word which
raises the implication that they are to be excluded from the ordinary right, as
corporators, to share equally with other corporators in a winding-up on this
portion of "the property of the company".
Turning now to the other articles,
I look in vain for any words which expressly or impliedly exclude the preference
shareholders from the right just mentioned. I would first note that article 12
has no relation to the existing preference stock, as it bad all been issued
before this article was adopted. I do not think it matters whether or not there
was an earlier article in the name terms, as the present rights of all
stockholders depend upon the 1923 articled. Counsel for the company relied
particularly upon articles 128, 139 and 141 (a). I shall have to return to
these articles later and I have no desire to minimise the marked difference
between the position of the preference and the ordinary stockholders in regard
to the profits, while the company is a going concern. But, with all respect to
those, who think otherwise, I cannot obtain from these three articles any light
on the respective positions of the preference and the ordinary when the company
goes into liquidation. As Lord Romer (then Romer, L J.) said in Re Metcalfe
& Sons, Ltd.:
" Because... the preference shareholders, as regards dividend, are
entitled to nothing store than the fixed preferential dividend expressed to be
given to them, it does not in the least follow that so far as regards their
rights in a winding-up they are only entitled to the privileges of preference
expressly given to them in that respect." In order to find out how the
company's property is to be dealt with when that event happens, one has to
return to the articles dealing with the position in a winding-up. I have
already dealt with articles 159 and 160, and, having travelled full circle, I
have discovered nothing which expressly or impliedly deprives the preference
stockholders of their ordinary right as corporators to share in the surplus
assets in a winding-up. I hope and believe that I have avoided approaching this
question of construction "with any obsession or preconceived idea as to
the inherent equality between Shareholders in a company "to quote again
Romer, L.J., in Meicalfe's case. I have
construed the memorandum and articles with an entirely open mind, and having
construed them I fall back upon that inherent equality which is, to my mind, in
no way disturbed by the regulations of the company. I leave the articles by
asking, and answering to the best of my ability, two questions: (a) What would
have been the position as to the distribution of the company's property on a
winding-up, if the articles had contained no provisions at all as to how that
property was to be distributed ? In that event there could, I suppose, be no
doubt that the balance remaining after payment in full of the creditors would
have been divisible equally among all the stockholders, preference and ordinary
alike, under Sections 211 and 247 of the Companies Act, 1929. See Birch v.
Cropper.
(b) To what extent is the position altered by the memorandum and articles of
this company? Answer—The only provisions
as so this are contained in articles 159 and 160, and they do no more than
confer a priority on the preference stockholders "to the extent of"
repayment of their capital.
In every case the answer to the question
now under consideration depends upon the true construction of the regulations
of the company in. question. I am, however, strengthened in the view which I
have formed by the closely reasoned judgment of Eve, J., in Metcalfe's case unanimously
accepted by the Court of Appeal as correct. There are, of course, differences,
in the wording of the memorandum and relevant articles between the present case
and Metcalf's case. The
articles are very shortly set out in the report, which does not snow whether or
not there were any articles on the same lines as articles1 128, 139 and 141
(a); but argued "the moment before the winding-up the ordinary
shareholders could have passed a resolution dividing the Whole of the surplus
assets or accumulated profits between' them" and this argument is dealt
with by Eve, J. I think, therefore, that any distinction which exists between
the present case and; Metcalfe's case must be an
extremely fine one. Metcalfe's case settled, so
far as regards the Court of Appeal, a longstanding difference of judicial
opinion which is fully set out in the judgments. It is not binding on your
Lordships' House, but in my view the decision, and the reasoning on which it
was founded, were correct. I also agree with the reasoning and the decision in
the case of Re Williamson-Buchanan Steamers Ltd. I have not
overlooked the case of Re Bridgewater Navigation Co. If the
preference stock were to continue in existence until liquidation, interesting
questions might arise as to whether that case was rightly decided, and if so
whether the facts of the present case would support any claim by the ordinary
stockholders similar to the claim successfully put forward in the Bridgewater
case. I do
not, however, find that case of any assistance on the question construction.
It is, of course, necessary to
consider carefully the decision of this House in Will v. United Lankat
Plantations Co.
I would observe first that the House was then dealing only with a question as
to the rights of the preference shareholders in respect of dividend while the
company was a going concern, but certain observations of Lord Haldane were much
relied upon by counsel for the company. For my part, I do not think that Lord
Haldane was addressing his mind in the slightest degree to the rights which the
preference shareholders would have in a winding-up. These rights were not in
dispute in this House. See Colleroy Co. v. Giffard. Lord
Haldane was delivering an impromptu opinion upon one topic only, and I do not think he intended his words to
be applied to any other topic. The other noble and learned Lords also
concentrated on the topic with which alone the case was concerned. I cannot
form any idea what view the House would have taken if the rights of the
preference shareholders to surplus assets in a winding-up had been under
consideration. I am supported in my view that Will's case is of no
assistance in the present problem by the following facts: (a) When Will's case was heard in
the Court of Appeal, Cozens-Hardy, M.R., clearly thought that the preference
shareholders would share in surplus assets in a winding-up, while Farwell, LJ.,
said, " To my mind the considerations affecting capital and dividend are
entirely different. The preference given to capital is in the winding-up, and
the preference claimed to be given to dividend here is in a going concern; and
I do not think that you can reason from what will happen to capital in a
winding-up to what ought to happen to dividend while the company is a going
concern. As to what may happen in a winding up I express no opinion. Sir
Francis Palmer says this, immediately following the passage read by the Master
of the Rolls, in Palmer's Company Precedents, 11th ed., Part I, p. 814: "
Where preference shares are given a preference as regards capital, that does
not impliedly exclude them from sharing in the surplus assets in winding-up
after clearing off the whole of the paid-up capital: Re Espuela Land and Cattle
Co. (1).
It is therefore open to contention that the attachment of a preferential
dividend does not impliedly exclude the right to participate in surplus profits
after paying a like dividend on the subordinate shares. In order, however, to
preclude any question on this point, it has for some time past been customary
to insert express words negativing the right of preference shareholders to
participate in further profits'". If this House, in affirming the Court of
Appeal, had disagreed with these observations, it would seem likely that some
member of the House would have criticised there. The absence of any such
criticism may indicate that their Lordships either formed no view upon the
observations of the Master of the Rolls and Farwell, L.J., or agreed with those
observations. In Metcalfe's case, all the
members of Court of Appeal mentioned Will's case and clearly
did not think it contained anything adverse to the reasoning of Eve, J. It may
possibly be material to note that in Will's case this House had
to consider the joint effect of the second resolution of July 13, 1891, which
(to quote Lord Haldane) "gave the authority to make the bargain and
defined the terms which the bargain was to contain" when the preference
shares were issued, and the articles
of the company, in particular article 43. In the present case the first
preference shares were created in 1878, and the second preference shares in
1892 and the present rights of the shareholders are defined by the articles
adopted in 1923. Your Lordships do not know, nor, in my view, is it now
material to know, what were the terms of the original offer of preference
shares at the time when they were created. For these reasons, I am of opinion
that the preference shareholders in the present case are entitled to share in
the surplus assets, and that the authorities furnish no good ground for a
contrary conclusion.
I now come to my second reason for
thinking that the scheme is unfair and inequitable, and I should like to adopt,
respectfully, the summary of the situation given by the learned Lord President,
"What are the admitted facts? This company's capital structure consists of
preference and ordinary stock in the ratio of roughly 1 to 13. Its business was
coal-mining, and on January 1, 1947, its collieries and working assets passed
to the National Coal Board in exchange for a share, as yet undetermined, in the
global sum of compensation. Liquidation is inevitable. The company's substratum
is gone. Its remaining assets, consisting of investments and cash, can no
longer be employed in prosecuting the objects for which it was formed. No
resumption of business is in contemplation. It survives, with one foot in the
grave, solely for the purposes of being wound up, and it will be wound up as
soon as the compensation has been ascertained. There is no question in this
case, as in earlier cases, of recasting the company's finances in its interests
as a trading entity. There is no question here of discretionary forecasts of
business men as to the company's commercial future. This company's future is
behind it. Its creditors are provided for. There is only one active
controversy, viz., the division of the assets amongst the shareholders. These
assets, even without taking into account the compensation from the National Coal
Board, are "much more than sufficient" to meet all liabilities, and a
glance at the balance sheets is enough to show that in the end of the day there
are bound to be considerable surplus assets.
"Faced with this situation
(which must have a parallel in many other concerns affected by nationalisation
of the industries in which they have previously been engaged), this company
determined to wind up by instalments and to die by inches. On September 26,
1947, a special resolution was passed (by a majority) reducing the capital from
£ 850,000 to £ 462,000 by returning capital to the shareholders to the extent
of £ 388,000, described as being in excess of the wants of the company, as it
manifestly is. Had this return of capital been effected rateably, no objection
could have been stated. But the proposal is to pay off the whole preference stock at par and to return 10s. in the £ to
the ordinary stockholders, who, if the scheme is approved-, will be left in
undisputed possession of the field. In answer to a protest on behalf of the
preference stockholders, the secretary of the company wrote on September 17,
1947: "In view of the passing of the Coal Industry Nationalisation Act,
1946, the liquidation of this company sooner or later is inevitable. The
proposed reduction of capital is only the first step in that direction the
Directors, being unwilling to proceed with formal liquidation until further
progress has been made with the adjustment of the company's claims . . ."
(The italics are mine.) Confirmation is now opposed not by a single
obstructive; shareholder or a small coterie of dissentients, but by seventy-one
preference stockholders holding 45 per cent. of the preference stock".
Later, the Lord President said: "If it were not anticipated' by both parties
that there will be a substantial surplus after repaying to- all the
shareholders their subscribed capital—and on the accounts this anticipation is
plainly well-founded—this case would be academic. Both parties see that, if
there is no 'first step' of a reduction of capital to extinguish the preference
stock at par, the surplus assets will have to be divided between all the
shareholders, whereas if this reduction is confirmed, the whole of the surplus
assets will be appropriated by the ordinary stockholders and the reference
stockholders will get nothing bat the pat value of their stock. The ordinary
stockholders have used their voting predominance with the object at cutting'
the preference, stockholders out, and the question for us .is whether in the
circumstances that is in. a business sense fair and equitable", Finally he
observed, "it can make no appreciable difference to these ordinary
stockholders whether, they get 10s. in the £ now at the "first step'
in-the winding up, or whether the relative investments continue to be field by
the company until the 'formal liquidation'. On the other hand it is impossible
on any business view of the matter to see how in the inevitable liquidation the
preference stockholders could ever get less than 20s. in the £ for their stock;
and if they are forced to accept 20s. now and to forgo their right to a 7 per
cent. dividend and to participation in the surplus assets in the liquidation,
they are being bought off for less than a just equivalent, and- this loss is
being inflicted upon them not in the interests of the company bat solely in
order that the ordinary stockholders may eventually appropriate 13-13ths of the
surplus assets instead of 12-13ths. This is not my idea of what is just, or
equitable, and I do not believe that, any, jury of business men would so regard
it." These, passages express so clearly my own views an this branch, of
the case that It would only add this— there is no question, in the present
case, of a "continuing burden" on the company in paying the dividend
on the preference stock. Winding up is inevitable, the sum required to pay this
dividend only amounts to £ 3,500 gross per annum, and this sum cannot seriously
be regarded as a burden, having regard to the free assets of the company and
the "interim income" provisions of the Act of 1946.
My third reason, as to the nature
of the opposition to the scheme, is also dealt with in the passages quoted
above. I would only add that it is not of course to be supposed that the
holders of the remaining 55 per cent. of preference stock support the scheme,
merely because they have not appeared in these proceedings. Indeed, I find it
difficult to imagine that any well informed preference stockholders would
support the scheme, unless he were also a still larger holder of ordinary
stock.
I don not place much weight on my
fourth reason, because it is 'impossible to foretell with any accuracy what (if
any) adjustment of interests will ultimately be made under Section 25 of the
Act of 1946, if the preference stock continues in being. There may be cases in
which it can be said that adjustments will probably be made in favour of
preference stockholders, but I am not satisfied that this is such a case. The
existence of Section 25 is, I think, of little importance in the present case,
one way or the other. It certainly cannot be regarded as suspending the power
of the court to approve a reduction of capital; it is merely a circumstance to
be taken into account when the court is exercising its discretion.
I now turn to the reasons urged by
counsel in favour of the scheme. First, it is said that it is the ordinary
practice, where money is to be returned to the shareholders in a company, to
return it in the same manner as capita! is repayable in a winding-up. Counsel
referred, as part of his argument, to a passage in Buckley on the Companies
Acts, 11th ed., p. 120 which has appeared in a number of editions of that work,
including at least one which Lord Wrenbury himself prepared. There is a
striking lack of authority upon this point, but I would agree that in an
ordinary case, where a company is intending to carry on business and desires to
pay off any paid-up share capital under Section 55 of the Act of 1929, the
practice is as stated in Buckley. It is still necessary, however, for the court
to consider with care in each case whether a scheme is fair and equitable in
the circumstances of that particular case. It is not enough for those
supporting a scheme to say "the company is still in being and the proposed
repayment is in accordance with the ordinary practice". If that were
enough, the court's discretion would be cut out and the ordinary shareholders
would be able to treat preference shares as being redeemable at their option,
as soon as sufficient capital, in
excess of the wants of the company, became available for the purpose. The
practice can, at most, have the effect of making it necessary for objectors to
point to some circumstances which distinguish the case under consideration from
the ordinary run of cases. Here they can point at once to the taking over of
the company's business by legislative action, the imminence of liquidation, and
the absence of any reason, from the standpoint of the company's business, for
any repayment of capital at this stage. Thus I think that the practice in question
is of little assistance to the respondent company's argument. The ordinary
stockholders are, in effect, seeking to use to the detriment of the proper
stockholders a priority in respect of capital which was intended to be for
their benefit. I would call attention, on this point, to the contrast drawn
between the position of a company intending to continue its business and a
company whose business is at an end, in the judgment of the Master of the Rolls
in the Chatterley-Whitfield case which your
Lordships are about to consider. The considerations which make the practice
prima facie a fair and convenient one in the former case have no application in
the latter case.
Next, reliance is placed upon
article 139, and in particular upon the power expressly given to the directors
to set aside, out of the profits, a reserve fund to be used, inter alia,
"for making provision for paying off the preference share capital".
This provision formed, I think, the basis for Lord Russell's approval of the
scheme, but, with all respect, I feel that he gave too little weight to the
fact that this article gave the ordinary stockholders no contractual right to
pay off the preference. If and when provision had been made for this purpose,
it would still have been necessary to bring the proposal before the court for
its confirmation or rejection. In this House it was argued that this article
"gave warning" to the preference stockholders that they might be paid
off some day, and therefore they could not properly complain if this event
happened. No doubt any stockholder who read article 139 would be given this
warning. But, in the case of every company whose articles contain no provision
as to the redemption of its preference shares, every preference shareholder who
reads Section 55 of the Act is given warning that, subject to confirmation by
the court, a scheme may provide for the payment off of his shares. The
preference stockholders in this company are in exactly the same position; they
may be paid off if the court, in its discretion, thinks fit, and they will not
be paid off if the court does not think it fair and equitable. I cannot see why
the existence of this "warning" in article 139 should be of any real assistance
to this House in deciding the question whether payment off, in the present
circumstances, is fair and equitable. It
may not be irrelevant to note that no funds have ever been set aside for the
express purpose of paying off the preference stock, which has stood at the
figure of £ 50,000 for over fifty years. I think that the Lord President was
justified in observing that "but for the Act of 1946 the investment would
in all human probability have continued to yield seven per cent. for an indefinite
time".
Lastly, and this is, I think, the
point which was most strongly pressed, it is said that there can be nothing
unfair or inequitable about the scheme, because the profits (after payment of
the preference dividend) are divisible among the ordinary stockholders under
Section 128; any surplus assets are due to the abstinence of the ordinary
shareholders as regards dividends in the past, and the ordinary shareholders
could now, if they thought fit, use their voting power to divide the surplus
assets among themselves, either (a) by declaring a vast ordinary dividend under
article 129 or (b) by capitalising all undivided profits under article 141 (a)
and distributing the resulting capital among themselves by way of bonus.
I was at first impressed by this
agrument, but 1 have come to the conclusion that it is of little weight.
Article 128 merely expresses that which is the ordinary rule in companies
having preference shares, and no doubt there were good reasons, from the point
of view of the company's business, why no larger ordinary dividends were paid
in the past. Now comes an event, imposed on the company from without, which
puts an end to the company's business. The fact that there are surplus assets
arises party from this event and only partly from the past abstinence of the
ordinary stockholders. I have already said why I think it would be unfair if
the preference stockholders were now cut out by proposed reduction of capital.
In my view it would also be unfair if at this stage the ordinary stockholders adopt
either course (a) or course (b) already mentioned. It is quite true that they
have a contractual right to do so, but it is easy to think of many cases in
which it becomes unfair for a man to exercise a contractual right in a
particular way; cases in which some unexpected event happens, giving rise to a
state of circumstances utterly different from that which the parties
contemplated. In the present case, nationalisation has come upon the company
and has made liquidation inevitable. The preference stockholders are about to
lose an investment which they would have liked to keep; the ordinary
stockholders would probably have preferred the company's business to continue.
In these circumstances it does not avail the ordinary stockholders to say:
"This scheme is not unfair, because we could have achieved the same result
by employing either of two other methods". I would reply: "Be it so;
the adoption of either of these two methods would be unfair. It may be that the
court could not prevent you from achieving your ends by either of these
methods, but you have chosen a third method which gives the court a discretion
to stop you, and you will be stopped."
For these reasons I do not think
that your Lordships' decision should be affected by the "alternative
methods" argument. The only question before you is in regard to this
particular scheme for getting rid of the preference shareholders. Is it fair
and equitable or not? I think it is not. I would allow the appeal, with the
result that the company's petition would meet with the fate which, in my view,
it richly deserves, that of dismissal with costs.
[1960]
30 COMP. CAS. 339 (Ch.D.)
ROXBURGH,
J.
DECEMBER
14, 1959
ROXBURGH,
J. This is a complicated
scheme involving a large number of subsidiary companies as well as the parent
company, and there is one small matter which I think might now be settled.
There is not, in fact, in any of the petitions the allegation that the relevant
company is carrying on business. It might appear from a report of a decision of
Kekewich, J. in In re Wallasey Brick and Co., that such an averment was
necessary in order to obtain the sanction of the court to a reduction of
capital. On looking at the report I am not at all sure that kekwich, J.
intended to say anything of that sort. The court, of course, always has
discretion as regards reductions of capital, and it may be that all that he was
saying was that, in the exercise of his desecration, he refused to sanction a
reduction in that particular case. If so, that has no relevance to any other
case. But if he intended to go further than that, it seems to me that any such
view is now completed out-dated and has so been since the decision of the House
of Lords in British and American Trustee and Finance Corporation Ltd. v.
Couper, which was given on April 16, 1894, within a few months of the decision
of kekewich J. There is no ground for suggesting that such an averment is a
sine qua non of the success of a petition. The facts in this case are entirely
different, and the only reason why I have dealt with the point is because of
the possibility that a different view might still be lingering in the text
books or elsewhere.
I sanction
the scheme with regard to the companies and confirm the reductions as regards
all the subsidiaries.
[1986]
60 Comp.Cas.990 (All)
Naini Oxyzen and Acetylene Gas
Ltd.
v.
Bisheshwar Nath
N. D. Ojha and R. K. Shukla JJ.
SPECIAL APPEAL NOS.
9 AND 7 OF 1985
August
19, 1985
Ravi Kant Agarwal for the
appellant.
N. D. Ojha J.—This special appeal and the connected Special Appeal No. 7
of 1985 have been preferred against the judgment of a learned single judge of
this court dated April 30, 1985, whereby two applications for execution of
decree passed in Company Petition No. 23 of 1981 on January 9, 1984, were
allowed. A direction was issued that the decree dated January 9, 1984, shall be
transmitted to the court of the Civil Judge, Allahabad, for execution in
accordance with law.
Naini Oxygen and Acetylene
Gas Ltd., Allahabad (hereinafter referred to as "the company"), was
incorporated as a public company limited by shares under the provisions of the
Companies Act, 1956 (hereinafter referred to as "the Act"). It
appears that there were four groups of directors managing the affairs of the
company, namely, (1) Group of Basheshwar Nath, (2) Group of Anil Saran, (3)
Group of Durga Prasad Agarwal and (4) Group of P. L. Gupta. Basheshwar Nath and
Anil Saran's groups were in the majority and were consequently the dominant
group. An application was made by the group represented by Durga Prasad Agarwal
being Company Petition No. 23 of 1981 in this court under sections 397 and 398
of the Act on the ground of oppression on the part of the dominant group. The
application, it appears, was heard by the learned company judge on various
dates and during the course of hearing the parties brought it to the notice of
the court that they had come to terms and a compromise had been arrived at
which was in the best interest of all concerned including the company. The
learned company judge, after scrutinising the terms of the compromise, came to the
conclusion that passing of a decree in the terms of the compromise arrived at
between the parties would be in the interest of the company and accordingly, he
passed the decree dated January 9, 1984, referred to above. All the parties to
Company Case No. 23 of 1981 appear to have been satisfied with the judgment and
decree passed by the learned company judge on January 9, 1984, as no one
preferred any appeal against the decree. The said decree has thus become final.
As a result of the decree
dated January 9, 1984, the shares were transferred by the dominant group in
favour of the group represented by Sri Durga Prasad Agarwal who had made the
application under sections 397 and 398 of the Act, with the result that the
group represented by Sri Durga Prasad Agarwal now becomes the dominant group.
Under the terms of the compromise, certain payments were to be made within the
time specified therein by the company to certain persons mentioned in the
compromise application. The payment not having been made to them within the
specified time, the persons concerned made two sets of applications for
execution of the decree dated January 9, 1984, and as already pointed out
above, it is on these applications that the order appealed against dated April
30, 1985, was passed.
A preliminary objection was
raised by Sri Jagdish Swarup, counsel for the respondents, that the order dated
April 30, 1985, passed by the learned company judge could not be termed as
"judgment" within the meaning of Chapter VIII, rule 5 of the Rules of
Court. According to Sri Jagdish Swarup, the order dated April 30, 1985, was an
interlocutory order not appealable under Chapter VIII, rule 5. In Shah Bdbulal
Khimji v. Jayaben D. Kania, AIR 1981 SC 1786, it was held in para 115 of the
report that every interlocutory order cannot be regarded as a judgment but only
those orders would be judgments which decide matters of moment or affect vital
and valuable rights of the parties and which work serious injustice to the
party concerned. In para 119 of the report it was emphasised that the
interlocutory order in order to be a judgment must contain the traits and
trappings of finality either when the order decides the question in controversy
in an ancillary proceeding or in the suit itself or in a part of the proceedings.
On the facts of the instant case we are of the opinion that even if the order
dated April 30, 1985, is treated as an interlocutory order in the sense that it
only directs the decree to be transmitted to the civil court for execution, it
does fall within the term "judgment" inasmuch as certain points
raised before the learned company judge and which have been reiterated before
us in this appeal were finally decided by the company judge and could not be
raked up by the appellants before the civil judge during the course of
execution of the decree. We accordingly find no substance in the preliminary
objection that the appeal is not maintainable.
Coming to the merits of
these appeals, it may be pointed out that Special Appeal No. 9 of 1985 filed by
the company has been argued by Sri Ravi Kant at some length. Counsel for the
appellant in Special Appeal No. 7 of 1985 which has been preferred on behalf of
two of the shareholders of the company who were not even parties in Company
Case No. 23 of 1981 has adopted the arguments made by Sri Ravi Kant. In other
words, he has challenged the order dated April 30, 1985, on those very grounds
alone which have been urged by Sri Ravi Kant in Special Appeal No. 9 of 1985.
The first submission which has been made by Sri Ravi Kant, counsel for the
appellant company, is that clauses 9.1 and 9.2 of the compromise filed before
the learned company judge on the basis of which the decree dated January 9,
1984, was passed were beyond the scope of sections 397 and 398 of the Act and consequently
were without jurisdiction. As already seen above, the decree dated January 9,
1984, has become final. In the order dated April 30, 1985, it has been
specifically mentioned by the learned company judge repelling the submission
made in this regard on behalf of the appellant that the company had not entered
into the compromise. Nothing has been brought to our notice to justify the
taking of a contrary view.
A perusal of the record of
Company Petition No. 23 of 1981 indicates that a joint affidavit was filed by
Ashok Agarwal, son of Sri D. P. Agarwal, Bisheshwar Nath, son of late Lala Beni
Prasad, and Anil Saran, son of Sri K. M. Saran, bringing to the notice of the
court the terms of the compromise. In para 2 of this affidavit it was, inter
alia, stated that the compromise was in the best interests of the company. The
counter-affidavits which have been filed on behalf of the company opposing the
applications on which the order appealed against was passed for execution of
the decree dated January 9, 1984, have also been filed by the same Ashok
Agarwal who was one of the persons who had filed the joint affidavit mentioned
above. Not only was no appeal filed against the decree dated January 9, 1984,
but on a question being put by us to the counsel for the appellant as to
whether the appellant was prepared to have the entire decree dated January 9,
1984, recalled and the status quo as it obtained before the said decree
restored, the counsel expressed his reluctance to accept that position. It was
asserted in this behalf by him that since the group represented by Sri Durga
Prasad Agarwal has become the dominant group by virtue of the decree dated
January 9, 1984, passed on the basis of the compromise, there was no question
of status quo being restored so as to make the group represented by Sri
Bisheshwar Nath and Anil Saran the dominant group. It thus appears that the
company now under the control of the group represented by Sri Durga Prasad
Agarwal is satisfied with the compromise excepting clauses 9.1 and 9.2 thereof,
the validity of which alone has been challenged before us. It may be pointed
out that under these clauses some outstanding dues of either the outgoing group
of directors or of their friends or relatives were to be paid. A direction in
regard to its payments could be made in proceedings under sections 397 and 398
of the Act. Even a bare perusal of the plain language of sections 397 and 398
makes it clear that they confer a very wide power on the court to pass such
orders as deemed fit in the interest of the company to remove the oppression
contemplated by section 397 and the mismanagement contemplated by section 398
of the Act.
In
Debt Jhora Tea Co. Ltd. v. Barendra Krishna Bhowmick, [1980] 50 Comp Cas 771, it was pointed out by a Division Bench of the
Calcutta High Court that there can be no limitation on the court's power while
acting under sections 397, 398 and 402 of the Companies Act, 1956. Instead of
winding up a company, the court has been vested with ample power to continue
the corporate existence of a company by passing such orders as it thinks fit in
order to achieve the objective by removing any member or members of a company
or to prevent the company's affairs from being conducted in a manner
prejudicial to public interest. The court under section 398 read with section
402 of the Act has the power to supplant the entire corporate management. Under
these provisions, the court can give appropriate directions which are contrary
to the provisions of the articles of the company or the provisions of the Act.
On a reading of section 402(a) and section 402(g), there can be no doubt that
the intention of the Legislature was to confer wide and ample powers upon the
court for the regulation of the conduct of the company's affairs and to provide
for any other matter which the court thinks just and equitable to provide for,
in the interests of the corporate body and the general public.
In
Cosmosteels Pvt. Ltd. v. Jairam Das Gupta [1978] 48 Comp Cas 312 (SC), a question arose as to whether, when a direction is
given by the court while granting relief against oppression to the minority
shareholders of the company under section 397 of the Act to the company to
purchase the shares of some of its members which would ipso facto bring about
reduction of the share capital because a company cannot be its own member, it
is obligatory to serve a notice upon all the creditors of the company as was
the procedure contemplated under section 100 or 104 of the Act. It was held
that undoubtedly, where the company has passed a resolution for reduction of
its share capital and has submitted it to the court for confirmation, the
procedure prescribed by sections 100 to 104 will have to be followed, if they
are attracted. On the other hand, where the court, while disposing of a petition
under sections 397 and 398, gives a direction to the company to purchase shares
of its own members, a consequent reduction of the share capital is bound to
ensue, but before granting such a direction, it is not necessary to give notice
of the consequent reduction of the share capital to the creditors of the
company. No such requirement is laid down by the Act. The two procedures
ultimately bringing about reduction of the share capital are distinct and
separate and stand apart from each other and one or the other may be resorted
to according to the situation.
Coming to the facts of the
instant case, it would be seen that the charge made by the group of Durga
Prasad Agarwal against the dominant group represented by Bisheshwar Nath and
Anil Saran was about their oppression. By the decree dated January 9, 1984, the
oppression stands removed so much so that now the group represented by Durga
Prasad Agarwal has become the dominant group and has come in control over the
affairs of the company. If in order to achieve this purpose, the payment of the
amounts contemplated by clauses 9.1 and 9.2 of the compromise was necessary,
that would certainly be in the interest of the company and such an order could,
therefore, be passed under sections 397 and 398 of the Act. Indeed it was a
case there that in substance the dominant group was being deprived of the
control of the company and the dues payable to the directors of that group or
to its friends and relatives for achieving this purpose were to be paid.
Consequently, we find it difficult to agree with the submission made by the
learned counsel for the appellant that the provision contained in clauses 9.1
and 9.2 of the compromise was beyond the scope of sections 397 and 398 of the
Act.
It was then urged by
learned counsel for the appellant that no resolution of the board of directors
giving permission to acknowledge the liability contemplated by clauses 9.1 and
9.2 having been passed, these two clauses could not be given effect to.
Reliance in support of this submission was placed by counsel for the appellant
on section 292 of the Act. Sub-section (1) of the said section contemplates
that the board of directors of a company shall exercise powers referred to in
clauses (a) to (e) thereof on behalf of the company, and it shall do so only by
means of resolutions passed at meetings of the board. However, the counsel for
the appellant was unable to point out that what is contained in clauses 9.1 and
9.2 falls under any of the clauses (a) to (e) of sub-section (1) of section
292. Learned counsel for the appellant then placed reliance on section 46 of
the Act which deals with the form of contracts.
Sub-section (1) of section
46 of the Act on which reliance has been placed by counsel for the appellant, inter
alia, contemplates that contracts on behalf of the company may be made in
writing signed by any person acting under its authority, express or implied,
and may in the same manner be varied or discharged. Sub-section (2) of section
46 contemplates that a contract made according to section 46 of the Act shall
be binding on the company. It was urged by counsel for the appellant that
before clauses 9.1 and 9.2 of the compromise could be given effect to, it was
essential to establish that the compromise had been signed by some person under
the authority of the company. According to him, the authority contemplated by
section 46 of the Act by the company could have been given only by the
directors of the company by a resolution and since no such resolution was filed
along with the compromise, clauses 9.1 and 9.2 thereof could not be binding on
the company. Even if it may be accepted for the sake of argument without
expressing any final opinion on the point that section 46 was attracted even to
the compromise in the proceedings under sections 397 and 398 of the Act, it
would be seen that section 46 would in that case apply to the entire compromise
and not to clauses 9.1 and 9.2 alone. As seen above, it is really the group
represented by Durga Prasad Agarwal which is speaking through the company as
its spokesman in the present appeal. As already pointed out above, the
counter-affidavits in these proceedings have been filed by Ashok Agarwal, son
of Durga Prasad Agarwal. It is the same Ashok Agarwal who had filed the joint
affidavit giving the terms of the compromise. This group is satisfied and
indeed is anxious to adhere to the other terms of the compromise as already
noticed above. What in substance it says is that the rights conferred by the
compromise on it are sweet, but the liabilities are sour. If the other terms of
the compromise whereby the minority group became the dominant group and gained
control over the affairs of the company and the dominant group led by
Bisheshwar Nath and Anil Saran washed its hands off the affairs of the company
by selling its shares in favour of the group represented by Durga Prasad
Agarwal are valid according to the appellant notwithstanding what is contained
in section 46, we find no justification in not applying the same principle even
in regard to clauses 9.1 and 9.2. It is settled law that a person cannot be
permitted to approbate and reprobate or to blow hot and cold in the same
breath.
There is another reason why
clauses 9.1 and 9.2 cannot be given the go-by on account of what is contained
in section 46 of the Act; An affidavit was filed by Durga Prasad Agarwal on
March 24, 1982 (paper No. A6/16-30), in Company Petition No. 23 of 1981, along
with an application presented on the same date, namely, March 24, 1982. In para
5 of the said affidavit, it has been stated that the company is managed by a
board of directors which consists of Sarvasri Bisheshwar Nath, Mohan Lal
Agarwal, S. S. Agarwal, Smt. Shakuntala Devi, Smt. Sushila Bansal, Smt. Sneh
Agarwal, Anil Saran and Lakshmi Chand. In regard to Lakshmi Chand, it was
stated that he was a nominee director of the Uttar Pradesh Finance Corporation,
Kanpur, who was arrayed as opposite party No. 10 in the company case. The
record of the case indicates that the compromise has been arrived at by all the
aforesaid directors except Lakshmi Chand, the nominee-director of the Uttar
Pradesh Finance Corporation. We have been informed by counsel for the parties
that the Uttar Pradesh Finance Corporation was represented in the proceedings
before the learned company judge by Shri R. P. Misra, advocate, and he had been
looking after the interests of the finance corporation during those
proceedings. The Uttar Pradesh Finance Corporation does not seem to be
aggrieved by the decree dated January 9, 1984. It is not the case even of the
appellant that any objection was raised on behalf of the U. P. Finance
Corporation before the learned company judge against the decree dated January
9, 1984, being passed. Suppose a meeting as contemplated by section 46 was held
to authorise the signing of the compromise and it may be accepted for the sake
of argument that Lakshmi Chand, the nominee-director of the finance
corporation, had not agreed to clauses 9.1 and 9.2. Yet the resolution to
include these clauses could apparently have been carried out with a majority of
7 to 1. Looking at the problem from any angle, we are of the opinion that
clauses 9.1 and 9.2 cannot be said to be unenforceable on the basis of anything
contained in section 46 of the Act.
It was then urged by
counsel for the appellant that since the procedure for compromise contemplated
by section 391 of the Act was not followed before entering into the compromise
containing clauses 9.1 and 9.2 in question, these two clauses were not binding
on the company. We find it difficult to agree with this submission either. The
purpose of section 391 of the Act is to confer power to compromise or make
arrangements with creditors and members. This purpose is entirely different
from the purpose of sections 397 and 398 of the Act. The purpose of these
sections is to put an end to acts of oppression and mismanagement promptly and
speedily by taking recourse to such action as the court considers expedient in
the interest of the company. Here, admittedly, no proceedings were initiated
under section 391 of the Act. The question which, however, as canvassed by
counsel for the appellant, was that since the proceedings under sections 397
and 398 were being decided on the basis of a compromise, the requirements of
section 391 automatically got attracted and unless recourse was taken to the
procedures contemplated by section 391, the compromise, even though arrived at
in proceedings under sections 397 and 398, could not be given effect to.
Keeping in view the nature and the purpose of section 391 on the one hand and
sections 397 and 398 on the other, we find no substance in this submission. The
dominant purpose of proceedings under sections 397 and 398 is to remove
oppression and mismanagement, as the case may be. For removing this oppression
or mismanagement, the court can take recourse to any action, of course which is
not unlawful and which may be in the interests of the company. In the instant
case, the complaint made by the minority group represented by Durga Prasad
Agarwal in proceedings under sections 397 and 378 was about oppression by the
dominant group. It was this purpose which was to be achieved by passing orders
in those proceedings. The purpose was achieved by ousting the dominant group
completely from the affairs of the company. That group sold its shares to the
minority group with the result that the minority group became the dominant
group and gained control over the affairs of the company. For achieving this
purpose, it was also considered expedient that the directors of the outgoing
dominant group as well as their friends and relatives should be paid off their
dues. For aught we know, in the absence of clauses 9.1 and 9.2, the main
purpose of ousting the dominant group and giving control over the affairs of
the company to the group represented by Durga Prasad Agarwal may not have been
achieved. As seen above, the learned company judge was of the view while
passing the decree dated January 9, 1984, that the compromise was in the
interest of the company.
The matter can be looked at
from another angle. In our opinion, making the provisions of section 391 of the
Act automatically applicable to proceedings under sections 397 and 398 if those
proceedings are contemplated to be decided on the basis of a compromise would
indeed in many cases serve no purpose. Take for example the instant case
itself. Suppose a meeting as contemplated by section 391 of the Act was called
and all other requirements of section 391 including its proviso were fulfilled
but the court was of the view that acceptance of the resolution passed in the
said meeting would be of no avail for removing the oppression complained of by
the group represented by Durga Prasad Agarwal and that that purpose could be
achieved only by taking recourse to the procedure followed in the instant case,
the learned company judge in view of the wide power conferred on him by
sections 397 and 398 could pass such order as was considered fit in the
interest of the company. He would have been justified in not giving effect to
the resolution passed in the meeting held as contemplated by section 391 and in
passing the same order which has been passed in the instant case. At this
place, it may also be pointed out that no authority has been brought to our
notice taking the view that section 391 of the Act automatically gets attracted
to the proceedings under sections 397 and 398 if those proceedings are sought
to be decided on the basis of a compromise.
Lastly, it was urged by counsel for the appellant that the amounts contemplated by clauses 9.1 and 9.2 being in respect of contracts by certain directors or their relatives or friends could not be required to be paid by the company in the absence of the consent of the board of directors as contemplated by section 297 and also on the ground that those contracts were not disclosed as contemplated by section 299. Suffice it to say so far as this submission is concerned, that those pleas do not appear to have been pressed before the learned company judge. There is not even a ground in the memorandum of appeal by the company that these pleas were pressed before the learned company judge but were not considered by him. These pleas do not raise pure questions of law which could be raised in appeal even for the first time. They essentially raise questions of fact and cannot be decided unless fresh evidence is permitted to be adduced. In our opinion, the appellant is not entitled to raise these pleas at this stage. As regards non-disclosure under section 299, it may further be pointed out that the consequence of non-disclosure is contained in subsection (4) thereof which contemplates punishment with fine up to the extent mentioned therein. Nothing has been brought to our notice which may render the contract void and unenforceable for failure to make disclosure under section 299.
As regards the appeal filed
by two of the shareholders, it may be pointed out that the learned company
judge has, in the order appealed against, stated that they appeared to have
been set up by the group represented by Durga Prasad Agarwal. Before us also
counsel for these two shareholders has only adopted the submissions made by
counsel for the company. The decree dated January 9, 1984, has not been
challenged even by these two shareholders on the ground that they are persons aggrieved
by the said decree. A perusal of section 399 of the Act indicates that
proceedings under sections 397 and 398 are really in the nature of
representative proceedings where the interests of the shareholders are
represented by the concerned directors. For all these reasons, we are unable to
take a view contrary to the view taken by the learned company judge in regard
to the nature of the objection filed by these two shareholders.
No other point has been
pressed. Indeed, several of the grounds taken in the memorandum of appeal are
such which cannot be raised in the execution proceedings and could be raised
only in an appeal, against the decree dated January 9, 1984.
In the result, we find no
merit in these appeals. They are accordingly dismissed but, in the
circumstances of the case, there shall be no order as to costs. The interim
order of stay is vacated.
Gujarat
High Court
[2005]
59 SCL 457 (Guj.)
HIGH COURT OF GUJARAT
Essar Steel Ltd., In Re
K.A. Puj., J.
Company
Petition No. 223 of 2003
February
28, 2005
Section 100, read with section 106, of the
Companies Act, 1956 - Share capital - Reduction of - Petitioner-company was
facing financial difficulties in respect of long-term debt on account of very
low average debt maturity profile and high rates of interest - To overcome said
difficulties, company was referred to Corporate Debt Restructuring (CDR) Forum
for restructuring its debt equity position - As per package approved by CDR
Forum, company would cancel four equity shares out of 10 shares and in lieu
thereof equal number of non-cumulative preference shares would be issued and
equity shareholders would be allowed to hold remaining six equity shares
without any alteration of rights attached thereto - As per package, unsecured
loans from promoters group would also be converted into equity shares -
Petitioner filed application seeking confirmation of High Court for
restructuring package - Objector-‘GIIC’ opposed package on ground that its
investment level in company would be substantially reduced and it would suffer
heavy financial loss due to that - Whether cancellation of part of equity share
capital and issue of preference shares in lieu thereof, would not in any way
affect repayment to any of creditors, as redemption of preference shares is
governed under section 80 - Held, yes - Whether by virtue of such reduction of
equity share capital, equity shareholders including objector would suffer heavy
loss - Held, no - Whether since said proposal was likely to improve financial
resources of company to increase share of profit available for expansion and
growth and did not involve diminution of any liability in respect of unpaid
capital or payment to any shareholder of any paid up share capital, resolution
passed at general meeting for reduction of share capital was to be confirmed -
Held, yes
Facts
The petitioner-company was engaged in the
business of manufacture of hot rolled steel coils. As the fortunes of steel
industry world wide were plagued by severely depressed prices due to various factors,
the profitability and cash flow of the company fell to much lower level than
the appraised levels, despite the fact that the company implemented a series of
cost reduction measures to maintain the cost of production at a competitive
position. The financial difficulties of the company were further compounded by
two additional factors with respect to long-term debt; firstly, the very lower
average debt maturity profile and secondly, the very high interest rates on the
debt. Due to failure of the petitioner-company to service its debts and due to
existing difficulties, the company was referred to the Corporate Debt
Restructuring (CDR) Forum for re-scheduling and restructuring the debt of the
company. A restructuring package was approved by CDR Forum, as per which, for
every ten equity shares, the company would cancel four equity shares and in
lieu of such cancellation, four non-cumulative preference shares would be
allotted. Further, the existing equity shareholders would continue to hold
remaining six shares without any alteration of rights attached thereto. To give
effect to the said restructuring package, the company passed a special
resolution in the general meeting and in the instant petition sought
confirmation of the High Court for the restructuring package.
The objector - ‘GIIC’ opposed the scheme of
reduction proposed by the company on the ground that if proposal was
sanctioned, some of the equity share held by it in the company would be
cancelled as a result of which, it would have to write-off its 40 per cent
investment in books of account. Further, the company would allot preference
shares of Rs. 10 each at a coupon rate of 0.01 per cent redeemable in four
quarterly installments against the cancellation of equal number of equity
shares. Thus, its monetary value considering Net Present Value (NPA) was to be
practically nil which would result in heavy financial loss to GIIC.
Held
It was only technically that
the capital of the petitioner would stand reduced. The implementation of the
proposed resolution would not practically result in a reduction of capital
inasmuch as on the cancellation of the equity shares, preference share capital
of an amount equal to the equity share capital cancelled would be
simultaneously created. Preference shares could be redeemed only out of profits
of the company (and an amount equal to the amount to be paid on redemption
would be transferred to a capital redemption reserve account) or out of the
proceeds of a fresh issue of shares made for the purpose of redemption. Effectively,
at the time of redemption of the preference shares, if the redemption was to be
by issue of fresh shares, the share capital of the petitioner would be
reinstated to the same level as it would be prior to the redemption of the
preference shares or if the redemption was to be out of profits, there shall be
transfer to the CRR account, a sum equal to the amount of the preference shares
redeemed. However, such cancellation of equity shares and issue of preference
shares in lieu thereof, had been held to be a deemed reduction as the equity
shares were cancelled. Under these circumstances, the instant petition was
filed under sections 100 to 104, for the approval and confirmation by the
Court. The creditors of the company would not be affected by the cancellation
of the equity shares as the share capital at all times was maintained. On the
restructuring package being fully implemented, the creditors would gain
substantially as further equity capital would be infused, by conversion of a
part of the debt into equity, into the petitioner. Therefore, effectively, the
paid-up share capital would be higher than the equity share capital of the
company prior to the reduction of equity share capital contemplated in the
instant petition. [Para 11]
The cancellation of part of
equity share capital and issue of preference shares in lieu thereof, would not
in any way affect the repayment to any of the creditors, as the redemption of
preference shares is governed under section 80. The interest of the creditors
would not be affected in any manner whatsoever as the share capital would be
always maintained as set out earlier. Section 101 provides that the procedure
under section 101(2) is to be followed only if there is diminution of liability
in respect of unpaid share capital or the payment to any shareholder of any
paid-up share capital or in any other case, if the Court directs. Since the
interest of the secured creditors was not affected in any manner, the creditors
meeting was also required to be dispensed with as prayed for by the petitioner.
[Para 12]
Admittedly, the special
resolution was passed by the requisite majority of the shareholders at the AGM.
The objector-GIIC did not attend the said meeting. As far as the objections
raised by the GIIC were concerned, much substance in the objections was not
found. The scheme specifically dealt with the shareholders and it was clearly
stated that for every ten equity shares of Rs. 10 each held by the equity
shareholders, the petitioner would cancel four equity shares and in lieu of
such cancellation create, issue and allot four non-cumulative redeemable
preference shares of Rs. 10 each with a coupon rate of 0.01 per cent redeemable
in four equal yearly installments and the existing equity shareholders would
continue to hold the remaining six equity shares held by them as equity shares
of Rs. 10 each fully paid, without any alterations to the rights attached
thereto. It was, therefore, not correct to state that by virtue of such
reduction of equity share capital, the equity shareholders including the
objector-GIIC would suffer very heavy loss. [Para 26]
First of all, the objector
GIIC had not remained present at the meeting nor it represented the majority of
the equity shareholders. The objection raised by the objector on that count
was, therefore, not sustainable and was to be rejected. [Para 27]
As far as the variation of the
rights of the equity shareholders and violation of the provisions of sections
106 and 107 were concerned, there was no variation of rights as such and there
was no violation of the provisions contained in sections 106 and 107. As a
matter of fact, those provisions had no application to the facts of the instant
case. The variation referred to in section 106 is variation to the prejudice of
any class of shareholders, and not any variation adding to or enhancing rights
of any class. It is only where a variation involves the curtailment of the
rights of any class or classes of shareholders, that the consent or sanction of
such class or classes will be necessary. The section relates to variation and
abrogation of rights attached to shares and has no application to cancellation
of shares or a reduction of capital. Similarly, increasing the capital of a
company does not amount to varying class rights. In the instant case, as per
the restructuring package approved by CDR empowered group, unsecured loans of
Rs. 200 crores from the promoters would be converted into equity (before the
write off of equity capital) and would be subject to write down by 40 per cent.
The equity share capital existing/proposed to be converted by the promoters,
would be written down by 40 per cent by allotment of .01 per cent cumulative
redeemable preference shares. Likewise, the company was under an obligation to
allot equity shares at par to financial institutions/banks by way of conversion
of a part of assistance to the extent of Rs. 175 crores. Thus, the simultaneous
exercise of increasing the equity share capital as a result of the
restructuring package approved by CDR forum and the reduction of equity share
capital, in no way, could be considered as the variation of the rights of the
equity shareholders including the objector. [Para 28]
Taking an overall view of the
matter and considering the proposed scheme of reduction in a larger perspective,
there was no reason not to confirm the proposed action of the petitioner to
reduce its share capital. The said proposal was likely to improve the financial
resources of the company and to increase the share of profit available for
expansion and growth. The said proposal did not involve diminution of any
liability in respect of unpaid capital or the payment to any shareholder of any
paid-up share capital. Accordingly, the resolution passed at general meeting
was, thereby, confirmed. [Para 29]
Cases referred to
Miheer H. Mafatlal v. Mafatlal Industries Ltd.
[1996] 87 Comp. Cas. 792/10 SCL 70 (SC) (para 27) and Spindel Fabrik Suessen v.
Suessen Textile Bearing Ltd. [1989] 2 CLA 202 (Bom.) (para 28).
S.N. Soparkar and Swati Soparkar for
the Petitioner. Sandeep Singhi, Mihir Joshi and R.D. Dave for the
Respondent.
Judgment
1. The petitioner, namely, Essar Steel Limited has filed this
petition under sections 78 and 100 to 103 of the Companies Act, 1956 before
this Court seeking following prayers:—
(a) That the reduction of the share
capital of the petitioner by cancellation of part of equity share capital being
20,47,33,113 (Twenty Crores Forty Seven Lacs Thirty Three Thousand One Hundred
and Thirteen) equity shares of the face value of Rs. 10 and fresh issuance of
preference shares in lieu thereof as resolved by the special resolution of the
petitioner at its 27th Annual General Meeting held on July 19, 2003 be
confirmed and passed by this Hon’ble Court;
(b) That the proposed Minutes as set out
in Para 14 hereinabove, be approved;
(c) That the procedure laid down under
section 102 (2) and (3) of the Act, as regards the creditors be dispensed with,
on such terms as the Hon’ble Court may deem fit;
(d) That the petitioner be dispensed
with the use of the words “and reduced”;
2. The capital of the petitioner-company as per the latest
audited balance-sheet as on 31-3-2003, when the present petition was filed, are
as follows:—
Share
Capital as on 31-3-2003
|
Authorized : |
|
|
|
Rs. |
|
150,00,00,000 Equity Shares of Rs. 10 each |
1500,00,00,000 |
|
1,00,00,000 Redeemable Cumulative Preference
shares of Rs. 100 each |
100,00,00,000 |
|
|
1600,00,00,000 |
|
Issued & Subscribed |
|
|
33,42,12,890 Equity shares of Rs. 10 each |
334,21,28,900 |
|
Paid up : |
|
|
33,42,12,890 Equity Shares of Rs. 10 each |
330,34,99,589 |
3. In Annual General Meeting held on 19-7-2003, the authorized
capital was raised from Rs. 1,600 crores to Rs. 5,000 crores. The Company has consequently
allotted 17,76,19,893 Equity Shares of Rs. 10 each fully paid up to Essar
Investments Limited and as such status of Authorized, Issued and Paid capital
as on 1-8-2003 was as follows:—
Authorized :
|
|
Rs. |
|
460,00,00,000 Equity Shares of Rs. 10 each |
4600,00,00,000 |
|
30,00,00,000 0.01% Redeemable Cumulative
Preference shares of Rs. 10 each |
300,00,00,000 |
|
10,00,00,000 10% Redeemable Cumulative
Preference shares of Rs. 10 each |
100,00,00,000 |
|
|
5000,00,00,000 |
|
|
Rs. |
|
Issued & Subscribed |
|
|
51,18,32,783 Equity Shares of Rs. 10 each |
511,83,27,830 |
|
Paid up : |
|
|
51,18,32,783 Equity Shares of Rs. 10 each |
507,96,98,519 |
4. Shortly after its incorporation, the Company commenced its
business and it is carrying it on since then.
5.
Under Article 48 of the Articles of Association of the Company, it is provided
that the Company in General Meeting may reduce its capital in any manner
authorized by section 100 of the Act. The Company, therefore, decided to reduce
its share capital by exercising powers conferred on the Company under Article
48 of the Articles of Association and also in the manner laid down under
section 100 of the Act. The circumstances which led to the Company to reduce
its share capital are as under:—
5.1 The petitioner Company was established in 1976 and has its
registered office and manufacturing facilities at Hazira, Distt. Surat and
manufactures Hot Rolled Steel Coils. The petitioner Company has a capacity to
produce 2.20 Million Tones of Hot Briquetted Iron and 2.40 Million Tones of Hot
Rolled Coils per annum. The petitioner company has also set up down-stream
facilities comprising of Hot Skin Pass Mill (having capacity of 1.20 Million
Tones per annum) and slitting and shearing line (having capacity of 0.40
Million Tones per annum).
5.2 The petitioner Company has increased production capacities of
the plant through indigenous developments. The production levels have been
stabilised and the petitioner Company has been achieving reasonably high
capacity utilisation consistently. The quality of petitioner Company’s product
is well established and the petitioner Company is country’s largest exporter of
Hot Rolled Steel Coils for the last five years.
5.3 The petitioner Company has obtained secured borrowings/credits
from various banks and financial institutions to finance its business needs.
The HRC Plant commenced commercial production in March, 1996 when the prices
were ruling at nearly USD 450 per ton in the international market. IDBI, the
lead Financial Institution to this Project, had appraised the project in 1995.
A selling price of USD 446 per ton was considered at the time of this
appraisal.
5.4 The fortunes of the Steel Industry worldwide were plagued by
severely depressed prices after 1997-98 due to South East Asian Meltdown,
dumping of steel by the CIS countries, an oversupply position and other adverse
factors. The steel prices dipped to levels as low as USD 170 per ton, a price
level at which most steel mills worldwide incurred substantial losses. Several
mills, particularly in the US, filed for bankruptcy protection.
5.5 Reflecting this global trend, in India too the prices fell
steeply. The Government of India brought down the customs duty on import of HR
Coils from 50% in 1994 to 25% in 2001. Also, new capacities were created with
Jindal Vijaynagar Steel Ltd. and Ispat Industries Ltd. setting up their steel
plants, whereas there was no commensurate increase in demand. This created an
oversupply position and steep fall in prices in the domestic market as well.
Consequently, the Indian steel industry’s performance has been very poor.
5.6 The petitioner Company’s profitability and cash flows, therefore,
were much lower than the appraised levels, despite the fact that the petitioner
Company implemented a series of cost reduction measures, to maintain the cost
of production at competitive levels. The financial difficulties of the
petitioner Company were further compounded by two additional factors with
respect to its long term debt; firstly, the very low average debt maturity
profile of only 3.5 years when the plant commenced commercial production in
1996 and secondly, the very high interest rates applicable on the debt; the
interest levels were contracted during the high interest rate regime at rates
averaging 18 to 19% p.a. on the Rupee debt. Hence, it could not fully meet its
term debt commitments. The non-servicing of debt commitments during this period
resulted in increase in the aggregate debt levels.
5.7 In view of the above, significant debt restructuring became
necessary. The critical components of this being a substantial reduction of
debt in order to reduce the overall debt profile of the petitioner Company
apart from extension of the maturity of the debt and rationalisation of
interest rates to the current prevailing market levels. The petitioner Company
has, therefore, initiated series of measures to upgrade capacity, increase
production and reduce costs of production.
5.8 Due to the failure of the petitioner Company to service its debt
and due to the existing difficulties of the petitioner Company, the need was
felt for rescheduling and restructuring the debt of the petitioner Company. The
petitioner Company proactively sought debt restructuring in a comprehensive
manner that would prevent it from seeking repeated roll-overs from the Existing
Secured Lenders at different terms.
5.9 The petitioner Company appointed KPMG India Pvt. Ltd. to assist in
formulating a Restructuring Plan in August 2001. A series of meetings were held
between the petitioner Company, its advisors KPMG and the lenders from August
2001 to December 2001 culminating in the petitioner Company submitting a
Reconstructing Proposal to its major lenders viz., IDBI, ICICI, IFCI and SEBI
in January 2002. Subsequent to submitting the Restructuring proposal, the
petitioner Company had several discussions with its lenders.
5.10 In October 2002, the petitioner Company was referred to the Corporate
Debt Restructuring (“CDR”) Forum by IDBI, the lead financial institution of the
petitioner Company. Reserve Bank of India had introduced the mechanism vide
their Circular dated 23-8-2001 for restructuring the corporate debts of viable
corporate entities affected by internal or external factors. All the major
Indian Financial Institutions and Banks are the members of the CDR Forum.
5.11 Upon reference in October 2002, a CDR meeting was held and the CDR
members appointed a Core Committee. The Core Committee comprised of IDBI, ICICI
Bank, State Bank of India and Bank of India to evolve a Restructuring Package.
A Restructuring Package as formulated by the Core Committee was approved in the
CDR Forum Meeting held on January 21, 2003.
6. The salient features of restructuring package, as regards the
Secured Term Lenders are as under:—
PART A - WITH REGARD
TO THE SECURED TERM LENDERS AND WORKING CAPITAL LENDERS
(i) Waiver of Penal Interest and
liquidated damages;
(ii) Conversion of Compound Interest into
Zero Coupon Bonds;
(iii) Simple Interest Charged in excess of
14% p.a. in respect of Rupee Term Loans and Non Convertible Debentures with
effect from 1-4-2001 till the Cutt-off Date would be converted into 10%
Cumulative Redeemable Preference Shares (CRPS) and Compound Interest charged,
for the above period, in excess of document rate shall be waived;
(iv) Conversion of Rupee term debt into
Equity Share Capital
(v) Conversion of 40% Rupee Term Debt
into Foreign Currency Loan/Reduced Rate Rupee Term Loan (carrying interest rate
at the rate of 18% p.a.)
(vi) Balance Rupee Term Loan (carrying
interest rate at the rate of 14% p.a.).
6.1 The Working Capital Lenders shall provide need based working
capital facility based on a current ratio of 1:1 as considered under the
Restructuring Package. The working capital lenders shall also sanction Working
Capital Term Loan (“WCTL”) of Rs. 140 crores (approximately for meeting the net
working capital deficit of the Company) as per detail set out in the
Restructuring Package.
PART B - WITH REGARD
TO THE SHAREHOLDERS
6.2 For every ten equity shares of Rs. 10 each held by the equity
shareholders, the petitioner shall cancel four (4) equity shares and in lieu of
such cancellation create, issue and allot four (4) non-cumulative redeemable
preference shares of Rs. 10 each with a coupon of 0.01% redeemable in four (4)
equal yearly installments starting from October 1, 2017 and the existing equity
shareholders shall continue to hold the remaining six (6) equity shares held by
them as equity shares of Rs. 10 each fully paid, without any alterations to the
rights attached thereto.
7.
By preferring this petition, the petitioner has sought the confirmation of this
Court only to the part B above of the restructuring package. This portion of
the restructuring package pertains to the shareholders of the petitioner. Part
A above of the restructuring package pertaining to the creditors of the
petitioner is being taken up separately by the petitioner and is not the
subject-matter of this petition.
8.
It is further stated that on confirmation of the reduction of share capital by
this Court, 20,47,33,113 (Twenty Crores Forty Seven Lacs Thirty Three Thousand
One Hundred Thirteen) equity shares of the face value of Rs. 10 each out of the
total existing 51,18,32,783 (Fifty One Crores Eighteen Lacs Thirty Two Thousand
Seven Hundred Eighty Three) equity shares of Rs. 10 each, will be cancelled by
the Company and in lieu of such cancellation 20,47,33,113 0.01% Cumulative
Redeemable Preference Shares of Rs. 10 each shall be issued on the terms stated
in the petition.
9.
It is further stated that the post restructuring of finance is based on the
assumptions of the satisfactory implementation of the restructuring package,
including cancellation of part of equity share capital and issue of preference
shares in lieu thereof and conversion of a portion of the IFIs debt into equity
share capital. Any change in the aforesaid assumption would result in
consequent change in the capital structure and the means of finance.
10. It is further stated that on annulment of forfeiture of any
equity shares made due to non-payment of call moneys, the said equity shares
would also be cancelled in the ratio of four equity shares of Rs. 10 each out
of every 10 equity shares of Rs. 10 each held and in lieu of such cancellation,
the petitioner will issue and allot preference shares as provided in the
resolution passed on July 19, 2003 at the 27th Annual General Meeting and the
remaining 6 equity shares shall be held by the shareholders as equity shares of
Rs. 10 each without any alterations.
11. It is only technically that the capital of the petitioner will
stand reduced. The implementation of the proposed resolution will not
practically result in a reduction of capital inasmuch as on the cancellation of
the equity shares, preference share capital of an amount equal to the equity
share capital cancelled will be simultaneously created. Preference shares can
be redeemed only out of profits of the company (and an amount equal to the
amount to be paid on redemption would be transferred to a capital redemption
reserve account) or out of the proceeds of a fresh issue of shares made for the
purpose of redemption. Effectively, at the time of redemption of the preference
shares, if the redemption is by issue of fresh shares, the share capital of the
petitioner shall be reinstated to the same level as it would be prior to the
redemption of the preference shares or if the redemption is out of profits, there
shall be transferred to the CRR account a sum equal to the amount of the
preference shares redeemed. However, such cancellation of equity shares and
issue of preference shares in lieu thereof, has been held to be a deemed
reduction as the equity shares are cancelled. Under these circumstances, the
present petition was filed under sections 100 to 104 of the Act, for the
approval and confirmation by this Court. The creditors of the company would not
be affected by the cancellation of the equity shares as the share capital at
all times is maintained. On the restructuring package being fully implemented,
the creditors would gain substantially as further equity capital of Rs. 175
crores would be infused by conversion of a part of the debt into equity into the
petitioner. Therefore, effectively, the paid up share capital would be higher
than the equity share capital of the company prior to the reduction of equity
share capital contemplated in the present petition.
12. It is further stated that the proposed cancellation of part of
the equity share capital and issue of preference shares in lieu thereof does
not involve either the diminution of liability in respect of unpaid share
capital or the payment to any shareholder of any paid-up share capital. The
cancellation of part of equity share capital and issue of preference shares in
lieu thereof, shall not in any way affect the repayment to any of the
creditors, as the redemption of preference shares are governed under section 80
of the Companies Act, 1956. The interests of the creditors is not affected in
any manner whatsoever as the share capital is always maintained as set out
earlier. Section 101 of the Act provides that the procedure under section
101(2) of the Act is to be followed only if there is diminution of liability in
respect of unpaid share capital or the payment to any shareholder of any
paid-up share capital or in any other case if the Court directs. Since the
interest of the secured creditors are not affected in any manner, the creditors
meeting was also required to be dispensed with as prayed for by the petitioner.
13. This entire restructuring package would assist the petitioner in
meeting the difficult situation and to make operations profitable. The proposed
restructuring of the petitioner including the proposed reduction of equity
shares capital will strengthen the petitioner and is in the best interest of
the petitioner, as also its shareholders and creditors. The petitioner has,
therefore, prayed that the proposed cancellation of part of equity share
capital and fresh issue of preference shares, in lieu thereof, as resolved by
the shareholders of the petitioner at its 27th Annual General Meeting held on
July 19, 2003 be confirmed by this Court.
14. This Court has passed an order on 10-9-2003 directing the
petitioner to supply one copy of the present petition to learned advocate Mr.
Sandeep Singhi appearing on behalf of Unit Trust of India (UTI), which is one
of the Secured Creditors of the petitioner Company.
15. This Court has passed further order on 14-10-2003 observing that
the Special Resolution for the reduction of share capital of the petitioner
Company referred to in the petition has been duly passed. The Court has,
therefore, ordered to issue notice in the prescribed form of the presentation
of the petition and the same would be inserted in the public advertisement in
‘Times of India’ - English Daily, Ahmedabad Edition and ‘Gujarat Samachar’ -
Gujarati Daily, Surat Edition on or before 5-11-2003.
16. Pursuant to the said advertisement, UTI Asset Management Company
Private Limited has filed its objections against the Scheme. However, UTI has
subsequently withdrawn its objections.
17. Gujarat Industrial Investment Corporation i.e. GIIC has also filed
its objections. Over and above certain specific objections raised by GIIC, they
have also relied on the objections filed by UTI.
18. Mr. Mihir Joshi, learned Senior Counsel appearing with Mr. R.D.
Dave, learned advocate for the Objector i.e., GIIC has submitted that GIIC is a
Government of Gujarat Enterprise of which 100% shares are held by Government of
Gujarat. One of the main activities of GIIC was to act as catalyst in promoting
industrialization of the State by way of equity investment. For this project,
GIIC has promoted the company viz., Steel Corporation of Gujarat Ltd. in July,
1987. The Company had obtained necessary license from the Government of India
for the project and finally it was decided to transfer the project along with
the company to Essar Group and thus the formation of the Company M/s. Essar
Gujarat Limited was made which is now known as Essar Steel Limited. He has
further submitted that as per the MOU signed by GIIC with M/s. Essar Investment
Limited (EIL in short), GIIC had the option to purchase the equity shares from
EIL, within 12 months after commencement of production by M/s. Essar Gujarat
Limited. After exercising the option of purchasing 29,86,875 equity shares from
EIL in July 1995, at the price of Rs. 19.14 crores, GIIC’s holding became
30,26,200 shares with total investment of Rs. 19,29,77,819 i.e., Rs. 63.77 per
share. GIIC has not participated in the management of the petitioner. The day
to day management of the petitioner Company was handled by Shri Ruia and others
of the main promoter group. The said group, subsequently diversified into other
fields like Petroleum Refinery (Essar Oil), Power Generation (Essar Power),
Shipping (Essar Shipping), Telecommunication (Cellular Services), Oil
Exploration, etc. Thus, this kind of over diversification resulted into
financial problems by the petitioner Company. As on 30-9-2002, against
shareholders fund of Rs. 2080.88 crores, the carried forward loss was Rs.
2249.09 crores i.e., higher than the shareholders fund. Mr. Joshi has,
therefore, submitted that GIIC strongly objects to sanction of the Scheme and
granting of any relief to the petitioner for the following reasons:—
(a) GIIC is holding 30,26,200 equity
shares of Rs. 10 each of the petitioner Company with an average cost of Rs.
63.77 per share (investment made in July 1995). If the proposal is sanctioned
by this Court, 12,10,480 equity shares of Rs. 10 each would stand cancelled.
Therefore, GIIC will have to write off its 40% investment, i.e., Rs. 7.72
crores in Books of Account out of Rs. 19.30 crores. GIIC will be left with
18,15,720 Equity Shares after the cancellation. Looking to the market price of
the petitioner, GIIC will have to suffer huge financial loss. Till this date,
GIIC has not received any return by way of dividend from the petitioner Company.
(b) As per the proposal, the petitioner
Company would allot 12,10,480 preference shares of Rs. 10 each at a coupon rate
of 0.01% redeemable in four quarterly instalments, commencing from 1-10-2017
against the cancellation of equal number of equity shares. Thus, its monetary
value considering Net Present Value (NPA basis) is practically Nil. This would
result into heavy financial loss to GIIC.
(c) GIIC is a Government Enterprise and
the investment made is of a public money. Therefore, any loss on investment as
proposed for sanction, would be a great blow on working of GIIC since GIIC was
passing through financial crisis due to heavy loss.
(d) The Scheme provides preferential
treatment to the lenders in as much as the fact that the Scheme provides for 10%
cumulative redeemable preference shares to be issued to the Financial
Institutions and Banks. However, different treatment is proposed to be given to
shareholders by allotting 0.01% cumulative redeemable preference shares against
the cancellation of equity shares of Rs. 10 each, whose market price today is
Rs. 25 per share. Therefore, GIIC has strong objection against such arrangement
proposed in the Scheme.
(e) The Unsecured loan of Rs. 238 crores
of M/s. Essar Investment Limited and associate companies is proposed to be
converted into equity shares at Rs. 11.26 per share. Otherwise, this investment
would have remained as unsecured and as per the normal practice adopted by the
Financial Institutions, it would not allow any interest on this investment as well
as would not allow repayment of this amount till entire repayment of Financial
Institutions i.e., upto the year 2018 or so is made. The proposal involves
preferential treatment to the promoter Company and associates since it allows
this amount to be converted into equity share capital @ Rs. 11.26 per share
against the present market price of Rs. 25 per share. Any appreciation in the
market price in future would give higher benefit in that proportion. Further,
the proposed route would enable them to have an early exit route with
appreciation than their investment of Rs. 238 crores, even if considering the
cancellation of 40% equity capital, i.e., the present market value of the
allotted shares would be Rs. 317 crores, which is even higher than the total investment
of Rs. 238 crores as unsecured loan. This is in addition to the amount which
otherwise would be available to them as redemption of preference share in the
year 2017. This would also give undue advantage to promoters in increasing
their present shareholding percentage in the Company.
(f) Mr. Joshi has further submitted
that the proposed reduction results into variation of shareholders’ rights and
it is in violation of the provisions contained in sections 106 & 107 of the
Act. He has further submitted that provisions prescribed in section 192A of the
Act has not been followed. It relates to passing of resolution by postal
ballot. The Central Government, vide Notification No. GSR 337(F) dated
10-5-2001 has framed Rules for postal ballot, in exercise of its powers
conferred by section 192A read with clauses (a) and (b) of sub- section (1) of
section 642 of the Companies Act, 1956. Rule 4 deals with list of businesses in
which the resolutions may be passed through postal ballot. Clause (j) of Rule 4
deals with variation in the rights attached with Class of shares or debentures
or other securities as specified under section 106.
19. Mr. S.N. Soparkar, learned Senior Counsel appearing with Mrs.
Swati Soparkar, learned advocate for the petitioner Company has submitted that
the objections raised by GIIC do not have any substance. He has further
submitted that the affidavit of objections is very vague, frivolous, mala fide,
illegal and dishonest in law as well as on facts and being governed by ulterior
motive. The present petition is filed by the petitioner Company for reduction
of share capital under section 100 of the Act. Under the provisions of the Act
as well as the rules framed thereunder, guiding the procedure for the said
reduction of capital, if the Articles of Association provides for such
reduction of capital, a Special Resolution is required to be passed at the
Annual General Meeting and the same was accordingly passed at the AGM dated
19-7-2003. Despite the objections raised by some of the objectors, the
Resolution was duly approved by the requisite statutory majority. The said
meeting was the Annual General Meeting and not a meeting convened as per the
directions of the Court for approval of the Scheme under section 391. The
present proceedings taken out by the petitioner company are separate from and
proceedings taken out for the restructuring of its debts. The scheme of
compromise which was proposed by the Company earlier and subsequently withdrawn
has no relevance so far as the present petition is concerned.
20. Mr. Soparkar has further submitted that under the present
proceeding for reduction of capital, the rights of the creditors are not
affected at all. The provisions of section 101(2) and 101(3) are very clear on
this issue. Since the proposed reduction does not involve either diminution of
any liability in respect of unpaid share capital or the payment to any
shareholder of any paid up share capital, it is not necessary to file the
procedure prescribed under section 101(2). The rights of the unsecured
creditors are not at all affected by the proposed conversion of part of Equity
Shares to preference share capital. The unsecured creditors shall always have a
preference over the preference shareholders for their claims. The meeting of
the creditors is not required to be convened under the provisions of the Act
for the reduction of capital.
21. Mr. Soparkar has further submitted that the petitioner has not
concealed any material fact from the shareholders of the company. The
shareholders are not necessary party for the approval of the scheme of
compromise with the creditors of the Company and for the same reason, the
objection raised to the debt restructuring package, by the objector is not
relevant for the purpose of passing special resolution for reduction of
capital. The details of the entire restructuring scheme were provided in the
explanatory statement sent to all the shareholders along with the notice for
27th AGM. The special resolutions were passed at the meeting after due
deliberation and discussion by the shareholders present at the meeting. No
material fact was concealed from the shareholders of the petitioner Company.
22. Mr. Soparkar has further submitted that the present petition is
filed for consideration of the limited issue of sanction of the proposed
reduction of capital only and not for consideration of the entire scheme which
was the subject-matter of Company Petition No. 176 of 2003 and it was
ultimately withdrawn by the petitioner. The contentions raised by the Objector
are absolutely irrelevant for the purpose of considering the proposed reduction
of capital. The unsecured loan of Rs. 200 crores has been converted into equity
and shares were allotted at a premium of Rs. 1.26 per share in accordance with
the formula under SEBI guidelines of preferential issue. Therefore, increase in
equity has taken place for Rs. 177 crores. Further the shares are locked in and
cannot be sold in the market. He has, therefore, denied that the material
information was intentionally or unintentionally concealed either from the
Equity Shareholders of the Company or from this Court.
23. Mr. Soparkar has further submitted that whether the shares are
to be forfeited or not is the matter of consideration for the Board of
Directors of the Company. In the present case, it was decided not to forfeit
such shares because they are held by small investors. The total number of such
partly paid-up shares is less than 1% of the total number of shares of the
company and hence the allotment of partly paid preference shares in no way
affects the rights of shareholders or creditors. The proposal of allotting the
partly paid up preference shares against the partly paid up Equity shares is
already considered by the Equity shareholders of the Company at the aforesaid meeting
of 19-7-2003. The commercial wisdom exercised by the majority of shareholders
collectively cannot be challenged by an individual shareholder. Except the
statement that the scheme is not in the interest of the company and its
shareholders, no material is placed on record by the objector to support its
contention. It is apparently baseless and cannot be considered for deciding the
maintainability of the petition.
24. Mr. Soparkar has further submitted that there is no substance in
the contention that the Company proposed to allot the preference shareholders
without voting rights causing any violation of section 87 of the Companies Act,
1956. In fact, out of abundant caution the special resolution proposed was
specifically modified for compliance of the provisions of section 87 of the Act
and the copy of the modified resolution forms part of the petition itself.
25. Mr. Soparkar has further submitted that the petitioner’s
proposal for reduction of capital is in no way unjust, unfair and against the
public interest. The present proceedings are completely governed by the
provisions of the Act and the relevant rules framed thereunder and all the
procedural requirements have been strictly followed. This Court should,
therefore, approve the proposal and grant its sanction to the proposed
reduction.
26. After having heard learned advocates appearing for the respective
parties and after having considered their submissions, the Court is of the view
that despite the objections raised by GIIC, the Scheme of reduction of the
share capital of the petitioner, by cancellation of part of equity share
capital deserves to be confirmed. It is an admitted position that the special
resolution was passed by the requisite majority of the shareholders at the 27th
AG Meeting held on 19-7-2003. The Objector GIIC did not attend the said
meeting. Initially, UTI Asset Management Company Private Limited has raised the
objections. However, the said objections were subsequently withdrawn. As far as
the objections raised by the GIIC is concerned, the Court does not find much
substance in these objections. By virtue of such reduction of equity share
capital, the objector GIIC or any other shareholder in this regard, will suffer
heavy loss as contended before this Court. Part B of the Scheme specifically
deals with the shareholders and it is clearly stated that for every ten equity
shares of Rs. 10 each held by the equity shareholders, the petitioner shall
cancel four (4) equity shares and in lieu of such cancellation create, issue
and allot four (4) non-cumulative redeemable preference shares of Rs. 10 each
with a coupon of 0.01% redeemable in four (4) equal yearly installments
starting from October 1, 2017 and the existing equity shareholders shall
continue to hold the remaining six (6) equity shares held by them as equity
shares of Rs. 10 each fully paid, without any alterations to the rights
attached thereto. It is, therefore, not correct to state that by virtue of such
reduction of equity share capital, the Equity Shareholders including the Objector
GIIC will suffer very heavy loss.
27. Even otherwise, the Hon’ble Supreme Court in the case of Miheer
H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp. Cas. 792 has observed
in the context of Scheme of Amalgamation that once the broad parameters about
the requirements of Scheme for getting sanction of the Court are found to have
been met, the Court will have no further jurisdiction to sit in appeal over the
commercial wisdom of the majority of the class of persons who with their open
eyes have given their approval to the Scheme. Even if in the view of the Court,
there would be a better Scheme for the company and its members or Creditors for
whom the Scheme is framed. The Hon’ble Supreme Court has further observed that
the bona fides of the majority acting as a group have to be examined,
vis-a-vis, the Scheme in question and not the bona fides of the person whose
personal interest might be different from the interests of the voters as a
class. The bona fides of a person can only be relevant if it can be established
with reasonable certainty that he represents the majority or is the controller
of the majority. These observations are equally applicable to the facts of the
present case. First of all, the objector GIIC has not remained present at the
meeting nor it represents the majority of the Equity Shareholders. The
objection raised by GIIC on this count is, therefore, not sustainable and
hence, it is rejected.
28. As far as the variation of the rights of the Equity Shareholders
and violation of the Provisions of sections 106 and 107 of the Companies Act,
1956 are concerned, the Court is of the view that there is no variation of
rights as such and there is no violation of the provisions contained in
sections 106 and 107 of the Act. As a matter of fact, these provisions have no
application to the facts of the present case. The variation referred to in
section 106 is variation to the prejudice of any class of shareholders, and not
any variation adding to or enhancing rights of any class. It is only where a
variation involves the curtailment of the rights of any class or classes of
shareholders, the consent or sanction of such class or classes will be
necessary. The section relates to variation and abrogation of rights attached
to shares and has no application to cancellation of shares or a reduction of
capital. Similarly, increasing the capital of a company does not amount to
varying class rights. The question arose before the Bombay High Court in the
case of Spindel Fabrik Suessen v. Suessen Textile Bearing Ltd. [1989] 2 CLA 202
(Bom.) wherein the promise of a company to its foreign collaborator that he
would be entitled to 26% of the Company’s equity was held to be not breached
when the Company resolved in accordance with its articles and in compliance
with section 81(1A) to capitalise the interest due to the Financial
Institutions in respect of their loans and to issue them in lieu thereof equity
shares in the Company. The Bombay High Court refused to stay the implementation
of the issue. Twenty-six per cent of the equity held by a shareholder does not
make him a class by itself unless he has some special rights attached to his
holding. Here in the present case, as per the Restructuring Package approved by
CDR Empowered Group, unsecured Loans of Rs. 200 crores from the promoters would
be converted into Equity (before the write down of equity capital) and would be
subject to write down by 40%. The Equity Share Capital existing/proposed to be
converted by the promoters, would be written down by 40% by allotment of .01%
cumulative redeemable preference shares. Likewise, the Company is under an
obligation to allot Equity Shares at par to Financial Institutions/Banks by way
of conversion of a part of assistance to the extent of Rs. 175 crores. Thus,
this simultaneous exercise of increasing the Equity Share Capital as a result
of the Restructuring Package approved by CDR Empowered Group and the reduction
of Equity Share Capital, in no way, can be considered as the variation of the
rights of the Equity Shareholders including the Objector-GIIC.
29. Taking overall view of the matter and considering the proposed
Scheme of reduction in a larger prospective, the Court is satisfied that there
is no reason not to confirm the proposed action of the petitioner to reduce its
Share Capital. The said proposal is likely to improve the financial resources
of the Company and to increase the share of profit available for expansion and
growth. The said proposal does not involve diminution of any liability in
respect of unpaid capital or the payment to any shareholder of any paid-up
share capital. Accordingly, the Resolution dated 19-7-2003 is hereby confirmed.
30.
The form of the Minute proposed to be registered under section 103(1)(b)
is as follows:—
MINUTE UNDER SECTION
103(1)
(a) “The issued, subscribed and paid up
equity capital of Essar Steel Ltd. was by virtue of a Special Resolution of the
Company and by virtue of the sanction granted by the High Court of Gujarat on the
day of 28th February, 2005, reduced from Rs. 507,96,98,519 (Rupees Five Hundred
Seven Crores Ninety Six Lacs Ninety Eight Thousand Five Hundred Nineteen only)
divided into 51,18,32,783 Equity Shares of Rs. 10 each into Rs. 304,78,19,111
(Rupees Three Hundred Four Crores Seventy Eight Lacs Nineteen Thousand One
Hundred Eleven Only) divided into 30,70,99,670 equity shares of Rs. 10 each.
31. The procedure laid down under section 102(2) and (3) of the Act, as
regards the creditors is hereby dispensed with. The petitioner is also
permitted to dispense with the use of the words “and reduced”.
32. The petitioner is directed to publish the notice of confirmation
of reduction of capital and approving of the minutes in the “Indian Express”
English Daily Vadodara Edition and “Gujarat Mitra” Gujarati Daily Surat Edition
within 14 days of the registration of the order with the Registrar of
Companies.
33.
The petition is accordingly disposed of with no order as to costs.
[1940] 10 COMP. CAS. 1 (RANGOON)
HIGH COURT OF RANGOON
Company Ltd., In re
SHAW, J.
CIVIL MISC. NO. 174 OF 1937
JUNE 16, 1939
R.
Clark and De, for the Petitioner.
B.C Paul, for
certain shareholder Objectors.
ORDER.
Shaw, J.—This application of the Bengal-Burma Steam Navigation
Co., Ltd., is for the confirmation by the Court of the reduction of its share
capital from Rs. 25,00,000 to Rs. 2,00,000 a special resolution to that effect
having been passed. In conjunction with that resolution there was also a
resolution that after the said reduction was sanctioned by the Court the share
capital of the company was to be increased to Rs. 50,00,000 by the issue of new
shares. The prayer of the petition was also for sanction to be accorded to the
scheme of re-organization embodied in the resolutions but as no sanction of the
Court is necessary under the Companies Act for the increase of the company's
share capital by the issue of new shares the learned advocate at the hearing
confined himself only to what was required by Section 56 of the Act. The other
matter was merely treated as the back ground for the action taken to reduce the
share capital. This had the effect of cutting down the ground from under the
feet of the objectors, for their main grievance was founded on what they imagined
would be the benefit Which would be derived by the new shareholders at the
expense of the present shareholders.
Mr. B.C. Paul
who argued the case for the objectors referred to In re Development Company of
Central and West Africa (1902,1 Ch. 547) as authority for the proposition that
the Court should go into the matter of the increase of capital. But it will be
seen that there the reduction scheme in its entirety really involved an
increase of capital and an issue of part thereof at 99 per cent. discount
without any consideration to the company. It was not suggested that any part of
the capital was lost or unrepresented by available assets or that any sum
should be returned to the shareholders as being in excess of the wants of the
company. Because the scheme was really for an increase of capital and for the
extent of the increase of nominal capital the company would receive no
consideration, the scheme was held to be illegal. Looking generally at the
scheme which will follow the reduction in the present case it is, of course
dependent upon the sanction of the reduction, but it is purely for the purpose
of obtaining further capital for the company, and by the issue of new shares
the company will obtain consideration to the extent of, it is hoped, Rs.
48,00,000. In Burland v. Early (1902 AC 83), it was stated at (page 93).
"It is
an elementary principle of the law relating to joint stock companies that the
Court will not interfere with the internal management of companies acting
within their powers, and in fact has no jurisdiction to do so."
It is
admitted on behalf of the objectors by Mr. B.C. Paul that there is nothing
objectionable in the resolution per se to increase the share capital of the
company by the method proposed. It is only because it happened to have been
mentioned in the petition, followed by a prayer now withdrawn, that advantage
was sought to be taken of it to go into the question whether the increase of
capital would not result eventually in the present shareholders being placed in
an unfair position as compared with the new shareholders. In considering the
question whether the reduction now proposed was unfair, it had to be admitted
that except by reference to the proposed new issue of shares there was no
unfairness. There is now only one class of shareholders, although the Articles
of Association speak of capitalist shareholders and ordinary shareholders. The
capitalist shareholders are those holding 400 shares or more and the ordinary
shareholders are those holding less than 400 shares but holding 40 or more
shares, and the classification is made for the purpose of the appointment of
directors, provision being made for a proportionate number of ordinary
shareholders and capitalist shareholders to be directors.
Sir George
Jessel, M.R., in In re Ebbw Vale Steel, Iron and Coal Co., [1877] (4 Ch. D.
827), regretted, as the law then stood, that he could not accede to the
application for sanction to a reduction of capital. He stated that when a joint
stock company has lost a portion of its capital nothing could be more
beneficial to the company than to admit that loss — to write it off — and, if
it chose to go on trading, to trade with the diminished capital which remained,
the dividend being declared on the capital actually remaining. In British and
American Trustee and Finance Corporation v. Couper, (1894, A.C. 399), the House
of Lords held that the reduction of capital was within the powers conferred by
the Companies Act, 1867 and 1877, and that the arrangement being a fair and
equitable one there was no reason why it should not be confirmed. Lord
Macnaghten stated:
"The
proposed arrangement has been approved by special resolution at general
meetings, in which the American shareholders apparently took no part.
The application to the Court was for an order confirming a reduction of capital
to meet the arrangement. It is for the company, and the company alone, to judge
of the prudence of the course proposed."
The Court had to be satisfied that the reduction was
fair and equitable to all concerned, as between different classes of
shareholders. The reduction here is shared equally by all the shareholders who
are all of one class. Standing by itself no fault can be found with the
reduction. The objectors have some fears for the future, but this Court's function
does not extend to the exercise of a paternal care of the shareholders of a
company so as to make it interfere in the internal management of a company
acting within its powers. Art. 68 of the Articles of Association of the
petitioner company empowers it to reduce its capital by cancelling capital
which has been lost or is unrepresented by available assets, or reducing the
liability on the shares, or otherwise as may seem expedient, etc. Art. 64 of
the Articles of Association empowers the company to increase the capital by the
creation of the new shares of such amount as may be deemed expedient, and Arts.
65, 66 and 67 contain provisions regarding the issue of new shares. Section
105(c), Companies Act, should be read with Art. 67 of the Articles of Association.
Art. 71 deals with the modification of rights as between different classes of
shareholders. Mr. B.C. Pal relied on In re Barrow Haematite Steel Co. (No. 2)
(1900 2 Ch.D. 846) wherein it was held that the Court would not confirm a
reduction of capital unless satisfied that it would not work unjustly and
inequitably and the Court refused to confirm a reduction on the ground (inter
alia) that the reduction would benefit the ordinary shareholders at the expense
of the preference shareholders, also that in ascertaining the available assets
of a company for the purpose of reduction of capital, the amounts of reserve
and unappropriated profit and the value of goodwill were to be taken into
account. In Poole v. National Bank of China, Ltd., (1907 A.C. 229) Lord
Macnaghten referred to In re Barrow
Haematite Steel Co. (No. 2) (1900 2 Ch.D. 846) saying "where the
scheme proposed was obviously unfair to the preference shareholders and the
petition was very properly dismissed there are some expressions in the judgment
of the learned Judge who decided the case which, taken apart from the context,
may appear to support that contention,"
in dealing with the argument that the Court had no
jurisdiction to entertain a petition for the
reduction of capital unless it be
proved that the capital which the company proposed to cancel was lost or
unrepresented by available assets. Further on he stated:
"The condition that gives jurisdiction is not proof of loss of capital or proof that capital is unrepresented by available assets, or that capital is in excess of the wants of the company. The jurisdiction arises whenever the company seeking reduction has duly passed a special resolution to that effect."
Again:
"In the
present case creditors are not concerned at all. The reduction does not involve
the diminution of any liability in respect of unpaid capital or the payment to
any shareholder of any paid-up capital. The only questions therefore to be
considered are these: 1. Ought the Court to refuse its sanction to the reduction
out of regard to the interests of those members of the public who may be
induced to take shares in the Company? and 2. Is the reduction fair and
equitable as between the different classes of shareholders?"
In the
present case creditors are not concerned at all, and the reduction does not
involve the diminution of any liability in respect of unpaid capital or the
payment to any shareholder of any paid-up capital. The second question does not
arise for the reason that there is only one class of shareholders to be
considered, and no differences are made among the one class of shareholders.
The first question is the only one for consideration, and I have not heard any
suggestion how any member of the public who may be induced to take shares in
the company can be adversely affected. It may be that there should be some
evidence of capital being lost or unrepresented by available assets, because of
the wording of Section 55, sub-section (1) Clause (b), and in view of the
observations of Lord Parker in Caldwell v. Caldwell and Co. (Paper-makers)
Ltd., (1916 W.N. 70), where he stated that his own practice had been to insist
on prima facie evidence of the existence of the state of facts referred to in
the resolution; if no such prima facie evidence were forthcoming, it may well
be that the special resolution had been passed under the influence of some
mistake or some misrepresentation as to the true facts, and it would be unfair
to the minority if not also to the majority of shareholders to confirm a
reduction voted under such circumstances; and after some further argument he
concluded by saying that he still thought therefore that whether the reduction
of capital was based on the ground that capital had been lost or was
unrepresented by available assets, it was, though not necessary at any rate
wise and prudent, to insist on some evidence of the fact. Such evidence is
forthcoming in this case. With the petition was filed an affidavit of the
Chairman of the Board of Directors in which he stated that the special resolution
was passed and that at the time when the said special resolution was passed
almost the whole of the paid-up capital had been lost or was not represented by
available assets, and he produced a true copy of the balance sheet and profit
and loss account of the company as at 31st August 1936, which showed the loss.
At the
hearing that affidavit was supplemented by the evidence of the secretary of the
company, who produced the minute book of the general meetings of the company
and also the book containing all the profit and loss accounts and balance
sheets since the formation of the company. The true position was fully set out
in the circular to the shareholders of the company dated 29th April 1937,
issued with a notice bearing the same date of an extraordinary general meeting
of the company to pass the special resolution for reduction of the capital and
other resolutions. It will be seen that by using the general reserve fund
amounting to Rs. 46,703 11-6, the net loss would be Rs. 11,75,506-1-3. The
paid-up capital (including 5261 shares forfeited with Rs. 54,875 paid-up
thereon) amounted to Rs. 12,43,075. There would be left as capital Rupees
67,568-14-9. The managing agents were agreeable to give up Rupees 27,487-1-3
out of the commission amounting Rs. 47,465-15-0 due to them. In that way the
amount of capital left over after wiping off the loss and the reserve fund
would be increased to Rupees 95,056. That is how the reduction to Rs. 2 of the
Rs. 25 fully paid-up shares was arrived at, for, there were 47,528 shares
issued and fully paid-up. The figures are all to be found in the profit and
loss account for the year ending 31st August 1936, and the balance sheet as at
31st August 1936.
As I have
said, the reason for the objections to the application was the fact that other
resolutions dealing with matters beyond the reduction were also passed. But in
an application such as this, under Section 56, Companies Act, the Court is only
concerned to confirm the proposed reduction and not the resolutions passed by
the company. This was laid down by Sterling J., in In re Hyderabad (Deccan) Co.
Lt, (1897, 75 L.T. 23), who stated it was the duty of the Court to confirm the
reduction if it was satisfied as to its fairness. That is all the Court is
asked to do on this application. An attempt has been made to induce the Court
to go into the question of the validity of the resolution. The shareholders who
originally objected to the application and who were represented by Mr. J.R,
Chowdhury have withdrawn their objections. They, along with others, had filed
Civil Regular No. 217 of 1937 for a declaration that the special resolution
passed at the special general meeting of the company of 4th July 1937, for
reduction of share capital and of the value of paid-up shares was null and void
and for an injunction not to give effect to the resolution. That suit was
withdrawn in consequence of a compromise entered into between the plaintiffs
and the defendants, after a notice by advertisement of the proposed settlement
of the suit was given to all the shareholders of the company as the suit was a
representative one. The objectors who came in and who were represented by Mr.
B.C. Paul and Mr. M.I. Khan do not wish to continue the suit in place of the
plaintiffs who desired to withdraw from the suit. Their only object was to be
heard in this application. They had appeared late for the purpose but their
appearance was not objected to by the company and their objections being to
this application and not to the compromise were transferred to this application.
There were some 86 shareholders represented by Mr. P.B. Sen, who had entered
appearance and filed objections on this application. On the day the compromise
petition was filed in the suit Mr. P.B. Sen withdrew his appearance for want of
further instructions. When this application came on for hearing Mr. B.C. Paul
appeared for the five shareholders whose objections were filed in the suit. Mr.
M.I. Khan failed to appear, but three of the six shareholders who instructed
him were present in person. One of the 86 shareholders who had previously
instructed Mr. P.B. Sen also was present in person.
I understand
these unrepresented shareholders to say that they left the matter to the Court
to see that justice was done because they knew nothing about the matter. On the
second day of the hearing of the application Mr. B.C. Paul filed a power on
behalf of the one shareholder out of the 86 above referred to. He is named
Belayethaly. On his behalf Mr. B.C. Paul desired to take objection to the
validity of the meeting at which the special resolution was passed and to
contend that the resolution was invalid. I heard both him and Mr. Clark on the
point, and I decided that I could not allow that objection to be now gone into.
It was obviously a matter that could not be agitated in an application under
Section 56, Companies Act, and was therefore made the subject matter of a suit
instituted a few days before this application was actually filed. After
succeeding in holding up this application for a considerable time that suit was
eventually dismissed upon withdrawal, after notice to all the shareholders,
none of whom chose to continue the suit. Belayethaly was a party in this
application which was to be heard with the suit, and he did not choose to carry
on that suit. I am not sure if he was not present on the day that the
compromise was mentioned.
The question
of the validity of the resolution cannot be decided in this application. The
opportunity to have that decision in the suit has been lost. As matters stand,
the resolution was duly passed at an extraordinary general meeting — no one
disputes that. The minutes produced by the Secretary are prima facie evidence
of the matters stated in such minutes — see Art. 141 of the Articles of
Association — and the minutes of the adjourned extraordinary general meeting
held on 4th July 1937 are to be found from page 55 onwards of the Minute Book,
Ex. A. That same day the adjourned ordinary general meeting had been held, as
entered from page 52 of Ex. A. at which a resolution was passed that the
audited balance sheet and the profit and loss account of the company together
with Director's Report for the year ended 31st August 1936, a copy of which had
been sent to each of the shareholders, be adopted. There was only one
dissentient. At the extraordinary general meeting which followed, the Chairman
made a speech in moving the resolution for reduction and the other resolutions.
At the end of that speech the resolutions being duly seconded, were put to the
vote and declared passed unanimously. The passing of the resolutions concerning
the increase of capital by the issue of new shares was put through at the same
time according to English practice, as will be found in Palmer's Company
Precedents; (Edn. 13) Part I, page 1168. It is a matter of procedure concerning
the internal management of the company's affairs upon which I express no
opinion. That capital was lost or was not represented by the available assets
has been proved by the evidence of the Chairman of the Board of Directors and
by the profit and loss account and balance sheet as at 31st August 1936, in
exhibit. These accounts were audited by the company's auditors and approved by
a general meeting. Under Art. 184 of
the Articles of Association of the company, the accounts are now conclusive
of what they contain. Any attempt now to challenge them in any particular is
not permissible. What should or should not be included in the accounts cannot
now be considered. There is nothing in this case corresponding to what occurred
in In re Abstainers and General Insurance Co., (1891 2 Ch. D. 124) and so its
application does not arise.
I may add that nothing was brought forward at the
ordinary general meeting or at the extraordinary general meeting to justify the
Court going into any matter as having arisen at those meetings either in
relation to the accounts or in regard to the reduction. I have referred to
Carruth v. Imperial Chemical Industries, Ltd., (1937 2 All E.R. 422) and I
cannot find anything in that case to assist the objectors. Considering the
reduction of the capital from the point of view as to whether it was necessary
because of capital being lost or not represented by available assets, from the
statement I have set out earlier it is clear that the reduction has been shown
to be proper and not unfair to the whole body of the shareholders. The
reduction of capital to be effected by the special resolution numbered 1,
mentioned in para. 12 of the petition is confirmed, and the form of minute
contained in paragraph 15 of the petition is approved. The addition of the
words "and reduced" to the company's name is dispensed with
altogether. Let a notice of the registration of the order and of the minute be
published in one issue of the "Burma Gazette" and three issues of the
"Ban-gala Gazette" As regards costs the matter has to be fully
considered by the Court even if there had been no objection. Consequently, I
award no costs against the objectors although they have not been successful.
They are certainly not entitled to any costs to be paid to them out of the
company's funds.
[1989] 66 COMP. CAS. 387
(MP)
HIGH COURT OF
MADHYA PRADESH
Indian National Press (Indore) Ltd., In re
P.D.
MULYE J.
COMPANY PETITION NO. 6 OF 1986
NOVEMBER 21, 1986
R.G. Waghmare for the
Petitioner.
The petitioner company,
namely the Indian National Press (Indore) Limited, has filed this petition
under section 101 of the Companies Act, 1956, for confirming the resolution
passed by the company regarding reduction of its share capital.
The petitioner-company was
registered on February 10, 1983 under the provisions of the Companies Act, 1956
as a company with limited liability. The registered office of the company is
situated at Free. Press House, 3/54, Press Complex, Agra-Bombay Road,
Indore-452 008 (MP).
The objects of the company
are :
(a) To carry on in India or abroad' the business of printing
and publishing newspaper, magazines, journals, books, news letters, pamphlets
and any other daily or periodical in any Indian or foreign languages, under any
name including names/titles registered by Indian National Press (Bombay) Ltd.
with the Registrar of News papers, Govt. of India, New Delhi.
(b) To carry on business as importer, exporter, agent,
broker, stockists, distributors, processors, manufacturers or otherwise to buy,
sell, exchange and deal in all commodities, materials, things and articles used
in the business of printing and publishing.
(c) To carry on the business of printers, publishers,
stationers, lithographers, stereotypers, electrotypers, photographic printers,
photo lithographers, chrome lithographer photographers, book binders, on job
basis or contract basis or otherwise.
(d) To carry on business as importers, exporters, agents,
brokers, stockists, distributors, processor, manufacturer or otherwise buy,
sell, exchange and deal in all commodities, things and articles mentioned in
the object clause of the company under these presents.
(e) To amalgamate or merge with any other company or to act
as a subsidiary or holding company for any other company and to enter into
partnership, with any other person, firm or company club, trust, association or
enter into any arrangement for sharing profits or losses, union of interest,
co-operation of association of persons, joint ventures or reciprocal concession
for attainment of main, incidental and other objects to the company under these
presents.
The capital of the company
is Rs. 25,000,00 divided into 25,000 equity shares of Rs. 100 each of which
20,506 equity shares have been issued and have been fully paid up or credited
as fully paid up.
Shortly after its
incorporation, the company commenced its business and has since then been
carrying on its business of printing and publishing newspapers, etc., and are
printers and publishers of the Indore edition of the Free Press Journal.
The memorandum and articles
of association of the said company are filed as annexure-A. By article 11 of
the articles of association of the company, it is provided that the company
may, from time to time, reduce its capital by a special resolution, the
wordings of which are as follows :
"The company may, from
time to time, by special resolution, reduce its capital in any manner for the
time being authorised by law and in particular (without prejudice to the
generality of the power) capital may be paid off on the footing that it may be
called up again or otherwise. This article is not to derogate from any power
the company would have if it were omitted."
The company, since its inception,
has been incurring heavy losses due to severe economic and financial
constraints in the newspaper industry and according to the annual report and
accounts of the company for the year ended December 31, 1985 (annexure-B), the
company has accumulated losses of Rs. 39,52,38623. Further, according to the
company, although there is a surplus in the present working, it is not adequate
to recover the total loss in the very near future. Hence taking into
consideration all the losses suffered, the capital of the company is not fairly
represented, for, with the available assets, it would be impossible to make
good the capital which is already lost and not represented by available assets.
Further, according to the
company, the accumulated losses will adversely affect the prospects of
obtaining institutional finance which will be required for the development and
modernisation of the company. Further, dividends can be declared only after set
off of the accumulated losses against future profits, in terms of section 205
of the Companies Act, 1956. The company is also not able to apply for
enlistment of the shares with a recognised stock exchange on account of the
large accumulated losses as this comes against the guideline issued in this
regard. Hence, unless the company is able to write off the losses or totally
restructure the capital base, it will affect the future of the company and the
shareholders will be deprived of any return on their investment.
Therefore, the company, in
order to give a true and fair view of the capital structure after considering
the facts referred hereinabove and the report of the auditors of the company,
M/s. D.Y. Ranade & Co., thought it necessary to reduce the capital at least
by Rs. 18,45,540 out of the said sum of Rs. 39,52,386 23 so that a true and
fair position of the capital structure of the company is reflected in the
balance-sheet.
Further, according to the
company, the proposed reduction is for the benefit of the company and its
shareholders and by the said reduction, the company is in a position to give a
true and fair view of the capital structure of the company to the outsiders who
have dealings and transactions with the company and the company will also be
able to reduce its expenses which is adding to the losses that are being
incurred by the company. This will also be economical for the company and its
shareholders.
Therefore, by a special
resolution of the company, passed in accordance with section 189 of the
Companies Act, 1956, at an extraordinary general meeting held on September 8,
1986, for which notice dated August 30, 1986 (annexure C), was issued, it was
unanimously resolved that the capital of the company should be reduced by
reducing the value of the share of the company subject to the confirmation of
the High Court of M.P. Bench at Indore and the following resolution was adopted
and the minutes of the said extraordinary general meeting are annexure E :
"Resolved
pursuant to section 100 of the Companies Act,
1956 and subject to confirmation of the Hon'ble High Court of Madhya Pradesh
Bench at Indore that the paid-up equity capital of the company be reduced from
Rs. 20,50,600 divided into 20,506 equity shares of Rs. 100 each fully paid up
and that such reduction be effected by cancellation to the extent of Rs. 90 share
of the paid up capital of the company which has been lost so as to bring the
paid up capital almost in parity with and making it representative of the
assets at present held by the company.
RESOLVED further that the capital clause of the
memorandum of association of the company be accordingly altered after the
aforesaid reduction becomes effective and operative.
RESOLVED further that the company should take
necessary steps for obtaining confirmation of the Hon'ble High Court for the
aforesaid resolution and scheme of reduction and on such confirmation each of
the shareholders would present his/her or their share certificates to the
company so that the share certificates be suitably amended to give effect to
their reduction."
Further, according to the
company, the proposed reduction of the capital does not involve either
diminution of any liability in respect of any paid up capital of the company or
the payment to any shareholder of any paid up capital. The proposed reduction
as has been stated hereinabove is by cancelling the paid up capital which has
been lost or is not represented by available assets. The company has creditors
and the proposed reduction will not be prejudicial to the interest of the
creditors in any manner whatsoever.
The form of the minutes
proposed to be registered under section 103(1)(b)of the Companies Act, 1956, is
as follows :
"Paid up equity share
capital of the company, namely, Indian National Press (Indore) Limited
henceforth is Rs. 2,05,060 divided into 20,506 equity shares of Rs. 10 each
reduced from Rs. 20,50,600 divided into 20,506 equity shares of Rs. 100 each.
So, at the date of registration of these minutes, all the said shares have been
issued and are deemed to be fully paid up."
Further, according to the
company, unless the orders herein are made, the interest of the company and its
shareholders will be seriously prejudiced and the company and its shareholders
will have to suffer serious loss and injury and the shareholders, in the near
future, will have no hope of any return of their capital invested in the shares
in, and of, the company and it is just and equitable that the proposed
reduction be confirmed by this court.
The petitioner company has,
therefore, prayed that :
(a) the petitioner be allowed reduction of the capital
resolved by a special resolution set out in paragraph 8 of the petition be
confirmed;
(b) the
proposed minutes be approved ;
(c) the
suffixed word "and reduced" to the name of the company be dispensed
with.
After the said petition was
filed under rule 46 of the Companies (Court) Rules, summons in Form No. 19 was
published in the English edition of the Free Press Journal published from
Indore dated September 29, 1986, the summons in Hindi was published in the Free
Press Journal, Indore dated September 30, 1986, in the English edition of the
Free Press Journal published from Bombay dated September 27, 1986, and in the
Hindi edition of the Navshakti published from Bombay dated September 27, 1986.
The Gazette notification in the M.P. Gazette was also published in the Gazette
dated October 10, 1986.
Shri Shantilal Porwal, son
of Ganpatsingh Porwal, who is working as an accountant in the said company has
filed his affidavit dated October 29, 1986, enclosing therewith a list of
creditors, as on September 30, 1986, giving all the necessary details, who have
given their "no objection" to the reduction, numbering 1 to 25,
amounting to Rs. 31,84,510.89 as also the list of creditors, including
depositors, from whom the no-objection consent letter has not been received,
numbering 27 to 38 amounting to Rs. 1,20,83.12.
After the publication of
the notices issued by this court, none has appeared so far to oppose this
petition.
Learned counsel for the
petitioner-company, Shri R.G. Waghmare, submitted that so far as the creditors,
including the depositors who have not given their consent to the reduction and
who have to recover a sum of Rs. 1,20,831.12, are concerned, for the security
of their dues, the company is prepared to furnish bank guarantee of a
nationalised bank for which a reasonable time be given to the company to
furnish the same in the name of the Additional Registrar of this court at
Indore.
The need for reducing
capital may arise in various ways, for example, trading losses, heavy capital
expenses, and assets of reduced or doubtful value. As a result, the original
capital may either have become lost or a company may find that it has more
resources than it can profitably employ. In either case, the need may arise to
adjust the relation between capital and assets.
The company has the right
to determine the extent, the mode and incidence of the reduction of its
capital. But the court, before it proceeds to confirm the reduction of capital,
must see that the interests of the minority and that of the creditors are adequately
protected and there is no unfairness to it, even though it is a domestic matter
of the company. The power of confirming or refusing to confirm the special
resolution of a company to reduce its capital is conferred on the court in
order to enable it to protect the interest of person who dissented or even of
persons who did not appear, except on the argument and hearing of the
petitioner.
In the present case,
according to the articles of association, the company is empowered to reduce
its capital by passing a special resolution in accordance with law, which has
been done in the present case. Some creditors (marked as annexure A to W) have,
in writing, submitted that they have no objection/consent to the proposed
reduction of capital. In the present case, there is nothing on record to
indicate that the proposal is unjust or unfair. That apart, the company is
prepared to give a bank guarantee of a nationalised bank by way of security
relating to the creditors who have not given their consent to the proposed
reduction.
In the result, this
petition is allowed. The special resolution passed by the company for reduction
of its share capital is confirmed minute submitted by the company is approved.
The company shall, within a fortnight from today, publish in the newspaper
"The Free Press Journal" published from Bombay and Indore, notice of
the registration of the order and of the minute as have been approved; that
within a period of two weeks from today, the words "and reduced"
shall be added to the name of the company as the last words thereof; that the
company shall, within two weeks from today, publish the reason for reduction or
the causes that led to it in the aforesaid journals published from Bombay and
Indore ; that a certified copy of this order, including the minute as approved,
be delivered to the Registrar of Companies within 21 days from this date; that
notice of the registration by the Registrar of Companies of this order and of
the said minute be published once each in the M.P. Gazette and in the Free
Press Journal published from Indore within 14 days of the registration
approved. The company shall, within a period of two weeks from today, furnish a
bank guarantee of a nationalished bank to the tune of Rs. 1,20,831.12 in favour
of the Additional Registrar of this court by way of security for the amount
payable to the creditors who have not objected nor consented to the proposed
reduction.
The petition is disposed of
accordingly.
[1966] 36 COMP.CAS. 356 (HL)
In Re Lucania Temperance Billiard
Halls (London) Ltd.
BUCKLEY,
J.
OCTOBER 25, NOVEMBER 8, 1965
ORDER
BUCKLEY,
J. - Read the following
judgment which stated the facts substantially as set out above and continued: Under
section 66 of the Companies Act, 1948, a reduction of capital requires the
confirmation of the court. Section 67 of the Act regulates applications to the
court for such confirmation. Sub-section (2) of that section provides that,
where the proposed reduction of share capital involves either diminution of
liability in respect of unpaid share capital or the payment to any shareholder
of any paid-up share capital every creditor who is entitled to any debt or
claim against the company which could be proved in a winding-up is entitled to
object.
Sub-paragraph
(b) of that subsection requires the court to settle a list of creditors so
entitled, for which purpose an inquiry is necessary. Under sub-paragraph (c) of
the subsection the court cannot confirm the reduction in the face of the
objection of any creditor on the list unless the company secures payment of
that creditor's debt or claim, in which case the court may dispense with the
creditor's consent.
Such payment
must be secured by appropriating, as the court may direct, the following
amount: "(i) if the company admits the full amount of the debt or claim,
or, though not admitting it, is willing to provide for it, then the full amount
of the debt or claim; (ii) if the company does not admit and is not willing to
provide for the full amount of the debt or claim, or if the amount is
contingent or not ascertained, then an amount fixed by the court after the like
inquiry and adjudication as if the company were being wound up by the
court."
This
procedure is obligatory unless the court otherwise directs. But under section
67(3): "Where a proposed reduction of share capital involves either the
diminution of any liability in respect of unpaid share capital or the payment
to any shareholder of any paid-up share capital, the court may, if having
regard to any special circumstances of the case, it thinks proper so to do,
direct that subsection (2) of this section shall not apply as regards any class
or any classes of creditors."
The present
application is made under subsection (3). The court will not in the absence of
special circumstances give any direction under section 67(3), but it will do so
if it is satisfied that having regard to the value of the company's liquid
assets, or for any other reason, no creditor who might otherwise be entitled to
object to the reduction will be prejudiced by it. Thus, if it is established
that the company has cash and trustee securities of a sufficient value to cover
all the provable liabilities as well as any amount proposed to be returned to
the shareholders with a reasonable margin of safety to cover oversights or
contingencies, this will usually be regarded by the court as a special
circumstance justifying exemption under section 67(3). Or if the discharge of
all the company's provable debts is guaranteed to the court's satisfaction,
this may be regarded as a sufficient special circumstance.
In the
present case the company has sufficient cash resources to cover its
liabilities, apart from those under the leases of its various properties, as
well as the amount proposed to be returned to shareholders with an adequate
margin.
The question
is whether in these circumstances the case is one in which the court can, without
more, properly direct that section 67(2) shall not apply to any class of
creditors of the company with the consequence that it will not apply to the
company's landlords.
The practice
usually followed hitherto, where a company owns a leasehold property and a cash
coverage, or a coverage in cash and trustee securities it relied upon as
affording, the necessary special circumstance for the purposes of section
67(3), has been to insist upon that coverage extending to the whole of the rent
to the end of the term of the lease, or where the coverage is insufficient for
this and no acceptable guarantee is forthcoming, to insist upon the landlord's
written consent to the reduction of capital being produced as well as his
written agreement to postpone his claim to those of other existing creditors.
Something a bank guarantee of the debts of all creditors other than the
landlord or landlords has been accepted, coupled with the written consent of
the landlord or landlords to the reduction but without any agreement to
postpone landlords’ claims. Occasionally, and in special circumstances, a bank
guarantee covering possible claims by landlords for a period of, say, ten years
has been accepted without any consents or postponements on the part of any
landlord.
In the
present case it is contended that having regard to the decision of Roxburgh J.
in In re House Property and Investment Co. Ltd [1954] Ch. 576; [1953] 3
W.L.R.1037; [1953] 2 All E.R.1525, possible claims by landlords can be ignored.
The evidence
with regard to the company's leasehold properties is that of the 29 properties
owned by the company 21 are held on terms as to rent or otherwise which are
significantly below current market rates and for a period which is long enough
to give the leases held by the company an appreciable value. It follows that if
the company were to be wound up in the immediate future it would either be able
to dispose of the residue of the respective terms for sums reflecting their
varying values or, in cases where liquidation would operate to determine the
leases, the lessors would benefit from the termination by being able to
negotiate fresh leases on more favourable terms and in consequence would have
no claims as creditors of the company by reason of such termination. The remaining
eight properties are held either for periods which are too short to confer any
premium value or at full current market rates. The surveyor whose affidavit is
filed in support of the application, however, deposes to the fact that he is
satisfied that in no case is the company paying a rent which is in excess of
current market rates, so that in all these cases-that is, the eight properties-
the lessors, though not benefiting from a hypothetical liquidation of the
company, would not have any significant claims as creditors since they would be
able to secure comparable rentals from other tenants.
Special
circumstances to justify a direction under section 67(3) must, in my judgment,
be such that the court is satisfied that so far as can be reasonably foreseen
the relevant creditors will not be adversely affected by the reduction of
capital. The circumstances must, I think, be such that broadly speaking the
creditors affected will at least be no worse off than they would be if they
were permitted to attend upon the application for confirmation of the reduction
of capital and to object. In that case the court could only override a
creditor's objection if the company secured payment of the creditor's debt or
claim by appropriating, a sufficient fund to satisfy the requirements of
section 67(2)(c). If the debt were liquidated and admitted, the fund would have
to be for the full amount of the debt. But a tenant's prospective liability to
his landlords for rent and under lessee's covenants is not liquidated. The question
is in what amount a landlord, as an objecting creditor, could insist upon an
appropriation to secure payment of his claim.
In In re
House Property and Investment Co. Ltd.,[1954] Ch.576. Roxburgh J. was concerned
with a company in liquidation. It was not a case of reduction of capital. A
lessor had demised property to company A for a term of 90 years. That company
went into liquidation and assigned the lessor's consent to company B. Company B
by a supplemental deed covenanted with the lessor that as from a stated past
date it would, during the remainder of the term of the lease, pay the rent and
perform the lessee's covenants under the lease. Company B was thus in the same
contractual relation with the landlord as if it were the original lessee.
Company B later went into members voluntary winding up. In that liquidation the
lease was sold for a large sum to a substantial assignee. There then remained
upwards of 70 years of the term unexpired. The rent was £5,000 a year. A rack-rent would have exceeded
£9,000 a year. The company was
amply solvent, the value of its assets being estimated to exceed it liabilities
by over £2,000,000. The assignee
tendered rent to the lessor, who refused to accept it, claiming to be entitled
in the winding-up of company B to have sufficient assets of that company set
aside to meet all future rent and obligations under the lease. Roxburgh J. held
that that was wrong, that the landlord had no right to refuse to accept the
rent tendered by the assignee and that the tender pro tanto discharged company
B. He further held that the lessor had no right to insist upon any fund being
set aside to answer any future claims by him against company B under the
covenants, although this was a course that the court might adopt. He thought,
however, that occasion to do so would seldom, if ever, arise in future cases.
After
referring to James Smith & Son (Norwood) Ltd. v. Godman [1936] Ch. 216,
C.A., the judge said [1954] Ch. 576,591:
"This is
a decision binding on me that a landlord can prove in the liquidation of the
original lessee company in respect of the original lessee original covenants in
a lease which has been assigned. He proves for the value of the original
lessee's covenants in the particular circumstances of the particular case, the benefit
of which he will lose by the original lessee's dissolution; not, of course, for
the rent, because, if the assignee duly pays the rent, which he will do if the
lease is beneficial, if only to avoid forfeiture, no rent could ever be
recovered from the original lessee; and, of course, precisely the same applies
to the other covenants. If the premises are duly kept in repair, as they
undoubtedly will be by the assignee if the lease is beneficial, if only to
avoid forfeiture, then no sum in cash would ever become payable by the original
lessee...The sum for which a proof could be lodged is the difference between
the market value of this particular lease at the date of valuation (and this
has been agreed between the parties), with the benefit of the original lessee's
covenants, and of the same lease without the benefit of the original lessee's
covenants."
Roxburgh J.
went on to state his reasons for considering that if the court should in any
case think it right for a fund to be set aside to answer future claims of a
landlord against an original lessee who had assigned the lease, it could not be
right to set aside a fund which would cover all future rent for the residue of
the term in a case in which it was unlikely that there would ever be a claim on
the fund at all. He accordingly refused to order any fund to be set aside,
leaving the landlord to pursue his admitted right to prove in the winding-up.
The judge in
that case pointed out the improbability of any claim ever being made by the
landlord on the original lessee under his covenants for payment of rent and so
forth where the lease is a beneficial one. The lease being a beneficial one, no
successor in title of the lessee would be likely to jeopardise it by failure to
pay the rent and to perform the covenants. If an assignee in possession were to
experience difficulty in meeting his obligations, he should, so long as the
lease continued to be beneficial, find no difficulty in disposing of it.
Founding
himself on that authority, Mr. Instone, for the company, says that if the
company were to be put into liquidation, then, having regard to the beneficial
nature of the majority of the leases and what I may call the neutral character
of the rest, being neither beneficial nor onerous, the company's landlords would
be in a position to prove only in very modest sums, if at all, in respect of
future liabilities under the leases. A reduction of capital by repaying paid-up
share capital is, he says, of the nature of a partial liquidation of the
company, and he submits that the company's landlords can insist on no more
favourable treatment in the one case than in the other. Therefore, he
concludes, no provision for meeting potential claims by landlords need be
insisted on in the present case as a condition of a direction under section
67(3) that section 67(2) shall not apply to any class of creditors of the
company.
It seems to
me that that argument ignores the fact that the company remains in possession
of the leaseholds and, so far as I know, is likely to continue to do so for
some years. There are no assignees whose performance of the tenants’
obligations under the leases would relieve the company of any obligations they
might otherwise be under by reason of covenants of the company's part. If the
liquid resources of the company were now to be exhausted, or nearly exhausted,
in paying or making provision for payment of the company's debts to creditors
other than its landlords and in making a cash distribution to its shareholders,
no liquid assets, or very few, would remain out of which the company could meet
liabilities to its landlords accruing under the leases. This would, as it seems
to me, clearly be prejudicial to the landlords.
A claim by a
landlord against a tenant in respect of future rent or future breaches of
covenant under a lease must, whether the tenant be the original lessee or an
assignee of the term, be a claim the amount of which is not ascertained, for in
either case the amount which will eventually accrue due to the landlord will
depend on whether, and if so when, the tenant assigns the term to an assignee,
and also, where the tenant is the original lessee, on the extent to which the
obligations under the lease are discharged by any successor in title of his.
Such a claim, therefore, falls within section 67(2)(c)(ii), which requires the
court to fix the amount to be appropriated in respect of such a claim after the
like inquiry and adjudication as if the company were being wound up by the
court. If in the present case the company were being wound up by the court,
landlords’ claims would be capable of proof under section 316, a just estimate
being made so far as possible of their value. If a company in winding up
remains in possession of leaseholds with a view to realising its property to
better advantage, the landlord may be able to demand payment of the rent in
full as an expense of the winding-up, but otherwise he is restricted to his
right of proof. It would not, I think, be right for the purposes of the
notional winding-up referred to in section 67(2)(c) to treat the leasehold of
which the company is in possession as being retained for the convenience of the
winding-up ; although for a reason which I will explain in a minute it makes
little difference whether the position is regarded in this way or not. In
assessing the amount to be fixed under that subparagraph attention should, in
my judgment, be fixed upon the amount for which any landlord could prove in the
notional winding-up. This amount, however, would depend upon how long in fact
the leasehold property remained in the possession of the company before it was
assigned, surrendered or disclaimed. Down to that date the landlord could prove
for all rent accrued. Upon the assignment of the lease he might also be able to
prove, if the company were the original lessee or otherwise bound by covenant,
for what Roxburgh J. described in a passage I have read as the value of the
lessee's covenants (1) [1954] Ch. 576, 592. But, since that value is one which
takes into account the probability of an assignee duly discharging the tenant's
obligations under the lease, it would, in my judgment, be clearly unfair to
assume for the purposes of the notional liquidation that the liquidator had
made, or would make, such an assignment ; for there is no present prospect, so
far as I am aware, of the company assigning any of its leaseholds and
consequently no prospect of there being any assignees from whom the landlords
can expect anything. An inquiry and adjudication under section 67(2)(c) should,
in my judgment, accordingly proceed on the footing that the company will for an
indefinite period remain in possession of the leaseholds, during which period
the landlords will be entitled to prove for all rent accruing due. As the
position in such that in a winding-up all admitted proofs will be met to the
extent of 20s. in the pound, the result will be the same as if the leaseholds
were retained in the notional liquidation for the convenience of the
winding-up.
However, in
this rather illusory state of affairs, in which the liquidator in a notional
winding-up is to be treated as retaining leaseholds which no liquidator would
normally be likely to retain longer than circumstances demanded, some
recognition of reality must, in my opinion, be admitted in the exercise of the
court's discretion under section 67(3). Where the term for which a leasehold is
held is a long one, it should not, in my judgment, normally be necessary to
insist on the full rent for whole term being included in the amount of any
coverage provided for the purpose of section 67(3). I think that 10 years' rent
should normally suffice to give a landlord adequate protection where the lease
is not an onerous one. I say "normally" because every case should be
dealt with on its own facts. In the present case I consider that ten years'
rent would be sufficient in respect of any of the company's lease holds held
for a term of which more than ten years remains outstanding. If the company can
cover by cash and trustee securities or by a satisfactory guarantee all rents
prospectively payable in respect of its leaseholds during the residues
outstanding of the terms for which they are held, but not exceeding ten years,
I consider that a direction could properly be given under section 67(3)
extending to the company's landlords.
The coverage
which is at present shown to exist is insufficient for this and accordingly, in
my judgment, as, matters stand, the court cannot make the order asked for in
respect of the company's landlords. I do not, however, exclude the possibility
of the company being able to meet this situation by procuring some suitable
guarantee, or in some other way.
BOMBAY HIGH COURT
[2002] 40 SCL 521 (Bom.)
HIGH COURT OF BOMBAY
Hindustan
Dorr-Oliver Ltd., In re
S. J.
VAZIFDAR, J.
COMPANY PETITION NO. 153 OF 2002
COMPANY APPLICATION NO. 573 OF 2001
OCTOBER 21, 2002
Section 101, read with sections 100 and 391,
of the Companies Act, 1956 - Share capital - Reduction of - Application to
court for confirming order, objections by creditors and settlement of list of objecting
creditors - Whether very nature of proceeding under section 101 indicates that
it does not contemplate a full fledged trial of creditor's claim and while
exercising powers under section 101, Court is not entitled to pay over amount
to creditors but only to secure their claim - Held, yes - Whether section
101(2)(c)(ii) only provides for procedure for fixing amount of security and it
does not contemplate a final, determinative and precise adjudication of
creditor's claim - Held, yes - Whether while absence of malafides would not by
itself entitle a company to an order under section 101(3) or deny a creditor an
order under section 101(2)(c), presence of it may well be an important factor
to deny a company an order - Held, yes - Whether there is a distinction between
dispensing with procedure under section 101 on one hand and dispensing with
provisions of section 101(2) on other - Held, yes - Whether even where a list
of creditors is settled under section 101(2)(b), it is not necessary that Court
must pass an order under section 101(2)(c) in favour of each of creditors whose
name is entered in list and Court under section 101(2)(c) is required to pass
an order for payment of security only in respect of those creditors who do not
consent to reduction - Held, yes - Whether financial condition of a company is
a relevant factor while deciding whether an order under section 101(3) is
warranted - Held, yes - To curtail unnecessary expenses of company and ensure
easy returns to investors, company brought a scheme for cancellation of equity
shares held in small lots in lieu of debentures, which was approved by
overwhelming majority of shareholders - In its order High Court noted that
provisions of section 101(2) was dispensed with - Subsequently, finding error in
statement to effect that share capital would not involve payment to any
shareholder, company sought modification of order - Court ordered to issue
notices to all secured creditors and unsecured creditors whose claims exceeded
Rs. 1 lakh - Unsecured creditor company 'T' intervened - Company contended that
procedure of section 101(2) being already dispensed with, unsecured creditors
could not oppose scheme or appeal to secure their debts - Suit was pending to
adjudicate dispute between petitioner and company 'T' as to which of them was
creditor of other - Whether by directing company to give notice of hearing of
petition to unsecured creditors whose claims were in excess of Rs. 1 lakh,
Court instead of going through elaborate procedure provided by section 101(2)(b)
had exercised its power under section 101(3) to limited extent of dispensing
with specified procedure under section 101(2) - Held, yes - Whether in respect
of creditors, who appeared at hearing of petition as to whether or not their
debts ought to be secured by company, Court did not dispense with provisions of
section 101(2) - Held, yes - Whether, therefore, creditors who had appeared
were not only entitled to oppose scheme generally but were also entitled to
apply that their debts be secured - Held, yes - Whether since none of parties
contended that scheme was fraudulent or malafide and further, company's
financial position was strong enough to meet liability of unsecured creditors,
instant scheme of arrangement was to be sanctioned - Held, yes
FACTS
The company presented a scheme for
cancellation of equity shares held in small lots and to issue in lieu thereof
11 per cent secured redeemable non-convertible debentures to curtail
unnecessary cost and ensure easy payment to investors. An over-whelming majority
of the equity shareholders voted in favour of the scheme. On 8-3-2002, order
was passed in which the Court noted that provisions of section 101(2) were
dispensed with. Finding some mistakes in the statement made by the company to
the effect that the proposed reduction of the share capital did not involve
payment to any shareholders of any paid-up share capital, the company asked for
rectification of order and stated that the financial position of the petitioner
was strong and, therefore, the procedure under section 101(2) should be
dispensed with. Fresh order was passed on 4-4-2002 directing company to issue
individual notices to all secured creditors and unsecured creditors whose
claims exceeded Rs. 1 lakh. Individual notices to unsecured creditors whose
claim were at Rs. 1 lakh or less were dispensed with and it was noted that
procedure under section 101(2) was dispensed with. Notices were issued, some
creditors including company 'T' appeared before the Court to secure their
debts. The petitioner company submitted that the entire procedure under section
101 and the requirement of the petitioner to secure the creditors claims had
been dispensed with by the instant Court by its order dated 4-4-2002. According
to the petitioner, the said order directing notices to be given to the
individual creditors merely permitted them to object to the scheme in general.
So, the creditors’ claims need not be settled and the scheme be sanctioned.
HELD
The submission of the petitioner could not be
accepted for more than one reason. The right given to and the protection
provided for creditors under section 101(2) are important and valuable. In a
given case, it is possible that the entire assets of a company can be eroded by
providing payment to the shareholders of the paid-up share capital of the
company. The Court may of course, in a given case if, having regard to any
special circumstances of the case, thinks it proper to do so in exercise of its
powers under section 101(3), direct that the provisions of section 101(2) shall
not apply as regards any class or classes of creditors. The extinguishment of
either this right or the protection of the creditors’ dues, however, cannot
easily be inferred.
In the instant case, it was to verify as to
whether the earlier orders warranted such an inference. The court by its order
dated 8-3-2002 dispensed with the provisions of section 101(2). That, however,
the court did in view of the statement made on behalf of the petitioner that
the proposed reduction of the share capital did not involve payments to any
shareholders of any paid-up share capital. The petitioners, fairly and
responsibly corrected the statement as the position was actually to the
contrary. The moment it was pointed out that the scheme involved payment to the
shareholders of paid-up share capital, which it did, the court in the
subsequent order dated 4-4-2002 did not dispense with the provisions of section
101(2). It confined its order to dispensing with the procedure and not the
provisions of section 101(2).
The difference between dispensing with the
procedure under section 101(2) and dispensing with the provisions of section
101(2) is material and significant. The court itself made a distinction between
the two. In the order dated 8-3-2002, the court directed that the provisions of
section 101(2) were dispensed with. The minutes dated 8-3-2002 provided that
the procedure under section 101(2) should not apply. If there was no
distinction between dispensing with the procedure under section 101(2) and
dispensing with the provisions of section 101(2), it would not have been
necessary to mention in the order again that the provisions of section 101(2)
were dispensed with. In a given case it is possible that the order may use the
term 'procedure' to mean 'provision' and vice-versa. The context of the order
would indicate this. However, in instant case it was not so.
The company itself proceeded on the basis that
there was a distinction between dispensing with the procedure under section 101
on the one hand and dispensing with the provisions of section 101(2) on the
other. That was evident from the fact that after pointing out the inaccuracy in
the statement made on its behalf before the court on 8-3-2002, the company, in
its affidavit dated 18-3-2002, did not even submit that the provisions of
section 101(2) ought to be dispensed with. The company only submitted that the
procedure under section 101(2) be dispensed with.
The fallacy in petitioner's submission was
apparent for another reason. In Company Application, the company requested that
the meeting of the creditors be dispensed with on two grounds. One of the
grounds was that the company undertook to give notice of the hearing of the
petition to the creditors of such value if and as may be directed by the
instant Court. It was on the basis of the application that the court in its
order dated 5-12-2001 dispensed with the convening and holding of the meeting
of the creditors of the company. There was nothing in the order to suggest that
the court while dispensing with the creditors meeting did not take into
consideration the undertaking given by the company to give notice of the
hearing of the petition to all the creditors.
The order dated 5-12-2001 did not affect the
rights of the creditors under section 101(2). Nor did it create any rights in
favour of the creditors. In other words, it was not an order under section
101(3). By dispensing with the holding of the meeting of the creditors in view
of the undertaking of the company to give notice to the creditors of the
hearing of the petition, the Court preserved the right of the creditors to
object to the scheme at the hearing of the petition. The creditors could have
opposed the scheme at the meeting on the ground that their interests were not
secured. No doubt, the Court could even in that event have passed an order
under sub-section (3), but the Court did not do so. It preserved the
consideration of this right of the creditors at the hearing of the petition.
Pursuant to and in view of the said undertaking, the court by the order dated
4-4-2002 directed the company to serve individual notices upon the secured
creditors and unsecured creditors whose claims exceeded Rs.1 lakh.
The substantive right of a creditor under
section 101(2) is to have his claim either paid or secured. The Court in
exercise of powers under section 101(3) is entitled to direct that the
provisions of sub-section (2) shall not apply as regards any class or classes
of creditors. The procedure to enable the Court and the creditors to protect
the interests of the creditors is provided in section 101(2)(b). The order
dated 4-12-2002 dispensed with neither the substantive nor the procedural
rights of the creditors. The procedural rights were only modified by ensuring
that the company would give notice of the hearing of the petition to the
individual creditors, whose claim exceeded Rs.1 lakh. Under section 101(2)(a),
every creditor of the company is entitled to object to the reduction in share
capital. By the order, the Court dispensed with the specific procedure under section
101(2) relating to the settlement of the list of the creditors. The Court
altered the procedure under section 101(2)(b). Thus, the Court exercised its
power under section 101(3) to the limited extent of dispensing with the
specific procedure and not with all the provisions of section 101(2). Instead
of going through the rather elaborate procedure provided by section 101(2)(b),
the Court in exercise of its jurisdiction directed the company to give notice
of the hearing of the petition to unsecured creditors whose claims were in
excess of Rs.1 lakh.
That, in turn, implied that the Court would
consider only the case of those creditors who appeared at the hearing of the
petition as to whether or not their debts ought to be secured by the company.
In respect of such creditors the Court did not dispense with the provisions of
section 101(2) nor was there anything in the said order which restricted the
right of the creditors to appear before the Court only for the limited purpose
of opposing the scheme generally and not for the purpose of enforcing their
rights under section 101(2)(a) and (c).
When the Court settles a list of creditors, it
does so after following the procedure mentioned in section 101(2)(b). The Court
applies its mind as to the rights of the creditors - the nature and amount of
their debts or claims. The Court would enter on the list only those creditors
who at the date fixed by the Court are entitled to any debt or claim which, at
the commencement of the winding up of the company would be admissible in proof
against the company. The dispensation of the procedure and the requirement of
settling the list predicates that the Court has not applied its mind to the
entitlement of any creditor either to object to the scheme or to have his debt
secured. Thus, a creditor in such circumstances, who appears at the hearing of
the petition is entitled to object to the scheme in general as well as apply to
have his claim secured.
The petitioner submitted that if the creditors
were permitted to apply for security under section 101(2)(c)(ii), it would give
them an unfair advantage over other creditors of the same class as they would
succeed in obtaining security in precedence over other creditors whose claims
may be admitted but not secured because of the dispensation order. But the
fallacy in the submission was laid in the proceeding on the basis that the
order dated 4-4-2002 dispensed with the requirement of the company securing the
debts under section 101(2). Considering the view taken, the argument did not
survive.
There was another reason why the submission
could not be accepted. Even where a list of creditors is settled under section
101(2)(b), it is not necessary that the Court must pass an order under section
101(2)(c) in favour of each of the creditors whose name is entered in the list.
The Court under section 101(2)(c) is required to pass an order for payment or
security only in respect of those creditors, who do not consent to the
reduction. Thus, section 101 contemplates a situation where only some creditors
may be paid or the claims of only some of the creditors may be secured. In that
view of the matter also, the petitioner's submission in this regard was
rejected.
If it was held that the notice of the hearing
of the petition given to the creditors did not permit them to make an
application in respect of their rights under section 101(2)(c), it must equally
be held that the notice did not give them a right to oppose the scheme at all.
Such an interpretation would render the direction and the notice issued pursuant
thereto otiose.
Therefore, the creditors who had appeared
before the Court were not only entitled to oppose the scheme generally but were
also entitled to apply that their debts be secured. In fact, the provisions of
section 101, itself make it clear that not every person who claims to be a
creditor of the company is entitled to an order in his favour under section
101(2)(c). Even a creditor whose name has been entered on the list is not
entitled to an order under section 101(2)(c) securing the entire amount, ipso
facto. Where the company does not admit and is not willing to provide security
for the full amount of the debt, the Court is required, in respect of a
creditor entered on the list, to fix the amount after the like enquiry and
adjudication as if the company were being wound up by the Court. The Court may
even dispense with the provisions of section 101(2) in exercise of its powers
under section 101(3). If it were not so, section 101(2)(c)(ii) would have
provided in express terms that the Court is bound to secure every creditor
entered on the list to the extent of the amounts of their debts or claims
determined under section 101(2)(b).
When a company is wound up, a creditor is
entitled either to prove his claim in winding up before the official liquidator
or apply for and obtain leave under section 446 to commence or proceed with
against the company the suit or other legal proceeding. When an application is
made under section 446, the Company Court may permit the creditor to commence
or to initiate a suit against the company. It is not mandatory that the Company
Court must entertain or dispose of such a suit or proceeding itself.
The very nature of the proceeding under
section 101 indicates that it does not necessarily contemplate a full-fledged
trial of the creditor’s claim. Firstly, and especially in a case such as that
of 'T' where a suit or other proceeding had already been initiated, there was
no question of the Company Court relegating the suit to itself. That is a power
specifically conferred upon the Company Court in respect of a company being
wound up. The final determination of such a creditor's claim would be only by
the Court or Tribunal before which the proceedings for recovery were pending.
The same would apply even, in respect of a creditor who has not adopted
proceedings for recovery. While exercising powers under section 101, the Court
is not entitled to pay over the amount to the creditors but only to secure
their claim.
Section 101(2)(c)(ii) only provides for the
procedure for fixing the amount of security. It does not contemplate a final,
determinative and precise adjudication of the creditor’s claim. This coupled
with the fact that the final adjudication of the creditors dues depends upon
the substantive proceedings adopted in a Court of law indicates that a similar
procedure is not contemplated under section 101(2). It was not suggested that a
Court has no power to direct the parties to lead evidence in proceedings under
section 101. But that would be only for the purpose of determining the extent
of the security. The Court is entitled to determine the extent of the security
on the basis of affidavits filed before it in a proceeding under section 101.
The manner and extent of proof must be decided by the Court depending on the facts
of each case.
Under section 101(2)(c)(ii), the Court is
required to fix the amount 'after the like inquiry and adjudication as if the
company were being wound up by the Court'.
Rules 147 to 163 of the Companies (Court)
Rules, 1959 deal with the debts and claims against the company and prescribe
the procedure for determination thereof. The Rules and especially rules 150,
151, 159, 160 and 163 establish that it is permissible for the liquidator to
determine the claims on the basis of the affidavits, which are to be filed in
Form No. 66. The liquidator is entitled to call for the production of vouchers
or further evidence in support of the debt. He is also entitled to call upon
the creditor to attend the investigation in person. The rules establish, therefore,
that a summary procedure is contemplated in proceedings under section
101(2)(c).
The only claim that was contested was that of
'T' Limited. Claims of 'T' were neither admitted nor liquidated. Therefore, the
court did not propose to deal with a situation where the claim of a creditor
was admitted in any manner.
The petitioner had disputed the claim of 'T'.
The petitioner's case was that 'T' committed several breaches of the agreement
and failed to rectify the same despite requests, as a result whereof, the plant
could not be commissioned. In that regard, the petitioner had craved leave to
refer to and rely upon the correspondence. The petitioner had further alleged
that consequent thereto, it could not recover all its dues from Telco which it
was entitled to under the principal contract with Telco. The petitioner claimed
to be the creditor of 'T'. There was, however, a serious dispute between the
petitioner and 'T' as to which of them had committed a breach of the contract
and as to which of them was the creditor of the other. These were questions
which could conveniently be decided only in the suit. In these circumstances,
it was not really necessary to insist on the company securing the dues of 'T'.
In the facts of the instant case, the claim for refund of the amounts recovered
by the petitioner invoking the bank guarantee was not secured.
Moreover, the financial condition of a company
is a relevant factor while deciding whether an order under section 101(3) is warranted.
There is no fetter on the power of the Court in exercising in its discretion
under section 101(3). For instance, if a dissenting creditor’s claim or even if
the claim of all the creditors is extremely small, and/or the consequence of
the reduction is not significant and the assets of the company are such that if
the scheme is sanctioned, it would pose no threat to the rights of the
creditors there is no reason why the Court cannot take the financial position
of the company into consideration while passing an order under section 101(3).
The petitioner had at several places contended
that its financial position was sound. That was evident from the balance sheet
and accounts of the company. The petitioner would, therefore, be able to meet
any liability, if, the suit was decided against it. That position had not been
controverted by any of the creditors who had appeared including 'T'.
None of the parties contended that the scheme
was fraudulent or was mala fide, with a view to benefitting the shareholders.
Indeed, such a contention would be unsustainable. The shareholding pattern of
the company showed that only nine shareholders held about 73 per cent of the
issued, subscribed and paid-up capital of the company. Even assuming that they
exercised their option to the entire extent, the benefit that they were likely
to derive was negligible viz., 1800 shares. The reason furnished by the
petitioner in the scheme was, therefore, genuine and there was no reason to
doubt the same.
Absence of mala fide is not a ground in itself
to deny a creditor an order under section 101(2). It is, however, one of the
factors which a Court must take into consideration while exercising powers
under section 101. While the absence of mala fides would not by itself entitle
a company to an order under section 101(3) or deny a creditor an order under
section 101(2)(c), the presence of it may well be an important factor to deny a
company an order.
Therefore, scheme of arrangement was to be
sanctioned.
Dr. Virendra V. Tulzapurkar and Ms.
Alpana Ghone for the Petitioner. C.J. Joy, D.A. Dube and T.C.
Kaushik for the Respondent. J.S. Saluja, R.S. Apte, A.A. Garge, S.V.
Doijode and Kedar Wagle for the Intervenor.
Judgment
1. The
Petition seeks the Court’s sanction to the scheme of arrangement between the
Petitioner and its equity shareholders as modified. The Petitioners have also
sought permission to amend certain provisions of the scheme.
2. The Petitioner
was incorporated on 26th July, 1974. As on 31st March, 2001, the authorized
share capital of the Petitioners was Rs. 10,00,00,000 (Rupees ten crores)
divided into 1,00,00,000 equity shares of Rs. 10 each. The issue, subscribed
and paid-up shares capital is Rs. 4,75,20,000 divided into 47,52,000 equity
shares of Rs. 10 each.
The shareholding pattern is as
follows :
|
No. of |
No. of |
% of |
No. of |
% of |
|
Equity |
Share |
Share |
Shares |
Share |
|
Shares |
holders |
holders |
held |
holding |
|
held |
|
|
|
|
|
1 to 50 |
3491 |
35.26 |
1,25,832 |
2.65 |
|
51 to 100 |
2852 |
28.81 |
2,61,007 |
5.49 |
|
101 to 200 |
2739 |
27.66 |
4,81,687 |
10.14 |
|
201 to 500 |
598 |
6.04 |
2,08,104 |
4.38 |
|
501 to 1000 |
155 |
1.56 |
1,07,788 |
2.27 |
|
1001 to 5000 |
57 |
0.57 |
94,187 |
1.98 |
|
5001 & above |
9 |
0.09 |
34,73,355 |
73.09 |
|
Total |
9901 |
100.00 |
47,52,000 |
100.00 |
3. The
Petitioner’s Board of Directors propounded the scheme and approved the same in
a meeting held on 27th November, 2001.
The scheme is presented under sections 391 to 394
read with section 100 of the Companies Act, 1956 for cancellation of equity
shares held in small lots and to issue in lieu thereof 11% secured redeemable
non-convertible debenture (NCD’s) of Rs. 20 each of the company in the manner
and to the extent provided therein.
4. (a) Clauses 3 and 4 of the
Scheme are as follows :—
“3. Objective
of the scheme.—The Company has a high number of Shareholders who hold Equity
Shares in small-lots. The cancellation of Equity Share Capital of the Company
and issue of Debentures proposed to be effected through this Scheme is expected
to eliminate the high number of small-lot shareholding in the Company and
reduce the cost of distribution of dividend, cost of printing and posting of
annual reports and dividend warrants and avoid dividend remaining unpaid due to
difficulties in encashment of warrants.
The shares of
the Company are thinly traded in view of the low liquidity and shareholders
find it difficult to dispose their holdings easily. During the past one year,
the volume of shares traded on the BSE was less than 1.2%. Moreover, since the
shares of the Company are traded compulsorily in dematerialized form,
shareholders of small-lot Equity Shares in physical form will also find it
difficult and expensive to dematerialise and dispose of the small number of
their shareholding in the Company. The proposed issue of Debentures will
facilitate accumulation of interest and encashment thereof on maturity together
with the principal amount of the Debentures and early encashment by buyback of
the Debentures by the Company immediately after issue and allotment. The
proposed scheme is thus expected to provide an exit option to the shareholders
holding small-lots as also to shareholders holding odd-lots.”
“4. Scheme of
arrangement.—The Company shall issue and allot 1 (one) Debenture of Rs. 20
(Rupees twenty) or as may be approved by the Court for every Equity Share
cancelled as follows :
(a) In case of shareholding
being up to 200 (two hundred) Equity Shares held in physical form on the Record
Date, automatic cancellation of the entire shareholding without surrender of
the share certificate relating to the Equity Shares, unless the Company
receives a written intimation in Form A from such Shareholder on or before the
Record Date desiring to continue holding the Equity Shares.
(b) In case of shareholding
being more than 200 (two hundred) Equity Shares in physical form on the Record
Date, cancellation of upto 200 (two hundred) Equity Shares upon the Company
receiving a written intimation in Form B from such Shareholder on or before the
Record date and surrender of the share certificate relating to the Equity
Shares desired to be cancelled upon which the Company would issue a new share
certificate for the balance shares (if any), not cancelled.
(c) In case of dematerialised
Shareholding, cancellation of upto 200 (two hundred) Equity Shares upon the
Company receiving a written intimation on or before the Record Date in Form C
and photocopy of debit instruction slip duly acknowledged by the Depository
Participants.
For receiving
dematerialised shares, the Company shall appoint Trustees who shall hold the
shares in trust till such time the shares are cancelled and debentures are
allotted in accordance with the Scheme.”
4(b) Clause 8 of the Scheme provides that the
issued, subscribed and paid-up equity share capital of the company shall stand
cancelled and be reduced to the extent of equity shares surrendered and/or
otherwise cancelled pursuant to Clause 4 of the scheme. Clause 10 is important.
It provides that in consideration of the equity shares surrendered for
cancellation or otherwise cancelled by the petitioner pursuant to the scheme,
the company is required to issue one 11% N.C.D. of Rs. 20 for every equity
share of Rs. 10 each cancelled pursuant to the scheme. The debentures are
proposed to be secured by creation of an equitable mortgage by way of first
and/or second charge in respect of specific fixed assets of the Company in
consultation with the Trustees.
4(c) Clause 10.4 of the scheme provides that
the debentures shall be redeemed at the end of one year from the appointed date
by paying the principal amount of debentures and annual interest thereof. The
Petitioners have in prayer (c) sought permission to modify clause 10.4 by
making the debentures redeemable at the end of one year from the date of
issuance of the debentures by paying the principal amount and interest to each
debenture holder. There was no objection taken by any of the parties to this
modification.
5. (a) The Company took out Company Application
No. 573 of 2001 seeking directions to convene a meeting of the equity
shareholders to consider the proposed scheme.
(b) By an order dated 5th December, 2001. D.G. Karnik, J., ordered a
meeting of the equity shareholders of the petitioner on 5th January, 2002 for
the purpose of considering and if thought fit to approve with or without
modification the scheme. The usual directions regarding advertisements
forwarding notices, convening the meeting, appointing a Chairman and fixing the
quorum were also passed. Clause 11 of the order reads as under :—
“11. Ordered
that the convening and holding of the meeting of the Secured and Unsecured
Creditors of the Applicant Company to consider and approve with or without
modification the proposed Scheme of Arrangement between Hindustan Dorr-Oliver
Limited and its Members is dispensed with in view of the undertaking mentioned
in Paragraph 23 of the Affidavit in support of the Summons for Directions.
Applicant undertake to issue notice of date of hearing of Petition to secured
and unsecured Creditors as directed by this Hon’ble Court.” [Emphasis supplied]
(c) Paragraph 23 of Company Application No. 573 of 2001 referred to in
clause 11 above, read as under :—
“23. It is
further submitted that the secured and unsecured creditors of the Applicant
Company are not affected by the Scheme as the scheme is principally between the
Applicant Company and its Members. Moreover no sacrifice or waiver is at all
called for from them nor are their rights sought to be modified in any manner.
In any event the Company undertakes to give notice of hearing of the Petition
to all the secured and unsecured creditors of such value if and as may be
directed by this Hon’ble Court. In the circumstances, the meeting of creditors
of the Applicant Company be dispensed with. This would not cause any prejudice
and would avoid unnecessary proliferation of notices and enormously cumbersome
procedure. In any event general notice of hearing of Petitioner in the
newspapers will be given if and as may be directed by this Hon’ble Court.”
[Emphasis supplied]
6. (a) The
meeting of the equity shareholders of the Petitioner was accordingly held on
5th January, 2002. Mr. A.P. Kothari, Company Registrar of this Court appointed
Chairman of the meeting by the order dated 5th December, 2001, submitted his
report.
(b) One of the shareholder viz., Dandvati Investments and Trading
Company Private Limited proposed an amendment to the scheme by incorporating
paragraphs 15A and 15B thereto, to provide for a longer validity period of the
scheme. The amendment was approved by an overwhelming majority of the equity
shareholders present at the meeting, only two persons having voted against the
same.
(c) Thirty-seven equity shareholders attended the meeting, three of
whom refrained from voting. Thirty-four equity shareholders holding equity
shares of an aggregate value of Rs. 3,42,41,700 voted in favour of the scheme
as amended. Only seven equity shareholders holding equity shares of an
aggregate value of Rs. 24,920 voted against the scheme. Three votes were
declared invalid. An overwhelming majority of the equity shareholders thus
voted in favour of the scheme.
7. On 5th
April, 2002, the present petition was filed. On 8th March, 2002 the petition was
called for directions. D.K. Deshmukh, J., recorded and accepted the statement
of the learned counsel appearing on behalf of the petitioner to the effect that
the proposed reduction of the share capital does not involve either the
diminution of liability in respect of the equity share capital or payment to
any shareholders of any paid-up share capital. In view of this statement, his
Lordship directed :—
“Therefore,
compliance with the provisions of sub-section (2) of section 101 is dispensed
with.” [Emphasis supplied]
The petition was admitted and the minutes of
the order separately signed excluding the bracketed portion were taken on
record. Incidently Minutes of the order do not contain any bracketed portion.
Nothing however turns on this.
8. The Company
Secretary of the petitioner filed an affidavit dated 18th March, 2002 in which
he stated that the above statement to the effect that “the proposed reduction
of the share capital does not involve payment to any shareholder of any paid-up
capital” was not correct, as under the scheme, payment was to be made to the
shareholders of the paid-up share capital in respect of share capital proposed
to be reduced. The petitioner therefore applied that the order dated 8th March,
2002 be modified or set-aside and a fresh order be passed. The affiant further
stated that the petitioner on realising this error, mentioned the matter before
his Lordship at 4.45 p.m. on 8th March, 2002 itself.
9. What
followed in the affidavit and the order based thereon is important to decide
Dr. V.V. Tulzapurkar’s submission. The affiant stated that the financial
position of the petitioner was strong and that therefore the procedure under
section 101(2) be dispensed with. It is important to note that the affiant did
not submit that the provisions of section 101(2) should be dispensed with. The
petitioner thereafter had the matter circulated for modifying the order dated
8th March, 2002. On 4th April, 2002, D.K. Deshmukh, J., passed a fresh order as
under :—
“P.C. :
Minutes of order taken on record and marked “X”. Order in terms of minutes of
order.”
clauses 5 and
6 of the Minutes of the order read as under :—
“5. At least
21 days prior to the date of the hearing
of the petition individual notice to be served upon the Secured Creditor
of the Petitioner Company viz. The
United Western Bank Limited and also upon the Unsecured Creditors whose claim
exceeds Rs. 1 lac and individual notice to Unsecured Creditors whose claim is
Rs. 1 lac and less is dispensed with.
6. In view of
clause 5 hereinabove, the procedure under section 101(2) of the Companies Act,
1956 is dispensed with.”
Clause 5 was pursuant to the undertaking of
the company contained in paragraph 20 of Company Application No. 573 of 2001
and in view of which the meeting of the creditors was dispensed with as
recorded in clause 11 of the order of D.G. Karnik, J., dated 5th December,
2001.
Once again it is important to note that the
order dated 4th April, 2002 did not dispense with the provisions of section
101(2). Even the minutes of the order did not dispense with the provisions of
section 101(2) but only the procedure thereunder.
10. Thereafter
notices were issued by the petitioner to the unsecured creditors informing them
that the petition had been admitted and had been fixed for hearing on 6th June, 2002. One such notice dated
24th April, 2002 was issued to Thermax Ltd. an unsecured creditor of the
petitioner who has opposed the confirmation of the scheme.
11. Dr. Tulzapurkar,
the learned counsel appearing on behalf of the petitioner submitted that the
entire procedure under section 101 and the requirement of the petitioner to
secure the creditors claims has been dispensed with by this court by its order
dated 4th April, 2002. According to him, the said order directing notices to be
given to the individual creditors merely permitted them to object to the scheme
in general.
I am unable to agree with this
submission for more than one reason.
Section 101 of the Companies Act,
1956 reads as under :—
“101.
Application to Court for confirming
order, objections by creditors, and settlement of list of objecting
creditors:—
(1) Where a company has passed a resolution for reducing share capital,
it may apply, by petition, to the Court for an order confirming the reduction.
(2) Where the proposed reduction of
share capital involves either the diminution of liability in respect of unpaid
share capital or the payment to any shareholder of any paid-up share capital,
and in any other case if the Court so directs, the following provisions shall
have effect, subject to the provisions of sub-section (3) :—
(a) every creditor of the
company who at the date fixed by the Court is entitled to any debt or claim
which, if that date were the commencement of the winding-up of the company,
would be admissible in proof against the company, shall be entitled to object
to the reduction;
(b) the Court shall settle a
list of creditors so entitled to object, and for that purpose shall ascertain,
as far as possible without requiring an application from any creditor, the names
of those creditors and the nature and amount of their debts or claims, and may
publish notices fixing a day or days within which creditors not entered on the
list are to claim to be so entered or are to be excluded from the right of
objecting to the reduction;
(c) where a creditor entered on
the list whose debt or claim is not discharged or has not determined does not
consent to the reduction, the Court may, if it thinks fit, dispense with the
consent of that creditor, on the company securing payment of his debt or claim
by appropriating, as the Court, may direct, the following amount :—
(i) if the company admits
the full amount of the debt of claim or, though not admitting it, is willing to
provide for it, then, the full amount of the debt or claim;
(ii) if the company does
not admit and is not willing to provide for the full amount of the debt or
claim, or if the amount is contingent or not ascertained, then, an amount fixed
by the Court after the like inquiry and adjudication as if the company were being
wound-up by the Court.
(3) Where a proposed reduction of
share capital involves either the diminution of any liability in respect of
unpaid share capital or the payment to any shareholder of any paid-up share
capital, the Court may, if, having regard to any special circumstances of the
case, it thinks proper so to do, direct that the provisions of sub-section (2)
shall not apply as regards any class or any classes of creditors.”
12. The right given
to and the protection provided for creditors under section 101(2) are important
and valuable. In a given case it is possible that the entire assets of a
company can be erode by providing payment to the shareholders of the paid-up
share capital of the company. The court may of course, in a given case if, having
regard to any special circumstances of the case, thinks it proper to do so in
exercise of its powers under section 101(3), direct that the provisions of
section 101(2) shall not apply as regards any class or classes of creditors.
The extinguishment of either this right or the protection of the creditors dues
however cannot easily be inferred. Do the earlier orders warrant such an
inference ? This is the question I must deal with first.
13. It is pertinent
to note that D.K. Deshmukh, J by his order dated 8th March, 2002 dispensed with
the provisions of section 101(2). This, however, the learned Judge did in view
of the statement made on behalf of the petitioner that the proposed reduction
of the share capital does not involve payments to any shareholders of any
paid-up share capital. The petitioners, fairly and responsibly corrected this
statement as the position was actually to the contrary. The moment it was
pointed out that the scheme involved payment to the shareholders of paid-up
share capital, which it did, the learned Judge in the subsequent order dated
4th April, 2002 did not dispense with
the provisions of section 101(2). He
confined his order to dispensing with the procedure and not the provisions of
section 101(2).
14. The difference
between dispensing with the procedure under section 101(2) and dispensing with
the provisions of section 101(2) is material and significant.
D.K. Deshmukh, J., himself made a distinction
between the two. In the order dated 8th March, 2002. D.K. Deshmukh, J. directed
that the provisions of section 101(2) were dispensed with. The minutes dated
8th March, 2002 provided in clause 7 that the procedure under section 101(2) of
the Companies Act shall not apply. If there was no distinction between
dispensing with the procedure under section 101(2) and dispensing with the
provisions of section 101(2), it would not have been necessary to mention in
the order again that the provisions of section 101(2) are dispensed with.
15. In a given case
it is possible that the order may use the terms “procedure” to mean “provision”
and vice versa. The context of the order would indicate this. However in this
case it is not so.
16. The company
itself proceeded on the basis that there was a distinction between dispensing
with the procedure under section 101 on the one hand and dispensing with the provisions of section
101(2) on the other. This is evident from the fact that after pointing out the
inaccuracy in the statement made on its behalf before D.K. Deshmukh. J., on 8th
March, 2002, the company in its
affidavit dated 18th March, 2002, did not even submit that the provisions of
section 101(2) ought to be dispensed with. The company only submitted that the
procedure under section 101(2) be dispensed with.
17. The fallacy in Dr.
Tulzapurkar’s submission is apparent for another reason. In paragraph 23 of
Company Application No. 573 of 2001 the company requested that meeting of the
creditors be dispensed with on two grounds. One of the grounds was that the
company undertook to give notice of the hearing of the petition to the
creditors of such value if and as may be directed by this court. It was on the
basis of this paragraph that D.G. Karnik, J., in his order dated 5th December,
2001 dispensed with the convening and holding of the meeting of the creditors
of the company. There is nothing in the order to suggest that the learned Judge
while dispensing with the creditors meeting did not take into consideration the
undertaking given by the company to give notice of the hearing of the petition
to all the creditors.
The order dated 5-12-2001 did not affect the
rights of the creditors under section 101(2). Nor did it created any rights in
favour of the creditors. In other words it was not an order under section
101(3). By dispensing with the holding of the meeting of the creditors in view
of the undertaking of the company to give notice to the creditors of the
hearing of the petition, the court preserved the right of the creditors to
object to the scheme at the hearing of the petition. The creditors could have
opposed the scheme at the meeting on the ground that their interests were not
secured. No doubt the Court could even in that event have passed an order under
sub-section (3). But the court did not do so. It preserved the consideration of
this right of the creditors at the hearing of the petition. Pursuant to and in
view of the said undertaking, D.K. Deshmukh, J., by the order dated 4th April,
2002 directed the company to serve individual notices upon the secured
creditors and unsecured creditors whose claims exceeded Rs. 1,00,000.
18. The substantive right of a creditor under
section 101(2) is to have his claim either paid or secured. The court in
exercise of powers under sub-section (8) of section 101 is entitled to direct
that the provisions of sub-section (2) shall not apply as regards any class or
classes of creditors. The procedure to enable the court and the creditors to
protect the interests of the creditors is provided in section 101(2)(b). The
order dated 4th April, 2002 dispensed
with neither the substantive nor the procedural rights of the creditors. The
procedural rights were only modified by ensuring that the company would give
notice of the hearing of the petition to the individual creditors, whose claim
exceeded Rs. 1,00,000. Under section 101(2)(a) every creditor of the company is
entitled to object to the reduction in share capital. Section 101(2)(b)
provides the procedure for settling the list of creditors so entitled to
object. By clause 6 of the order, the court dispensed with the specific
procedure under section 101(2) relating to the settlement of the list of the
creditors. The court altered the procedure under section 101(2)(b). Thus the
court exercised its power under section 101(3) to the limited extent of dispensing
with the specific procedure and not with all the provisions of section
101(2).Instead of going through the rather elaborate procedure provided by
101(2)(b), the court in exercise of its jurisdiction directed the company to
give notice of the hearing of the petition to unsecured creditors whose claims
were in excess of Rs. 1,00,000.
19. This in turn
implied that the Court would consider only the case of those creditors who
appeared at the hearing of the petition as to whether or not their debts ought to
be secured by the company. In respect of such creditors the court did not
dispense with the provisions of section 101(2).
20. Nor do I see
anything in the said order which restricts the right of the creditors to appear
before this court only for the limited purpose of opposing the scheme generally
and not for the purpose of enforcing their rights under section 101(2)(a) and
(c).
21. When the court
settles a list of creditors it does so after following the procedure mentioned
in section 101(2)(b). The court applies its mind as to the rights of the
creditors - the nature and amount of their debts or claims. The court would
enter on the list only those creditors who at the date fixed by the court are
entitled to any debt or claim which, if that debt, at the commencement of the
winding-up of the company would be admissible in proof against the company. The
dispensation of the procedure and the requirement of settling the list
predicates that the court has not applied its mind to the entitlement of any
creditor either to object to the scheme or to have his debt secured. Thus, a
creditor in such circumstances, who appears at the hearing of the petition is
entitled to object to the scheme in general as well as apply to have his claim
secured.
22. In support of his
submission, Dr. Tulzapurkar submitted that if the creditors before me are
permitted to apply for security under section 101(2)(c)(ii) it would give them
an unfair advantage over other creditors of the same class as they would
succeed in obtaining security in precedence over other creditors whose claims
may be admitted but not secured because of the dispensation order. But the
fallacy in this submission lies in proceeding on the basis that the order dated
4th April, 2002 dispensed with the requirement of the company securing the
debts under section 101(2). Considering the view I have taken this argument
does not survive.
23.There is another reason why the submission
cannot be accepted. Even where a list of creditors is settled under section
101(2)(b), it is not necessary that the court must pass an order under section
101(2)(c) in favour of each of the creditors whose name is entered in the list.
The court under section 101(2)(c) is required to pass an order for payment or
security only in respect of those creditors who do not consent to the
reduction. Thus, section 101 contemplates a situation where only some creditors
may be paid or the claims of only some of the creditors may be secured. In that
view of the matter also Dr. Tulzapurkar’s submission in this regard is
rejected.
24. Dr. Tulzapurkar
relied upon the following passage in Pennington’s Company Law (Eighth Edition
page 214) in support of their submissions :
“The Court
may dispense with these provisions for the protection of creditors, but it will
only do so in special circumstances, and on being satisfied that the company
has deposited in court a sum of money sufficient to satisfy all claims which
are likely to be made against it, or that a bank or other responsible person or
company (e.g., an insurance company) has guaranteed the payment of such claims,
valuing them in the same way as if the company were being wound-up, and that
the guarantor has sufficient assets to meet all its liabilities. The effect of
such a dispensation is not only to obviate the procedural requirements with
regard to creditors, but also to deprive them of their right to object to the
reduction on the hearing of the company’s petition.” [Emphasis supplied.]
25. Dr. Tulzapurkar
relied upon the last three lines of the above extract in support of his
submission that the order dated 4th April, 2002 deprived the creditors of their
right even to object to the scheme at the hearing of the Company Petition. But,
the last three lines must be read with the first sentence in that paragraph.
The words “such a dispensation” referred to in the last three lines relate to
the words “the Court may dispense with these provisions for the protection of
creditors”. Thus the last sentence would support Dr. Tulzapurkar’s submission
only in a case where the Court has dispensed with the provisions for the
protection of creditors. I have already held that the order dated 4th April,
2002 did not dispense with the provisions of section 101(2) and only modified
the procedure to a limited extent. The passage is Pennington therefore can be
of no assistance to Dr. Tulzapurkar.
26. Lastly, as
submitted Mr. Doijode, the learned counsel appearing on behalf of Termax
Limited, the Petitioner was directed to give notice of the hearing of the petition
to the individual creditors who had a claim in excess of Rs. 1,00,000. The
question is to what intent and purpose was this direction given ? If, according
to Dr. Tulzapurkar it was not the intent or the order to give the creditors a
right thereby, to apply for security under section 101(2), on what basis could
it be said that it permitted the creditors to object to the scheme generally?
There is nothing in the order to indicate the same. Thus, if it is held that
the notice of the hearing of the Petition given to the creditors did not permit
them to make an application in respect of their rights under section 101(2)(c),
it must equally be held that the notice did not give them a right to oppose the
scheme at all. Such an interpretation would render the direction and the notice
issued pursuant thereto otious.
In my view, therefore, the creditors who have
appeared before me are not only entitled to oppose the scheme generally but are
also entitled to apply that their debts be secured.
27. This view, therefore,
also disposes of the contention of Mr. Doijode, that the Court in a petition
for sanction to a scheme for reduction of share capital involving the payment
to any shareholder of any paid-up share capital is bound to either order
payment of or secure the claim of all the creditor’s irrespective of anything.
In other words according to him a creditor whole name is entered on the list is
ipso facto entitled to have his claim either paid over or secured. I am unable
to agree with Mr. Doijode’s submission either. In fact the provisions of
section 101, itself make it clear that not every person who claims to be a
creditor of the company is entitled to an order in his favour under section
101(2)(c). Even a creditor whose name has been entered on the list is not
entitled to an order under 101(2)(c) securing the entire amount, ipso facto.
Where the company does not admit and is not willing to provide security for the
full amount of the debt, the court is required in respect of a creditor entered
on the list, to fix the amount after the like enquiry and adjudication as if
the company were being wound-up by the court. The Court may even dispense with
the provisions of section 101(2) in exercise of its powers under section
101(3). If it were not so section 101(2)(c)(ii) would have provided in express
terms that the Court is bound to secure every creditor entered on the list to
the extent of the amounts of their debts or claims determined under section
101(2)(b).
28. Dr. Tulzapurkar
submitted, in the alternative, that a creditor who appears pursuant to the
notice is not entitled to security as of right, as if he is on the list of
creditors settled by the court. Such a creditor is bound, according to him, to
satisfy the Court that in the facts of his case he is entitled to have his
claim either paid or secured. The submission is well founded. The Court
dispensed with the procedure of settling the lists of creditors. The Court
therefore, had no occasion to consider the tenability of the creditors claim. I
have held that the consideration thereof was postponed to the hearing of the
Petition. Dr. Tulzapurkar’s submission is therefore axiomatic.
29. This then gives
rise to the question as to the nature and scope of enquiry, and adjudication
contemplated in section 101(2)(c)(ii).
30. When a company is
wound-up, a creditor is entitled either to prove his claim in winding-up before
the Official Liquidator or apply for and obtain leave under section 446 of the
Companies Act to commence or proceed with against the company the suit or other
legal proceeding. When an application is made under section 446, the Company
Court may permit the credited to commence or to initiate a suit against the
company. It is not mandatory that the Company Court must entertain or dispose
of such a suit or proceeding itself.
Thermax Limited has already filed a suit in
this Court being suit No. 39 of 2000 seeking an injunction restraining the
petitioner from invoking the bank guarantee. Having failed to obtain the
injunction, the bank paid under the guarantee. It is stated that Thermax Pvt.
Limited has now amended the suit to claim refund of the amounts alleged to have
been wrongly recovered by the company under the bank guarantee.
The very nature of the proceeding under
section 101 indicates that it does not necessarily contemplate a full-fledged
trial of the creditors’ claim. Firstly and especially in a case such as that of
Thermax where a suit or other proceedings has already been initiated, there is
no question of the Company Court relegating the suit to itself. That is a power
specifically conferred upon the Company Court in respect of a company being
wound-up. The final determination of such a creditor’s claim can be only by the
Court or Tribunal before which the proceedings for recovery are pending. The
same will apply even in respect of a creditor who has not adopted proceedings
for recovery. For while exercising powers under section 101, the Court is not
entitled to pay over the amount to the creditors but only to secure their
claim.
31. Section 101(2)(c)(ii)
only provides for the procedure for fixing the amount of security. It does not
contemplate a final, determinative and precise adjudication of the creditors
claim. This coupled with the fact that the final adjudication of the creditors
dues will depend upon the substantive proceedings adopted in a Court of law
indicates that a similar procedure is not contemplated under section
101(2). I do not suggest that a Court
has no power to direct the parties to lead evidence in proceedings under section
101. But that would be only for the purpose of determining the extent of the
security. The Court is entitled to determine the extent of the security on the
basis of affidavits filed before it in a proceeding under section 101. The
manner and extent of proof must be decided by the Court depending on the fact
of each case.
32. Under section
101(2)(c)(ii), the Court is required to fix the amount “after the like inquiry
and adjudication as if the Company were being wound-up by the Court”.
Rules 147 to 163 of the Companies (Court)
Rules, 1959 (hereinafter referred to as the Rules) deal with the debts and
claims against the company and prescribe the procedure for determination
thereof. The Rules and especially Rules 150, 151, 159, 160 and 163 establish
that it is permissible for the Liquidator to determine the claims on the basis
of the affidavits, which are to be filed in Form No. 66. The Liquidator is
entitled to call for the production of vouchers or further evidence in support
of the debt. He is also entitled to call upon the creditor to attend the
investigation in person. Rule 163 requires the Liquidator to admit or reject
the proof in whole or in part “after such investigation as he may think
necessary”.
The Rules establish therefore that a summary
procedure is contemplated in proceedings under section 101(2)(c).
33.This leaves then for consideration the applications of the various
creditors on facts.
The Petitioner and Watco Technical Private
Limited have arrived at a settlement whereby the Petitioner shall pay to Watco
Technical Private Limited a sum of Rs. 3,00,000 in full and final settlement of
Watco’s claims on or before 10th January, 2003. In the event of the
Petitioner’s failing to make payment of the said amount. Liberty to Watco
Technical Private Limited to apply.
34. Alstom Limited has withdrawn its objection.
35. The Petitioner and
Paharpur Cooling Towers Limited have arrived at a settlement whereby the
Petitioner shall pay Paharpur Cooling Towers Limited a sum of Rs. 16,00,000 in
full and final settlement of the latter’s claims on or before 1st March, 2003.
In the event of the Petitioner failing to make payment, liberty to Paharpur
Cooling Towers Limited to apply.
36. The only claim that is contested is that of Thermax Limited.
Thermax Limited has raised its claims in two
affidavits filed on its behalf dated 29th May, 2002 and 4th June, 2002. At the
outset it is necessary to state that the Thermax claims are neither admitted
nor liquidated. I do not propose therefore to deal with a situation where the
claim of a creditor is admitted in any manner.
37. I will deal with
the claim in the second affidavit dated 4th June, 2002 first. Thermax stated
that certain claims remained to be raised in its affidavit dated 29th May,
2002. Its case is that on 27th June, 1995 the Petitioner placed an order on it
to set up a filtration plant which it did and in respect thereof a sum of Rs.
26,55,016 remains due and payable to it by the Petitioner. It is further stated
that an amount of Rs. 12,60,321.12 ps. is due and payable by the Petitioner to
Thermax in connection with transportation and freight charges on account of
dishonour of cheques issued by the Petitioner in favour of Thermax in
connection with the payments in respect of the aforesaid two orders. Thermax
has tabulated its claims in Exhibit ‘A’ to its affidavit. The claims are ex
facie barred by limitation. Mr. Doijode was unable to dispute the same.
38. In the affidavit
in reply, the petitioner has further stated that Thermax had abandoned the
sight of the two contracts. Further, the petitioner disputed the various claims
of Thermax by various letters, two of which are annexed to the Petitioner’s
affidavit in reply. The Petitioner has alleged that it was Thermax which was
responsible for various breaches of the said contract and that it has suffered
losses as a result thereof.
The above facts are not rebutted by Thermax.
In the circumstances, and specially in view of the fact that the claim appears
to be barred by limitation, I am not inclined to secure the same.
39. In the first
affidavit dated 29th May, 2002 Thermax alleges to have a claim against the
Petitioners in respect of a purchase order dated 25th June, 1997. The purchase
order was for a sum of Rs. 75,00,000. The Petitioner had procured a contract
for setting up a Water Treatment Plant for Telco at Pune. The Petitioner was to
set up a Primary Treatment Plant and the effluents from the plant set up by the
Petitioner were to be set up by the Secondary Treatment Plant which was
sub-contracted to Thermax by the purchase order. 10% of the payment was to be
paid against submission of a corporate guarantee and the balance 90% of the sum
was to be paid to Thermax on a pro rata basis within 15 days from the date of
Thermax’s invoice along with, lorry receipt, packing slip, and test
certificates. Thermax was to provide a performance guarantee in the form of a
bank guarantee for 10% of the value of the contract. The Secondary Treatment
Plant was guaranteed by Thermax against faulty workmanship for a period of
eighteen months from the date of delivery or twelve months from the date of
commissioning, whichever is earlier.
Thermax furnished a corporate guarantee on 5th
June, 1997 to secure advance bill. Thermax also submitted a performance
guarantee dated 15th December, 1997 executed by Deutsche bank AG in the sum of
Rs. 7,50,000. The main case of Thermax is that the Primary Treatment Plant was
to be installed by the Petitioner and only the job of installing the Secondary
Treatment Plant was given to it that although the technical completion of the
Secondary Treatment Plant was achieved by Thermax in October, 1998, the same
could not be commissioned as the Primary Treatment Plant was not ready as a
result whereof Thermax could not commission its plant and had to wait beyond
the period provided in the purchase order, that the delay in commissioning the
Secondary Treatment Plant was wholly attributable to the Petitioner, that
Thermax had carried out certain alterations due to defaults of the Petitioner,
that the Petitioner delayed the civil foundation work for both the plans which
in turn delayed the work and that the same resulted in Thermax suffering
damages. In addition to the claim for damages, according to Thermax, the
Petitioner has also not paid an aggregate amount of Rs. 6,47,438.52.
40. The Petitioner invoked the performance guarantee. Thermax filed Suit
No. 39 of 2000 inter alia seeking an injunction restraining the Petitioner from
invoking the said guarantee. Thermax took out Notice of Motion No. 72 of 2000
for interim reliefs which was dismissed by an order dated 18th January, 2000.
41. Thus, in respect of the aforesaid contract,
Thermax claims to be entitled to a sum of Rs. 6,47,438.52 ps. under various invoices
issued by it pursuant to the purchase order Rs. 12,37,000 by way of damages,
Rs. 5,56,639.98 ps. towards interest and Rs. 10,50,000 towards recovery of the
amount recovered by the Petitioner by invoking the guarantee, including
interest thereon.
42. Dr. Tulzapurkar submitted that in view of the order dated 18th January,
2000 dismissing the application for injuncting payment under the bank
guarantee, the Respondent is not entitled to have any part of its claim
secured. I am unable to agree. The injunction was refused not pursuant to an
adjudication of the claim of Thermax on merits but in view of the law relating
to the grant of injunctions in respect of unconditional bank guarantees. This
is clear from the order. However, refusal of the injunction does indicate that
the invocation of the guarantee by the Petitioners was not fraudulent and that
there were no special equities in favour of Thermax, entitling it to the
injunction. The refusal of an injunction restraining the bank guarantee would
not by itself disentitle a creditor from seeking security under section 101.
43. The Petitioner has disputed the claim of Thermax. The Petitioner’s case
is that Thermax committed several breaches of the agreement and failed to
rectify the same despite requests, as a result whereof, the plant could not be
commissioned. In this regard, the Petitioner has craved leave to refer to and
rely upon the correspondence. The Petitioner has further alleged that
consequent thereto, it could not recover all its dues from Telco which they
were entitled to under the principal contract with Telco. The Petitioner claims
to be the creditor of Thermax.
44. Firstly, there is no rejoinder disputing the Petitioner’s case against
Thermax. Secondly, as far as the individual claims are concerned. Mr. Doijode
conceded that while considering the amount of security furnished by a company
under section 101, the Court may not consider an unliquidated claim for
damages, I express no view on this point. Suffice it to say that in the present
case, I am not inclined to secure the same.
45. I would at the highest have considered securing the claim of Thermax to
the limited extent of Rs. 6,47,438.52 ps. i.e., in respect of the amounts
claimed under the invoices. There is however a serious dispute between the
Petitioner and Thermax as to which of them has committed a breach of the
contract and as to which of them is the creditor of the other. These are
questions which can conveniently be decided only in the suit. In these
circumstances, it is not really necessary to insist on the company securing the
dues of Thermax. In the facts of this case, I am not inclined to secure the
claim for refund of the amounts recovered by the Petitioner invoking the bank
guarantee.
46. Moreover the financial condition of a Company is a relevant factor
while deciding whether an order under section 101(3) is warranted. I am not in
agreement with Mr. Doijode’s contention to the contrary. On the contrary, I see
no such fetter on the power of the Court in exercising in its discrection under
section 101(3). For instances, if a dissenting creditors claim or even if the
claim of all the creditors is extremely small, and/or the consequence of the
reduction is not significant and the assets of the company are such that if the
scheme is sanctioned, it would pose no threat to the rights of the creditors
there is no reason why the Court cannot take the financial position of the
company into consideration while passing an order under section 101(3). I
hasten to reiterate that this judgment does not purport to deal with an
admitted claim or a claim regarding the sustainability of which the Court has
little or no doubt.
47. The Petitioner has at several places contended that its financial
position is sound. For instance, in its affidavit in reply, the Petitioner has
stated that it is a profit-making and financially sound company. This is
evident from the balance sheet and accounts annexed to the petition. The
Petitioner will therefore be able to meet any liability, if the suit is decided
against it. This position has not been controverted by any of the creditors who
have appeared before me, including Thermax.
48. I am also satisfied that this assertion is well founded. The latest
audited accounts of the company for the year ended 31st March, 2001 are annexed
to Company Application No. 573 of 2001. The net wealth (share capital and
reserves excluding revaluation reserves) for the year ending 31st March, 2001
was Rs. 18,50,66,000. The Net Current Assets for the Financial Year 31st March,
2000 and 31st March, 2001 was Rs. 26,37,11,000. Moreover, the company has been
paying dividend throughout from 1997 except during the year ended 31st March,
2000. The audited financial results for the year ended 31st March, 2002 also
indicate that the company is in a sound financial position. It is important to
note that none of these facts are in dispute. It is also important to note that
the company’s assertion in Company Application No. 573 of 2001 to the effect
that it has been paying all its dues on time and has not defaulted any of its
financial obligations is not controverted.
49. Before parting with the judgment, it is
necessary to observe that none of the parties before me contended that the
scheme is fraudulent or is mala fide, with a view to benefiting the
shareholders. Indeed, such a contention would be unsustainable. I have
tabulated earlier the shareholding pattern of the company. Only nine
shareholders hold about 73% of the issued, subscribed and paid-up capital of
the company. Even assuming that they exercise their option to the entire
extent, the benefit that they are likely to derive is negligible viz., 1800
shares. The reason furnished by the Petitioner in clause 3 of the scheme is
therefore genuine and I have no reason to doubt the same.
Absence of mala fide is not a
ground in itself to deny a creditor an order under section 101(2). It is
however one of the factors a Court must take into consideration while
exercising powers under section 101 while the absence of mala fides would not
by itself entitle a Company to an order under section 101(3) or deny a creditor
an order under section 101(3)(c) the presence of it may well be an important
factor to deny a Company an order.
50. The Petitioners have sought leave to amend. Clauses No. 15(a)(i) and
10.4 of the scheme. In paragraph No. 15(a)(i), the Petitioner has, through
inadvertence, in line No. 9 mentioned the word ‘later’ instead of the word
“earlier”. There can be no objection to the same.
It would also be necessary to
amend clause 10.4 of the scheme in view of the modification of the scheme.
There can be no objection to the same in real.
51. In the circumstances, the petition is made absolute in terms of prayer
clauses (a) to (d). There shall be no order as to costs.
52. Mr. Doijode, the learned counsel appearing on behalf of Thermax applies
for stay of this order. The order is stayed upto 26th November, 2002. An
application is also made today on behalf of a creditor, seeking security under
section 101(2) of the Companies Act. However, the application was made after
the arguments were over. It is therefore, rejected.
Parties
to act on an ordinary copy of this order duly authenticated by the Company
Registrar of this Court.
BOMBAY HIGH COURT
[2005] 59 scl 199
(Bom.)
HIGH COURT OF BOMBAY
EOC Tailor Made Polymers India (P.) Ltd., In re
S.U. Kamdar, J.
Company Petition Nos.
695 and 696 of 2004
And Company Application
Nos. 192 AND 193 of 2004
February 2005
Section 394, read with section 101, of the Companies
Act, 1956 - Amalgamation - Whether provisions of section 101 would apply in
case where there is a reduction in share capital of company by virtue of
amalgamation of two companies and in case where transferor-company held shares
in transferee- company - Held, no
Words and phrases : ‘any other case’ as
occurring in section 101(2) of the Companies Act, 1956
Facts
The board of directors of the
transferor-company passed a resolution approving the scheme of amalgamation of the
transferor -company with the transferee-company. The equity shareholders and
creditors of the transferor-company as well as the transferee-company approved
the scheme of amalgamation. Therefore, the transferor and transferee companies
filed the instant petition under sections 391 to 394 for obtaining sanction of
amalgamation scheme. However, the Regional Director contended that since by
virtue of the scheme, the shares held by the transferor-company would stand
extinguished in view of the fact that once amalgamation took place, the company
could not allot shares to itself and there would be a reduction in share
capital, the company should follow the procedure for reduction of capital as
contemplated under section 101(2).
Held
Section 101(2), inter alia, provides
for three eventualities for which a special procedure prescribed thereunder is
required to be followed. In a case, where a proposed reduction of share capital
involves such a diminution of liability in respect of unpaid share capital or
the payment of any shareholder of any paid-up share capital ,then in that event
the provision prescribed in sub-section (2) thereof is required to be complied
with. The third eventuality contemplated is wide enough to cover all cases
since the words used are ‘in any other case’. Insofar as the third eventuality
is concerned, the Court is vested with a discretion whether to direct a party
to follow the provisions of sub-section (2)(a), (b) and (c) or not to direct
the compliance thereof. In the instant case, admittedly there was no question
of diminution of any liability in respect of unpaid share capital nor there was
a situation where the payment was made to any shareholder out of any paid-up
share capital. However, the Regional Director had contended that reduction of
share capital even if by virtue of automatic operation of law results in the
shares of the transferor -company being extinguished by virtue of amalgamation
and, thus , in the instant case the provisions of section 101(2) were attracted
by virtue of the third category, i.e., any other case, and, further that though
there was a discretion in the Court in the third category of the case , yet
still the Court could not grant dispensation of the provisions of section
101(2). On the other hand, as far as the provisions of section 101(2) are
concerned,the words appearing, in any other case, must necessarily be read
ejusdem generis with the words preceding in other cases. It is because only if
the reduction in share capital is likely to affect the interest of the creditor
adversely, then the provisions which are provided in section 101(2) that either
his consent can be obtained or his objections can be heard and considered by
the Court apply. The object for which the provision is inserted would be
defeated if cases of reduction of share capital are taken into account by
virtue of the words ‘any other case’, appearing in sub-section (2) of section
101. Thus, the power of the Court to direct compliance of the procedure ,
particularly in the case like the instant one where by virtue of operation of
law there is a necessity to reduce the share capital is not necessary. The
shares held by the transferor -company in the transferee -company cannot
continue to exist by virtue of the amalgamation and extinguishment of a transferor-company.
To hold that even in such cases the provisions of section 101(2) must be
necessarily followed would be inappropriate and would amount to stretching the
words ‘any other case’ beyond the intent and object of the provisions of
section 101(2). There is one more angle which should be taken into
consideration while interpreting the provisions of sub-section (2), i.e., if
the words‘any other case’ are wide enough to cover all kinds of reduction in
share capital including the reduction which necessarily arises due to
amalgamation of the company, then the earlier part of section 101(2) would be
redundant as the words ‘any other case’ would also include the cases where
there is a diminution of the liabilities in respect of the unpaid share capital
or where the payment is made to any shareholder of any paid-up share capital.
Thus, before exercising the discretion in the third category of the cases,
which falls in ‘any other case’, the Court must take into consideration and
account whether the procedure should be directed to be complied with or not and
while doing so it should take into consideration whether in that particular
case interest of the creditors is affected or not. [Para 10]
The provisions under section
101 would not apply in case where there is a reduction in the share capital of
the company by virtue of amalgamation of two companies and in case where the
transferor -company held the shares in the transferee-company. In view of the
aforesaid position in law, there was no merit in the objection raised by the
Regional Director in the instant case. [Para 12]
Cases referred to
Asian Investments Ltd., In re [1992] 73 Comp.
Cas. 517 (Mad.) (para 9), Mcleod & Co. v. S.K. Ganguly [1975] 45 Comp. Cas.
563 (Cal.) (para 9) and PMP Auto Industries Ltd. In re [1994] 80 Comp. Cas. 289
(Bom.) (para 9).
Mrs. Mona Bhide for the Petitioner. C.J. Roy, R.C. Master,
M.M. Goswami and T.C. Kaushik for the Panel Counsel. R.C. Gupta
for the Official Liquidator.
Order
1. These
two company petitions are filed by the transferor company and transferee
company for sanction of an amalgamation scheme under sections 391 to 394 of the
Companies Act, 1956.
2. Some of the material facts of
the present case are as under:
3. On 16-3-2004 the
board of directors of the transferor company passed a resolution approving the
scheme of amalgamation of the transferor company being EOC Tailor Polymers
India Private Limited with the transferee company known as Raj Prakash
Chemicals Limited. On 6-5-2004 an order was passed by this court for convening
a meeting of the equity shareholders and creditors of the transferor Company as
well as the transferee company. In the said meeting a special resolution has
been passed approving the scheme of amalgamation. Accordingly the present
petition is moved for seeking final approval under sections 391 to 394 of the
Companies Act-I of 1956. All the procedural requirements for the purpose of
amalgamation as contemplated under section I of the Company court rules have
been complied with by the petitioner. An affidavit has been filed by the
Regional Director dated 1-12-2004 and has confirmed that there are no
objections except that the company should follow the procedure for reduction of
capital as contemplated under section 101(2) of the Companies Act.
4. The only
objection raised by the Regional Directors and which requires my consideration
that under Clause (20.2)(a) of the proposed scheme for amalgamation some of the
shares held by the transferor company in the transferee company will stand
automatically cancelled on the scheme being sanctioned. According to the
Regional Director the same amounts to reduction of share capital and thus
attracts the provision of sections 100 and 101 of the Companies Act-I of 1956.
He further contends that the companies are thus required to follow the
procedure contemplated under sub-section (2) of section 101 of the said Act. By
virtue of the scheme, the shares held by the transferor company amounting to
6,38,109 Equity shares out of total issued and paid up capital of 15,90,000
Equity shares the shares will stand extinguished in view of the fact that once
amalgamation takes place the company cannot allot shares to itself. Thus by
virtue of operation of law there will be a reduction in the share capital to
the extent of 6,38,109.
5. The Regional
Director has contended that though it is true that by virtue of transfer the
transferor company will cease to exist and thus the transferee company in law
cannot allot shares to itself. But still according to the Regional Director the
same amounts to reduction in the share capital and thus it requires approval
and following of the procedure contemplated under sections 100 and 101 of the
Companies Act-I of 1956.
6. According to
the petitioner the reduction in share capital is an automatic effect of
amalgamation because the shares held by the transferor company has to be
cancelled since the said company will cease to exist. It is further submitted
that to allot the shares held by the transferor company of the transferee
company cannot be permitted in law as the company cannot allot shares to
itself. According to the petitioners once there is an automatic cancellation of
the shares held by the transferor company in the transferee company the said shares
are required to be cancelled else the company will have to issue the shares to
itself.
7. The relevant provisions of the
Act which needs very interpretation reads as under:
“(2) Where the proposed reduction of share
capital involves either the diminution of liability in respect of unpaid share
capital or the payment to any shareholder of any paid-up share capital, and in
any other case if the (Tribunal) so directs, the following provisions shall
have effect, subject to the provisions of sub-section (3):—
(a) every creditor of the company who at the
date fixed by the (Tribunal) is entitled to any debt or claim which, if that
date were the commencement of the winding-up of the company, would be
admissible in proof against the company, shall be entitled to object to the
reduction;
(b) the (Tribunal) shall settle a list of
creditors so entitled to object, and for that purpose shall ascertain, as far
as possible without requiring an application from any creditor, the names of
those creditors and the nature and amount of their debts or claims and may
publish notices fixing a day or days within which creditors are not entered on
the list are to claim to be so entered or are to be excluded from the right of
objecting to the reduction;
(c) where a creditor entered on the list whose
debt or claim is not discharged or has not determined does not consent to the
reduction, the (Tribunal) may, if it thinks fit, dispense with the consent of
that creditor, on the company securing payment of his debt or claim by appropriating,
as the (Tribunal) may direct the following amount:—
(i) if the company admits the full amount
of debt or claim, or, though not admitting it, is willing to provide for it,
then, the full amount of the debt or claim;
(ii) if the company does not admit and is
not willing to provide for the full amount of the debt or claim, or if the
amount is contingent or not ascertained, then, an amount fixed by the
(Tribunal) after the like inquiry and adjudication as if the company were being
wound-up by the (Tribunal).”
8. This
sub-section (2) of section 101 is a subject matter of interpretation before me
in the present case. The question which is posed before me is whether in cases
of an automatic cancellation of share holding of a transferor company by virtue
of amalgamation with the transferee company the provision of sub-section (2) of
section 101 of the Companies Act-I of 1956 are to be complied with or not?
9. The learned
counsel for the petitioner has relied upon a judgment of the Madras High Court
in the case of Asian Investments Ltd., In re [1992] 73 Comp. Cas. 517 as well
as judgment of Calcutta High Court reported in Mcleod & Co. v. S.K. Ganguly
[1975] 45 Comp. Cas. 563 by relying upon the aforesaid two judgments the
learned counsel for the petitioner has contended that it is not necessary to
follow the prescribed procedure of sub-section (2) of section 101 of the
Companies Act-I of 1956 in cases where reduction of share capital is automatic
by virtue of operation of law. The respondent has on the other hand relied upon
the judgment of this court in the case of PMP Auto Industries Ltd., In re
[1994] 80 Comp. Cas. 289 (Bom.) and has contended that in cases of amalgamation
under sections 391 to 394 of the Companies Act the procedure prescribed for
reduction of share capital cannot be dispensed with.
10. Before I deal
with the rival submissions of the parties it is necessary that the provisions
of section 101 which requires an interpretation must be analysed. The said
sub-section (1) of section 101 inter alia, provides for a passing of a
resolution by the company for reducing the share capital and after passing of
such a resolution the company is required to obtain an order from the court
granting confirmation of such a resolution. Sub-section (2) of section 101
inter alia provides for three eventualities for which a special procedure
prescribed thereunder is required to be followed. In a case where a proposed
reduction of share capital involves such a diminution of liability in respect
of unpaid share capital or the payment of any shareholder of any paid-up share
capital then in that event the provision prescribed in sub-section (2) thereof
is required to be complied with. The third eventuality contemplated is wide
enough to cover all cases since the words used are ‘in any other cases’. In so
far as the third eventuality is concerned the court is vested with a discretion
whether to direct a party to follow the provisions of sub-section (2)
sub-clauses (a), (b) and (c) or not to direct the compliance thereof. In the
present case admittedly there is no question of diminution of any liability in
respect of unpaid share capital nor there is a situation where the payment is
made to any shareholder out of any paid-up share capital. However the learned
counsel appearing for the Regional Director has contended before me that
reduction of share capital even if by virtue of automatic operation of law
results in the shares of the transferor company being extinguished by virtue of
amalgamation and thus the provisions of sub-section (2) of section 101 are
attracted by virtue of the third category, i.e., any other case. The learned
counsel has further contended that though there is a discretion for the court
in the third category of the case still the court cannot grant dispensation of
the provisions of sub-section (2) of section 101 of the Companies Act. On the
other hand as far as of the provisions of sub-section (2) of section 101 are
concerned I am of the opinion that the words appearing in any other cases must
necessarily be read ejusedem generis with the words preceding in other cases.
It is because only if the reduction in share capital is likely to affect the
interest of the creditors adversely to him then the provisions which are
provided in sub-section (2) of section 101 that either his consent can be
obtained or his objections can be heard and considered by the court. The object
for which the provision is inserted would be defeated if cases of reduction of
share capital is taken into account by virtue of the word ‘any other case’
appearing in sub-section (2) of section 101. Thus the power of the court to
direct compliance of the procedure particularly in the case like the present
one where by virtue of operation of law there is a necessity to reduce the
share capital is not necessary. The shares held by the transferor company in
the transferee-company cannot continue to exist by virtue of the amalgamation
and extinguishment of a transferor company. In my view to hold that even in
such cases the provision of sub-section (2) of section 101 must be necessarily
followed would be inappropriate and would amount to stretching the words ‘any
other case’ beyond the intent and object of the provisions of sub-section (2)
of section 101 of the Act. There is one more angle which should be taken into
consideration while interpreting the provisions of sub-section (2) i.e., if the
words ‘any other case’ is wide enough to cover all kinds of reduction in share
capital including the reduction which necessarily arises due to amalgamation of
the company then in my opinion the earlier part of the sub-section (2) of
section 101 would be redundant as the words ‘any other case’ would also include
the cases where there is a diminution of the liabilities in respect of the
unpaid share capital or where the payment is made to any shareholder of any
paid-up share capital. Thus before exercising the discretion in the third
category of the cases which falls in ‘any other case’, the court must take into
consideration and account whether the procedure should be directed to be
complied with or not and while doing so it should take into consideration
whether in that particular case interest of the creditors is affected or not,
the aforesaid view which I have taken is also fortified by the judgment of the
Madras High Court as under:
“...This clause has become necessary in view of
the statutory prohibitions contained in section 42 and section 77 of the Act.
The object of section 42 is to maintain the separate operational identity of a
holding company and its subsidiaries and thereby preserve the respective
shareholder’s control on them.
Section 77 imposes a restriction on purchase by
a company of its own shares. It is not necessary that extinguishment of shares
in all cases should necessarily result in reduction of share capital. Section
100 will not come into play where the scheme of amalgamation contemplate the
transfer of the entirety of assets and liabilities of the transferor company to
the transferee company. In such a case, in my view, there is no release of assets,
the assets of the transferor company, on amalgamation, stand transferred to and
vested in the transferee-company.
Further, rule 85 of the Companies (Court) Rules,
1959 which is part of the scheme of section 101 and section 102 of the Act,
provides that where a proposed compromise or arrangement involves reduction of
capital of the company, the procedure prescribed by the Act and the rules
relating to reduction of capital shall be complied with before the compromise
or arrangement as far as it relates to reduction of capital is concerned, it
is, therefore, evident that section 101 and section 102 and rule 85 would stand
attracted only to cases of compromise or arrangement involving reduction of
capital and not to cases of amalgamation simpliciter when the entirety of the
‘assets and liabilities are transferred and when there is no release of any
assets’.
The object of asking for confirmation by the
court of reduction of capital is to safeguard the interest of the creditors of the
company. In the instant case, the resolution approving the scheme of
amalgamation was unanimous. There was no voice of protest from any quarter. The
scheme is a comprehensive and consolidated scheme. It is peculiar case of
amalgamation where a holding company is amalgamated with a subsidiary company.
Therefore, I am clear in my mind that the contention raised by Mr.
Venkathalamoorthy is not well founded. As already mentioned, this case on hand
is not a case where there is reduction in capital. Further, the procedure
prescribed under sections 101 and 102, read with rule 85 do not stand attracted
to a case of scheme of amalgamation, where there is no release of assets but
which involves transfer of all the assets and liabilities.” (p. 523)
11. However the
learned counsel for the Regional Director has brought to my attention the
judgment of this court in PMP Auto Industries Ltd.’s case (supra) and
particularly the following para which reads as under:
“Thus the position in law appears to be clear.
Section 391 invests the court with powers to approve or sanction a scheme of
amalgamation/arrangement which is for the benefit of the company. In doing so,
if there are any other things which, for effectuation, require a special
procedure to be followed-except reduction of capital-then the court has powers
to sanction them while sanctioning the scheme itself. It would not be necessary
for the company to resort to other provisions of the Companies Act or to follow
other procedures prescribed for bringing about the changes requisite for
effectively implementing the scheme which is sanctioned by the court. Not only
is section 391 a complete code as held by the courts. . . .” (p. 299)
12. According to me
the provisions under section 101 would not apply in case where there is a
reduction in the share capital of the company by virtue of amalgamation of two
companies and in case where the transferor company held the shares in the
transferee company. In view of the aforesaid position in law, I find that there
is no merit in the objection raised by the Regional Director in the present
case. I accordingly make both the petitions absolute in terms of prayer clauses
(c) to (f).
13. The Official Liquidator has filed his report and he has no objection to
the approval of the said scheme.
BOMBAY HIGH COURT
[2005] 59 SCL 219
(Bom.)
HIGH COURT OF BOMBAY
S.U. KAMDAR, J.
COMPANY APPLICATION NO.
3 OF 2005
FEBRUARY 10, 2005
Section 101 of the Companies Act, 1956 - Share
capital - Reduction of - Whether, words ‘any other case’ appearing in section
101(2) must be so read as to cover all such categories in interest of creditors
which are vitally affected by any process of reduction in share capital and
only in that event, Court is empowered to direct company to follow procedure
provided for under section 101(2) - Held, yes - Whether where there was no
diminution of liability or payment to any shareholder of any paid-up share
capital and reduction in share capital was only for set-off of accumulated
losses against capital redemption reserve account and share premium account,
interest of creditors was not likely to be affected and, therefore, it was not
necessary to comply with procedure prescribed under section 101(2) - Held, yes
Words and phrases - ‘Any other case’ as occurring in section 101(2) of the Companies Act,
1956
Interpretation of statute - Rule of ejusdem generis
Facts
Four wholly-owned subsidiaries of the
applicant-company were merged with the applicant. Due to said merger, losses of
all those four companies were included in the books of account of the
applicant-company which resulted in substantial loss in the accounts of the
company. It was then decided by the applicant-company that the share premium
account and the capital redemption reserve of the company should be reduced to
adjust the debit balance in the profit and loss account. The board of directors
of the applicant-company held a meeting and approved said proposal of the
reduction in share capital by the aforesaid adjustment and an extraordinary
general meeting was convened for passing a necessary resolution as required
under the provisions of the Act. Thereafter, the applicant filed the instant
application seeking direction that the provisions of section 101(2) and the
procedure set out therein should not be applied to the reduction of capital due
to adjustment in share premium account and capital redemption reserve account
of the company with the accumulated losses of the company.
Held
Under section 101(2), the
Legislature has carved out three eventualities :
(i) diminution
of liability in respect of unpaid share capital, or
(ii) payment
to shareholder of any paid-up share capital, and
(iii) and
in any other case if the Court so directs. [Para 11]
Insofar as the first two categories
of section 101(2) are concerned, there is no difficulty because they are
specific in nature and if reduction of share capital has an effect of either of
the first two eventualities prescribed therein, then obviously the provision of
section 101(2) is totally mandatory and is required to be complied with.
Undoubtedly, there is power in the Company Court to dispense with even such
mandatory requirement by virtue of section 101(3) but such power can be rarely
exercised and the language of section 101(3) makes the said fact clear. Section
101(3) provides with the dispensing of the requirements falling in the first
two categories only in special circumstances and Court can exercise such power
under section 101(3) only after recording special reasons for exercising such a
power. Thus, in regard to the power dispensing with the provision of section
101(2) insofar as it relates to the first two categories, the Court must apply
its mind and ascertain what are the special circumstances which call for exercise
of power of dispensing under section 101(3). [Para 12]
Insofar as section 101(2) is
concerned, i.e., ‘any other cases’ where the Court so directs, the procedure of
section 101(2) should be complied with. In such cases there is no provision of
dispensing with the procedure prescribed under section 101(2). It is because
the language of the section is clear that such requirement is to be complied
with only if there is such a direction from the Court to do so. This leads to
next facet of interpretation of section 101(2). It is more complex, i.e., what
are the cases where a direction can be given to the company to comply with the
provisions of section 101(2) even though the same does not result in diminution
of the liability and/or repayment of the share capital. For the said purpose,
it is necessary to interpret the words ‘any other case’ as appearing in section
101(2). [Para 13]
In the instant case, the
reduction in the share capital neither resulted in diminution of liability nor
payment to any shareholder of any paid-up share capital but fell in the third
category ‘any other cases’. [Para 19]
The provision of section
101(2) is enacted with an intention to protect the interest of the creditors.
Thus, it is required to consider the words ‘any other cases’ appearing in
section 101(2) by keeping in mind the purpose and intention of the Legislature
as enunciated by the authorities. [Para 23]
It is a settled principle of
law that wherever specific words in a section are followed by the general
words, then the interpretation of the general words must be restricted to the
same category which is prescribed in the preceding part of the said general
words. This principle of law known as ejusdem generis is well-settled. The rule
of ejusdem generis is applicable when any particular words pertaining to a
class, category or genus are followed by general words in such cases. Then the
general words are so construed as limited to things of same kinds as are
specified in the preceding part of such section. [Para 24]
Thus, applying the principle
of ejusdem generis in the instant case, the words ‘any other case’ which are
general in nature must take colour from the earlier part of section 101(2)
which, inter alia, provides for protecting all creditors either in the case of
diminution of liability or the payment to any shareholder of paid-up share
capital. Thus, the words ‘any other case’ must be so read as to cover all such
categories in the interest of the creditors which are vitally affected by any
process of reduction in share capital and only in that event, the Court is
empowered to direct the company to follow the procedure provided for under
section 101(2). [Para 26]
In view of the above
discussion, since in the instant case, there was no diminution of liability or
payment to any shareholder of any paid-up share capital and the reduction of
share capital was only for set-off of accumulated losses against the capital
redemption reserve account and share premium account, the interest of the
creditors was not likely to be affected and, therefore, it was not necessary to
comply with the procedure prescribed under section 101(2). [Para 28]
Per Court
Thus, on a true and correct
interpretation of section 101(2), the question of dispensing with the
requirement of following the procedure provided therein for reduction in share
capital in cases which do not fall in the category of one and two does not
arise. It is only when the Court finds that by any other method the company
seeks to affect the interest of the creditors, that the Court is empowered to
issue direction to follow the procedure under section 101(2). The question of
dispensation arise only under section 101(3), where the reduction of the share
capital is by the method provided in category 1 and 2 of section 101(2). At
present the practice followed on the original side of the High Court is to
apply for dispensing with the procedure prescribed under section 101(2) even in
cases where it does not fall in either of the first two categories and, thus,
provisions of section 101(3) do not apply. The said procedure is required to be
discontinued. However, it is necessary that the company while making an
application for confirmation of reduction in share capital under sections 100
to 101 either independently or along with amalgamation petition under sections
391 to 394, must aver in the petition that whether a reduction in the share
capital proposed is likely to affect in any manner the interest of the
creditors or not. This would enable the Court to ascertain whether the power
under section 101(2) for giving specific directions under the third category of
the cases should be exercised or not. The office of the Company Registrar is,
thus, directed to ensure that such necessary averments are made in the petition
wherever the cases involve a reduction in share capital. [Para 29]
Cases referred to
Tata Iron & Steel Co. Ltd., In re [1926]
30 Bom. LR 197 (Bom.) (para 13), Katni Cement & Industrial Co. Ltd., In re
[1936] 39 Bom. LR 677 (Bom.) (para 14), Moneckchowk & Ahmedabad Mfg. Co.
Ltd., In re [1970] 40 Comp. Cas. 819 (Guj.) (para 16), Vasant Investment Corpn.
Ltd. v. Official Liquidator, Colaba Land & Mill Co. Ltd. [1981] 51 Comp.
Cas. 20 (Bom.) (para 17), PMP Auto Industries Ltd., In re [1994] 80 Comp. Cas.
289 (Bom.) (para 18), Hindustan Dorr-oliver Ltd., In re [2002] 40 SCL 521
(Bom.) (para 19), S.E.B.I. v. Sterlite Industries (India) Ltd. [2003] 45 SCL
475 (Bom.) (para 20), Cosmosteels (P.) Ltd. v. Jairam Das Gupta [1978] 1 SCC
215 (SC) (para 21), Meux’s Brewery Co. Ltd., In re [1919] Ch. D. 28 (para 22),
Collector of Central Excise, Bombay v. Maharashtra Fur Fabric Ltd. [2002] 7 SCC
444 (SC) (para 25), Siddeshwari Cotton Mills (P.) Ltd. v. Union of India [1989]
2 SCC 458 (SC) (para 26) and Asian Investments Ltd., In re [1992] 73 Comp. Cas.
517 (Mad.) (para 27).
Janak Dwarkadas and Jal Andhyarujina for the
Applicant.
Judgment
1. The
present application is placed before me for directions inter alia seeking
direction that the provisions of section 101(2) and procedure set out therein
should not be applied to the reduction of the capital due to adjustment of
share premium account and Capital Redemption Reserve Account of the applicant
with the accumulated losses of the company. The applicant company has passed a
special resolution in terms aforestated on 20-12-2004 and in terms of section
100 and section 101 of the Act seeks confirmation thereof from this Court.
2. This
application raises a very interesting question of law as to the interpretation
of the provisions of sub-section (2) of section 101 of the Companies Act-I of
1956.
3. Some
of the few facts which are necessary for determination of the aforesaid
question of law. I have briefly enumerated as under :
4. Rallis
India Limited was incorporated on 13-8-1998 under the provisions of the Indian
Companies Act, 1930 at a public limited company limited by shares. The
authorized share capital of the company is Rs. 200,00,00,000 (Rupees Two
Hundred crores) divided into 5,00,00,000 Equity shares of Rs. 10 each and
15,00,00,000 preference shares of Rs. 10 each. The paid up share capital of the
company is Rs. 99,98,45,930 representing 1,19,84,593 Equity shares of Rs. 10
each and 8,80,00,000 preference shares of Rs. 10 each. Sometime in or about
2003-04 four wholly owned subsidiaries of the applicant company were merged
with the applicant, thus, due to the said merger losses of all these four
companies were included in the Books of Account of the applicant company and
therefore substantial loss was indicated in the financial year 2002-03 in the
accounts of the company. It was then decided by the company that the share
premium account and the Capital Redemption Reserve of the Company should be
reduced to adjust the debit balance in the Profit and Loss Account. Thus in the
aforesaid manner it was decided that a debit balance of Rs. 75.58 crores in the
Profit and Loss Account of the Company as on 31-3-2004 should be wiped off. The
said adjustment of outstanding in the Capital Redemption Reserve account and
Share Premium Account reduces the share capital which has already been lost, or
is unrepresented by available assets. The Company is thus proposing to utilize
and apply the balance in respect of the said accounts for the adjustment and
writing off of the debit balances under the Profit and Loss Account of the Company.
5. On 28-10-2004,
the board of directors of the applicant company held a meeting and approved the
said proposal of the reduction of share capital by the aforesaid adjustment and
an extraordinary general meeting was convened on 20-12-2004 for passing a
necessary resolution as required under the provisions of the Companies Act.
According to the company under the provisions of the sections 78 and 80 read
with section 100 of the said Act of 1956 it is permissible to adjust the share
premium account and the Capital Redemption Reserve Account for the purpose of
writing off of the debit balances in the Profit and Loss Account of the
Company. In view of the sub-section (2) of section 78 of the Act the reduction
in the Share Premium Account would amount to reduction in the share capital of
the company and thus the procedure prescribed for the purpose of reduction in
the share capital from section 100 to section 105 of the Act is required to be
complied with. According to the Company the company is empowered under the
provisions of Articles of Association to carry out such an exercise. In the
meeting of the shareholders held on 20-12-2004 being an extraordinary general
meeting of the company the shareholders of the company accorded their consent
to the reduction of the Share Premium Account and the Capital Redemption
Reserve Account and the necessary resolution as contemplated under the
provisions of the Act was passed.
6. It is thus in
the aforesaid facts of the case that the learned advocate for the applicant
submitted that the reduction of the Share Premium Account and the Capital
Redemption Reserve Account does not involve a diminution of liability in
respect of unpaid share capital or the payment to any shareholder of any paid
up share capital of the Company and thus the company has pleaded that the
procedure prescribed under sub-section (2) of section 101 of the Act should be
dispensed with.
7. In the light of
the aforesaid facts a question of law has been raised whether the Court has
power to dispense with procedural requirements as contemplated under the
provisions of sub-section (2) of section 101, the procedural requirements as
contemplated therein and if there is any such power then what should be the
guidelines of criteria which the court should take into consideration for
dispensing with such a requirement. Before I go into large number of
authorities which have been cited before me it is necessary that the provisions
of sections 100 and 101 of the said Act are reproduced which are as under :—
“100. Special resolution for reduction of share
capital.—(1) Subject to confirmation by the [Tribunal] a company limited by
shares or a company limited by guarantee and having a share capital, may if so
authorized by its articles, by special resolution, reduce its share capital in
any way; and in particular and without prejudice to the generality of the
foregoing power, may—
(a) extinguish or
reduce the liability on any of its shares in respect of share capital not
paid-up;
(b) either with or without extinguishing or
reducing liability on any of its shares, cancel any paid-up share capital which
is lost, or is unrepresented by available assets; or
(c) either with or without extinguishing or
reducing liability on any of its shares, pay of any paid-up share capital which
is in excess of the wants of the company;
and may, if and so far as is necessary, alter
its memorandum by reducing the amount of its share capital and of its shares
accordingly.
(2) A
special resolution under this section is in this Act referred to as ‘a
resolution for reducing the share capital’.
“101. Application to the Tribunal for confirming
order, objections by creditors and settlement of list of objecting
creditors.—(1) Where a company has passed as resolution for reducing share
capital it may apply, by petition, to the [Tribunal] for an order confirming
the reduction.
(2) Where
the proposed reduction of share capital involves either the diminution of
liability in respect of unpaid share capital or the payment to any shareholder
of any paid-up share capital, and in any other case if the [Tribunal] so
directs, the following provisions shall have effect, subject to the provisions
of sub-section (3) :
(a) every creditor of the company who at the
date fixed by the [Tribunal] is entitled to any debt or claim which, if that
date were the commencement of the winding up of the company, would be
admissible in proof against the company, shall be entitled to object to the
reduction;
(b) the [Tribunal] shall settle a list of
creditors so entitled to object, and for that purpose shall ascertain, as far
as possible without requiring an application from any creditor, the names of
those creditors and the nature and amount of their debts or claims, and may
publish notices fixing a day or days within which creditors not entered on the
list are to claim to be so entered or are to be excluded from the right of
objecting to the reduction.
(c) where a creditor entered on the list whose
debt or claim is not discharges or has not determined does not consent to the
reduction, the [Tribunal] may, if it thinks fit, dispense with the consent of
that creditor, on the company securing payment of his debt or claim by
appropriating, as the [Tribunal] may direct, the following amount:—
(i) if the company admits the full amount
of the debt or claim or, though not admitting it, is willing to provide for it,
then the full amount of the debt or claim;
(ii) if the company does not admit and is
not willing to provide for the full amount of the debt or claim, or if the
amount is contingent or not ascertained, then, an amount fixed by the
[Tribunal] after the like inquiry and adjudication as if the company were being
wound-up by the [Tribunal].
(3) Where
a proposed reduction of share capital involves either the diminution of any
liability in respect of unpaid share capital or the payment to any shareholder
of any paid-up share capital, the [Tribunal] may, if, having regard to any
special circumstances of the case, it thinks proper so to do, direct that the
provisions of sub-section (2) shall not apply as regards any class or classes
of creditors.
8. The
first question which arises for my determination is that whether on the true
scope and interpretation of the sections 100 and 101 of the Act, whether the procedure
contemplated therein is required to be complied with in cases where the
proposal put forward for reduction of share capital does not involve, (1) the
diminution of liability in respect of unpaid share capital or (2) the payment
to any shareholder of any paid-up share capital or by virtue of the words “any
other cases” appearing under sub-section (2) of section 101 the procedural
requirements set out therein should be complied with in all cases where share
capital is proposed to be reduced.
9. Mr. Dwarkadas
learned counsel appearing for the applicant company has contended before me
that by virtue of the provisions of section 100 after the resolution is passed
by the company for reducing the share capital it is required to be put forward
to the court for confirmation thereof and while confirming the said resolution
under section 101 the court has to take into account the interest of the
creditors by virtue of the provisions of sub-section (2) thereof. Thus
according to him the provisions shall apply only in cases where the interest of
the creditors is affected. He has contended that in the first two categories
namely where the reduction of share capital involves the diminution of the
liability in respect of the unpaid share-capital or (2) the payment to any
shareholder of any paid up share capital, and thirdly if the court so directs
where the interest of the creditors is likely to be affected by virtue of such
reduction of share capital. He has thus contended that in the third category
there is no need to comply with the provisions of sub-section (2) of section
101 because according to him, in the third category the provisions of the
section would apply only if the court so directs. The learned counsel has thus
made a distinction between the first two categories where the requirement of
compliance with the provisions of sub-section (2) of section 101 is mandatory
and the third category where there is no need to comply with such procedure
unless there is specific direction from the court in that behalf. The learned
counsel has thereafter further submitted that even in cases where there is
diminution of liability in respect of unpaid share capital and the payment to
any shareholder of paid up share capital where the procedure is required to be
complied with under sub-section (2) of section 101 still in those cases by
virtue of the provisions of sub-section (3) of section 101 the court has been
given power to dispense with the procedural requirements of sub-section (2) in
special circumstances. Thus according to the learned counsel for the applicant
the power of the court to dispense with the requirements of sub-section (2) of
section 101 only applies in cases of first two categories whereas in the third
category there has to be specific direction from the court to comply with the
provisions of sub-section (2) of section 101 and in absence of such direction
the company is not bound to comply with the provisions of sub-section (2) of
section 101 and entitled to confirmation of reduction in the share capital without
complying with the procedure therein.
10. Thus according to
the learned counsel for the applicant in the present case since the reduction
in the share capital is neither for the diminution of liability nor payment to
any shareholder of the paid up share capital the provisions of sub-section (2)
are not required to be complied with. In so far as third category is concerned
empowering the court to give specific direction in the cases falling under the
words “any other case” the learned counsel has submitted that such a power of
the court must be exercised and can only be exercised in cases where reduction
of share-capital is not in either of the two modes provided in the first part
of sub-section (2) but still likely to affect the interest of the creditors
then in that event alone the court has discretion to specifically direct a
particular company to comply with the procedure of sub-section (2). It has been
further submitted by the learned counsel for the applicant that the whole
purpose and intent of enactment of sub-section (2) of section 101 is to protect
the interest of the creditors. Thus while construing the third part of
sub-section (2) of section 101 it is necessary that the court must keep in mind
the intention of the Legislature in enacting the said section and therefore
reduction in share capital must be correlated with the likely effect on the
interest of the creditors and not otherwise.
11. Before I consider
various authorities in my opinion in so far as the provisions of sub-section
(2) of section 101 is concerned the same requires an interpretation for more
than one reasons. On the plain reading of sub-section (2) of section 101 the
Legislature has carved out three eventualities.
(i) diminution of liability in respect
of unpaid share capital, or
(ii) payment to shareholder of any
paid-up share capital, and
(iii) and in any other case if the court so
directs.
12. In so far as
the first two categories are concerned, I do not find any difficulty because
they are specific in nature and if reduction of share capital has an effect of
either of the first two eventualities prescribed therein then obviously the
provisions of sub-section (2) is totally mandatory and is required to be
complied with. Undoubtedly there is power in the company court to dispense with
even such mandatory requirement by virtue of sub-section (3) of section 101 but
in my opinion such power can be rarely exercised and the language of
sub-section (3) makes the said fact clear. Sub-section (3) provides with the
dispensing of the requirements falling in the first two categories only in
special circumstances and that court can exercise such power under sub-section
(3) only after recording special reasons for exercising such a power. Thus the
power dispensing with the provisions of sub-section (2) of section 101 in so
far as it relates to the first two categories the court must apply its mind and
ascertain what are the special circumstances which calls for exercise of power
of dispensing under sub-section (3) of section 101 of the Act.
13. In so far as
sub-section (2) of section 101 is concerned, i.e., “any other cases” where the
court so directs the procedure of sub-section (2) of section 101 should be
complied with in my opinion in such cases there is no provision of dispensing with
the procedure prescribed under sub-section (2) of section 101. It is because
the language of the section is clear that such requirement is required to be
complied with only if there is such a direction from the court to do so. This
leads me to next facet of interpretation of sub-section (2) of section 101. It
is more complex, i.e., what are the cases where a direction can be given to the
company to comply the provisions of sub-section (2) of section 101 even though
the same does not result in diminution of the liability and/or repayment of the
share capital. For the aforesaid purpose it is necessary to interpret the words
“any other case” as appearing in sub-section (2) of section 101. The learned
counsel for the applicant Mr. Dwarkadas has relied upon the various authorities
which I shall now revert to brieftly for the purpose of interpretation of
sub-section (2) of section 101. Firstly the learned counsel for the applicant
has relied upon the judgment of this court in the case of In re Tata Iron and Steel
Co. Ltd. [1926] 30 Bom. L.R. 197 particularly the following paragraph appearing
on page 207 on the judgment:
“I now come to the second of the general
objections, it is urged that the company must take proceedings to alter the
memorandum and the articles before the Court can sanction a scheme involving
such alteration. The Act is capable of a construction which may seem to favour
this argument, but there is authority so clear upon the point that it is
unnecessary to discuss at length. It is enough to point out that section 153
does not contain any express requirement of this nature, and it would be most
inconvenient were its terms cut down by section 10. But to come to the
authorities. The case of In re Palace Hotel, Limited is one where a scheme was
put forward which involved an alteration of the memorandum of association (vide
p. 443), the question considered was whether the scheme fell within section 45
the conditions of which has not been complied with. (The references are to the
English statute). That section is identical with section 54 of the Indian Act.
It was held that as section 45 was inapplicable the scheme could be sanctioned
under section 120, the question whether this could have been done had section
45 been applicable was left open. The next case upon the point is In re
Scheweppes Limited. Though the scheme did not in fact involve an alteration of
the memorandum the Court held that even if an alteration had been involved the
scheme could have been sanctioned under section 120 so long as it was outside
section 45 the last case is In re J.A. Nordbery Limited Naville J. followed the
previous decisions. He says (p. 441):—
“As I understand the authorities you can under
section 120 alter the rights conferred by the memorandum upon preference
shareholders, provided that in so doing you avoid consolidating shares of
different classes or dividing shares into shares of different classes.”
He regarded section 45 (p. 441) “not an enabling
section as its form would suggest, but a section limiting the generality of the
power under section 120 to make arrangements with regard to capital which alter
the terms of the memorandum of association”.
The general results appears to be this that
where the Act lays down an express procedure for altering the memorandum it is
doubtful whether it is not necessary to follow that procedure, before applying
for sanction under section 120, but where that is not so the Court can under
section 120, but where that is not to the Court can under section 120 sanction
a scheme which alters the memorandum. I have considered the other cases cited,
but those discussed are the most recent authorities upon the point. I follow
these cases. This objection, therefore fails.”
14. Thereafter the
learned counsel has relied upon the judgment of this court in the case of In
re, Katni Cement and Industrial Co. Ltd. [1936] 39 Bom. L.R. 677, particularly
the following paragraph :
“On a careful consideration of the cases
referred by Buckley as authorities for the statement of the law and practice in
the above passage, and others cited at the bar, it seems to be well established
in England that (see Palace Hotel, Limited) In re Scheweppes Limited, In re and
J.A. Nordberg Limited, In re) the court can under this section sanction a
scheme, even though it involves acts which, apart from such provisions, would
be ultra vires the company; but this rule is subject to the limitation that if
the Companies Act contains express provisions enabling the doing of any act in
a particular way, the provisions of the enabling section, and not those of
section 153, must be followed. The decision in the three cases to which I have
referred above would seem to show that section 153 as altered by the Act of
1929 would, read with section 154, give a very wide power to a company in this
respect and a scheme involving a re-organization of capital which altered
rights conferred by the memorandum of association can be sanctioned under
section 120. A non-cumulative dividend conferred by the memorandum was altered
into a cumulative dividend as part of a scheme under section 120 (United States
and South American Investment Trust Co. (00145 of 1913), Neville J. July 8,
1913).”
15. In my opinion
both the aforesaid Judgments has no direct relevance to the issue which I am
considering in the present case. Firstly both the aforesaid judgments were in
respect of alteration of Memorandum of Association and the issue before the
court was whether a special procedure prescribed under the Act is required to
be separately complied with or not, while considering the amalgamation of the
two companies. The issue was that at the time of amalgamation of the two
companies if the resolutions are passed merging the two companies then whether
a separate special resolution is required for the purpose of alteration of
Memorandum of Association. In both the cases court has held that if a
particular action requires a special procedure to be fulfilllllllled then in
that event the same should be so done.
16. The learned
counsel has thereafter relied upon the judgment of the Gujarat High Court in
the case In re, Maneckchowk & Ahmedabad Mfg. Co. Ltd. [1970] 40 Comp. Cas.
819. This judgment pertains to reduction in the share capital and subsequently
the application of sections 100 and 101 of the said Act. While considering the
aspect of reduction in the share capital the learned single Judge D.A. Desai,
J. (as he then was) has held that reduction in the share capital requires a
special provision to be complied with if it involves repayment of a part of
paid up capital or extinguishment or reduction of the liability or any of the
shares in respect of unpaid share capital it would adversely affect the
interest of the creditors. While considering and analysing section 100 and 101
read with Rule 85 of the Company Court Rules the court has come to the
conclusion that the sole and main object of the provisions of sub-section (2)
of section 101 is to protect the interest of the creditors. The court in the
following paragraph has held as under :
“Rule 85 which I have already referred to
earlier, provides that when reduction of share capital is to be effected as
part of a scheme of compromise and arrangement, procedure prescribed for the
same in the Companies Act and Rules should be carried out as stated earlier.
This provision is made for very good reasons. It unmistakably indicates that
re-organization of share capital can be brought about as part of the scheme of
compromise and arrangement. But even if it is to be done as part of the scheme
of compromise and arrangement this special provision in rule 85 enjoins a duty
to carry out the procedure contained in section 100 onwards of the Companies
Act. Ordinarily, reduction or share capital affects members of the company and
it can be brought about by a compromise or arrangement between the company and
its members ignoring the creditors. Now, if reduction of share capital involves
repayment of a part of paid up capital or extinguish or reduce the liability on
any of the shares in respect of unpaid share capital it would adversely affect
the creditors. Yet the creditors would have no voice in the matter. If the
procedure as provided in section 100 onwards has got to be carried out the
court could not sanction reduction of share capital unless the creditors are
heard and provision is made for the creditors who object to the reduction.
However, if the reduction of share capital does not involve either diminution
of liability in respect of unpaid share capital or payment to any shareholder
of any paid-up capital, the court can sanction the same without reference to
the creditors. The creditors in such a case would not even be entitled to
object to the proposed reduction as provided in section 102. In the instant
case, admittedly, the reduction of share capital is by way of cancellation of
share capital which is lost or is unrepresented by available assets. In such a
case, creditors, even in a reduction simpliciter, are not entitled to object
and it makes no difference if reduction is brought about by following the
procedure prescribed in section 100 onwards or by way of a scheme of compromise
and arrangement. Thus, if it can be done in a given set of circumstances as
part of a scheme of compromise and arrangement, it has been properly done in
this case and while sanctioning the scheme ipso facto the reduction of share
capital ought to be confirmed.” (p. 868)
It does not appear well settled that where the
scheme of compromise and arrangement comprises within its ambit reduction of
share capital, the procedure for reduction must be gone through but if it is
shown that the procedure prescribed under section 100 onwards has been carried
out simultaneously while submitting the scheme for approval of the creditors
and members, the court can, while sanctioning the scheme, sanction reduction of
share capital. The important thing to find out would be whether the procedure
for reduction of share capital wherever it is mandatory has been strictly
carried out and wherever it is directory has been substantially complied with.
Before one can find out as to what exact
procedure should be followed for effecting reduction in share capital in a
given case, it must be found out how the company proposes to reduce the share
capital. The share capital of a company can be reduced in three distinct ways
as set out in section 100. The company for effecting reduction of share capital
may extinguish or reduce the liability of any of its shares in respect of share
capital not paid up, either with or without extinguishing or reducing liability
on any of its shares cancel any paid up share capital which is lost, or is
unrepresented by available assets; or with or without extinguishing or reducing
liability on any of its shares, pay off any paid-up share capital which is in
excess of the wants of the company. The reduction of the share capital can be
effected by a special resolution at a general meeting which must be sanctioned
by the court. Section 101 provides that, if the proposed reduction of share
capital involves either diminution of liability in respect of unpaid share capital
or payment to any shareholder of any paid up share capital, the provisions
therein prescribe shall have effect, subject to the powers of the court having
regard to the special circumstances in the case to direct that the provisions
of sub-section (2) shall not apply as regards any class or classes of
creditors. (p. 870)
17. The learned
counsel has thereafter relied upon the judgment of the learned Single Judge in
the case of Vasant Investment Corpn. Ltd. v. Official Liquidator, Colaba Land
and Mill Co. Ltd. [1981] 51 Comp. Cas. 20 (Bom.) and has drawn my attention
that the judgment of the Gujarat High Court has been confirmed and approved by
the learned single Judge and while considering the provisions of sections 100
and 102 of the said Act of 1956 a principle has been introduced of substantial
compliance with the provisions of sections 100, 101 and 102. The relevant
portion of the said judgment reads as under :
“In the present case also, the company proposes
to carry on its business with the help of the surplus funds available. The
company has already repaid in full to all the shareholders the capital invested
by them in the company. There is, therefore, no question of any reduction of
the share capital of the company.
Even assuming that the scheme involves a
reduction of the share capital of the company, it is possible to say, on the
facts of the present case, that the procedure prescribed under sections 100 to
102 of the Companies Act for the reduction of share capital has been
substantially complied with by the company before the filing of this petition
(by the petitioners). In this connection, the petitioners have relied upon a
decision of the Gujarat High Court in Maneckchowk and Ahmedabad Manufacturing
Co. Ltd., In re reported in [1970] 40 Comp. Cas. 819. In the course of his
judgment in the above case, D.A. Desai, J. (as he then was) has held that
section 391 of the Companies Act is a complete code. However, in view of rule
85 of the Company Rules, whenever a scheme of arrangement proposed under
section 391 involves a reduction of share capital, the procedure prescribed
under sections 100 to 102 of the Companies Act must be complied with. He went
on to hold that in a case where the rights of the creditors were not affected,
where 21 days notice had been given of the proposed scheme to the members of
the company and where the scheme was approved at a meeting held for the purpose
by more than three-fourths of the members present and voting, the provisions of
the Companies Act pertaining to reduction of share capital were substantially
complied with. In respect of section 100 which requires a special resolution to
be passed for the reduction of share capital, he further held that the notice
calling the general meeting need not specify the resolution as a special
resolution. He held that the provision under the Companies Act for such notice
is merely a directory provision and not a mandatory provision. The Court
should, therefore, ascertain in such cases whether sections 100 to 102 of the
Companies Act are substantially complied with. In the above case, the rights of
the creditors were not affected by the scheme. Hence, the provisions laid down
in sections 100 to 102 for the protection of the creditors did not require any consideration....”
(p. 26)
18. The aforesaid
judgments in my opinion does not answer the question directly which is posed
before me i.e. whether under the provisions of sections 100 to 101 the
circumstances under which the court is empowered to issue direction for
compliance of the said provisions where the cases fall under the third category
i.e. falling in “any other case”. This issue did not come up for direct
interpretation in the above mentioned cases i.e. Maneckchowk & Ahmedabad
Mfg. Co. Ltd.’s case (supra) or in the case of Vasant Investment Corpn. Ltd.’s
case (supra). The learned counsel has also fairly drawn my attention to the
judgment of this court in the case of PMP Auto Industries Ltd. [1994] 80 Comp.
Cas. 289. The learned counsel pointed out that in the said judgment there is no
discussion pertaining to interpretation of section 100 and section 101 of the
Act. The issue before the court arose under the provisions of section 394 of
the said Companies Act and the objections were raised by the Company Law Board
for integration and amalgamation of PMP Auto Industries Ltd. with S.S. Miranda
Ltd. and S.S. Miranda Ltd. with Morarjee Goculdas Spg. and Wvg. Co. Ltd. The
objection raised was that when memorandum of association of the transferee
company namely Morarjee Goculdas Spg. and Wvg. Co. Ltd. did not provide in the
object clause the business carried out by the other two companies, i.e. PMP
Auto Industries and Morarjee SS Miranda Ltd. then by way of amalgamation the
Memorandum of Association of the Company should be deemed to have been altered
or whether a special resolution is required in that behalf as provided under
the Companies Act. However while dealing with the aforesaid question the
learned single Judge of this court has made a passing observation that while
sanctioning the scheme of amalgamation the court has power to dispense with any
special procedure which is otherwise required for effectuation of the
amalgamation of the two companies and if such procedure is required then the
court has power to dispense with the same except the procedure provided for
reduction of share capital. The relevant potion of the said judgment is
reproduced as under:
“Thus the position in law appears to be clear.
Section 391 invests the court with powers to approve or sanction a scheme of
amalgamation/arrangement which is for the benefit of the company. In doing so,
if there are any other things which, for effectuation, require a special
procedure to be followed-except reduction of capital-then the court has powers
to sanction them while sanctioning the scheme itself. It would not be necessary
for the company to resort to other provisions of the Companies Act or to follow
other procedures prescribed for bringing about the changes requisite for
effectively implementing the scheme which is sanctioned by the court. Not only
is section 391 a complete code as held by the courts, but in my view, it is
intended to be in the nature of a “single window clearance” system to ensure
that the parties are not put to avoidable, unnecessary and cumbersome procedure
of making repeated applications to the court for various other alterations or
changes which might be needed effectively to implement the sanctioned scheme
whose overall fairness and feasibility has been judged by the court under
section 394 of the Act.” (p. 299)
19. The learned
counsel has thereafter relied upon the judgment of the another Single Judge of
this court in the case of Hindustan Dorr-Oliver Ltd., In re [2002] 40 SCL 521.
The aforesaid judgment though considers the provision of section 102, however
on facts of that case the issue I propose to consider did not arise. In that
case in fact the reduction in the share capital was directly resulting in
diminution of liability and thus the issue was whether the power should be
exercised under sub-section (3) of section 101 or not. In my opinion the said
issue do not directly or squarely arise in the present case as admittedly in
the present case the reduction in the share capital neither results in
diminution of liability nor payment to any shareholder of any paid-up share
capital but falls in the third category “any other cases”.
20. The learned
counsel has thereafter relied upon the Division Bench judgment in the case of
SEBI v. Sterlite Industries (India) Ltd. [2003] 45 SCL 475 (Bom.). The said
judgment once again is not directly relevant to the facts of the present case.
However the learned counsel has relied upon the said judgment only to the
limited extent of pointing out that the judgments of PMP Auto Industries Ltd.’s
case (supra), Maneckchowk & Ahmedabad Mfg. Co. Ltd.’s case (supra), Vasant
Investment Corpn. Ltd.’s case (supra) were considered by the Division Bench of
this court and has in fact approved the ratio thereof.
21. In the present
case, the issue in my opinion can be considered on a simple interpretation of
sub-section (2) of section 101. For such an interpretation of the said
sub-section (2) it is important to ascertain what was the intent of the
Legislature while providing for a particular procedure of sub-section (2) of
section 101. This issue of interpretation of sections 100 to 104 of the Act in
fact came up for consideration before the three Judge Bench of the Apex Court
in the case of Cosmosteels (P.) Ltd. v. Jairam Das Gupta [1978] 1 SCC 215 and
while considering the aforesaid sections the court has held that the main
intention of the Legislature provided the procedure of sub-section (2) of
section 101 is to provide security to the creditors and protect the interest of
the creditors. Even while considering the provision of sub-section (3) of
section 101 the court has come to the conclusion that what is required to be
seen into is whether notice is given to the creditors or not and should be
given if the company is unilaterally trying to act to the detriment of the
creditors. The said para-11 of the judgment is reproduced as herein under:
“A very serious apprehension was voiced by Mr.
De that if the court directs the company to purchase the shares of some of its
members while granting relief against oppression, the company would part with
its funds which would jeopardise the security of the creditors of the company
and that if such a direction for reduction of share capital can be given by the
court behind the back of the creditors, the creditors would be adversely
affected and, therefore, it was contended that, even though while giving
direction under section 402 directing the company to purchase the shares of its
members, it is not obligatory upon the Court to give notice to the creditors,
such notice ought to be given in the interests of the creditors. This
apprehension is in our opinion unfounded. Even when the Court is moved to
confirm the resolution for reduction of share capital under sections 100 to
104, the Court may in its discretion dispense with the procedure prescribed in
that group of sections [vide section 101(3)]. Undoubtedly, the court would use
the discretion only upon proof of special circumstances as contemplated by
section 101(3), but when such discretion is used, the creditors would have no
opportunity to object to the reduction. The opportunity to object would thus
depend upon the court exercising its discretion one way or the other. It may be
noticed that until the company submits its resolution for reduction of share
capital to the Court, the creditors have no say in the matter and, therefore,
the court is empowered to ascertain the wishes of the creditors by following
the procedure prescribed in sections 101 to 104. The object behind prescribing
this procedure requiring, save in special circumstances as contemplated in
section 101(3), the Court to give notice to the creditors is that the members
of the Company may not unilaterally act to the detriment of the creditors
behind their back. If such a procedure were not prescribed, the court might,
unaware of all the facts, be persuaded by the members to confirm the resolution
and that might cause serious prejudice to the creditors. But such a situation
would not be likely to arise in a petition under sections 397 to 398. In such a
petition the court would be better in a position to have all the relevant facts
and circumstances before it and it be the court which would decide whether to
direct purchase of shares of the members by the company. Before giving such a
direction the court would certainly keep in view all the relevant facts and
circumstances, including the interest of the creditors. Even if the petition is
being disposed of on a compromise between the parties, yet the court, before
sanctioning the compromise, would certainly satisfy itself that the direction
proposed to be given by it pursuant to the consent terms, would not adversely
affect or jeopardise the interest of the creditors. Therefore, it cannot be
said that merely because section 402 does not envisage consent of the creditors
before the court gives direction for reduction of share capital consequent upon
purchase of shares of some of the members by the company, there is no safeguard
for the creditors.” (p. 223)
22. Another judgment
which is directly relevant in my opinion is the judgment of the Chancery
Division in the case of In re, Meux’s Brewery Co. Ltd. [1919] Ch. D. 28 where
also while considering the identical provisions of section 49(1) of the English
Companies Act the learned Judge has given an opinion that the words “any other
cases if the Court so directs” is directly concerned with the interest of the
creditors and any person who is not a creditor and thus not affected by such
reduction in share capital cannot object to the same. The relevant portion of
the said judgment reads as under:
“Section 49(1) enacts : Where the proposed
reduction of share capital involves either diminution of liability in respect
of unpaid share capital or the payment to any shareholder of any paid-up share
capital- which is not the case here- “and in any other case if the court so
directs, the creditors shall be entitled under the provisions contained in this
section to object to the reduction. It is argued on behalf of the debenture
stock holders that this is a case in which the court ought to exercise its
discretion by directing that, notwithstanding the fact that no diminution of
liability or repayment to shareholders is involved, the creditors should still
have the right to come in and object to this reduction. This is from one point
of view a very startling proposition. The court has made hundreds of similar
orders from time to time and there appears to be no authority in the books and
no record of any reported case, in which debenture holders have successfully or
otherwise been permitted to oppose a reduction of capital which does not
involve a reduction of unpaid share capital or a repayment of paid-up share
capital to shareholders. I think it is quite clear from section 49(1) that
there is power in the court to permit a creditor to object to a reduction where
no such diminution of assets is about to take place, but from the framing of
the section, and after considering the observations of Lord Macnaghten in Poole
v. National Bank of China (1) I think that I am at least right in saying that
prima facie creditors are not supposed to be concerned in these questions of
reduction of capital where no diminution of unpaid share capital or repayment
to shareholders of paid-up capital is involved; in other words, if the court is
to allow a secured creditor in particular to object to a reduction which does
not involve such a diminution of assets as is referred to in section 49(1) it
is at least incumbent on him to make out a strong case before such a direction
would be given. Now if I understand it rightly, the argument which has been
addressed to me on behalf of the respondents really comes to this that the
company is proposing to wipe of a debit on capital account which must include a
substantial sum of floating or circulating capital-in other words, the company
is proposing to put itself in a position which will enable it to pay a dividend
out of its annual profits without making good such portion of its lost capital
as is properly attributable to floating or circulating capital, whatever may be
the true meaning of that term.”
23. The aforesaid two
judgments establishes beyond doubt that the provisions of sub-section (2) of
section 101 is enacted with an intention to protect the interest of the
creditors. Thus I am required to consider the words “any other cases” appearing
in sub-section (2) of section 101 by keeping in mind the purpose and intention
of Legislature as enunciated by these authorities.
24. In my opinion it
is a settled principle of law that wherever specific words in a section are followed
by the general words then the interpretation of the general words must be
restricted to the same class of category which are prescribed in the preceding
part of the said general words. This principle of law known as ejusdem generis
is well settled. The rule of ejusdem generis is applicable when any particular
words pertaining to a class, category or genus are followed by general words in
such cases. Then the general words are so construed as limited to things of
same kinds as are specified in the preceding part of such section. The
principle of ejusdem generis has been so expressed by Maxwell in its 12th
edition as under :
“But the general word which follows particular
and specific words of the same nature as itself takes its meaning from them and
is presumed to be restricted to the same genus as those words for according to
a well established rule in the construction of statutes, general terms
following particular ones apply only to such persons or things as are ejusdem
generis with those comprehended in the language of the Legislature.” In other
words, the general expression is to be read as comprehending only things of the
same kind as that designated by the preceding particular expressions, unless
there is something to show that a wider sense was intended, as where there is a
provision specifically excepting certain classes clearly not within the
suggested genus.”
25. This principle of ejusdem generis is also
accepted by the Apex Court in the case of Collector of Central Excise v.
Maharashtra Fur Fabrics Ltd. [2002] 7 SCC 444, wherein the Apex Court has held
as under:
“A careful reading of the proviso to the
notification would show that by resorting not only to the process of bleaching,
dyeing, printing, shrink-proofing, tentering, heat-setting, crease resistant
processing, but also to “any other process or any two or one of these
processes”, the respondent would lose the benefit of the exemption. It is a
well established principle that general terms following particular expressions
take their colour and meaning as that of the preceding expressions, applying
the principle of ejusdem generis rule, therefore, in construing the words “or
any other process”, the import of the specific expressions will have to be kept
in mind. It follows that the words “or any other process” would have to be
understood in the same sense in which the process, including tentering would be
understood. Thus understood, a process akin to stentering/tentering would fall
within the meaning of the proviso, and consequently, the benefit of
notification cannot be availed by the respondent.”
26. The said judgment
approves earlier view of the Apex Court in the case of Siddeshwari Cotton Mills
(P.) Ltd. v. Union of India [1989] 2 SCC 458. Thus applying the principle of
ejusdem generis in the present case the words “any other case” which are
general in nature must take its colour from the earlier part of the said
sub-section (2) of section 101 which inter alia provides for protecting all
creditors either in the case of diminution of liability or the payment to any
shareholder of paid-up share capital. Thus the words “any other case” must be
so read that this will cover all such categories in the interest of the
creditor is vitally affected by any process of reduction of share capital and only
in that event the court is empowered to direct the company to follow the
procedure provided for under sub-section (2) of section 101 of the said Act.
27. The aforesaid
view which I am inclined to take is also supported by the judgment of Madras
High Court in the case of Asian Investments Ltd., In re [1992] 73 Comp. Cas.
517 wherein while considering the provisions of sections 100, 101 and 102 of
the Companies Act the court has held as under:
“further rule 85 of the Companies (Court) Rule,
1959 which is part of the scheme of section 101 and section 102 of the Act,
provides that where a proposed compromise or arrangement involves reduction of
capital by the company, the procedure prescribed by the Act and the rules
relating to reduction of capital shall be complied with before the compromise
or arrangement as far as it relates to reduction of capital is concerned. It is
therefore evident that section 101 and section 102 and rule 85 would stand
attracted only to cases of compromise of arrangement involving reduction of
capital and not to cases of amalgamation simpliciter when the entirety of the
assets and liabilities are transferred and when there is no release of any
assets.”
The object of asking for confirmation by the
court of reduction of capital is to safeguard the interest of the creditors of
the company. In the instant case, the resolution approving the scheme of
amalgamation was unanimous. There was no voice of protest from any quarter. The
scheme is a comprehensive and consolidated scheme. It is a peculiar case of
amalgamation where a holding company in amalgamated with a subsidiary company.
Therefore, I am clear is mind that the contention raised by Mr.
Venkathalamoorty is not well-founded. As already mentioned this case on hand is
not a case where there is reduction in capital. Further the procedure
prescribed under sections 101 and 102 read with rule 85 do not stand attracted
to a case of scheme of amalgamation, where there is no release of assets but
which involves transfer of all assets and liabilities.”
28. In view of the
aforesaid discussion I am of the view that in the present case since, there is
no diminution of liability or payment to any shareholder of any paid up share
capital and that the reduction of share capital is only for set off of accumulated
losses against the Capital Redemption Reserve Account and Share Premium Account
thus the interest of the creditor is not likely to be affected and therefore it
is not necessary to comply the procedure prescribed under section 101(2) of the
Companies Act-I of 1956.
29. Thus in my
opinion on a true and correct interpretation of sub-section (2) of section 101
of the Act the question of dispensing with the requirements of following the
procedure provided therein for reduction in share capital in cases which do not
fall in the category of one and two does not arise. It is only when the court
finds that by any other method of the company seeks to affect the interest of
the creditors that the court is empowered to issue direction to follow the
procedure under sub-section (2), the question of dispensation in the present
case arises only under sub-section (3) of section 101 where the reduction of
the share capital is by the method provided in category 1 and 2 of sub-section
(2) of section 101. At present the practice followed on the original side of
this court is to apply for dispensing with the procedure prescribed under
sub-section (2) of section 101 even in cases where it does not fall in either
of the first two categories and thus provisions of sub-section (3) does not
apply. In my opinion the said procedure is required to be discontinued. However
it is necessary that the company while making an application for confirmation
of reduction of share capital under sections 100 to 101 either independently or
alongwith amalgamation petition under sections 391 to 394 of the Companies Act
the company must aver in the petition that whether a reduction in the share
capital proposed is likely to affect in any manner the interest of the
creditors or not. This would enable the court to ascertain whether the power
under sub-section (2) for giving specific directions under the third categories
of the cases should be exercised or not. The office of the Company Registrar is
thus directed to ensure that such necessary averments are made in the petition
wherever the cases involve a reduction in share capital.
30. In light of the
above observation the application is made absolute in terms of prayer clause
(a) with the aforesaid directions contained in a preceding paragraph.
BOMBAY HIGH COURT
[2003] 43 scl 486 (bom.)
HIGH COURT OF BOMBAY
Shapoorji
Data Processing Ltd.
v.
Ameer Trading Corporation Ltd.
F.I.
REBELLO, J.
REVIEW PETITION NO. 8 OF 2002
COMPANY PETITION NO. 420 OF 2002
AND COMPANY APPLICATION NO. 229 OF 2002
NOVEMBER 30, 2002
Section 101 of the Companies Act, 1956 -
Share capital - Reduction of - Company Court confirmed resolution of
shareholders reducing share capital of respondent-company without notice to
petitioner - Petitioner filed review application contending that he being
creditor of respondent- company in respect of mesne profits, ought to have been
heard before order was passed - Whether mesne profits would become debt only on
decree being passed by Court and, therefore, when on date when petition was
filed, claim for mesne profits could not be said to be debt, petitioner was not
entitled to notice under section 101 - Held, yes
Facts
The Court
confirmed the resolution of the shareholders of the respondent company reducing
the share capital of the company. The petitioner filed review application
seeking review of order of the Company Court contending that he was creditor of
the company in respect of mesne profits and as such ought to have been heard
before the order was passed. The respondent-company contended that the review
petition was not maintainable as the petitioner was not party to the
proceedings.
Held
The
Legislature has chosen to use two different expressions - One ‘person
aggrieved’ in Order 47, Rule 1, of the Code of Civil Procedure and ‘any party’
under Order 47, Rule 2. Expression ‘person aggrieved’ under Order 47 Rule 1 is
wider in amplitude and scope than the expression ‘Party’ under Order 47 Rule 2
which restricts the parties to the lis. [Para 3]
To maintain an
application for review, the party must satisfy two tests. Firstly, that the
party is aggrieved, and secondly, that the review is filed within the
prescribed period of limitation. In respect of a company petition before the
Company Court, a review petition would lie at the instance of a party
aggrieved. [Para 4]
Mesne profits
would be in the nature of compensation for occupation of the premises after
termination of the tenancy. In other words, these would be ‘damages’ which the
Court would have to ascertain. The damages would become debt only on decree
being passed by the Court. That event had yet to happen and in those
circumstances the claim for mesne profits could not be said to be debt which
would entitle the petitioner to notice, if any, under section 101. What was
important to bear in mind was that whether on the date when the petition was
filed, the company was indebted to the petitioners. There was no material
before the Court to so hold. Under section 101 before giving effect to a
resolution of the company for reduction of share capital, the Court in those
situations which would result in diminution of liability in respect of unpaid
share capital or payment of any shareholders of any paid up share capital has
to issue notice to the parties set out therein and that was not the case in the
instant case. In the instant case, there was only one creditor. Notice
otherwise was published in the newspaper inviting objections. No objection was
received and in those circumstances, the Court proceeded to confirm the
resolution of shareholders’ reducing the share capital. Considering that aspect
the instant case would not be a case which would fall within Order 47, Rule 1,
for the Court to review its earlier order.
Review
application was, therefore, rejected.
Cases referred to
Smt. Jatan Kanwar
Golcha v. Golcha Properties (P.) Ltd. AIR 1971 SC 374 (Para 2), Fakir Mohamed
Abdul Razak v. Charity Commissioner AIR 1976 Bom. 304 (Para 2), Bharat Singh v.
Firm Sheo Parshad Giani Ram AIR 1978 Delhi 122 (Para 2), K. Ajit Babu v. Union
of India [1997] 6 SCC 473 (Para 2) and Union of India v. Raman Iron Foundry
[1974] 2 SCC 231 (Para 5)
G.R. Joshi
for the Petitioner. R.M. Kadam and B.B. Saraf for the Respondent.
Judgment
1. At the threshold it was
contended on behalf of the Respondent company that petition for review
considering Order 47 was not maintainable. In so far as power of review is
concerned, it is now a settled proposition of law that the power to review must
be conferred for exercising the power of review. The company court while
exercising jurisdiction under the Companies Act does not cease to be civil
court. The rules framed under the Companies Act, will be applicable to company
proceedings. In the absence of any specific rule, procedure provided under the
Code of Civil Procedure would be applicable. In the instant case, Order 47 is
power of the Civil Court and in those circumstances, the High Court functioning
as a company court, but nonetheless a Civil Court has the power of review.
2. The only question which remains
to be answered is whether the power of review can be exercised at the instance
of the party who was not a party to the proceedings. This is the argument which
learned counsel for the company has raised considering language of Order 47,
that the order sought to be reviewed by this court cannot be reviewed. Order 47
rule 1 provides that the application for review is maintainable at the instance
of any person aggrieved by decree or order from which appeal is allowed but
from which no appeal is preferred, or from a decree or order from which no
appeal is allowed, or reference of the court of small causes. In so far as
Order 47 rule 2 is concerned, it is the specific power only of a party to the
proceeding. In other words, the Legislature has chosen to use two different
expressions one in so far as “Person aggrieved” in Order 47 rule 1 and any
party under Order 47 rule 2.
The Court,
therefore, will have to consider the expression under order 47 of C.P.C. On
behalf of the petitioners, their learned counsel relies on the judgment of the
Apex Court in the case of Smt. Jatan Kanwar Golcha v. Golcha Properties (P.)
Ltd. AIR 1971 SC 374. We are not really concerned with the facts of that case
but considering the expression “person aggrieved” under section 96, the Apex
Court has observed as under :
“...It is well settled that a person who is
not a party to the suit may prefer an appeal with the leave of the appellate
Court and such leave should be granted if he would be prejudicially affected by
the Judgment.” (p. 376)
A Division
Bench of this court in Fakir Mohamed Abdul Razak v. Charity Commissioner AIR
1976 Bom. 304 considering section 96 of the C.P.C. held that it is well settled
position in law that there is nothing in section 96 which lays down that it is
only party to the suit who can file appeal. Section 96 of the C.P.C. does not
use the expression other person or party. It is in that context that the court
held that even a person who is not party to the proceeding can prefer an
appeal. The learned counsel on behalf of the company relied on the Division
Bench judgment of the Delhi High Court in the case of Bharat Singh v. Firm Sheo
Parshad Giani Ram AIR 1978 Delhi 122 which has taken a view that it is only a
party to the lis who can prefer review and other person adversely affected can
take such steps which may be available to them in law to protect their rights
as and when the adverse order or decree is sought to be enforced so as to
protect their rights. It seems that the attention of the Division Bench of Delhi
High Court was not drawn to the observations of the Apex Court in the case of
Smt. Jatan Kanwar Golcha (supra) as referred to earlier. The learned counsel
also relied on the judgment of the Apex Court in the case of K. Ajit Babu v.
Union of India [1997] 6 SCC 473.
3. Having heard learned
counsel, I am of the opinion that expression person aggrieved under Order 47
rule 1 is wider in amplitude and scope than the expression party under Order 47
rule 2 which restricts the parties to the lis. This is the view taken by Apex
Court in Smt. Jatan Kanwar Golcha’s case (supra). It is also the view of the
Apex Court in the case of K. Ajit Babu (supra). In the case of K Ajit Babu
(supra) in proceedings arose from an Order of Central Administration Tribunal.
The issues raised were whether power of review was available to the Tribunal
and whether a person not a party to the order could prefer a review. After
considering the scope and effect thereto in Paragraph 4 of the judgment, the
Apex Court finally observed as under :
“We therefore find that a right of review is
available to the aggrieved persons on restricted ground mentioned in Order 47
of the Code of Civil Procedure if filed within the period of limitation.”
4. In other words to
maintain an application for review, the party must satisfy two tests. Firstly
that the party is aggrieved and secondly that the review is filed within the
prescribed period of limitation. The use of expression “prescribed period of
limitation” will be subject to section 5 of the Limitation Act. Considering the
two judgments of the Apex Court and Division Bench of this court in the case of
Fakir Mohamed Abdul Razak (supra), it is clear that review at the instance of a
person aggrieved and filed within the period of limitation would lie and to
that extent the judgment Division Bench of Delhi High Court in the case of
Bharat Singh (supra) does not correctly lay down the law. In respect of a
company petition before the company court, therefore, clearly a review petition
would lie at the instance of a party aggrieved.
5. Petitioner before this
court by the present review application seeks review of the order passed by the
company court dated 6-6-2002 in company petition No. 420 of 2002. The case of
the petitioner is that he was creditor within the meaning of section 10 of the
Companies Act and as such ought to have been heard before the order was passed.
In the review petition, contention is that the petitioner was creditor as per
Exh. 5 to the petition. Perusal of Exh. 5 would show that the rent as and upto
July, 2002 had been paid. Petition was filed on 15-4-2002 and order was passed
on 6-6-2002. The claim of which petitioner contended that he was creditor was
in respect of mesne profits. The review petition proceeds on the footing that
as mesne profits can be claimed by the petitioners that would be “debt” and
therefore, petitioner would be creditor. In so far as this aspect is concerned,
mesne profits would be of compensation for occupation of the premises after
termination of the tenancy. In other words, these would be “damages” which the
court would have to ascertain considering the Judgment in Union of India v.
Raman Iron Foundary [1974] 2 SCC 231 the damages would become debt only on
decree being passed by this court. That event has yet to happen and in these
circumstances, at least today the claim for mesne profits cannot be said to be
debt which would entitle the petitioner to notice, if any under section 10 of
the Companies Act. It is then contended that the municipal taxes for the period
April, 2000 to September, 2000 at least would be payable. There is nothing on
record to show when the demand was made or when the municipal taxes were to be
paid. It is no doubt true that apart from rent, petitioner is entitled to claim
taxes. However, what is important to bear in mind is that whether on the date
when the petition was filed, the company was indebted to the petitioners. There
is no material before this court to so hold. Under section 101 before giving
effect to a resolution of the company for reduction of share capital, the court
in those situations which would result in diminution of liability in respect of
unpaid share capital or payment to any share holders of any paid up share
capital has to issue notice to the parties set out therein. That is not the
case here. However, the court can still direct notice. In the instant case,
considering section 102 notice was dispensed with. The case of the company was
that there was only one creditor Notice otherwise was published in the Times of
India inviting objections. No objection was received and it is in those
circumstances, the court proceeded to confirm the resolution of the
share-holders reducing the share capital considering that aspect, to my mind,
this would not be a case which would fall within Order 47 rule 1 for the court
to review its earlier order dated 6-6-2002.
RAJASTHAN HIGH COURT
[2003]
43 SCL 381 (Raj.)
Om
Metals & Minerals Ltd., In re
S.K.
Keshote, J.
Company
Petition No. 52 of 2000
August
9, 2002
Section 100, read with section 201, of the
Companies Act, 1956 - Share capital - Reduction of - A large number of
shareholders defaulted in payment of unpaid allotment/call money in respect of
shares held by them - To make shares fully paid-up, company decided to reduce
its share capital - A special resolution was passed in general meeting -
Petition under section 101 was filed in instant High Court for confirmation of
said resolution - In spite of publication of notice in newspapers and gazette none
of shareholders or creditors appeared to oppose petition - Whether, therefore,
reduction of share capital as resolved and effected by resolution was to be
confirmed - Held, yes
G.L. Pareek
for the Petitioner.
Order
1. The petitioner M/s. Om
Metals & Minerals Limited, a company registered under the provisions of
Companies Act, 1956 (hereinafter referred to as the Act of 1956), having its
registered office at Kothari Bhawan, 30-31, New Grain Mandi, Kota, filed this
petition under section 101 of the Act of 1956 for confirmation of the reduction
of Share Capital.
2. In the petition the
petitioner prays that reduction of capital resolved on by the special
resolution set out in para 8 of the petition be confirmed, that to this end all
inquiries and directions necessary and proper be made and given; that the
proposed minute be approved; and that such further or other orders may kindly
be made in the premises as to the Court may deem fit in the interest of the
company and its shareholders.
3. In para 1 of the
petition, the petitioners has given the events in respect of registration of
the company. In para 2 the address of the registered office of the company has
been given and along with this petition copy of memorandum of article of
association has been enclosed to the petition. In para 3 of the petition the
objects of the company are given.
4.
The authorised capital of the company is Rs. 8,00,00,000 (Rs. eight crores)
divided into 80,00,000 equity shares of Rs. 10 each of which 67,86,300 equity
shares have been issued and out of issued share capital 48,44,000 shares have
been fully paid up and 19,42,300 shares have been paid up ranging from Rs.
12.50 to Rs. 25 per share, the details of which are given in Schedule ‘A’
appended to the petition.
5.
The company after its incorporation commenced business and it has since been
and still carrying on business successfully, as what stated in para 5 of the
petition.
6.
In para 6 of the petition stated that by virtue of Article 10 of articles of
association of the company, it is provided that the company may, from time to
time, by special resolution reduce its capital in any manner permitted by law.
The text of Article 10 of the Articles of association of the company is
reproduced in that para.
7.
In para 7 it is stated that in spite of a number of reminders the share-holders
defaulted in payment of unpaid allotment/call money in respect of shares held
by them. What it is stated is that in order to make above shares fully paid up,
the company has two options; first to forfeit the shares on which calls
remained unpaid; and second to reduce the subscribed share capital to the
extent of amount unpaid as per provision of sections 100 to 105 of the Act of
1956 read with Article 10 of the Articles of Association of the company.
8.
It is stated that number of shareholders, who failed to pay the allotment/call
money in respect of shares held by them, constitute a large portion of total
shareholders of the company, it is considered to be unfair and against the
interest of shareholders to forfeit the shares held by them. To protect the
interest of shareholders, the company wishes to go for reduction of capital
under Article 10 of Articles of Association of the company.
9. By
special resolution of the company, duly passed in accordance with section 189
of the Act of 1956, at a general meeting thereof, held after due notice as
provided in the Act on the 29th day of August, 2000, it was resolved :
1. In respect
of 35,700 partly paid shares on which Rs. 12.50 is paid up including premium,
75 shares shall be cancelled for every 100 shares held.
2. In respect
of 10,600 partly paid shares on which Rs. 18.75 is paid up including premium,
60 shares shall be cancelled for every 100 shares held and shareholders shall
pay Rs. 1.25 in respect of each share held.
3. In respect
of 52,500 partly paid shares on which Rs. 20 is paid up including premium, 60
shares shall be cancelled for every 100 shares held.
4. In respect
of 18,08,000 partly paid shares on which Rs. 20 to Rs. 22.50 is paid up including
premium, 60 shares shall be cancelled for every 100 shares held and balance
(exceeding Rs. 20) shall be paid back in respect of each share held.
5. In respect
of 35,500 partly paid shares on which Rs. 25 is paid up including premium, 50
shares shall be cancelled for every 100 shares held.
10.
On implementation of the above resolution the subscribed and paid up share
capital stand to be Rs. 5,61,91,150 divided into 56,19,115 equity shares of Rs.
10 each fully paid up. The company has further resolved authorising the Board
of Directors to move a petition to the Court for confirming the aforesaid
reduction and Shri C.P. Kothari, Managing Director of the company was
authorised to sign and verify the petition to appoint advocates, give power of
attorney to any person and to do all such acts, deeds and things as may be
necessary for obtaining the order of the court for reduction of capital in
terms of resolution. As a consequence of the reduction of share capital, the
liability of the shareholders which has been mentioned in Schedule ‘A’ shall
stand reduced by 5,69,55,000 and a number of shares held by such shareholders
shall be ratably reduced to 7,75,115 shares so as to convert these shares in to
fully paid up shares in the following manner :
(a) In
respect of 35,700 partly paid shares on which Rs. 12.50 is paid up including
premium, 75 shares shall be cancelled for every 100 shares held, the details of
which have been mentioned in category I in Schedule ‘B’.
(b) The
shareholders which have been mentioned in category II in Schedule ‘B’ shall
have to pay Rs. 13,250 in total which will be demanded from them.
(c) In
respect of 52,500 partly paid shares on which Rs. 20 is paid up including premium,
60 shares shall be cancelled for every 100 shares held, the details of which
have been mentioned in category III in Schedule ‘B’.
(d) An
amount of Rs. 14,17,500 in total shall be refunded to some share-holders which
have been categorised as category IV in Schedule ‘B’.
(e) In
respect of 35,500 partly paid shares on which Rs. 25 is paid up including
premium, 50 shares shall be cancelled for every 100 shares held, the details of
which have been mentioned in category V in Schedule ‘B’.
11. The
petition was placed for preliminary hearing on 22-12-2000. The court ordered
for publication of notice in Hindustan Times and Rajasthan Patrika as per rules
15 days prior to next date fixed. The notice was published in Rajasthan
Patrika, Jaipur edition dated 1-6-2001, Hindustan Times, New Delhi dated
2-6-2001 and Rajasthan Gazette dated 31-5-2001.
12.
Counsel for the petitioner filed the affidavit on 8-3-2002 in form No. 26 as
what required by Rule 55 of the Companies (Court) Rules, 1959. He made
statement that no person has sent to him pursuant to notice published in the
newspaper and gazette, a claim to be entered in the list for a lesser sum then
in respect of which he has entered in the said list Annexure 3. It has next
been stated that no claims have been sent to him in pursuance to the notice
referred to in para 2 of the affidavit Shri C.P. Kothari by persons not entered
on the said list ‘A’ and claiming to be so entered. In spite of publication of
the notice in the two newspapers and the gazette none of the creditors or
shareholders appeared in person or by advocate to oppose or support the
petition. Thus, the reduction of share capital of the company resolved and
effected by resolution passed in the general meeting of the said company is
confirmed and the authorised share capital of M/s. Om Metal & Minerals
Limited, is henceforth Rs. 8,00,00,000 divided into 80,00,000 equity shares of
Rs. 10 each and the subscribed and paid up share capital of the company after
reduction of subscribed share capital is Rs. 5,61,91,150 divided into 56,19,115
equity shares of Rs. 10 each fully paid up. At the date of the registration of
this minute 56,19,115 equity shares have been issued and are deemed to be fully
paid up and the remaining 23,80,885 equity shares are unissued.
13.
A certified copy of this order be delivered to the Registrar of Companies,
Rajasthan, Jaipur within 21 days of the date of receipt of a certified copy of
this order. A notice of registration by the Registrar of Companies, Rajasthan,
Jaipur of this order and that of said minutes be published in the Rajasthan
Patrika, Jaipur edition, Hindustan Times, New Delhi edition and Rajasthan
Gazette within 14 days of the registration aforesaid.
14. The
company petition accordingly stands disposed of.
[2003] 115 COMP CAS
260 (PUNJ & HAR)
HIGH COURT
OF PUNJAB AND HARYANA
G.S. SINGHVI AND MRS. BAKSHISH,
JJ.
company
appeal nos. 1 to 3 of 2000
july 3,
2000
l.m. suri and Deepak Suri for the appellant.
G.S. Singhvi, J.—These appeals are directed
against the order dated October 12, 1999, passed by the learned company judge
dismissing Company Petition No. 135 of 1999 and Company Applications Nos. 241
and 242 of 1999 filed by the appellants under sections 100,101 and 102 of the
Companies Act, 1956 (for short "the Act") and rule 9 of the Companies
(Court) Rules, 1959.
A brief statement of
facts would enable us to appreciate the issue raised by the appellants in the
correct perspective. Highway Cycle Industries Ltd. (appellant No. 1 in Company
Appeals Nos. 1 and 3 of 2000) and the sole appellant in Company Appeal No. 2 of
2000 (hereinafter described as "the transferor-company") was
incorporated as a private limited company on May 20, 1971. Its authorised share
capital is Rs. 5,00,00,000 divided into 50 lakh equity shares of Rs. 10 each.
The issued, subscribed and paid-up capital of the transferor-company was Rs.
3,48,80,000 as on March 31, 1996. The transferor company initially started the
business of manufacturing and dealing in automobile components, special purpose
machines etc in its factory at Ludhiana. Later on, it started the business of
manufacturing and dealing in aluminium die-casting and automobile components in
its unit Sunbeam Castings located at Narsinghpur, District Gurgaon. Sunbeam
Auto Ltd. (appellant No. 2 in Company Appeals Nos. 1 and 3 of 2000) was
incorporated on May 2, 1996, as an independent limited company (hereinafter
described as the transferee-company) with authorised share capital of Rs.
1,00,00,000 divided into 10 lakh equity shares of Rs. 10 each. The issued,
subscribed and paid-up share capital of the transferee-company was Rs.
10,00,700 as on June 30, 1996.
With a view to
introduce greater efficiency in their operations, the transferor-company and
the transferee-company formulated a scheme of arrangement which envisaged the
transfer of the unit of Highway Cycle Industries Ltd., namely, Sunbeam Castings
to the transferee-company at book value for all its liabilities and interests
subject to the existing charges thereof in favour of the banks and financial
institutions; For seeking approval of the scheme of arrangement, they filed
separate petitions under sections 391 and 394 of the Act. The learned company
judge issued directions on October 3, 1996, and again on December 5, 1996, for
holding the separate meetings of the equity shareholders and creditors. After
receiving the report of the chairmen of the meetings and issuing notices to the
Regional Director, Company Law Board, Department of Company Affairs, Kanpur and
Registrar of Companies, the learned company judge sanctioned the scheme on
February 10, 1999, with' the following observations:
"The unit of the
transferor-company is being transferred to the transferee-company. The scheme
as proposed was approved by the board of directors of the respective companies.
The report of the chartered accountants of the respective companies had also
been filed on record copy annexed to this petition as well. Along with the
balance-sheet of the company as on March 31, 1996, the Bank of Baroda, the lead
bank in relation to the affairs of the companies, has issued a
"no-objection certificate" for the implementation of the proposed
scheme. It is true that consideration in cash is not being paid for transfer of
the unit but for this purpose, the scheme has to be construed and g read in its
entirety. The scheme already stands approved by the shareholders as well as
secured and unsecured creditors of the respective companies. It is settled
principle of law that internal management and running of the business is
primarily a matter which falls in the domain of management for internal affairs
of the company. Unless and until such scheme is impermissible in law or bad in
law and/or opposed to public policies, the court would not interfere in
sanctioning of such scheme. It has been certified that the proposed scheme is
not opposed to public policies and does not offend the interests of the
shareholders/members/creditors of the company and that it is not opposed to the
public at large. Growth, expansion and profitability appear to be the objects
of both the companies without infringing the rights of all concerned. The
function of the court while considering the scheme within the purview of
sections 391 and 394 of the Companies Act is more of supervisory in nature. The
court certainly has to record its satisfaction that all relevant material as
required under the proviso to section 391(2) has been placed on record and the
attempt of the scheme is not to work for the benefit of some particular
interested person. The proposed scheme need not satisfy the basic ingredients
of a contract. Cash consideration, per se, would not frustrate or invalidate
the proposed scheme.
Despite public notice
no objection has been filed by any person interested or from the public at
large. In other words, there appears to be no objection to the acceptance of
the scheme. The concerned financial institutions have consented to the
arrangement."
Soon after the
sanction of the scheme of arrangement, the transferor and the transferee
companies filed Company Applications Nos., 241 and 242 of 1999 for modification
of the scheme in the following terms:
"(a) The transfer date shall be April 1, 1999 (instead of April 1,
1996, as sanctioned).
(b) The Sunbeam Auto Ltd. shall issue 17,44,000
equity shares of Rs 10 each fully paid up on a premium of Rs. 30 per share to
the shareholders of Highway Cycle Industries Ltd. (transferor-company) on a
proportionate basis (instead of issuing to Highway Cycle Industries Ltd.
transferor-company).
(c) Subject to the approval of the High Court in
pursuance of sections 1O0, 101 and 102 of the Companies Act, 1956, the paid up
share capital of Highway Cycle Industries Ltd. (transferor-company) shall stand
reduced from Rs. 3,48,80,000 (rupees three crores forty-eight lakhs eighty
thousand only) divided into 34,88,000 equity shares of Rs. 10 each by
cancellation of 17,44,000 equity shares to Rs. 1,74,40,000 (rupees one crore
seventy-four lakhs forty thousand only) divided into 17,44,000 equity shares of
Rs. 10 each credited as fully paid up: The shareholders of the Highway Cycle
Industries Ltd. shall stand reduced proportionately."
The
transferee-company also filed Company Petition No. 135 of 1999 for approval of
the resolution passed in the special meeting of its shareholders for reduction
of the paid up. share capital from 3,48,80,000 to Rs. 1,74,40,000 by
cancellation of 17,44,000 equity shares of Rs; 10 each.
Notices of the
company applications and petition" were published in the newspapers in
pursuance of the directions given by the learned company judge who; after
hearing counsel appearing for the applicants and the official liquidator
dismissed the company petition as well as the two applications filed by the
appellants.
Shri L.M. Suri argued
that the reasons assigned by the learned company judge for declining the prayer
of the appellants for modification of the scheme of arrangement and approval of
the resolution passed by the shareholders of appellant No. 1 for reducing the
paid up share capital are ex facie erroneous and, therefore, the impugned
orders should be quashed. He submitted that the observation of the learned
company judge about the possibility of the appellants taking undue benefit
under the Finance Bill, 1999, by seeking change in the scheme of arrangement is
based on pure conjectures and there was no legal justification to decline the
prayer made by them. He argued that the proposed amendment does not, in any
manner, affect the existing shareholders and creditors and, therefore, the
learned company judge was not justified in refusing to entertain the request of
the appellants ignoring the fact that the shareholders of appellant No. 1 had
approved reduction in the share capital and the proposed amendment was necessitated
due to the long lapse of time between the date of preparation of scheme of
arrangement and approval thereof by the learned company judge.
We have given serious
thought to the arguments of learned counsel and agree with him that the order
under challenge deserves to be set aside. A careful reading of the order dated
February 10, 1999, by which the scheme of arrangement was sanctioned and the
order under challenge shows that in the first instance, the learned company
judge had given due weightage to the management's prerogative to regulate its
affairs and also to the fact that the proposed scheme was not adverse to the
interest of the shareholders and creditors, but while rejecting the prayer for
modification of the scheme, the learned company judge completely ignored the
following important factors:
(i) the
transferee-company is a subsidiary of the transferor-company;
(ii) the shareholders of both the
companies had approved the scheme of arrangement as well as its amendment;
(iii) all the creditors of appellant No. 1
including the banks and financial institutions had approved the scheme of
arrangement; and
(iv) the Regional Director, Company Law
Board had not only given no objection to the scheme of arrangement and the
proposed amendment but also clearly stated that the affairs of the companies
had not been conducted in a manner prejudicial to the interest of their members
or public.
Not only this, the
learned company judge delved into the realm of conjectures by observing that
the proposed amendment in the scheme of arrangement was meant to take undue
advantage of the provisions introduced by the Finance Bill, 1999, and that the
creditors are likely to be adversely affected by such modification. In our
opinion,, the impugned order suffers from an error of law because the learned
company judge has not only ignored material aspects of the case but has also
proceeded on conjectures.
Hence, the appeals
are allowed. Order dated October 12, 1999, passed by the learned company judge
is set aside and Company Applications Nos. 241 and 242 of 1999 as well as
Company Petition No. 135 of 1999 are allowed in terms of the prayer made
therein.
[1986] 59 COMP. CAS. 368
(GUJ.)
HIGH COURT OF GUJARAT
Shri Ambica Mills Ltd., In re
Jaykrishna Harivallabhdas Ex parte
S.B. MAJMUDAR, J.
MISCELLANEOUS CIVIL
APPLICATION NO. 6 OF 1983 IN COMPANY PETITION NO. 49 OF 1978
JUNE 15, 1983
G.A. Thakkar, S.B. Vakil
and A.C. Gandhi, Mrs. Mona U. Chinubhai S.I. Nanavati, Miss V.P. Shah, B.P. Tanna,
B.S. Trivedi, Y.B. Bhatt and N.G. Shodhan for the Appearing Party.
S.B. Majmudar, J.—This is an application under section 151 of the Code of
Civil Procedure read with rule 9 of the Companies (Court) Rules, 1959, invoking
the inherent powers of this court with a view to enabling applicants to get
certain remarks made by me in my judgment dated November 19, 1981, in Company
Petition No. 49 of 1978 with Company Application No. 115 of 1981, expunged.
In order to appreciate the
grievance of the applicants in the present application, it is necessary to note
a few relevant facts leading to the aforesaid company petition which came to be
disposed of by me by the aforesaid judgment.
Relevant
facts, undisputed and/or well-established facts on record.—The present three applicants are the managing directors of Shri
Ambica Mills Ltd., a public limited company earlier registered under the Indian
Companies, Act, 1913, and then governed by the provisions of the Companies Act,
1956. In order to facilitate easy reference to the concerned parties, I will
mention Ambica Mills Ltd. as petitioning company which had filed Company
Petition No. 49 1978 before this court; while the three applicants will be
referred to as the managing directors of the company or managing directors for
short.
By way of Company Petition
No. 49 of 1978, the petitioning company moved this court under section 101 of
the Companies Act, 1956, for getting an order of confirmation regarding
reduction of its equity share capital. The grounds sought to be made out in the
said company petition were to the effect that the paid-up share capital of the
company was in excess of its wants and that the company had decided to reduce its
equity share capital. That with that end in view, the company had passed a
special resolution dated June 1, 1978, to return to the holders of the equity
shares paid-up capital to the extent of Rs. 13 per share by reducing the
nominal value of the said equity shares from Rs 100 to Rs. 87 per share by
repayment of a sum of Rs. 8 11 in cash against each equity share and by
distribution to the shareholders of 41,851 equity shares of Shri Arbuda as
mentioned in the said special resolution. The company's case was that the
requisite resolution was passed by three-fourths majority in the meeting of
equity shareholders of the company. The company application before this court
under section 101(2) was filed on June 29, 1978, which was registered as
Company Petition No. 49 of 1978.
|
** |
** |
** |
This petition originally
was placed before me for final hearing in the last week of December, 1980. At
that time, Mr. J. M. Thakore, learned Advocate-General with Mr. I. M. Nanavati,
appearing for the petitioning company raised a preliminary objection about the
locus standi of the equity shareholders to address this court and to oppose the
petition, while the learned advocates of the respective objectors on the other
hand contended that they had sufficient locus standi to object to the petition
and to have their say before the court. Accordingly, I heard the learned
concerned advocates on the preliminary point about the nature of the
jurisdiction of this court under section 101 of the Companies Act. Hearing on
the preliminary objection lasted for about two weeks and thereafter by my order
dated 18, 19, 22-12-1980, I gave a preliminary judgment laying down the scope
and ambit of the proceedings for reduction of share capital that may be taken
out by the company before the court and I indicated various issues which would
arise for decision of the court in the facts and circumstances of the case and
on the basis of rival contentions of the parties on diverse points on which
they were at variance. It would be sufficient for the present purpose to note
that the main thrust of the objecting shareholders and creditors was that the
entire ; scheme was a camouflage and that it was a fraud on the statute. That
the managing directors, viz., three brothers, were interested in effecting a
family arrangement of their properties inter se the family branches of these
three brothers and, therefore, under the pretext of having a scheme of
reduction of share capital, they wanted to achieve their private purpose and
that they had misled not only the board of directors but also the general body
by keeping back relevant facts and by representing false facts to achieve their
private purpose and, consequently, the company petition could not be granted.
There were various other contentions raised on merits regarding the viability
of the scheme with which I am not concerned at present.
After the aforesaid
preliminary judgment was given by me, the company petition lingered on on the
file of this court for a couple of months. Thereafter, as in the meanwhile, Mr.
I.M. Nanavati, learned advocate appearing for the petitioner company,
unfortunately expired. Ultimately, the company petition reached final hearing
before me in the later half of the year 1981 and the final hearing of the
petition lasted before me for about three months. It was started by the end of
July and it was completed in the final week of October, 1981. It is thereafter
that I disposed of the company petition by my C.A.V. judgment which was
delivered on November 19, 1981. In view of various findings arrived at by me on
diverse issues, I came to the conclusion that the petitioning company was not
entitled to succeed and, consequently, I dismissed the company petition
granting special costs of Rs. 500 to Mr. Narendra Shodhan, party in person. A
little later I will refer to the various findings arrived at by me on the main
issues in controversy between the parties in the said company petition. It is
an undisputed position between the parties that against my judgment dated
November 19, 1981, whereby Company Petition No. 49 of 1978 was dismissed by me,
the petitioning company has already filed O.J. Appeal No. 6 of 1982 before this
court and the same has been admitted by a Division Bench of this court
consisting of P.D. Desai J (as he then was) and R. C. Mankad J. on February 24,
1982. It is not in dispute that the present three applicants who are managing
directors of the petitioning company have filed Civil Application No. 6 of 1983
in 0. J. Appeal No. 5 of 1982 seeking to get stay of operation of my order in
the main company petition under appeal on diverse grounds which are on the same
lines as the grounds put forward by the applicants-managing directors before me
in the present miscellaneous civil application. The said Civil Application No.
6 of 1982 is pending for disposal before the Division Bench.
|
** |
** |
** |
Rival contentions.—Mr.
Thakkar, learned advocate appearing for the applicants, submitted that the petition
for reduction of share capital was filed by Ambica Mills. That the applicants
being the managing directors of the company were not before the court as
parties. Therefore, they had no opportunity to meet various charges levelled
against them by the concerned objectors. Consequently, certain remarks made by
me against their conduct in the judgment are required to be expunged in
exercise of my inherent powers, as they were vitiated on the ground of failure
of natural justice. He submitted that the impugned remarks which have been
tabulated at annexure "A" to the application and which consist in all
of 9 paras are too wide of the mark, they are sweeping in nature and are
totally irrelevant and based on no evidence and, consequently, they are
required to be expunged in the interests of justice.
|
** |
** |
** |
Question
of maintainability of the present application.—It is to be appreciated that the present application is filed under section
151, Civil Procedure Code, read with rule 9 of the Companies (Court) Rules,
1959. Rule 9 of the said Rules is in pari materia with section 151 of the Code
of Civil Procedure. It is now well settled that the inherent power of the court
is not a substantive power but is merely a procedural power and it cannot be
exercised if it conflicts with what is expressly provided by the Code (vide
Padam Sen v. State of U.P., AIR 1961 SC218). In Manohar Lai Chopra v. Rai Bahadur Rao Raja Seth Hiralal,
AIR 1962 SC 527, the majority of the Supreme
Court, placing reliance on the aforesaid decision reported in AIR 1961 SC 218,
made the following pertinent observations on the powers of the court under
section 151, Civil Procedure Code (at p 533):
"These observations clearly
mean that the inherent powers are not in any way controlled by the provisions
of the Code as has been specifically stated in section 151 itself. But those
powers are not to be exercised when their exercise may be in conflict with what
had been expressly provided in the Code or against the intentions of the
Legislature. This restriction, for practical purposes, on the exercise of those
powers is not because those powers are controlled by the provisions of the
Code, but because it should be presumed that the procedure specifically
provided by the Legislature for orders in certain circumstances is dictated by
the interests of justice. "
At this stage, it would be
profitable to have a look at Order 20, rule 3, Civil Procedure Code. It
provides that the judgment shall be dated and signed by the judge in open court
at the time of pronouncing it and, when once signed, shall not afterwards be
altered or added to, save as provided by section 152 or on review. Mr. Thakkar
made it very clear that he was not seeking to invoke review jurisdiction of
this court to get expunged the concerned remarks. He also stated that he did
not intend the judgment to be altered or added to. If that is so, it must be
held that the only alternative left for him to get the judgment modified by
deletion of passages in question would be under section 152 of the Code read
with section 151. It is obvious that section 152 is out of picture as it talks
of clerical or arithmetical mistakes in judgments, decrees or orders or errors
arising therein from any accidental slip or omission which may be corrected by
the court concerned either of its own motion or on application of any of the
parties. It is not the case of Mr. Thakkar that there was any accidental,
clerical or arithmetical mistake in my judgment or any accidental slip or
omission. On the contrary, the remarks have been made by me regarding the
conduct of the managing directors, after full deliberations and conscious
consideration of the relevant evidence on record and in the light of the rival
contentions put forward by the learned advocates of the respective parties
including the learned advocate for the petitioning company, Mr. Vakil, who also
tried to justify the conduct of the managing directors and put forward his
explanation regarding their conduct as Mr. Vakil thought it fit in the
interests of the concerned managing directors. It is, therefore, obvious that I
cannot grant the prayer of the applicants under section 151, Civil Procedure
Code, simpliciter to delete the 9 paras from my judgment as mentioned in
annexure 'A' to the application simply on the ground that the managing
directors had allegedly no opportunity to meet the charge of fraud levelled
against them and, therefore, the remarks have been passed contrary to the
principles of natural justice and that the managing directors were condemned
unheard. In order to judge the maintainability of the present application, I
will assume for the time being that the remarks were made without giving any
real opportunity to the concerned managing directors to have their say in the
matter though I must hasten to add that this assumption, as I will later on
show, is totally uncalled for and on the contrary, the applicants had ample
opportunity to have their say in the matter and they deliberately avoided to
avail of that opportunity. But, for the time being, I proceed on the assumption
that they got no real opportunity to controvert the charge of fraud against
them. Even then, the question is whether on such an allegation itself without
anything more, the alleged offending remarks in the 9 paras of my judgment as
mentioned in annexure 'A' and which comprise of 75 lines approximately can be
deleted from my judgment at this stage. Now, it is well settled that alteration
in the judgment cannot be done by the same court, save and except by way of
review or within permissible limits of section 152 of the Code of Civil
Procedure. A little later, I will refer to a judgment of the Supreme Court
rendered under section 561 of the Criminal Procedure Code, which also
represents a scheme parallel to the one under section 151 of the Code of Civil
Procedure, to show that under certain exceptional circumstances, the High Court
not by way of review, but only on the ground of propriety of the concerned
sweeping observations, may be able to delete the impugned remarks from the
judgments. But even in such a contingency, it has to be shown that the
concerned remarks were totally irrelevant, uncalled for and ware not based on
evidence, meaning thereby, that they were as good as accidental slip and
represented errors in the judgment which were in the nature of creases in the
judgment which could be ironed out without affecting the main texture of the
judgment. If, however, the offending remarks were an integral part of the
judgment and if they formed a vital link in the chain of reasoning or if they
reflected ultimate findings logically flowing from the earlier penultimate
findings based on evidence on record, even if such remarks were found to have
been made against persons who had no real opportunity to meet them, they cannot
have any remedy under section 151, Civil Procedure Code, and the only remedy in
such a case for innocent strangers who are accidentally or unwittingly injured
by the court's remarks would be to go in review. The aforesaid legal position
is well borne out by a series of judgments of various courts including the
Supreme Court. In Shivdeo Singh v. State of Punjab, AIR 1963 SC 1909, it was
held by the Supreme Court that if the High Court on an earlier occasion in
breach of the principles of natural justice had passed an adverse order against
a stranger, such stranger, aggrieved by the order of the High Court can file a
writ petition under article 226 of the Constitution which in its very nature
would be by way of review of the earlier ex parte order of the High Court
against such aggrieved party. Mudholkar J., speaking for the Supreme Court in
the aforesaid decision, has made the following pertinent observations in this
connection (p. 1911):
"Learned counsel
contends that article 226 of the Constitution does not confer any power on the
High Court to review its own order and, therefore, the second order of Khosla
J. was without jurisdiction. It is sufficient to say that there is nothing in
article 226 of the Constitution to preclude a High Court from exercising the
power of review which inheres in every court of plenary jurisdiction to prevent
miscarriage of justice or to correct grave and palpable errors committed by it.
Here the previous order of Khosla J. affected the interests of persons who were
not made parties to the proceeding before him. It was at their instance and for
giving them a hearing that Khosla J. entertained the second petition. In doing
so, he merely did what the principles of natural justice required him to do. It
is said that the respondents before us had no right to apply for review because
they were not parties to the previous proceedings. As we have already pointed
out, it is precisely because they were not made parties to the previous
proceedings, though their interests were sought to be affected by the decision
of the High Court, that the second application was entertained by Khosla
J."
The aforesaid decision,
therefore, clearly lays down that it is not as if the party against whom an ex
parte order is passed is without remedy. It can file substantive petition under
article 226 as in the case before the Supreme Court which would in its turn be
an exercise of inherent review jurisdiction of the concerned court and in
exercise of that power, the same court can correct its own error and can put
the record straight and do justice to the really aggrieved party against whom
the earlier decision was rendered ex parte without giving any opportunity of
hearing. It is interesting to note that even in the aforesaid decision, second
application by way of review was moved as a substantive petition under article
226. Save and except in a substantive application like review petition under
Order 47, rule 1, read with section 151, Civil Procedure Code, or a petition
under article 226, if at all it lies, the entire judgment or main texture of
the judgment cannot be altered by the same court at the instance of any party
or even a stranger who is aggrieved by a decision of the court rendered in
breach of the principles of natural justice. In the present case, Mr. Thakkar
has not invoked the review powers of this court and has relied on section 151,
Civil Procedure Code, read with rule 9 of the Companies (Court) Rules,
simpliciter. In my view, Mr. Thakkar has rightly not invoked the review power
of this court for two obvious reasons. Firstly, because under article 124 of
the Indian Limitation Act, 1963, the period of limitation of 30 days from the
date of the judgment for filing a review petition has expired long back. More
than 1½ years have elapsed since I gave my
judgement in Company Petition No. 49 of 1978. It is not the case of the
applicants that they were not alive to this judgment and were not in the know
of this judgment which contained the aforesaid alleged adverse remarks against
them. Thus, the hurdle of limitation would stare in the face of the applicants.
Even otherwise, the second hurdle would be that as per Order 47, rule 1, it has
been clearly laid down that any person considering himself aggrieved—(a) by a
decree or order from which an appeal is allowed, but from which no appeal has
been preferred, may apply for a review of the judgment to the court which
passed the decree or made the order. The Explanation which is added in 1976 to
Order 47, rule 1, provides that the fact that the decision on a question of law
on which the judgment of the court is based has been reversed or modified by
the subsequent decision of a superior Court in any other case, shall not be a
ground for the review of such judgment. Sub-clause (2) of rule 1 of Order 47
can obviously not apply, as according to Mr. Thakkar, the present applicants
were not parties to the company petition and only the company was a party and
the company has already filed an appeal before the Division Bench. If that is
so, Mr. Thakkar's case would fall only under Order 47, rule 1(a), wherein, any
person considering himself aggrieved by a decree or order from which an appeal
is allowed but from which no appeal has been preferred has a right to file a review
application. It is interesting to note that the Legislature has advisedly made
a difference between "any person aggrieved" for the purpose of
application for review under Order 47, rule 1(a) and the enabling provision of
clause (2) of Order 47, rule 1, wherein non-appealing party is permitted to
come by way of review to the same court even though appeal by some other party
is pending before the higher court. In the present case, the three applicants
can certainly be said to be persons who feel aggrieved by certain observations
made by me against them. Still, however, they are precluded from coming in
review on account of the fact that an appeal is already pending against my
judgment in the company petition. If that is so, no review can be filed by the applicants
and hence they have rightly not filed any. review application. However, that
does not mean that they have no remedy whatsoever. If no appeal would have been
filed against the judgment in the company petition, the review could have been
held maintainable within the permissible time allowed by the Legislature. But
in the present case, an appeal is already filed against my judgment and it is
admitted and expedited for final hearing. Consequently, no review would lie at
the instance of the applicants even though they might be persons feeling
aggrieved by certain observations against them in my judgment. But if that is
so, they have an alternative remedy of requesting the appellate court to grant
them permission to prefer an appeal against my judgment with the permission of
the court. Consequently, even on the ground that the applicants were allegedly
not given any opportunity of having their say in the matter and that my remarks
are in a way passed ex parte against them and they are contrary to the principles
of natural justice, the applicants have adequate remedy by way of going in
appeal as aggrieved persons with leave of the appellate court. By
shortcircuiting this legal procedure, they cannot invoke by application under
section 151, Civil Procedure Code, simpliciter, my powers to delete 75 lines
from various paras of my judgment which would in turn substantially alter my
judgment. That can be done only if a review application is filed and is
entertained on merits or alternatively if in this application it is shown that
these remarks are totally dehors the record and they are like accidental errors
or inadvertent errors in my judgment. The present application does not
represent either of these fact-situations. It is admittedly not a review
application nor is it an application for correcting inadvertent clerical or
accidental errors. On the other hand, the remarks which I have made have been
made after full consideration of the rival contentions of the parties and they
are an integral part of the entire process of reasoning and are irretrievably
intertwined and embedded in the main body fabric of the judgment spread over a
number of pages. It is not as if these remarks are entirely extraneous or
accidental in nature or that they represent inadvertent errors. In the facts of
the present case and in the light of the detailed analysis which I have already
made of my preliminary as well as final judgment, it is impossible to take the
view that the remarks made against the concerned managing directors are totally
extraneous or irrelevant or that they are based on no evidence whatsoever. In
my view, these remarks logically flow from the voluminous evidence on record
and are a logical corollary to the various findings reached by me on the main
points in controversy between the parties. I cannot sit in appeal over my own
findings and reverse the same, notwithstanding the nature of the grievance that
the applicants might harbour on the alleged grounds of breach of principles of
natural justice. If they have any such grievance, this is not the forum where
they can vindicate the same and they may divert their attention and action to a
different and more appropriate forum, that is, the appellate court, which is
already seized of the main appeal against this judgment. I accordingly hold
that this application is not maintainable on merits in the backdrop of the
peculiar facts of this case and has to be rejected.
I may now briefly refer to
the decided cases on which strong reliance was placed by Mr. Thakkar in support
of the present application. In L. Janakirama Iyer v. P. M. Nilakanta Iyer, AIR
1962 SC 633, the Supreme Court had an occasion to consider the jurisdiction of
the High Court under section 151 read with section 152, Civil Procedure Code,
to correct an inadvertent error in the decretal order of the High Court even if
an appeal to the Supreme Court had been admitted against the High Court's main
judgment. The inadvertent error which had crept in the High Court's judgment in
that case was that instead of the words "net profit ", the words
"mesne profits "were employed in the judgment. It is obvious that on
the facts of the aforesaid Supreme Court case, the concerned error squarely
fell in the scope and ambit of section 152, Civil Procedure Code, read with
section 151 thereof. That error was not a deliberate one but was an accidental
or unintended one. Such an error could be legitimately corrected in exercise of
the powers under section 151 read with section 152, Civil Procedure Code Such an error had nothing to
do with the main texture of the judgment and its correction could not in the
very nature of things affect the reasoning or the main part of the judgment.
The aforesaid decision cannot be of any assistance to Mr. Thakkar. It is
obvious that clerical errors or accidental errors in a judgment can be
corrected by the same court at any time even though appeal against the said
judgment is pending. But if it is not a case of any accidental error and if the
alleged error is interwoven with the main reasoning in the judgment as is the
fact-situation in the present case as was seen earlier, such an error can be
corrected only in exercise of the review jurisdiction if a proper case is made
out on merits, as that exercise would amount to altering or changing the basic
texture of the judgment and even for having recourse to that remedy, the
Legislature has advisedly put a restriction on review powers to the effect that
if an appeal is pending, no exercise by way of review should be undertaken by
the same court. In the present case, as noted earlier, a regular appeal on
facts and law is already pending against my final judgment in the main company
petition. Hence, the applicants cannot be permitted to indirectly achieve that
which they are directly prohibited from obtaining as no review application is
permissible to them at this stage. Mr. Thakkar then invited my attention to the
decision in Samarendra Nath Sinha v. Krishna Kumar Nag, AIR 1967 SC 1440. In
the aforesaid case, the Supreme Court was concerned with a question regarding correction
of an accidental slip in the judgment of the court, even after the judgment was
pronounced and signed by the court. In para 11 of the report, it has been
observed by Shelat J. for the Supreme Court as under (at p. 1443);
"Now,
it is well settled that there is an inherent power in the court which passed
the judgment to correct a clerical mistake or an error arising from an
accidental slip or omission and to vary its judgment so as to give effect to
its meaning and intention."
Considering
Order 20, rule 3, Civil Procedure Code, Shelat J. made the following
observations (at p. 1443):
"The
rule does not also affect the court's inherent power under section 151. Under
section 152, clerical or arithmetical mistakes in judgments, decrees or orders,
or errors arising therein from any accidental slip or omission may at any time
be corrected by the court either on its own motion or on an application by any
of the parties."
It
is difficult to appreciate how this judgment can advance the case of Mr.
Thakkar. It is not the case of the applicants that the observations made by me
are accidentally made or inadvertently made. Their case is that these
observations have been made against the managing directors who had no
opportunity to have their say in their defence as they were not parties to the proceedings. Therefore, their contention is that, on
merits, such observations are not justified and whatever may be the texture of
the judgment, it has to be altered as principles of natural justice and fair
play have not been complied with. This objection touches the merits of the
observations and seeks to establish that they are vitiated in law and hence
void. The contention of the applicants is not that there was some arithmetic or
accidental error in my judgment. Consequently, applicability of section 152,
read with section 151, Civil Procedure Code, is out of the picture. It is now
well settled that the inherent powers cannot be exercised to cut across or to
circumvent the statutory provisions of the Code (vide Arjun Singh v. Mohindra
Kumar, AIR 1964 SC 993). In this case, it was observed as under (headnote):
"The inherent power of
the court cannot override the express provisions of the law. If there are
specific provisions of the Code dealing with a particular topic and they
expressly or by necessary implication exhaust the scope of the powers of the
court or the jurisdiction that may be exercised in relation to a matter the
inherent power of the court cannot be invoked in order to cut across the powers
conferred by the Code. The prohibition contained in the Code need not be
express but may be implied or be implicit from the very nature of the
provisions that it makes for covering the contingencies to which it relates.
"
Similarly, in the case of
Nain Singh v. Koonwarjee, AIR 1970 SC 997, J. C. Shah J., speaking for the
Supreme Court, held that under the inherent powers of courts recognized by
section 151, Civil Procedure Code, a court has no power to do that which is
prohibited by the Code. Inherent jurisdiction of the court must be exercised
subject to the rule that if the Code does contain specific provisions which
would meet the necessities of the case, such provisions should be followed and
inherent jurisdiction should not be invoked. In other words, the court cannot make
use of the special provisions of section 151 of the Code where a party had his
remedy provided elsewhere in the Code and he neglected to avail himself of the
same. Further, the power under section 151 of the Code cannot be exercised as
an appellate power. The present application seeks precisely to do what is held
legally impermissible by the aforesaid decisions of the Supreme Court.
By way of this application,
the applicants in effect are attempting to circumvent the provision of Order
47, rule 1, Civil Procedure Code, and are trying to circuitously achieve that
which is expressly prohibited by Order 47, rule 1, Civil Procedure Code. Mr.
Thakkar then placed reliance on Bachan v. Raghunath, AIR 1926 All 304. A
learned single Judge of the Allahabad High Court had occasion to consider the
question whether a trial court had jurisdiction to carry out an amendment in
the judgment during the pendency of the appeal. In that connection, it was
observed that merely because an appeal is pending, it cannot be said that the
decree of the trial court had not remained in force and it can be rectified or
amended by the court which passed it. It is only when the appeal has been
decided and a decree has been passed in appeal confirming, amending or
reversing it, that the appellate decree operates to supersede the decree of the
trial court. In the aforesaid Allahabad case, it was found that there was an
apparent accidental error in the decree which was not properly drawn up in
accordance with the judgment. The said mistake was sought to be rectified. It
was observed that for correcting any accidental and unintended error in a
decree which did not conform with the judgment, the court can exercise its
amending power notwithstanding pendency of the appeal. It was not a case in which
the error in question went to the root of the matter and its removal was likely
to destroy or displace the main basis of the findings as is the case before me.
Consequently, the said judgment of the Allahabad High Court cannot be of any
assistance to Mr. Thakkar.
Mr. Thakkar then invited my
attentian to Shyamal Bihari Mishra v. Girish Narain Missir, AIR 1962 Pat 116. A
learned single judge of the Patna High Court has held therein that where the
court would otherwise have the authority to amend its decree, it may do so even
after an appeal has been taken against the said decree and is pending and has
not yet been disposed of. Even in the Patna case, there was an inadvertent
error in the decree. The decree was not in accordance with the judgment. Such
an error was corrected by the court in exercise of its power under section 152
read with section 151, Civil Procedure Code, during the pendency of appeal
against the decree. It is obvious that such an accidental error can always be
corrected till the decree gets merged in the appellate decree after the
disposal of the appeal. However, the entire operation-correction still remains
in the domain of rectification of only inadvertent or accidental errors either
in the judgment or in the decree, as the case may be. As seen earlier, the
present is not one such case.
Mr. Thakkar then invited my
attention to a decision of the Supreme Court rendered under section 561A of the
Code of Criminal Procedure directly touching on the question of the power of the
court regarding expunging of remarks in the judgment. In Dr. Raghubir Saran v.
State of Bihar, AIR 1964 SC 1, the Supreme Court was concerned with the case in
which certain remarks were passed in the judgment of the subordinate court
against a stranger. The said judgment had become final. The question whether
these objectionable remarks could be expunged from the judgment of the
subordinate criminal court by the High Court in exercise of the powers under
section 561A of the Code of Criminal Procedure, 1898, or not came up for
consideration before the Supreme Court in the aforesaid decision. Raghubar
Dayal J., speaking for the majority of the Supreme Court, made the following
pertinent observations in this connection (headnote):
"Every High Court as
the highest court exercising criminal jurisdiction in a State has inherent
power to make any order for the purpose of securing the ends of justice. This
power extends to expunction or ordering expunction of irrelevant remarks made
against a person who is neither a party nor a witness to the proceeding, from a
judgment or order of a subordinate court, although the matter has not been
brought before it in regular appeal or revision, and would be exercised by it
in appropriate cases for securing the ends of justice. Being an extraordinary
power, it will, however, not be pressed in aid except for remedying a flagrant
abuse by a subordinate court of its powers such as by passing comment upon a
matter not relevant to the controversy before it and which is unwarranted or is
likely to harm or prejudice another."
In para 29 (at p. 11) of
the report, it has been observed as under:
"When the question
arises before the High Court in any specific case whether to resort to such
undefined power, it is essential for it to exercise great caution and
circumspection. Thus, when it is moved by an aggrieved party to expunge any
passage from the order or judgment of a subordinate court, it must be fully
satisfied that the passage complained of is wholly irrelevant and
unjustifiable, that its retention on the records will cause serious harm to the
person to whom it refers and that its expunction will not affect the reasons
for the judgment or order."
I fail to appreciate how
the aforesaid judgment of the Supreme Court can be of any assistance to Mr.
Thakkar Unless it is shown by the applicants that the observations made by me
in diverse paras of my judgment against the managing directors were wholly
irrelevant and unjustified and that their expunction will not affect the
reasons for the judgment or order, the power of expunction of the remarks
cannot be exercised by me in the present proceedings. I have already X-rayed
various steps taken by me for reaching various penultimate and final findings
on different questions in controversy between the parties which were debated
before me for upwards of two months in the light of relevant evidence on
record. The objectionable remarks are an integral part of the entire process of
my reasoning and their expunction is bound to affect the entire web and texture
of the penultimate conclusion and ultimate findings based thereon. Such an
exercise also would make the ultimate findings inconsistent and would totally
denude them of their efficacy and potency. Consequently, even on the basis of
the aforesaid Supreme Court judgment in Dr. Raghubir Saran's case, AIR 1964 SC
1, this would not be a fit case for exercise of my inherent powers for
expunging those remarks which are neither irrelevant nor unjustifiable. On the
contrary, as the evidence stands and as I have found on various disputed points
in controversy between the parties, these observations are wholly relevant and
justified on the evidence on record. May be, on merits, the applicants may not
find them palatable and they may have a grievance that they were not justified
on merits or on the basis of the evidence. But certainly, in that eventuality,
this is not the forum where they can agitate their grievance. By way of present
proceedings, they cannot ask me to sit in appeal over my judgment and reappreciate
the evidence and remove these adverse findings against the applicants. Their
remedy obviously lies elsewhere.
Mr. Thakkar then invited my
attention to another judgment in the same volume in the case of State of U.P.
v. Mohammad Naim, AIR 1964 SC 703, wherein the Supreme Court was concerned with
expunging of certain remarks in the judgment of the Allahabad High Court on the
criminal side wherein Mr. Justice Mulla while considering the question whether
a complaint for an offence under section 196, Indian Penal Code, should be
launched against a police officer, viz., one Mr. Mohammad Nairn, made certain
observations not only against him but against the entire police force of Uttar
Pradesh and on the application by the State of Uttar Pradesh under section 561
A, Criminal Procedure Code, the learned judge refused to exercise his inherent
powers for expunging the said remarks. In the special leave petition against
the said order of the learned judge, the Supreme Court, speaking through S. K.
Das J., made the following observations (p. 706):
"The second point for
consideration is this, has the High Court inherent power to expunge remarks
made by itself or by a lower court or otherwise to secure the ends of justice ?
There was at one time some conflict of judicial opinion on this question. The
position as to case-law now seems to be that except for a somewhat restricted
view taken by the Bombay High Court, the other High Courts have taken the view
that though the jurisdiction is of an exceptional nature and is to be exercised
in most exceptional cases only, it is undoubtedly open to the High Court to
expunge remarks from a judgment in order to secure the ends of justice and
prevent abuse of the process of the court….... The view taken in the Bombay
High Court is that the High Court has no jurisdiction to expunge passages from
the judgment of an inferior court which has not been brought before it in
regular appeal or revision; but an application under section 561 A, Criminal
Procedure Code, is maintainable and in a proper case, the High Court has
inherent jurisdiction even though no appeal or revision is preferred to it, to
correct judicially the observations made by pointing out that they were not
justified, or were without foundation, or were wholly wrong or improper…….. In
State of U. P. v. J. N. Begga, Cr. A. No. 122 of 1959D/16-1-1961 (SC), this
court made an order expunging certain remarks made against the State Government
by a learned judge of the High Court of Allahabad. The order was made in an
appeal brought to this court from the appellate judgment and order of the
Allahabad High Court. In State of U.P. v. Ibrar Hussain, Cr. App. Nos. 148 of
1957 and 4 of 1958, D/. 28-4-1959 (SC), this court observed that it was not
necessary to make certain remarks which the High Court made in its judgment.
Here again the observation was made in an appeal from the judgment and order of
the High Court. We think that the view taken in the High Courts other than the
High Court of Bombay is correct and the High Court can in the exercise of its
inherent jurisdiction expunge remarks made by it or by a lower court if it be
necessary to do so to prevent abuse of the process of the court or otherwise to
secure the ends of justice; the jurisdiction is, however, of an exceptional
nature and has to be exercised in exceptional cases only. In fairness to
learned counsel for the appellant, we may state here that he has submitted
before us that the State Government will be satisfied if we either expunge the
remarks or hold them to be wholly unwarranted on the facts of the case. He has
submitted that the real purpose of the appeal is to remove the stigma which has
been put on the police force of the entire State by those remarks the truth of
which it had no opportunity to challenge.
The last question is, is
the present case a case of an exceptional nature in which the learned judge
should have exercised his inherent jurisdiction under section 561 A, Criminal
Procedure Code, in respect of the observations complained of by the State
Government ? If there is one principle of cardinal importance in the
administration of justice, it is this: the proper freedom and independence of
Judges and Magistrates must be maintained and they must be allowed to perform
their functions freely and fearlessly and without undue interference by
anybody, even by this court. At the same time it is equally necessary that in
expressing their opinions, Judges and Magistrates must be guided by
considerations of justice, fair-play and restraint. It is not infrequent that
sweeping generalisations defeat the very purpose for which they are made. It
has been judicially recognised that in the matter of making disparaging remarks
against persons or authorities whose conduct comes into consideration before
courts of law in cases to be decided by them, it is relevant to consider (a)
whether the party whose conduct is in question is before the court or has an
opportunity of explaining or defending himself; (b) whether there is evidence
on record bearing on that conduct justifying the remarks; and (c) whether it is
necessary for the decision of the case, as an integral part thereof, to
animadvert on that conduct. It has also been recognised that judicial
pronouncements must be judicial in nature, and should not normally depart from
sobriety, moderation and reserve."
A mere look at the
aforesaid decision shows that the remarks made by judicial authorities against
persons or authorities will have to be judged in the light of certain relevant
considerations as to whether the parties whose conduct is in question before
the court had an opportunity of explaining or defending themselves and whether
there was evidence on record bearing on that conduct and whether it was
necessary for the decision of the case as an integral part thereof to animadvert
on that conduct. On facts, it was found by the Supreme Court that the sweeping
and general observations were made by the High Court against the entire police
force of the State though the case related to only one police officer. It is in
these circumstances that the Supreme Court held that those general remarks were
not justified on the record of the case and that the remarks were not necessary
for the disposal of the case before the learned judge. Thus, those observations
were sweeping and general in nature and were not based on record and hence they
were quashed by the Supreme Court in appeal before them. Even this decision
cannot advance the case of the applicants any further. The remarks in the
present case are not too sweeping or general or dehors the record nor are they
based on no evidence whatsoever as Mr. Thakkar would like to have it. I have
already shown how from the voluminous evidence on record, various inferences
have been drawn by me, penultimate findings have been arrived at and final
findings have been reached on various points in controversy between the
parties. The remarks made against the managing directors logically flow from
the salient features of the case which have emerged on record. Not only these
remarks are based on evidence, but they have a direct bearing on the conduct of
the applicants justifying these remarks and they are very much necessary for
the decision of the case and they are an integral part of the final judgment
thereof. Consequently, even, according to the aforesaid decision, the present
application cannot be granted.
Mr. Thakkar then invited my
attention to a Full Bench decision of the Punjab and Haryana High Court in Guru
Nanak University v. Dr. Mrs. Iqbal Kaur Sandhu, AIR 1976 P&H 69. In this
case, certain adverse remarks against the Vice-Chancellor of Guru Nanak
University were made without giving any opportunity to him to have his say. In
that case, certain remarks were made against the Vice-Chancellor in a writ
petition filed by an employee of the University against the University. In the
said proceedings, the Vice-Chancellor was earlier joined as a party against
whom allegations of mala fide were made. But the petitioner later on deleted
the allegations and thereafter the name of the Vice-Chancellor was struck off from
the array of the respondents. The learned single judge disallowed the civil
miscellaneous application of the petitioner for reagitating the allegations of
mala fide against the Vice-Chancellor a second time. It is in these
circumstances that there were no allegations of mala fide against the
Vice-Chancellor who was also no longer thought to be a proper party and he was
deleted from the record. It is thereafter that in the final judgment, some
observations came to be made by the learned single judge against the
Vice-Chancellor. It is in the aforesaid factual context that the question arose
whether the remarks were required to be expunged in exercise of the inherent
powers of the court. In this connection, it was observed by the Full Bench as
under (headnote):
"Prejudicial
observations should not be made against a person who is neither a party nor a
witness in the proceedings before a court. It would amount to a denial of
justice to allow adverse reflections upon the character of such a person to
stand intact in a judgment. No such remarks should be made unless they are
based on legal material properly placed on the record and further an
opportunity has been afforded to the person concerned to furnish an explanation
thereto "
It has been further noted
that the Vice-Chancellor personally was neither a party to the writ petition
nor was there any allegation of mala fides or bad faith against him on record.
Hence, there was no factual foundation upon which strictures could be passed
against the Vice-Chancellor. It is difficult to appreciate how the ratio of
this judgment can be of any real assistance to Mr. Thakkar. In the case before
the Punjab and Haryana High Court, no allegations of mala fides against the
Vice-Chancellor survived on the record of the case at a later stage and they
were all withdrawn. The name of the Vice-Chancellor was also deleted as a
party. Therefore, he became a total stranger against whom, in the absence of
any material whatsoever, strictures were passed by the learned single judge. In
such a case, inherent powers for expunging such remarks which will clearly
partake of the character of inadvertent and accidental errors could be
exercised.
Mr. Thakkar also invited my
attention to a decision of Tek Chand J. in the matter of H. Daly, AIR 1928
Lahore 740, to support his contention that the court should not make remarks
against a person who has no chance to explain his conduct. Relevant
observations of Tek Chand J. on which reliance was placed by Mr. Thakkar read
as under (headnote):
"The High Court has
power to expunge passages from judgments delivered by itself or by a
subordinate court but this jurisdiction is of an extraordinary nature and has
to be exercised with great care and caution. On the one hand, it has to be
borne in mind that in weighing evidence and arriving at conclusions on
questions of fact, lower courts have to review the conduct of witnesses with
reference to particular incidents and at times have to adjudge generally on the
veracity or otherwise of such persons and in doing so they have often to make
remarks which reflect adversely on their character. It is of the utmost
importance to the administration of justice that courts should be allowed to
perform their functions freely and fearlessly and without undue interference by
the High Court. At the same time, it is equally necessary that the right of
Magistrates to make disparaging remarks on persons who appear, or are named, in
the course of a trial, is one that should be exercised with great reserve and
moderation, especially where the person disparaged has had little or no
opportunity of explaining or defending himself. If the conduct of the witness
appears to the judge to be suspicious or otherwise not above board, he has the
right and the duty to test his evidence by putting questions to him. But before
he is justified in commenting adversely upon his evidence, he must establish
the particular fact warranting such criticism by proper evidence in court and
not on conjectures or by reference to materials which are not properly on the
record. Again, a Magistrate should not in his judgment make observations
prejudicial to the character of a preson, who is neither a witness nor a party
to the proceedings and who has no opportunity of being heard. "
The aforesaid decision of
Tek Chand J. has been referred to by the Supreme Court with approval in Dr.
Raghubir's case, AIR 1964 SC 1. The aforesaid decision of the Lahore High Court
cannot be of any assistance to the applicants for the simple reason that all it
lays down is that disparaging remarks based on no evidence against a total
stranger may in proper cases be expunged. But so far as the present case is
concerned, as I have shown earlier and as will also be demonstrated later on,
there was sufficient evidence on record for supporting the impugned remarks,
the present applicants were as good as parties and/or witnesses and they had
ample opportunity to meet the charge and still they did not think it proper to
file their affidavit or to come openly in the arena and boldly face the proceedings.
In the process, the remarks came to be passed against .them on the basis of the
evidence on record. Consequently, the ratio of the judgment of Tek Chand J. in
the aforesaid case cannot advance their case any further.
I may now turn to the
decision of the Supreme Court in State of Assam v. Ranga Muhammad, AIR 1967 SC
903. The Supreme Court had an occasion to consider the powers of the High Court
under section 151, Civil Procedure Code, to expunge remarks made against the
concerned parties. Mr. Justice Dutta of the Assam High Court had made certain
remarks against the State of Assam and Nagaland. He described the action of the
State Government as mala fide and actuated by ulterior motive. While
considering the question, whether these remarks were required to be removed by
the Supreme Court in appeal or not, the following pertinent observations have
been made by Hidayatullah J. (p. 907):
"We have considered
very carefully the question of expunging Mr. Justice Dutta's remarks. The power
to expunge is an extraordinary power and can be exercised only when a clear
case is made out. That another judge in Mr. Justice Dutta's place would not
have made those comments is not the right criterion. The question is whether
Mr. Justice Dutta can be said to have acted with impropriety. Although we think
that Mr. Justice Dutta need not have made the remarks, we cannot say that in
making them he acted with such impropriety that the extraordinary powers should
be exercised in this case."
The aforesaid decision
clearly lays down that unless the remarks can be said to be made with
impropriety, they cannot be expunged. Mr. Thakkar then submitted that these
observations of the Supreme Court are confined to the powers of the appellate
court to expunge remarks of the lower court. But so far as I am concerned, I
have to decide whether I would like to expunge my own remarks in exercise of my
inherent powers, being the author thereof. Nevertheless, it must be observed
that the Supreme Court has treated the inherent power to expunge remarks from a
judgment to be an extraordinary power which can be exercised only when a clear
case is made out. In my view, no such clear case has been made out by the
applicants nor can I say that the remarks made were in any way improper in the
state of the evidence on record and it is not open to me to attempt to find out
whether they were not called for on merits as it would be an exercise of the
appellate jurisdiction against my own judgment which obviously does not inhere
in me. However, it is made clear that, in my view, the impugned remarks are
fully justified in the light of evidence on record and are not improper from
any point of view.
It is now time for me to
take stock of the situation. As it is well-settled, inadvertent remarks in the
judgment which are of sweeping nature and which are not supported by evidence
on record can be expunged in exercise of the inherent powers of the court. I
have already discussed in detail and have fully analysed various parts of my
judgments, both preliminary and final, to show that the impugned remarks made
by me in various parts of my judgments are neither sweeping nor irrelevant nor
based on no evidence. On the contrary, they are based on sufficient evidence
and they form an integral part of the entire texture of the judgment. Any
attempt to weed them out would destroy the basic fabric of the judgment and its
internal homogeneity and would render the findings on various points for
determination vulnerable and in a sense inconsistent and, consequently, this is
not a fit case in which I can exercise my inherent powers as prayed for by the
applicants.
|
** |
** |
** |
I will now proceed to
consider the case of the applicants on merits. Mr. Thakkar is right when he contends
that the company has a separate personality. The managing directors being
officers of the company are also having their own individual and separate
personalities. However, it cannot be gainsaid that the managing directors are
officers of the company. Section 2(26) of the Companies Act, 1956, defines
"managing directors "to mean—
"A director who, by
virtue of an agreement with the company or of a resolution passed by the
company in general meeting or by its board of directors, or, by virtue of its memorandum
or articles of association, is entrusted with substantial powers of management
which would not otherwise be exercisable by him, and includes a director
occupying the position of a managing director, by whatever name called."
Section 2(30) defines
"Officer "to mean :
"Any director,
managing agent, secretaries and treasurers, manager or secretary or any person
in accordance with whose directions or instruc- tions the board of directors or
any one or more of the directors is or are accustomed to act and also
includes"
Consequently, the managing
directors, being directors, are officers of the company. Section 51 of the Act
lays down the mode of service of documents on a company and states that a
document may be served on a company or an officer thereof by sending it to the
company or officer at the registered office of the company by post under a
certificate of posting or by registered post, or by leaving it at its
registered office. Thus, an officer of the company is a duly authorised agent
for receiving service of any document on behalf of the company. Section 100
read with section 101 of the Act lays down the contingencies in which the
company may apply for sanction of the court for reduction of its share capital.
As per section 105, penalties are provided for concealing name of any creditor
and it has been laid down that if any officer of the company knowingly conceals
the name of any creditor entitled to object to the reduction or knowingly
misrepresents the nature or amount of the debt or claim of any creditor or
abets or is privy to any such concealment or misrepresentation aforesaid, he
shall he punishable with imprisonment for a term which may extend to one year
or with fine or with both. Section 252 deals with constitution of board of
directors and lays down minimum number of directors for each company. Under
section 291, general powers of the board have been dealt with and it has been
provided that:
"(1) Subject to the provisions of this Act, the board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do :
Provided that the board
shall not exercise any power or do any act or thing which is directed or
required, whether by this or any other Act or by the memorandum or articles of
the company or otherwise, to be exercised or done by the company in general
meeting."
Thus, the board of
directors and the managing directors are fully authorised to act on behalf of
the company. My attention was also invited to the articles of association of
the petitioning company, especially articles 115, 128 and 129(1) to point out
that the managing directors can take all steps on behalf of the company in any
court of law by filing proceedings and/or by defending them. The Companies
(Court) Rules, 1959, also throw lot of light on this question. As per rule 46,
a petition to confirm a reduction of the share capital of a company is required
to be filed in Form No. 18 and shall be accompanied by a summons for directions
in Form No. 19. Rule 49 lays down that the company shall, within the time
allowed by the judge, file a list in Form No. 21 containing names and addresses
of the creditors, etc., while rule 50 deals with affidavit verifying list of
creditors and states that such list shall be verified by an affidavit made by
an officer of the company competent to make the same, who, in such affidavit,
shall state his belief that the list verified by such affidavit is correct.
Rule 53 states that notice of the presentation of the petition and of the list
of creditors under rule 49, shall within seven days after the filing of the
said list of such further or other times as the judge may allow, be advertised
by the company in such manner as the judge shall direct. Rule 55 lays down that
the company shall file a statement signed and verified by the advocate of the
company stating the result of the notices mentioned in rules 52 and 53,
respectively, and verifying a list containing the names and addresses of the persons,
if any, who shall have sent in the particulars of their debts, etc. If we turn
to Form No. 21 which prescribes the statutory form of list under rule 49, it is
found that the said list can be signed by the director, secretary or other
competent officer of the company. Statutory form of affidavit as per rule 55 is
provided by Form No. 26. If we look at the same, it is found that an affidavit
as to the result of the notice issued as required by rule 55 has to be made by
an advocate of the company and has to be supported by an affidavit of the
managing director of the company. Form No. 29, as per rule 59 of the Companies
(Court) Rules deals with hearing of petition. Rule 59 provides that after the
expiry of not less than fourteen days from the filing of the certificate
mentioned in the preceding rule, the petition shall be set down for hearing.
Notice of the date fixed for the hearing of the petition shall be advertised
within such time and in such newspapers as the judge may direct and shall be in
Form No. 29. Form No. 29 is the form of advertisement of hearing of petition.
It is further pertinent to note that as per rule 11(a)(3), applications under
section 101 to confirm reduction of share capital has to be by way of a
petition. As per rule 12, petitions are to be heard in open court and as per
rule 21, such petitions are to be verified by affidavit made by the petitioner
or by one of the petitioners, where there are more than one, and in the case of
a petition presented by a body corporate, by a director, secretary or other
principal officer thereof. Such affidavit is to be filed along with the
petition and has to be in Form No. 3. Rule 24 lays down that where any petition
is required to be advertised, it shall be done not less than 14 days before the
date fixed for hearing. Rule 34 deals with notice to be given by persons
intending to appear at the hearing of petition. As per rule 35, the petitioner
or his advocate has to prepare a list of the names and addresses of the persons
who have given notices of their intention to appear at the hearing of the
petition. Such list shall be in Form No 10 and shall be filed in court before
the hearing of the petition. The aforesaid Rules clearly show that petitions
under the Companies Act have to be advertised widely so that any one desirous
of having his say in the matter can come before the company court and put
forward his submissions either in support of, or in opposition to, the
petition. The managing directors, therefore, cannot be said to be total
strangers to the company petition. Mr. Thakkar is right to the limited extent
that merely because a company files proceedings before the court, straightway,
an equation cannot be drawn that the company is equal to the managing
directors. Merely because a company has initiated certain proceedings in the
court, it cannot be said that ipso facto, the concerned managing directors are
also parties in their individual capacities in these proceedings. The company
has its own independent corporate existence which cannot be automatically
equated with the independent personality of the managing director. If that is
not so, some absurd results may follow, viz., if cost is ordered against the
company, it can be said that the managing director has personally to pay the
said cost. But Mr. Thakkar's submission is well justified thus far and no
further. On the scheme of the relevant provisions of the Act and the Companies
(Court) Rules, it cannot be said that managing directors being officers of the
company are total strangers to the company petition under section 101. In fact,
section 105 indicates that any officer who intentionally commits a wrong during
the proceedings under section 101 as contemplated by that section will be
liable to be criminally dealt with. That presupposes that the company being an
inanimate personality has to act through its limbs, that is, its officers. The
scheme of the Companies (Court) Rules also points in the same direction.
Therefore, without drawing any exact equation between the company and the
managing directors and without treating them as one and the same personality,
it can still be legitimately said that in proceedings under section 101,
managing directors being officers of the company are required to act in support
of the petition and in the progress of the petition as envisaged by the scheme
of the Act and the rules themselves and they cannot plead total ignorance of
these proceedings or nor can they with any justification, say that they are
total strangers to the proceedings. To that limited extent, the corporate veil
of the company stands statutorily pierced and lifted. In this connection, it
would be profitable to have a look at certain observations found in Gower's Principles of Modern
Company Law, fourth edition 1979, at page 1, nature
and functions of companies have been discussed and it has been mentioned that
although company law is a well-recognised subject in the legal curriculum and
the title of a voluminous literature, its exact scope is vague, since the word
"company"has no strictly legal meaning. At page 9, inadequacy of
legal definitions has been pointed out. Various organs of the company have been
mentioned at page 17, viz., the members in general meeting and the directorate.
Board of directors as organ of the company is mentioned at page 18 and
functions of the managing directors are discussed at page 19 and it is stated:
"This wide delegation
of the company's powers is, however, to the directors acting as a board, not to
the individual directors."
Then, in Chapter 6, at page
112, is found a discussion pertaining to lifting of the corporate veil, It is
observed, relying on diverse decisions of Engligh courts, as follows:
"The question,
generally described as that of ' lifting the veil' is one which until recently,
has aroused little attention and less theoretical discussion in this country.
Nevertheless, it has always been recognised that ' the Legislature can forge a
sledgehammer capable of cracking open the corporate shell' and even without the
aid of a legislative sledgehammer the courts have sometimes been prepared to
have a crack."
At page 126 is found a
discussion regarding fraud or improper conduct. It has been observed therein
that "many examples can be found of cases in which the courts have refused
to allow the corporate entity principle to be used as an instrument of fraud.
Thus, they will not allow company promoters to conceal the profits which they
are making by operating through dummy companies". In this connection, it
would be profitable to look at a decision in the case of Wallersteiner v. Moir
[1974] 1 WLR 991 (CA), delivered by the Court of Appeal in England, which
refused to allow Dr. Wallersteiner to put in a defence out of time to claims
for misfeasance as a director in relation to breaches of the Companies Act.
Lord Denning, M.R. made the following observations in that connection (p.
1013):
"He controlled their
every movement. Each danced to his bidding. He pulled the strings. No one else
got within reach of them. Transformed into legal language, they were his agents
to do as he commanded. He was the principal behind them. I am of the opinion
that the court should pull aside the corporate veil and treat these concerns as
being his creatures— for whose doings he should be, and is, responsible."
Thus, corporate veil can be
pierced in proper cases either by statutory provisions or by the judicial
decision of the court. I may now refer to one decision of the Supreme Court on
the point. In Tata Engineering and Locomotive Co. Ltd. v. State of Bihar [1964] 34 Comp Cas 458 (SC),
the Supreme Court quoted with approval, the
aforesaid passage of Gower, at p. 470 of the report and explained the principle
of lifting of corporate veil in cases where the court is concerned with finding
out the fraud of the concerned officers of the company. The said passage reads
(at p. 470):
"Gower has similarly
summarised this position with the observation that in a number of important
respects, the Legislature has rent the veil woven by the Salomon's case [1897]
AC 22 (HL). Particularly is this so, says Gower, in the sphere of taxation and
in the steps which have been taken towards the recognition of enterprise-entity
rather than corporate-entity. It is significant, however, that, according to
Gower, the courts have only construed statutes as ' cracking open the corporate
shell' when compelled to do so by the clear words of the statute; indeed they
have gone out of their way to avoid this construction whenever possible. Thus,
at preseent, the judicial approach in cracking open the corporate shell is
somewhat cautious and circumspect. It is only where the legislative provision
justifies the adoption of such a course that the veil has been lifted. In
exceptional cases where courts have felt ' themselves able to ignore the
corporate entity and to treat the individual shareholder as liable for its
acts', the same course has been adopted. Summarising his conclusions, Gower has
classified seven categories of cases where the veil of a corporate body has
been lifted. But it would not be possible to evolve a rational, consistent and
inflexible principle which can be invoked in determining the question as to
whether the veil of the corporation should be lifted or not. Broadly stated,
where fraud is intended to be prevented, or trading with an enemy is sought to
be defeated, the veil of a corporation is lifted by judicial decisions and the
shareholders are held to be the persons who actually work for the
corporation."
At page 205 of the same
volume of Gower, are found the observations pertaining to the organic theory
and it has been observed in this connection:
"In a previous
Chapter, we have seen that in relation to the internal operation of a company,
the general meeting, the board of directors and even a managing director have,
in effect, come to be treated as organs of the company rather than as merely
its agents. But the judicial development with which we are now concerned seems
to have taken place quite independently of that line of cases. Instead, it
sprang from the speech of Lord Haldane in Lennard's Carrying Co. v. Asiatic Petroleum Co.
Ltd. [1915] AC 705 (HL). In that case, a
company which owned a ship was seeking to take advantage of the limitation of
liability under section 502 of the Merchant Shipping Act, 1894. This limitation
is available only where the injury is caused without the owner's ' actual fault
or privity '. The loss resulted from the default of Lennard, its managing
director, and in holding the company liable, Viscount Haldane L.C., delivering
the judgment of the House, said:
'My Lords, a Corporation is
an abstraction. It has no mind of its own any more than it has a body of its
own; its active and directing will must consequently be sought in the person of
somebody who for some purposes
may be called an agent, but who is really the directing mind and will of the
corporation, the very ego and centre of the personality of the corporation...……. If Mr. Lennard was the directing mind of the company,
then his action must, unless a corporation is not to be liable at all, have
been an action which was the action of the company itself within the meaning of
section 502………. It must be upon the true construction of that section in such a
case as the present one that the fault or privity is the fault or privity of somebody who is not
merely a servant or agent for whom the company is liable upon the footing
respondent superior, but somebody for whom the company is liable because his
action is the very action of the company itself."
The aforesaid legal
position on the point leaves no room for doubt that when the company acts as a
corporate body, it acts through its officers who are its real organs and the
managing directors are the brain of the company. For the purpose of expenses
involved in litigation and costs, etc., the company as a corporate body may
remain liable independent of its officers, but when the question of fraud of some officers is
on the anvil, the court cannot be precluded from tearing of the veil to reach
the substance of the matter. Under these circumstances, it is impossible to
agree with Mr. Thakkar that the managing directors of the company were total
strangers and had nothing to do with the proceedings for reduction of share
capital of the company which they were managing. It is, therefore, held that
they were as good as parties to the proceedings, though their names were not
expressly mentioned as persons filing the petition on behalf of the company.
They were for all practical purposes petitioners be-fore the court legally
representing the petitioning company which has to file an application under
section 101 of the Act for sanction in the name of the company but which has to
act through its officers and which term in its turn includes the concerned
managing directors. It must be noted at this stage that the managing directors
in their individual capacities may not be parties to such proceedings but in
their official capacity as managing directors and as officers of the company,
they could certainly be said to represent the company in such proceedings. In
fact, they are entitled to act on behalf of the company in their official
capacity in such proceedings but even they are required to so act as seen from
the various provisions of the Act and the Rules. Even apart from this position,
on the peculiar facts of this case, it must be held that the concerned three
brothers-managing directors of the company were the real parties to the
proceedings. As I have already observed earlier, the evidence on record clearly
shows that the very idea of having the scheme of delinking of Arbuda from
Ambica owed its genesis to the family arrangement document among the three
brothers. It was their private purpose and not the corporate purpose which
ultimately resulted in the scheme of reduction of share capital. Thus, they
were the real persons who were interested in getting the first step towards the
implementation of the family arrangement processed and sanctioned through the
court. They were the persons who were pulling the strings in the main
proceedings if I borrow the phrase employed by Lord Denning M.R. in
Wallersteiner's case [1974] 1 WLR 991. It is in the background of the peculiar
facts of this case that I have already found on evidence that but for the
family arrangement, the main company petition would not have seen the light of
the day. Thus, in the name of the company, the managing directors were the real
parties who were interested in getting their family arrangement scheme
fructified by getting the scheme sanctioned under section 101 of the Companies
Act. Therefore, on the special facts of the case, the managing directors must
be held to be the real parties' while the company was only the apparent party
as the managing directors by themselves could not have applied under section
101 which requires the company to move the court through its officers. In fact, the meat of the matter is that the
applicants-three managing directors were masquerading in the name of the
company in the petition proceedings and were interested in seeing that the
company petition succeeds so that their private purpose of effecting the family
arrangement gets clearance at least at the first main stage. Consequently, the
main submission of Mr. Thakkar in support of the application that the managing
directors being total strangers to these proceedings and not being parties to
the proceedings, could not have been stigmatised without giving an opportunity
of hearing them, falls through on the facts of this case. They were the real
parties to the proceedings and were in full know of the charges levelled
against them by the concerned objectors. But they intentionally kept away at a
safe distance from the court proceedings and did not think it proper to file
affidavits presumably because they wanted to avoid the uncomfortable situation
of being summoned for cross-examination by the objectors. If they have
deliberately taken that course, they cannot make a grievance about violation of
the principles of natural justice. It is now well settled that the rules of
natural justice are not codified ones. That if a party had a full opportunity
to meet the case against it and does not think it proper to meet it, he has to
thank himself and cannot make a grievance regarding the breach of principles of
natural justice. In Roshan Lai Mehra v. Ishwar Dass, AIR 1962 SC 646, S. K. Das
J., speaking for the Supreme Court, observed (headnote):
"If, however, the
landlord chose to be absent in spite of repeated intimation to him, he could
not be heard to say that the enquiries were made in his absence and were,
therefore, bad. To hold in such circumstances that there had been a violation
of the principles of natural justice would be to put a premium on the
recalcitrance of a party. After all, what natural justice required was that a
party should have the opportunity of adducing all relevant evidence and that he
should have an opportunity of the evidence of his opponent being taken in his
presence"
In the present case, even
though the applicants were as good as parties and in fact, were the real
applicants, basking in sunshine under the name of the company and who were
directly interested in the result of the company petition being rendered in
their favour, if they deliberately did not file any affidavit in reply to the
objections of the objectors making specific allegations of mala fides against
them, they have to thank themselves and they cannot clutch at the abstract
principles of natural justice and their alleged breach. On the facts of the
case, it is found that the applicants had full knowledge about the charges
levelled against them and had full opportunity to refute the same if they would
have been so minded by filing affidavit-in-reply. As I have already observed,
these proceedings had to be advertised in local newspapers. It was practically
an open debate on relevant points and any one who had anything relevant to say,
was welcome. The managing directors being as good as applicants did not think
it proper to venture into the arena and they sat on the fence. In doing so,
they took a calculated risk and avoided an unpalatable situation for themselves.
If such calculated risk was willingly and knowingly taken by them, they must be
prepared to meet the consequences and cannot make a grievance on the score that
ultimately the court passed certain strictures against them on the basis of the
evidence on record. It is also to be kept in view that the observations made by
me against the conduct of the managing directors in their official capacity and
their role as such vis-a-vis other members of the board of directors as well as
the general body. The observations are borne out from the evidence and they
have logically flowed from the scheme of the chronological events that have
emerged on the record.
Even apart from the fact
that they were as good as parties to the proceedings and they had full
opportunity to meet the charges levelled against them and were in the know of
the facts, they were called upon by me to file an affidavit along with which to
produce the family arrangement document in question. At that time, I had not
specified that a particular managing director may file the affidavit. It was
left to the concerned managing directors to decide amongst themselves inter se
as to who should file the affidavit and having so decided, they presented the
affidavit of Shri Balkrishna Harivallabhdas and along with it, they produced
the family arrangement document. Consequently, it cannot be said, in any view
of the matter, that they were total strangers to the proceedings. They were at
least as good as witnesses in this case. Under these circumstances, the remarks
made against them cannot be treated to have been made against total strangers.
In this connection, I may also refer to the preliminary judgment which I gave
at least six months before the petition was taken up for final hearing and even
at that time, having heard all the concerned parties, I have noted the nature
of the controversy between the parties. At page 22 of the preliminary judgment,
I have noted the submission made by Mr. Shodhan in support of his
affidavit-in-reply that the three brothers who were the managing directors were
interested in their personal gains. Thus, the objectors were clamouring from
house top about the alleged mala fides of the managing directors. Still,
however, the applicants did not think it proper to refute the said charge
levelled against them in no uncertain terms from the very beginning of the
contest in these proceedings. I have already discussed various submissions made
by Mr. Vakil, learned advocate of the petitioner company during the long drawn
out hearing which lasted for about two months wherein he vehemently tried to
defend the action taken by the managing directors in not revealing the family
arrangement document to the board of directors as well as to the general body.
Thus, Mr. Vakil practically held the brief for the company as well as the
managing directors, though strictly speaking, it can be said that he was
representing the company and the managing directors in their own names were not
parties to the proceedings. But, in substance, they were the real parties to
the proceedings against whom charges were levelled by the objectors. The
charges were reflected in the points for determination as framed by me at least
six months prior to the taking up of the company petition for final hearing.
The points were framed in the preliminary judgment and were made known to all
the concerned parties. Being conscious of these charges, issues were joined by
the learned advocates of the respective parties. My findings were invited.
Rival versions were submitted for consideration in the light of the evidence on
record and on that basis, I gave my findings and while doing so, I made the
impugned remarks which clearly flow from the earlier findings and evidence on
record and which form the main fabric of the ultimate findings on the relevant
points. The managing directors, therefore, had ample opportunity to put forward
their case in defence and, in fact, an attempt was made on behalf of the
company's advocate to justify their action in the light of the evidence on
record and ultimately findings were arrived at by me on merits. If these
findings are not justified, the grievance of the managing director, as earlier
observed, lies elsewhere and not before me. Consequently, even on merits, the
applicants are not entitled to any relief in the present miscellaneous civil
application and hence, the said application must be dismissed. Accordingly,
rule issued therein is ordered to be discharged. In the facts and circumstances
of the case, there will be no order as to costs.
[1962] 32 COMP. CAS. 1162 (GUJ.)
v.
Bhalbhadrasinhji Indrasinhji
P. N. BHAGWATI, J.
JUNE 23, 1961
This
application raises a short and interesting question of law ;regarding the right
construction to be put insurrection 87 to 90 of the companies Act, 1956,. These
sections which relate to voting rights did not find a place in the Indian
Companies Act, 1913, and have been introduced for the first time in the
Companies Act, 1956. there is no provision in the English Companies Act, 1948,
corresponding to theses section nor is there any authority of any High court in
this country which throws light on the interpretation of these section. the
question of construction posed by this application has, therefore, to be
decided ;by me on the language of these section unpaid by any authority or
dicta of any court in this court or in England. The facts gins rise to this
application are few and for the most part undisputed and may be briefly stated
as follows:
The Lakhtar Ginning
Company Private Limited was incorporated as a public company limited by shares
in the old Lakhtar4 state in December, 1912, under the company law then in
force in the old Lakhtar state. the company had a share capital of Rs. 32,000
divided into 128 ordinary shares of ?Rs.250 each and the entire share capital
was issued, subscribed and fully aid up. the voting rights were prescribed by
article 76 of the articles of association of the company ad under that article
each member of the company had one vote irrespective of the number f shares
held by him, The voting rights of the members were not proportionate to their
respective shares of the paid up capital of the company but ;were distributed
equally among the members in the sense that teach member had one vote
irrespective of his hare of the paid up capital of the company. At an
extraordinary general main of the company held on August 5, 1951, a special
resolution was passed where by the old articles of association were deleted and
new articles of association were adopted. Under the new article of association
each member of the company was given voting rights in proportion to his share
of the paid up capital of the company in contradiction to the voting rights
given to each member by the old articles of association irrespective of the
share of the paid up capital of the company. As a result of to adoption of the
new articles a association the company was converted into a private limited
company hence the addition of the word "Private" in the name of the company.
Originally there where seventeen members of the company; and they were divided
into two groups, one group consisting of nine members need the other group
consisting of the remaining eight members. The nine members who formed one
group were in a position to control the affairs of the company if the voting
rights remained as provided in. e old articles of association. their voting
strength was, however affected by the adoption of the new articles of
association sick their share in the paid up capital of the company was less
than the share of the remaining member in the paid up capital of the company.
These members of to company therefore filed a petition in the then High Court
of Saurashtra under sections 397 and 398 of the companies Act, 1956, contending
inter alia that the extraordinary general meeting of the Company y h end n
August 5, 1951, at which the new articles of association were adopted was not a
validly convened meeting nor was it validly h led and conducted and that the
resolutions passed at thee m, being were therefore illegal and via According to
these members to whom I shall refer as petitioner for the purpose of thee
judgment the special resolutions passed at the extraordinary general meeting of
the company held on August 5, 1951, being illegal and via the new articles of
association were not a adopted by the company and the company contained top be
governed by the old articles of association. Thee necessary corollary of this
argument was that the voting rights of the member of the company remained
unaffected and each member continued to have one by irrespective of thee number
f shares held by him in the share capital f the company and the company all
continued to be a public limited company. There were various other contentions
raised in. ear petition but I am not con creed with those contentions for the
purpose of its application and I need not therefore rehearse the facts relating
to those contentions, Suffice it to state that the petitioner challenged the
adoption of the new articles of association which altered the voting rights
enjoyed by the members of the company under the old articles of association. If
the new articles of association were not validly adopted at the extraordinary
general seeing held on August 5, 1951, the petitioner would be entitled to
voting rights in accordance with the old articles of association, i.e. the
petitioner between themselves would have nine votes as against high votes of
the remaining members who formed the other group and the petitioner would in
that event be able to controller the affairs of the company. O course this
result would follow on the assumption that the transfer of five shares made by
respondent No.1 to respondent No. 1 to respondent No.4 and himself jointly on
July 1, 1950, were unlawful and void as contended by the petitioners. If theses
transfer were valid the members other than the petitioner would be able to
control the affairs of the company, for their voting strength would e augmented
by two votes of responds Nos.3 and 4 who became members as a result of these
transfer and the would thus have ten votes against nine vote's of the
petitioner But apart from this circumstance, whether these transfer were valid
or not if the mew articles off association validly replaced the old articles of
association the petitioner would not be in a majority at a general meeting of
the company for the petitioner between themselves hold less than fifty per
cent, of the paid up capital of the company and their voting strength would
therefore be less had that of the remaining member who freed to the other
groups. Thee struggle for power and supreme in the affairs of the company this
depended to a large extent on the question whether the special resolution
passed at the extraordinary general meeting of the company held on August 5,
1951, was valid and the old articles of association were valid y and effectally
replaced by the new articles of association. the petitioner therefore conceded
the special resolution re voting the old articles of association and adopting
the articles of association was illegal and void, The petitioner immediately
after filling the petitioner made an application for an interim injunction
restraining the company from holding any general l meeting since the dispute as
regards the validity of the special resolution which affection the voting
rights of the member was held pending determination of that dispute it would
create serious complications for it would not be authoritatively known how the
voting rights were exercised in accordance with the new articles of association
the resolutions passed at the general meeting would be illegal and via and in
that invite grave and irreparable injury would be caused tot he petitioner .,
The application was granted b the High Court of Bombay at Rajkot and an interim
injunction was issued restraining the company from holding any genial meeting
pending thee hearing and final disposal of the petition The interim injunction
was issued, I am told, on November 5, I956. the petition was thereafter not
heard for a considerable time and it ultimately reached hearing before me.
After the petition n was heard for some time, I suggested to the parties that
this was per-eminetly a cases fit for settlement and that they might try to see
if it was possible for them to arrive at a compromise on terms mutually
acceptable to them. Mr. M.P. Thakkar, learned advocate on behalf of the
petitioners, there upon asked for an adjournment since the petitioners were not
in Ahmedabad and it would require some time e to consult them. Mr. L.M.Zaveri,
on behalf of the company, stated that he had no objection to the petition being
ad journey, but that in the meantime the anteroom injection granted against the
company should be dissolved, since as a result of the operation of the interim
injunction, the company was not in a position to hold any general matting and
this had the effect of paralyzing the working of the company. Mr. L.M. Zeveri
pointed out section 87 to 90 of the Companies Act , I956, and contended that
having regard to these sections it was immaterial to consider whether the
special resolution passed at the extraordinary general meeting of the company
held on August 5, I95I, was valid or not, since by the operation of these
section the same result was brought about which was intended to be achieved by
the specials resolution in regard to voting rights. Mr. L. M. Zeveri argued
that even if the special resolution was illegal and void and the old article of
association contained to govern the company, the voting rights conferred by the
old articles of association came to an end from Its April, I956, when the
Companies Act, I956, came into force or at any rate on the expiration of the
prior of one year from the commencement of the Companies Act, I956, by reason
of sections 87 to 90 of the Companies Act, I956, and form that date each member
of the company was entitled to exercise voting rights in proportion to his
share of the paid of the paid up capital of the company. If that was the
position argued Mr. L M Zeveri , it was futile to continue the interim
adjunction for whatever be the fate of the special resolution substituting the
new articles of association of the old article was association the voting
rights at every general meeting of the Company held after 1st April 1956 or at
any r ate after 1st April 1957, were required to be exercised by to members inn
proportion to their respective e shares of the paid up capita of the company
and were not restricted to one vote per member irrespective of his share of the
paid up ca vital of the company. Mr. M P Thakkar disputed this construction and
effect of sections 87 to 90 of the companies Act, 1956 and contended that these
section detain to had the effect of aborad giant the voting rights conferee day
the old articles of association and that despite these section the voting
rights contained to be as provided in the old articles of association. these
were the rival co intentions urged b the parties on the questions of
interpretation of sections 87 to 90 of the companies Act, 1956, and both M
r. L M Zeveri
and Mr. M P Thakkar invited me to decide the question and agreed that if it was
held by me that as result of t operation of these sections the voting rights
could not be exercised as provide in. he old articles of association but were
retired to be exercised as provided in t he old articles of association b at
were required to be exercised in proportion to the respective shares of the
member in the paid up capital of the company from 1st April, 1956, or at any r
ate from 1st April, 1957, the interim injunction should e dissolved but if it
was held that these sections did not affect the voting rights provided in. e
old articles of association and that even after 1st April, 1957, each member
could have one vote irrespective of his share of the paid up capital f the
company th e interim injunction should not be dissolved. The sole questions ch
therefor arise on this application is: Whats is the trues interpretation and
effect of s actions 87 to 90 of the companies act, 1956?
Section 87 to
90 occur in Part I under the heading "Kinds of share Capital", These
section are preceded by sections 85 and 86 which also occur under the same
heading. Section 85 d evades the has are capital of a Company into two classes
namely preference share capital and equity share capital. "Preference
share capital" with reference to these requirements does not constitute
any departure from the ordinary concept of preference share capital but merely
r estates the concept in precise ad accurate language. There was not definition
of preference share or preference share capital in. he india Companies Act,
1913 and the preference shares are de scribed as such by r reason old of the
fact that they carried some preference rights in relation to other classes
shares particularly in relating to ordinary shares, These preferentila rights
were of great variety but referred normally to ea. or two of the principal
rigthness carried by the share namely the right to dividend and the right, on
winding up to receive the amount of the capital paid up or deemed to haven been
paid up, Now b y sector 85(I) a more precise and accurate definition is
introduced and these characteristics here made the statutory tests for
determining the preference share capital The tests are whether the share
capital fulfills the following requirements namely:
"(A) that, as respects
dividends it acquires r will carry a preferenctial r right to be paid a fixed
amount or an amount calculated at a fixed rate which may be either free of or
subject income tax and
(b) that as respects
capital it cares or will carry on a worn- down up or repayment of capital a
preferentila right to be repaid the amount of t he capital paid up r deemed to
have been paid up whether or not there is a preferential rights to the payment
of either or both of the following amounts, namely:
(i) any money remaining unpaid
in respect of the amounts specified in clause (a), up to the date of the
winding up or repayment of capital; and
(ii) any fixed premium or premium
on any fixed scale, specified in the memorandum or articles of thee
company."
It is also
declared by section 85 (I) that the fact that a preference share is entitled in
addition to the preferential right to the fixed dividend , to a portion of the
divided depending upon the quantum of the profit or that on a winding up it
carries in addition to the preferential right to repayment of capital a right t
participate in. he surplus assets after the entire capital has been paid unfurl
will not have the effect of making the definition of "preference shares
capital" inapplicable to the case. "Equity share capital" is
defined by section 85(2) as meaning all share capital which is not preference
share capital, The definition of "equity share capital" is thus an
exclusive definition and comprehends within its scope all share capital other
than prefers share capital. theere are therefore now under the companies Act,
1956 only two kinds of share capital namely preference share capital and equity
share capital. Prior to the enactment of the companu new Act, 1956 it w as not
unusual to divide the shares in. he capital of a company into two or more
classes as for example, preference shares and ordinary shares or preference
shares and A ordinary shares and B ordinary shares or ordinary shares and
deferred shares iii preference shares, ordinary shares and founder share's also
on and so froth and to attach various special rights privileges and conditions
to such shares. Where a company divide its share capital into different classes
the classes were usually given distinguishing descriptions and thee company was
at liberty to attach to them such descriptions as appeared appropriate, the
classes were often described as "ordinary shares","preference
shares","deferred shares" and "founders" shares",
as mention aid above but sometimes a m ore complicated terminology was also
used by the company such as "first preference shares", "ordinary
preference shares", etc. The law did not attach a rigid uniformly
applicable meaning to these descriptions and the rights carried bat e saris
were not dependent upon the descriptions but were always to be gathered from t
he terms of issue which normally reproduced the relevant provisions of the
memorandum and articles of association. these different description are however
now abolished by the companies Act, 156. That part o the share capital f the co
many which satisfies the requirements set out in section 85(I) is now described
as 'preference share capital" and the rest of the share capital is
described as "equity share capital" and the rest of the share capital
is described as "equity share capital" no matter what its description
ore nomenclature was before the commencement of the companies Act, 1956. Even
if any share were issued prior to the commencement of the companies Act, 1956,
they would be considered as equity share's for the purpose of the companies,
Act, 1956, unless the fall within the definition in section e85(I) in which
event they would be considered as preference shares, All the share capital
issued before thee commencement of the companies Act, 1956 must, therefore fall
in either of the two classes namely preference share capital or equity share
capital and the incidents of one or the other of the two classes must attach to
such share capital. this insistence upon classification off share capital into
preference share capita and quiets share capital is also to be found in regard
t future issue of share capital for section 86 prescribes that the share
capital of a company formed after the commencement of to companies Act, 1956 or
issued after such commencement shall be of two kinds only , namely preference
share capital and equity share capital The scheme of the companies Act, 1956,
therefore is that there should be only tow kinds of share capital namely
preference share capital and equity share capital and it is i n relating to
these t o kinds of share capital that voting rights are prescribed by section
87 to 90. If this contextual background of sections 87 to 90 is borne din mind
the interpretation of those s actions does not prescient any difficulty .
Thee is also
another rule of interpretation which is no less important and which affords
considered guidance in. thee interpretation of sections 87 to 90 That is th
rule in Heydon's case. It is a sound rule of construction established firmly in
England as far back as 1584, when Heydon's case was decided that"
".....for
the sure and true interpretation of all statutes in general (be they anal or
beneficial restrictive or enlarging of tee common law) four things are to be discerned
and considered:
1st. what was
the common law before the making of the Act, 2nd. what was the mischief and
defect for which the common law did not provide. 3rd. What remedy the
Parliament hate resolved and appointed to cure the disease of he commonwealth
and 4th. The true reason of the remedy and then the office of all the judges is
always to make such construction as shall suppress the mischief, and advance
the remedy and to suppress subtle inventions and visions for continuance of the
mischief and pro private comedo and to add force and life to the cure and
remedy, according to the true intent of the makers of the Act , pro boon
publics."
this rule was
reaffirmed by the Earl of Halsbury in Eastman photographic Materials co. Ltd.
v. comptroller-General of patents, Designs and Trade-Marks in. he following
words:
"My
Lords, it appears to me that to construe the statute now in question , it is
not only legitimate but highly convenient to refer both to the former act and
to the ascertained evils to which the former act had given rid and to the later
act which provided the remedy. these three things being compared, I cannot
doubt the conclusion."
In order to
arrive at a correct interpretation of section 87 to 90. it is therefore
necessary to consider how the matter stood immediately before the en actment of
these sections what the mischief was for which the old law did n to provide and
the remedy. these three things being compared I cannot doubt the
conclusion"
In orders to
arrive at a correct interpretation of sections 87 to 90 it is therefore
necessary to consider how the matter stood immediately before et e enactment of
these sections what the mischief was for which the old law did not approved and
the red,die which has been provided by theses sections to cure that mischief.
the position
that prevailed prior to the commencement of the companies Act, 1956 was that a
company could make any provision it liked in the articles of association
regarding voting rights in respect of varies classes of shares in the shares
capital of the company. there was nothing in the law which required that any
particular voting rights shall attach to any particular class of shares, The
voting rights depended entirely on the articles f association and it was for
the articles of association to determine whether any particular class of shares
shall carry any votes and if so what voting rights shall attach to such class
of shares. the mischief which resulted was that a few person could control the
affairs of a company through a small investment by holding shares which through
of less face value carried larger voting rights. The articles of association
could provide for different voting rights for different classes of shares
irrespective of the amount paid up on the shares and persons holding shares
carrying larger voting rights could therefore by owning a sufficient number of
such shares control the affairs of the company even though the amain of paid up
capital on such shares was less than the amount of paid up capital on the other
shares, Person in management of the affairs of a company cold also collect
share capital for he company from other by issue of new shares without in any
manner affecting their control of the company by the simple expedient of
attaching proportion Italy less voting rights to such new shares, there being
no requirement of the law that the voting rights should be proportionate t the
amounts of paid up capital n the shares, person who had contributed less to the
paid up capital of the company cold enjoy greater voting right than those who
had contributed more and consequently control the affairs of the company even
though there contribution to the paid up capital of the company was less than
that of the others.
It was in
order to cure this mischief the section 87 to 90 where introduced in the
companies Act, 1956. these sections were en acted with the object of removing
the inequality in the voting rights attaching to different classes of shares.
this object has been achieved by the legislature by making the total paid up
equate capital of the company as the pivot round which the structure of voting
rights should be centered. Sections 87(1) provides that subject to the
provisions of sections 89 and 92(2) the voting right of every member of a
company holding equity share capital in the company shall on a poll be in
proportion to his share of the paid up capital of the company, The voting right
of every member holding equity share capital in a company is thus made
commensurate with the extent of his holding in the equity share capital of the
company so that there would be no inequality of voting rights as between
members headline equity share capital in the company would have voting rights
in proportion to the amounts contributed by them to the paid up equity capital
of the company. the member we have contributed less to the paid up equity
capital of the company would have lesser voting rights than the member who have
contributed more and there would thus be no inequality in respect of voting
rights which could be brought about by any provision in the articles of
association as was being done in the past, The total paid up equity capital o
the company is taken as the basis or the norm and the voting rights attached to
equity shares are prescribed with refereed sore to this basis or norm, the
principle laid down being that the voting rights of members holding equity
shares should be in proportion to their safe i of the paid up equity capital of
the company. Now it must be remembered that by reason of the definition contained
i section 85 equity share capital includes all share capital other than
preference share capital so that the provision that the voting right of every
member of a company holding equity share capital other than preference share
capital no matter what the description or nomenclature of such classes of share
capital was before the commencement of the companies act, 1956. this provision
this strikes down in one wide sweep the inequality in voting rights attached to
all shares other than preference shares and places all shares other than
preference shares on the same footing as regards voting rights. Section
87(2)(c) makes a similar provision in regard to voting rights attached to
preference share and declares that the voting rights of the holder of a preference
share shall subject to the provisions of sections 89 and 92(2), be in the same
proportion as the capital paid up in respect of the preference share bears to
the total paid up equity capital of the company. It will be noticed that here
again thee total paid up equity capital of t he company is taken a s the basis
or the norm and it is with reference to this basis or n or that the voting
rights attached to preference shares are prescribed, the voting rights attached
to preference share are placed on the sea footing as the voting rights attached
tie equity shares, In both cases tea total paid up equity capital o the company
is taken as the standard and the voting rights capital of the company is taken
as the stand and the voting rights are r required to be in the same proportion
as the capital paid up in respect of the share beards to the total paid up
equity capital o he company. Section 87 the removes the inequality in voting
rights not only as between member holding equity share capital i.e. share capital
other than preference share capital enters but sale as between member s holding
equity share capital and member holding equity share capital, i.e. share
capital others than preference share capital entire se but also as between
members holding equity share capital and member holding preference share
capital so f ar tree is no dispute between the parties but the real dispute
between the parties arise where one turns to the provision of section 89 the
provisions of section 89 are very material to the determination of the question
which has arisen before me and the main controversy between the parties has
centered round the true interpretation of this section . Ordinarily section 87
wool have applied immediately on the commencement of he companu new Act, 1956
to voting rights attached t equity shares as well as preference shares and no
matter what the provision was in the articles of association the voting rights
in respect of both equity shares and preference shares would have had o be
exercised inn accordance with the provisions so section 87 right from the date
of the commencement of the Act, for section 9 proves that, save as other wise
expressly provided in the act, the provisions of the act. shall have effect
notwithstanding anything to the contrary cannonade inn the memorandum or
articles of association of a company., whatever inequality in respect of voting
rights e listed under the articles of association would have come to an end
immediately on the coming in. force of the companies Act, Section 93 however,
provides that nothing in sections 85 to 89 shall in the case of any shares
issued before he commencement of the Act, affect any voting attached to the
shares save as otherwise provided in section 89. there is thus an express
provisions in the Act that the provisions of section 87 shall not in the c ask
f any shares issued before the commencement of the Act, affect any voting
rights attached to existing shares are affected by the enactment of the
companies Act, 1956.
Before I
proceed to discuss the provisions of section 89, I must refer to section 88
which enacts that no company formed after the commencement of the companies
Act, 1956, or issuing any share capital after such commencement shall issue any
share the than preference shares which carry voting right which are
disproportionate to the rights attaching to the holder of other share's not
being preference shares, This section in express terms prohibits the issue of
equity share can therefore be made after the commencement of the companies Act,
1956 which would carry voting rights disproportionate to the voting right
attached t to e holder of the existing equity shares, Now it is clear from this
provision that the legislature does not was any equity shares with
disproportionate voting rights, The legislature is keen that there should be no
equity shares which carry voting rights disproportionate to the voting rights
attaching to others equity shares. The object of the legislature clearly is
that there should be no inequality in voting rights attached to equity shares
and that the voting rights should be in the proportion which the capital paid
up in respect of the share bears to the total paid up equity capital o the
company. this object must be boned in mind while interpreting the provisions of
section 89 and if there are possible construction that construction must be
adopted which best carries out and effectuates this object, there is also
another aspect of section 88 which must be burned in mind while interpreting
the provisions of section 89. Section 88 prohibits the issue f equity share's
after the commencement of the companies Act, 1956,. which carry voting rights
disproportionate to the voting rights attaching to the holder of the existing
equity shares. Section 88 prohibits the issue of equity shares after the
commencement f the companies Act, 1956. the voting right should not be
disproportionate to the voting right attaching to thee existing equity shares,
Now, how can this be possible unless the voting rights attach in to the
existing equity shares are themselves proportionately uniform? If the voting
rights attaching to the existing equity shares are disproportionate to one
another there would be no one standard with reference to which the voting
rights can be prescribed for the new shares to be issued fate the commencement
of the companies Act, 1956. It is therefore clear that section 88 assumes that
there is no inequality in voting rights attached to the existing equity shares
are no disproportionate to one another. It is only if the voting right attached
tot he existing shares are proportionately uniform that it would be possible to
give affect to section 88 The legislature has thus clearly proceeds n the
assumption that, after the commencement of the companies act, 1956 the voting
rights attached to existing equity shares would one be disproportionate to one
another and that no one class of existing equity shares would have
disproportionately excessive voting rights as co,pared to any other class of
existing equity shares. the construction to be put upon section 89 must, t
hereof be such as supports this assumption of it is only be putting such a
construction that fl effect can be given to section 88. Of course, if the
language of section 89 is clear and unambigums and does not yield the meaning
which supports this assumption the court will not stain the language merely
with a view to giving effect to the supposed intention of the legislation but
will construe the words according their plain and grammatical meaning, If
however the language used can bear a meaning consistent with the assumption of
the legislature the court will certain interpret the language in a manner which
will carry out the intention of t her legislature as gathers from the
assumption made by it. Bearing these consideration I mind, I shall now proceed
to examine the provisions of section 89.
Section 89
provides that if at the a commencement of thee companies Act, 1956, any shares
by whatever name called, of any existing company carry voting rights attaching
under section 87(1) to equity shares inn respect of which the same amount of
capital has been paid up the company shall within a period of one year form the
commencement of the act , reduce the voting rights i respect of the shares
first mentioned ss as to bring them 8n conformity with the voting rights
attached to such equity shares under section 87(I) As the language how the
clear and manifest purpose of the section is to terminate disproportionate
excessive voting rights of the existing shares and to bring them into conformity
with he voting rights as prescribed under section 87(I). The section applies to
all shares "by whatever name called" and lays down one uniform rule
for all shares with the object of removing the inequality in voting rights and
bringing the voting right attached to equity shares under section 87(I)
Ordinarily the voting rights of all shares would have t be in conformity with
the prescription of section 87 right from the date of them commencement of the
companies Act, 1956, by reason of the combined operation of action 87 and 9,
but by section 89 a period of one year is laid down during which the existing
structure f voting rights can confine even though it may b e contrary to the
provisions of section 87. Even if any shares carry voting in excess of the
voting rights attaching under section 87 (I) to equity shares in respect so
which the same amount of capital has been paid up the holder so such shares can
exercise their disproportionately excessive voting rights for a period of one
year from the commencement of the companies ACt, 1956. the structure of voting
rights m use be brought by the company into conformity wit t he requirements of
section 87 befores the exepiration of a period of one year from the
commencement of the companies act, 1956e. Though during this period of one year
the holder of the shares can exercise voting rights even if they be
disproportionately excessive having regard to the provisions of section 87,
such voting rights can't be exercised i n respect of certain resolutions mentioned
in section 89 (2) These resolutions relate to important matters and the
legislature has therefore en acted i section 89(2) that in respect of these
resolution the holder of shares carrying disproportionately excessive voting
rights in excess of what would have been exercisable by them if the capital
paid up n their share had verb equity share capital . the n et effect of these
profane is that if there are at the commencement of the Company use act, 1956,
any shares of any existing company which carry voting rights in excess of
voting right attaching under section 87(I) to equity shares in respect of which
the same amount of capital has been paid up the provision of section 87 would
be to immediately apply to such share's, but the company would have a period of
one year we thing which to reduce the voting rights of shaky shares as right he
into conformity with the stretcher of voting rights attached to such shares
even though they may be disproportionately excessive but in respect of the
resolutions set to in section 89(2) the holder would not be entire to exercise
such voting rights even during this period of one year but would have to
exercise voting rights in accordance with the requirements of section 87. If
this i s the position it is clear the inequality in voting rights in respect of
existing shares would have to be brought in c infirmity with the requirements
of section 87. the arguments of Mr. M P Thakkar was that section 89 was
intended to remove the inequality of voting rights in r expect of share capital
other than equity share capital. The intention of the legislature was, argued
Mr. M P Thakkar to bring the voting rights in respect of such share capital
into conformity with the voting right in respect of equity shares capital so
that to other shares should have the same voting rights as equity shares on
which the same amount of capital had b been paid up. this arguments was for
need n a supposed contradistinction between the voting rights of share "
by whatever name called" and the voting rights "attaching under
sub-section (I)of section 87 to equity shares in respect of which the same
mount of capital has been paid up" t be found in section 89 (I) The
arguments was that since the voting rights of the shares mentioned in section
89(I) are compared with the voting rights attaching under section 87(I) to
equity shares in respect of which the same amount of capital has been paid u of
the purpose of determining whether they are excessive the shares first
mentioned must be shares other than equity shares and section 89 cannot,
therefore apply so as to affect t he voting rights in respect of equity shares.
Mr. M P thakkar contended the sin see section 89 (I) does not apply so as to
affect the voting rights in respect of equity shares but ifs merely intended to
bring the voting rights in respect of o there shares in to conformity with he
voting right in respect t of other shares into confirm with with e voting
rights in respect of equity shares, the voting rights provided into old
articles of association in the present case continue to remain unaffected and
can be exercised notwithstanding the enactment of the companies Act, 1956. Mr.
M P Thakkar sought to reinforce this argument by reference to the language o
section n 89(2) which provides that before the voting right are brought into
conformity in accordance with the requirements of section 89 (I)e the holder of
the shares in question shall not exercise in respect thereof voting rights in
excess of what would have been exercisable by them if he capital paid up on
their shares had been equity share capital in respect of certain resolutions to
which I have already referred a little earlier The arguments of Mr. M P Thakkar
wash the words the holder of the shares in question shall not exercise in
respect thereof voting rights in excess of what would have been exercisable by
them if the capital paid up on tore she had been equity share capital" in
section 89(2)clearly indicate that the capital paid up on the shares whose
voting rights are required to be brought into conformity under section 89 (I)
is not equity shares capital and that such shares are no equity shares, The
argument was stressed in the form of an interrogation if the shares in question
are equity shares and the capital paid up on such share's been equity shares
and the capital paid up on such shares i equity share capital why should the
legislature have sad a the holder of such shares should not exercise in respect
thereof voting rights i n excess of what would have been exercisable no them if
the capital paid up on their shares had been equity share capital These words
argued Mr.M P Thakkar, clearly presuppose that the shares in question are no
equity share an that the capital paid up on such shares is not equity share
capital. If th is a argument of Mr. M P Thakkar were correct there can be no
doubt that section 89 would not apply so as to affect the voting rights of
equity share and in that event, despite the enactment of the companies Act,
1956 the voting rights as prescribed by the old articles of association would
continue to be exercisable by the member of the company subject of course to
the validity of the special resolution substituting the new articles of
association of the old articles of association of association. this arguments
is however no on lea repugnant to the object of t hen legislature be is also
defective in ignoring a number of relevant a material considerations which in
my judgment must weight with the court in interpreting this section.
The
construction contended for by Mr. M. P. Thakkar ignores the crucial word
"any shares by whatever name called "occurring in section 89(1).
Section 89(1) in terms applies to all "shares by what assessor name called
" and affects their voting rights if such voting rights are in excess of
the voting rights if such voting rights are in excess of the voting rights
attaching under section 87(1) to equity shares in respect of which the same
amount of capital has been paid up. The words "any shares by whatever name
called" according to the plain and grammatical meaning would include all
classes of shares as ordinary shares, preference shares, deferred shares,
founders' shares as ordinary shares, preference shares, deferred shares,
founders' shares, etc. Unless, therefore, there is something in the section or
the context which requires that the plain and grammatical meaning of these
words should be cut down and confined to any particular class or classes job
shares, I must give full effect to the plain and grammatical meaning and hold
that section 89(1) applies to all classes of shares whether they are called
ordinary shares or preference shares or deferred shares job founders' shares or
any other class of shares. The only thing to which Mr. M.P. Thakkar could draw
my attention was that section 89(1) itself has made a distinction between
shares whose voting rights are sought to be affected and enquiry shares and
that this destination between shares whose voting rights are sought to be
affected and equity shares and that this distinction is emphasized by the words
"the holders of the shares in question shall not exercise in respect
thereof voting rights in excess of what have been exercisable by them if the
capital paid up on their shares had been equity share capital " in section
89(2) and he argued that the shares to which section 89(1) applies must,
therefore, be shares other than Equity shares and the words "any shares by
whatever name called " must be construed not according to their plain and
grammatical meaning to include all classes of shares but in a narrow and
limited sense so as not to includes equity shares. I cannot accept this
argument of Mr. M.P. Thakkar. This argument, as I have already pointed out
above, tights are sought to be affected and equity shares. In my opinion there
is no such contrasistinction to be found either shares. In my opinion there is
no such contradistinction to found either in section 89(1) or in section 89(2).
Since the total paid up equity capital of the company is taken as the basis or
the norm for the purpose of prescribing the voting rights in respect of equity
shares as well as preference shares and the voting rights of both equity shares
and preferences shares are required to be in the same proportion as the capital
paid up in respect of the shares bears to the total paid up equity capital job
the company and the voting rights job preference share's are thus places on the
same footing as the voting rights of equity shares. Section 89(1) has taken the
voting rights attaching to equity shares under section 87(1) as the yardstick
for the purpose of determining whether the voting rights of the existing shares
are disproportionately excessive. There is no contradistinction sought to be
made between existing shares whose voting rights are sought to be made between
existing shares whose voting tights are sought to be affected and equity
shares. All existing shares are brought within the scope and ambit of section
89(1) and the question whether the voting rights of such shares are
dispropotionately excessive or not is to be determined with reference to the
yardstick of voting rights attacking under section 87(1) to equity shares in
respect of which the same amount of capital has been paid up. The existing
shares must by reason of the provisions of section 85 fall in either of the two
classes, namely,equity shares job preference shares. If the existing shares are
equity shares and they carry voting rights in excess of the voting rights
prescribed under section 87(1) for equity shares in respect of which the same
amount of capital has been paid up, their voting rights would have to be
reduced and brought into conformity with the voting rights attaching to such
equity shares under section 87(1). The yardstick of voting rights attaching
under section 87(1) to equity shares in respect of which the same mount of
capital has been paid up would apply and with reference to this yardstick the
voting rights of the existing shares in question would have to be reduced so as
to bring them into conformity with the requirements of section 87(1). There would
equally be no difficulty in applying its yard-stick even though the existing
shares be preference shares. The voting rights of preference shares are placed
on the same footing as the voting rights of equity shares and the yardstick job
voting rights attaching under section 87(1) to equity shares would hold god
equally for preferences shares. If the voting rights of existing preference
shares are in excess of the voting rights attaching under section 87(1) to
equity shares in respect of which the same amount of capital has been paid up,
they would equally be in excess of the voting rights attaching under section
87(2) (c) to preference shares in respect of which the same amount of capital
has been paid up and when such voting rights are reduced and brought into
conformity with the voting rights attaching under section87(1) to equity shares
in respect of which the same amount of capital has been paid up, they would
equally be in conformity with the voting rights attaching under section
87(2)(c) to preference shares in respects of which the same amount of capital
has been paid up. The words "the voting rights attaching under sub-section
(1) of section 87 to equity shares in respect job which the same amount of
capital has been paid up" in section 89(1) are not intended to bring out
any contradistinction between equity shares an d other shares, nut they merely
provide a yardstick with reference to which it must be determined in the case
of all shares, be they equity shares job preference shares, whether their voting
rights are disproportionately excessive and if such voting rights are, tested
by this yardstick, disproportionately excessive, they have to be reduced and
brought into conformity with the standard provided by this yardstick, which is
nothing more than the requirement of section 87. There is, therefore, which is
nothing more than the requirement of section 87. There is , there, nothing in
section 89(1) which would compel me to put any narrow constructions on the
words "any shares by whatever name called" so as to exclude from
their scope and ambit equity shares. There is equally nothing in section 89(2)
which would compel me to put such narrow construction on the words "any
holders of the shares in question shall not exercise in respect thereof voting rights
in excess of what would have been exercisable by them of the capital paid up on
their shares had been equity share capital" , they are again used not for
the purpose of bringing out any contradistinction but merely for the purpose of
describing the voting rights exercisable under section 87 so that in respect of
the resolutions set out in section 89(2) the holders of the shares in question
should not exercise voting in excess of those prescribed under section 87. The
test for the purpose of determining what are the voting rights which can be
exercised by the holders of the shares in respect of these resolutions is
formulated by providing that the voting rights shall be such as would be
exercisable by them if the capital paid up on their shares had been equity
share capital and the test is so formulated because the total paid up equity
capital of the company is made the basis or the norm and the voting rights in
respect of the shares are required to be in the same proportion as the capital
paid up on the shares bears to the total paid up capital of the company.
Section 89(2) therefore says: whatever be the shares in question, treat them as
equity shares and the voting rights attaching to such equity shares under
section 87(1) would be entitled to exercise in respect of the resolutions se
out in section 89(2). If the shares in question are equity shares, there is no
difficulty in applying the test for the capital paid up on such shares would be
equity share capital and the voting rights attaching to such S. ares under
section 87(1) would be exercisable by the holders of such shares. If, however,
the shares in question are preference shares, the voting rights in respect of
such shares must be determined as if the capital paid up on such shares is
equity share capital and the voting rights so determined would be exercisable
by the holders of such shares. It would be noticed that the voting rights
determined in this manner by reference to this test would be the voting rights
prescribed by section 87 so that the net effect of section 89(2) is that, in
respect of the resolutions st out in that section, the holders of the existing
shares cannot exercise voting rights except in accordance with the provisions
of section 87. In my opinion , therefore, there is nothing in section 89(2)
which requires any narrow or limited construction to be put on the words
"any shares by whatever name called " in section 89(1). These words
must, therefore, be construed according to their plain and grammatical meaning
to include all kinds of existing shares whether they be preference shares or
equity shares.
Apart from
this plain and grammatical construction, there are various circumstances which
militate against the construction which Mr. M.P. Thakkar wants me to place upon
section 89. If section 89(1) applies to all shares other than equity shares as
contended by Mr. M.P. Thakkar, the only shares to which this section can
possibly apply could be preference shares for, under the Companies Act, 1956,
shares are divided old into two classes, namely , equity shares and preference
shares and if equity shares are excluded from the scope and ambit of this
section, preference shares would be the old shares to which this section can
apply. The logical conciliation of this argument would be that section 89(1)
provides for termination of disproportionately excessive voting right the any
in respect of preference shares and disproportionately excessive voting rights
in respect of equity shares continue to remain unaffected. This result could
never have bane intended by the legislature. It is inconceivable that th
legislature could have intended that disproportionately excessive voting rights
in respect of preference shares should come to an end while disproportionately
excessive voting rights in respect of equity shares which in almost all cases
comprise a large bulk of equity share capital should continue to remain
unaffected. What possible object could the legislature have had in views in
leaving out equity shares from the scope and ambit so section 89(1) ? I cannot
think of any. If the legislature for which the law as it stood prior to the
commencement of the Companies Act, 1956, did not provide and that it was a
defect in the law which required to be remedied and provided the remedy for
such mischief and defect by unexciting sections 87 to 90, could it ever have
been intended by the legislature that so far as the existing shares are
concerned, this remedy should apply to preference shares but not to equity
shares / I must put such constriction as will "suppress the mischief and
advance the remedy ...and ... add force and life to the cure and remedy,
according to the true intent of the makers of the Act, provide public". If
I construct section 89(1) as applying only to preference shares, the remedy provided
by sections 87 to 90 would in the case of existing shares loses all meaning
for, as I have pointed out anode, equity shares in almost all cases constitute
a large bulk of the share capital of the company and in respect of this large
bulk of share capital, the members would be entitled to exercise
disproportionate voting rights and the mischief resulting from such
disproportionate voting rights should be perpetuated. On the other hand the
construction which the company wants me to place on section 89(1) not only
accords with the plain and grammatical meaning of the section but also
suppresses the mischief resulting from disproportionate voting rights and
advances the remedy provided for curing the mischief. The marginal note cannot
be referred to for curing the mischief. The marginal note to section 89 also
supports this construction. No doubt the marginal note cannot be referred to
for the purpose o f constructing a section but it certainly furnishes some clue
as to the meaning and purpose of the section. The marginal note to section 89
clearly indicates that the object and purpose of the section is to effect
termination of disproportionately excessive voting rights in existing
companies. There are no words in the marginal note limiting the object and purpose
of the section to termination of disproportionately excessive voting rights
only in respect of preference shares. The marginal note also thus indicates
that section 89(1) applies to all existing shares whether they be preferences
shares or equity shares.
These
considerations would be sufficient to dispose of the contention urged by Mr.
M.P. thakkar that section 89(1) applies only to preferences shares and does not
apply to equity shares. But there are still two further considerations which
clearly show that the construction contended for by Mr. M. P. Thakkar is not
correct. If sec lion 89(1) applies only to preference share's, the application
of section 89(2) would also be confined only to preference shares but, if that
where so, section 89(2) would be meaningless in almost all cases. The
resolutions set out in section 89(2) are resolutions which ordinarily do not
directly affect the rights attached to preference share's and the holders of
preference shares would not, therefore be entitled to exercise any voting
rights in respect of these resolutions unless the dividend due on the
preference shares has remained unpaid to the extent provided by section
87(2)(b).
Now it is not
a normal feature of companies that divided on preference shares should remain unpaid
to the extant provided by section 87(2)(b). In fact such cases would be quite
rare. In most of the cases dividend on preference shares would not be i arrears
to the extent provided in section 87(2)(b) and the holders of preference shares
would not, therefore, be entitled to exercise and voting rights in respect of
the resolutions asset out in section 89(2). If that is the position it is
difficult to see why the legislature should had made an provision i section
89(2) why the legislature should have made any provision in section 89(2) for
restricting the voting rights of preference shares in respects of these
resolutions. Such voting rights would be exercisable only in the remote
contagions of dividend remaining unpaid to the extent provided in section
87(2)(b) and the legislature could not have possibly made this provision with a
view to providing for such remote contingency. These resolutions are important
resolutions and the legislature, therefore, obviously wanted that in respect of
these resolutions the voting right should be exercised in accordance with the
provisions of section 87 right from the date of the commencement of the
Companies Act, 1956, and that is why the revision was enacted in section 89(2)
that the holders of the holders of the shares shall not exercise, in respect of
these resolutions, voting rights in excess of what would have been exercisable
by them if the capital paid up on their shares had been equity share capital.
Now if this provision is confined only to preference shares, the whole object
of the legislature would be defeated. The holders of equity shares which
constitute a large bulk of the share capital would be entitled to exercises
their disproportionate voting rights in respect of these resolutions and
section 89(2) would have no meaning. In that event section 89(2) might as well
not have been enacted , for it would be achieved only if section 89(2) is held
to apply to all existing shares, for then, the holders of all existing shares
would have to exercise their voting rights in accordances with the provisions
of section 87 right from the date of thee commencement of the Companies Act,
1956, in so far as these resolutions area concerned. If section 89(2) applies
to all existing shares, equally must section 89(1) apply to all existing shares
and section 89(1) cannot in that even be construed so as to be applicable only
to preference shares and not to equity shares. Par from this the construction
which includes within the scope and ambit of section 89(1) all existing shares,
whether they be preference shares or equity shares, is consistent with the
assumption made by the legislature in section 88. As pointed out by me above,
section 88 assumes that the voting rig has in respect of all existing equity
shares would be proportionately uniform after the commencement of the Companies
Act, 1956, and this would not be possible unless section 89(1) is construed so
as to apply to all existing shares including equity shares. If in any
particular case the existing equity shares carry disproportionate voting
right's and section 89(1) does not apply to existing equity shares as contended
by Mr.M.P. Thakkar, the voting rights of the existing equity shares would
continue to remain disproportionate notwithstanding the enactment of the
Companies Act, 1956, and in that even section 88 would be rendered meaningless
and ineffectual, for there would be no one standard of comparison for the
purpose of determining whether the voting rights carried by new equity shares
issued after the commencement of the Companies Act, 1956, are disproportionate
to the voting rights attaching to the holders of existing equity shares. None
it is a well known principle of interpretation of statutes that the court
should always lean against a construction which has the effect of rendering any
provision of the statute meaningless or ineffectual. All the parts of the
statute must be read to general so as to make as far as possible a consistent
enactment of the whole statute giving full meaning and effect to every part and
not rendering any company accords with this well known principle of
interpretation and gives full meaning and effect to section 88. Section 88
clearly showed the legislative intent that the voting rights of all assisting
equity shares should be proportionately uniform and this legislative intent is
best should be [proportionately u uniform and this legislative intent is best
carried out by the construction contended for by the company. I must, therefore
hold that section 89(1) applies to all existing shares including equity shares.
There is one
further aspect of thins question to which I must make a reference since that
also supports the construction which the company wants me to place on section 89(1).
The provisions of section 87(1) regarding voting rights attaching to equity
shares are expressly made subject to the provisions of section 89. If,
therefore, there is any conflict between the privations of section 87(1) and
section 89(1) the provisions of section of section 89(1) operate on the same
field as the provisions of section 87(1) at least to some extent, for otherwise
there would be no possibility of any conflict between the provisions of section
87(1) and the provisions of section 89(1). Now the provisions of section 87(1))
deal only with voting rights of equity shares and it must, therefore, a
fortiori follow that the provisions of section 89(1) also relate to voting
voting rights rights of equity shares. The provisions of section 87(2)(c)
regarding voting fight attaching to preference shares are also held on a parity
of reasoning that the provisions of section 89(1) relate to voting rights of
preference shares. It is, therefore obvious that section 89(1) applies to all
existing equity shares whether they be preference shares or equity shares
equity shares whether they be preference shares or equity shares and the
contention of Mr. M. P> Thakkar that section 89(1) is confined in its
application only to existing equity shares must be negatived.
It was next
contended by Mr. M. P. thakkar that the only mischief which the legislature
sought to remedy by annexation sections 87 to 90 was that arising out of the
inequality of voting rights in respect of the same class of shares on w high
different amounts of capital might be paid up and that sections 87 to 90 would,
therefor, apply only if there were shares of the same class on which d afferent
amounts of capital were paid up. The argument of Mr. M. P Thakkar was the
emphasis throughout sections 87 to 90 was on the amount of capital paid up on
the shares and voting rights were made proportionate to the amounts of capital
paid up on the shares. If, therefore, there were shares on which different
amounts of capital were up and the voting rights of such shares were not
proportionate to the amounts of capital paid up on the shares, sections 87 to
90 would apply. Mr. M. P. Thakkar argued that in the present case the same
amount of capital was paid up on all the shares and section 89(1) did not,
therefore , apply so as to affect the voting rights of all shares. This
argument of Mr. M. P. Thakkar is fallacious and cannot be accepted. Section 87
requires that the voting rights of all shares shall be in the same proportion
as the capital of the company and by reason of section 89 the voting right
capital paid up in r expect up in respect of the respect of resolutions other
than those set out in section 89(2), the existing voting of such shares may
continue for a period of one year from the date of t he commencement of the
Companies Acts, 1956. Even if the same amount of capital is paid up on all the
shares, yet if the voting rights attached to such shares are different, the
voting rights would obviously not be in the proportion as the capital paid up
in respect of the shares bears to the total paid up equity capital of the
company ans would thus not be in accordance with the provisions of section 87.
The test is not weather the amount of capital paid up on the shares in question
is the same or different. The test is whether the voting rights of the shares
are in the same proportion as the capital paid up in respects of the shares
bears to the total paid up equity capital of the company, no matter what the
capital paid up in respect of the shares is. If the capital paid up in respect
of the shares is the same, the voting rights must equally be the same, for
otherwise the proportion would be violate If the capital paid up in respect of
the shares is different, the voting rights must equally be different in the
same proportion. Sections 87 to 90 do not require as a condition of their
applicability that Theere should be shares on which different amounts of
capital have been paid up. This argument of Mr. M.P. Thakkar must, therefore,
be rejected.
It is clear
from this discussion that section 89(1) applies to the shares of the company in
the present case. The question therefore is whether the shares of the company
care voting rights in excess of those prescribed under section 87(1). The
answers to the question is self evident of one turns to the old articles of
association. Under the old articles of association. Under the old articles of
association e act me bed of the company has one vote irrespective of the number
of shares held by him. The voting rights of the member are not proportionate to
their respective shares of the paid up capital of the company. A member holding
one share has on e vote while a member holding ten shares held by the letter is
ten times the capital paid ups in respect of the one share held by the former.
The voting rights carried by the shares under the old articles of association
are , therefore, clearly in excess of those prescribed under section 87(1) and
the company was bound to bring rights into conformity with the voting rights
87(1) latest at the expiration of a period of one year from the date of the
commencement of the Companies Acts, 1956. If the old articles of association
were not validly substituted by the new articles of association as contended by
Mr. M. P. Thakkar, it is obvious that the company failed to bring the voting
rights of the shares into conformity with the voting rights prescribed by
section 87(1) within the period of one year prescribed by the section 89(1),
but that can't make any difference. Even if the company did not b ring to
voting rights of the shares into conformity with the voting rights prescribed
by section 87(1) as required after the expiration of the period of the year
from the date of the commencement of the Companies Act, I956, in view of thee
provisions of section 9. The company could not by refusing to carry out the
provision of section n 89(I) perpetuate the disproportionate voting rights
provided under the old articles of association. It was only for a period of one
year from the date of the commencement of the Companies Act, I956, that the old
voting rights could continue and thereafter the voting rights had to be
exercised in accordance with the provisions of section 87. Thee period of one
year expired on April 1, I957, and each member of the company was, therefore,
from and after that date, not entitled to exercise nothing rights in respect of
the shares held by him in accordance with the old articles of association but
was bound to exercise voting rights in proportion to his share of the paid up
capital of the company.
This being
the position, I vacate the interim injunction granted by the High Court of
Bombay act Rajkot on November 5, I956, restraining the company from holding any
general meeting pending the hearing and final disposal of the petition. Costs
of the application will be costs in the petition.
[1984] 56 COMP. CAS. 281 (KAR.)
HIGH COURT OF KARNATAKA
v.
Bellary Spinning and Weaving Co.
Ltd.
M. P. CHANDRAKANTARAJ URS J.
Company Petition No.
2 of 1982 in Company Application No. 324 of 1982
NOVEMBER 23, 1982
Jayavittal Kolar for
the petitioners.
T.S. Ramachandra for the respondents.
Chandrakantaraj Urs J.—This is a petition under s. 107 of the Companies Act, 1956.
The five petitioners are holders of 9½% redeemable cumulative preference shares
in the respondent company. Respondent company is a company duly incorporated
under the Companies Act, 1956 (hereinafter referred to as "the Act").
Initially, the company had divided its capital into 1,00,000 equity shares of
the value of Rs. 100 each. Subsequently, by an amendment to the memorandum,
art. V(a) was introduced by which the equity share capital was reduced to
75,000 equity shares of the value of Rs. 100 each and 25,000 9½% redeemable
cumulative preference shares of Rs. 100 each were added. The petitioners are
subscribers to the class of shares mentioned above as redeemable cumulative
preference shares. It is alleged that on December 23, 1981, a general meeting of
this class of shareholders was held at the registered office of the company in
Bellary and a resolution was passed as follows:
"Resolved that the
preference share amount and the accrued preference interest/dividend at 9½%
from the date of allotment on respective shares up to December 31, 1981, be
converted into equity shares from January 1, 1982."
Petitioners who were
present at the meeting are aggrieved by the resolution and have, therefore, approached
this court for relief, inter alia, contending that the resolution cannot be
given effect to as the requisite majority for passing the resolution at the
aforementioned general meeting for the special resolution had not been obtained
and, therefore, the resolution is liable to be cancelled by an order of this
court.
Respondent company has
entered appearance and filed its counter-affidavit. In the counter-affidavit,
the facts alleged by the petitioner in so far as they relate to the holding of
the meeting and the passing of the resolution are not disputed. Certain other
claims regarding mismanagement, etc., have been denied.
In this petition we are
only concerned with whether the company by the impugned special resolution has
acted in accordance with s. 106 of the Act and in accordance with art. 80 of
its articles of association.
Section 106 of the Act
provides for a variation of the shareholders' rights of the different class of
shareholders in a company. The rights can be varied by obtaining the consent of
that class of shareholders in writing and such consent must not be less than
3/4ths of the issued shares of that class or with the sanction of a special
resolution passed at a separate meeting of holders of the issued shares of that
class subject to the provisions contained in sub-cl. (a) or (b) of that
section. Undisputedly, the consent in writing of 3/4ths of the holder of shares
of that class, namely, redeemable 9½% cumulative preference shares, has not
been obtained by the company. They have resorted to the second method of
obtaining sanction at a special general meeting of that class of shareholders.
Article 80 of the articles
of association of the company is as follows :
''A resolution shall be a
special resolution when the intention to propose the resolution as a special
resolution has been duly specified in the notice calling the general meeting or
other intimation given to the members of the resolution and the notice has been
duly given of the general meeting and where the votes cast in favour of the
resolution by the members entitled to vote are not less than three times the
number of votes, if any, cast against the resolution."
In other words, in
conformity with what is provided in the first part of s. 106 of the Act, the
majority by which the present resolution can be validly passed at a special
meeting for a sanction of the alteration of the rights of that class of
shareholders is also by 3/4ths majority. It is not disputed that out of those
present at the meeting on December 23, 1981, of the class of redeemable
cumulative preference shareholders, 1,808 votes were cast both in person and by
proxy in favour of the resolution. The votes cast against the resolution was
1,430. In other words, the special resolution, the legality of which is questioned
in this petition, was passed by a bare majority of 378 votes. It was not passed
admittedly by 3/4ths majority as required by art. 80 of the articles of
association of the company.
In this view of the matter,
this court should have no hesitation to declare that the special resolution
passed at the meeting held on December 23, 1981, of the cumulative redeemable
preference shareholders of the respondent company was not passed in accordance
with law and, therefore, the company is not entitled to act upon the same and
alter the rights of that class of shareholders.
For the above reason, the aforementioned special resolution is set aside as illegal and not binding on the petitioners and other redeemable cumulative preference shareholders of the company.
Petition is allowed with costs. Advocate's fee is Rs. 100.
[1999] 21 SCL 234 (PAT.)
HIGH COURT
OF PATNA
v.
Industrial Forge & Engg. Co. Ltd.
G.S. CHAUBE, J.
COMPANY PETITION NO. 1 OF 1999 (R)
MARCH 30, 1999
Section 106, read
with section 81, of the Companies Act, 1956 - Voting rights of shareholders -
Variation of - Whether merely because company decided by resolution or
otherwise to increase number of its capital share within limit of authorised
capital and thereby voting power of existing shareholders was diminished, it
did not amount to variation of rights of shareholders - Held, yes - Whether,
therefore, increase in paid-up capital by issuance of certain shares in favour
of an ex-director against unsecured loan company owed to him, could be said to
be illegal or violative of either constitution of company or provisions of Act
or of Sick Industrial Companies (Special Provisions) Act, 1985 under which
company was under rehabilitation scheme of BIFR - Held, yes
FACTS
By a special
resolution passed at an extraordinary meeting of shareholders, the company
decided to issue certain number of equity shares to an ex-director against the
unsecured loan it owed to him and which it was unable to repay. Subsequently, the
Board of Directors passed resolution to allot said shares to him. The
petitioner contended that such variation without giving any information to him
was in violation of the constitution of the company and also the provisions of
the Act as by same action percentage of shareholding of the petitioner group
was deceased, adversely affecting their right and also the power to control
over the company. Therefore, the petitioner sought for cancellation of
variation of equity shares and restraining the respondent from giving effect to
such variation and holding further meeting until cancellation.
It is well settled
that a variation which affects the enjoyment of right without modifying the
right itself, is not a variation within the meaning of section 106. Increase in
the number of shares of any kind/category for raising capital or otherwise,
though affects the voting power of existing members by diminishing it in
number, in no way amounts to variation of their right as envisaged by section
106. The rights attached to ordinary equity shares include a right to vote,
right to receive dividends, right to maintain its face-value, and right to
transfer freely without restriction the shares toanother. Unless such rights
are altered or varied by the company by the resolution of the shareholders in
accordance with the provisions of sections 106, noaction lies under section
107. Merely because the company decided by a resolution or otherwise to
increase the number of its capital share within the limit of authorised capital
and thereby the voting power of the existing share holders was diminished, it
did not amount to variation of the right of the shareholders as envisaged under
section 106. Also, according to article 17 of articles of association of the
company the rights conferred upon shareholders of any class issued with
preferred or other rights shall not unless otherwise expressly provided by the
terms of issue of the shares of that class, be deemed to be varied by the
creation or issue of further shares ranking pari passu therewith.
Section 81(1), no doubt, provides that if at
any time after expiry of two years from the date of formation of the company or
at any time after expiry of one year from allotment of shares in that company
made for the first time after its formation, whichever is earlier, it is
proposed to increase the subscribed capital of the company by allotment of
further shares; such further shares shall be offered to the persons who at the
date of the offer are holders of equity shares of the company in proportion to
the capital paid up on those shares on that date. However, section 81(1A)
permits allotment of further shares to any persons, whether or not those
persons include persons referred to in sub-section (1) in any manner
whatsoever, if a special resolution to that effect is passed by the company in
a general meeting.
In the instant case, 80,500 equity shares of
Rs. 10 each, had been allotted to SJ pursuant to special resolution adopted at
the general meeting of the company. Therefore, it was perfectly valid In spite
of notice/knowledge, the petitioner chose not to participate in that meeting
which was incidentally held on the same day when the annual general meeting of
the company had been held after due notice to the shareholders. The decision to
allot equity shares to SJ had been taken at a meeting of the board of directors
on 10-10-1998 presided over by the father of the petitioner himself.
In the instant case for the rehabilitation of
the company, a scheme sanctioned by the BIFR was under implementation. There
was nothing to suggest that for the purpose its management had also been
changed or taken over. Therefore, for giving effect to the resolution of the
company for enhancing the paid up capital by issuing 80,500 equity shares and
allotting the same to SJ, approval of the BIFR was not required. Therefore, on
no account, the increase in the paid up capital of the company by issuance of
80,500 equity shares in favour of 'SJ' could be said to be illegal or violative
of either the constitution of the company or the provisions of the Act or of
the SICA. Therefore, the instant petition was not maintainable and was fit to
be dismissed
CASE
REFERRED TO
State of Karnataka v. Mysore Coffee Curing
Works Ltd [1984] 55 Comp. Cas. 55 (Kar.).
Anil Kumar Sinha and M.M. Prasad for the Petitioner. P.K. Sinha and
M.S. Mittal for the Respondent.
JUDGMENT
1. This company
petition purporting to have been filed under section 107 read with section 10
of the Companies Act, 1956 ('the Act') was filed by the petitioner Girish Kumar
Kharia, one of the holders of the equity shares of the opposite party company,
the Industrial Forge & Engg. Co. Ltd., having its registered office in the
town of Jamshedpur in the district of East Singhbhum for cancellation of
variation of equity shares from 1,50,000 having face value of Rs. 10 each to
2,30,500 without notice to, and prior knowledge of, the petitioner; and
restraining the opposite parties from giving effect to such variation and
holding further meeting until such cancellation. The case of the petitioner is
that the said company which has been arrayed as opposite party No. 1, was
established on 5-6-1980 and registered under the provisions of the Act as a
company limited by capital of equity shares. The company has its own memorandum
and articles of association. As on 10-11-1998, the issued paid-up capital of
the company was 22,50,000 divided into 1,50,000 issued capital of equity shares
of Rs. 10 value and 7,500 preferential shares of the value of Rs. 100. Out of
the total number of issued equity shares, the petitioner jointly with his wife
Smt. Geeta Kharia was holding 25,000 shares worth Rs. 2.50 lakhs. However, on
18-12-1998 he received a notice dated 16-12-1998 issued by the opposite party
No. 1 under the signature of its Managing Director (opposite party No. 2)
informing him about holding of a meeting on 12-1-1999 for resolving with or
without modification for enhancement of the paid-up capital of the company from
Rs. 23,05,000 to Rs. 30,55,000 by issue of 75,000 equity shares of Rs. 10 each,
at par. On receiving such notice he came to know for the first time that the
number of equity shares of the company had been increased to 2,30,500 from
1,50,000 without any information to him. According to him, such increase or
variation in the number of equity shares was illegal and in complete violation
of the Constitution of the company as alleged the provisions of the Act.
Consequently, he presented the petition in this Court on 6-1-1999; and
simultaneously filed an application under section 151 of the Code of Civil
Procedure, 1908, read with section 10 of the Companies Act for restraining
opposite parties from holding meeting scheduled on 12-1 -1999 or even on any
subsequent date for taking any decision on the agenda mentioned in the notice
dated 16-12-1998.
2. When
the petition was presented on 2-2-1999, there was a direction for issuing
notice of the application for injunction to opposite parties No. 1 and 2. In
the meantime, the said opposite parties were directed not to proceed on the notice
(Annexure 5) if the meeting pursuant thereto had already not been held. After
service of the notice opposite parties No. 1 and 2 appeared and filed counter
affidavit to the main petition, and application for vacating the interim order
of restraint passed on 2-2-1999. Consequently, with the consent of the learned
counsel for the parties, the matter was listed in chamber on 26-3-1999 for
admission of the petition and appropriate order on the application for vacating
the interim order dated 1-2-1999. It may be mentioned that in the meantime
opposite parties No. 1 and 2 filed supplementary counter affidavit and the
petitioner has filed replies to the counter affidavit, supplementary counter
affidavit and the application for vacating the stay.
3. The
learned counsel for the opposite parties No. 1 and 2 has submitted that the
petition purporting to have been filed under section 107 itself is not
maintainable inasmuch as issuance of further equity shares does not amount to
variation of the right or rights of shareholders within the meaning of section
106 of the Act. He has further contended that, as a matter of fact, 80,500
equity shares of Rs. 10 each, has been issued by the Board of Directors
pursuant to the resolution adopted at an extraordinary meeting of the members
held on 10-11 -1998, to the son and heir of one late B.K. Jain, former director
of the company, who had given an unsecured loan of Rs. 8.5 lakhs. As the
company was not in a position to repay that loan, at a meeting or the Board of
Directors held on 10-10-1998 it has been decided to issue equity shares to his
son Sanjay Jain worth Rs. 8.5 lakhs. Information of allotment of such shares
was given to the Registrar of the Companies (opposite party No. 3) in due
course and entered into the book. It has further been contended on behalf of
opposite parties No. 1 and 2 that, as a matter of fact, Mr. D.P. Kharia, father
of the present petitioner was a party to the decision taken by the Board of
Directors on 10-10-1998, as he had acted as the chairman at the meeting.
Therefore, it has been contended that the main petition barred by limitation
having been filed much after 21 days from the date of allotment of the shares
to Sanjay Jain. Therefore, the petition is fit to be dismissed. On the other
hand, the learned counsel for the petitioner has submitted that the equity
shares worth Rs. 8,05,000 were allotted to an outsider depriving him of his
right to receive proportionate share therein in terms of section 81(1) of the
Act. Therefore, it has materially varied and affected his right to manage the
affairs of the company. In the reply to the counter affidavit, it has been
stated that earlier the petitioner and other members of his family had 49 per
cent of the total shares but by surreptitiously increasing the number of the
equity shares and allotting the same to Sanjay Jain and subsequently purchasing
them from him, the percentage of share of opposite party No. 2 and other
members of his family has considerably increased from 47 per cent. Thus, the
balance of power has now tilted in favour of opposite party No. 2 and members
of his family.
4. It is
well settled that a variation which affects the enjoyment of right without
modifying the right itself, is not a variation within the meaning of section
106. Increase in the number of shares of any kind/category for raising capital
or otherwise, though affects the voting power of existing members by
diminishing it in number, in no way amounts to variation of their right as
envisaged by section 106. It has been held by a single Judge of the Karnataka
High Court in the case of State of Karnataka v. Mysore Coffee Curing Works Ltd.
[1984] 55 Comp. Cas. 55 at page 70 that sections 106 and 107 provided for a
particular class of shareholders to move the Court whenever the rights attached
to that class of share were sought to be altered by the company, and in no
other circumstances. The rights attached to ordinary equity shares include a
right to vote, right to receive dividends, right to maintain its face-value,
and right to transfer freely without restriction the shares to another. Unless
such rights are altered or varied by the company by the resolution of the
shareholders in accordance with the provisions of section 106, no action lies
under section 107. Merely because the company decided by a resolution or
otherwise to increase the number of its capital share within the limit of
authorised capital and thereby the voting power of the existing shareholders is
diminished, it does not amount to variation of the rights of the shareholders
as envisaged under section 106. In this connection, article 17 of the Articles
of Association of the Companies (Annexure 2/A) is very pertinent. According to
this article, the rights conferred upon shareholders of any class issued with
preferred or other rights shall not, unless otherwise expressly provided by the
terms of the issue of the shares of that class, be deemed to be varied by the
creation or issue of further shares ranking pari passu therewith. In the
present case, what the opposite party No. 1 is alleged to have done is that by
special resolution dated 10-11 -1998 passed at an extraordinary meeting of its
members decided to issue 80,500 equity shares in favour of one Sanjay Jain
whose father, late B.K. Jain, had earlier advanced an unsecured loan to the
company as one of its directors and pursuant to that resolution by their
resolution dated 18-11-1998, the Board of Directors of the company allotted
that much of equity shares in lieu of the unsecured loan of Rs. 8.5 lakh which
the company owed to the father of the allottee.
5. The
learned counsel for the petitioner has, however, urged that such allotment was
contrary to the provisions of section 81. Sub-section (1) of section 81, no doubt,
provides that if at any time after expiry of two years from the date of
formation of the company or at any time after expiry of one year from allotment
of shares in that company made for the first time after its formation,
whichever is earlier, it is proposed to increase the subscribed capital of the
company by allotment of further shares; such further shares shall be offered to
the persons who at the date of the offer are holders of equity shares of the
company in proportion to the capital paid-up on those shares on that date.
However, sub-section (1A) of the said section permits allotment of further
shares to any persons, whether or not those persons include person referred to
in sub-section (1) in any manner whatsoever, if a special resolution to that
effect is passed by the company in a general meeting.
6. In the
present case, the contention of opposite parties No. 1 and 2 is that 80,500
equity shares of Rs. 10 each, had been allotted to Sanjay Jain pursuant to
special resolution adopted at the general meeting of the company on 10-11-1998.
Therefore, it was perfectly valid. In spite of notice/knowledge, the petitioner
chose not to participate in that meeting which was incidentally held on the
same day when the annual general meeting of the company had been held after due
notice to the shareholders. The decision to allot equity shares to Sanjay Jain
had been taken at a meeting of the Board of Directors on 10-10-1998 presided
over by the father of the petitioner himself. Documents annexed with the counter
affidavit support this contention of opposite parties No. 1 and 2. At the time
of hearing, the learned counsel for the petitioner disputed the correctness of
the copy of the resolution which has been annexed with the counter affidavit.
Therefore, on my direction, the original books containing the minutes of the
proceedings of the general body of the company as also of the Board of
Directors thereof together with the attendance book showing the attendance of
the directors and members who attended those meetings were produced. On their
perusal, I find that actually such resolutions were passed and the meeting of
the Board of Directors held on 10-10-1998 had been presided over by the father
of the petitioner.
7. At one
stage, the learned counsel for the petitioner also disputed the existence of
the alleged unsecured loan in lieu of which 80,500 equity shares were allotted
to Sanjay Jain on 18-11 -1998. However, Annexure-D to the supplementary counter
affidavit discloses the existence of such unsecured loan. The document is a
projected balance sheet furnished before the Board of Industrial & Finance
Reconstruction (BIFR) when the company went to the said Board sometime in 1994.
It means that there are unimpeachable documents to show that the company owed
to its ex- director B.K. Jain a sum of Rs. 8.5 lakhs on account of unsecured
loan.
8. The learned counsel
for the petitioner also contended that even if it is accepted that 80,500
equity shares were allotted to Sanjay Jain in view of special resolution of the
company, such resolution could not have been given effect to unless approved by
the BIFR in view of the fact that the company was under rehabilitation scheme
of the BIFR. My attention was drawn to clause (b) of sub-section (2) of section
22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA)
according to which no resolution passed at any meeting of the shareholders of a
company shall be given effect to unless approved by the BIFR when management of
that company is taken over or changed in course of implementation of the
sanctioned scheme for its rehabilitation. It is manifest that such rider is
applicable only on resolutions of a company whose management is either taken
over or changed under the scheme sanctioned by the BIFR under section 18 of the
said Act. Sub-section (1) of section 18 enumerates the scheme/schemes which an
operating agency appointed by the BIFR can prepare for sanction by the latter,
and they include, inter dlia, (a) reconstruction, revival or rehabilitation of
the sick industrial company, and (b) proper management of the sick industrial
company by change in, or take over of, management of the sick industrial
company. If the scheme so prepared and sanctioned is for reconstruction,
revival or rehabilitation only of the company without change in, or takeover
of, the management thereof, the restriction imposed by clause (b) of
sub-section (2) of section 22 aforesaid is not applicable. In the instant case,
what is stated is that for the rehabilitation of opposite party No. 1, a scheme
sanctioned by the BIFR is under implementation. There is nothing to suggest
that for that purpose its management has also been changed or taken over.
Therefore, for giving effect to the resolution dated 10-11-1998 of opposite
party No. 1 for enhancing the paid-up capital by Rs. 8,05,000 by issuing 80,500
equity share and allotting the same to Sanjay Jain, approval of one BIFR was
not required. Therefore, on no account, the increase in the paid-up capital of
the company by issuance of 80,500 equity shares in favour of Sanjay Jain can be
said to be illegal or violative of either the constitution of the company or
the provisions of the Act or of the SICA.
9. In view
of what I have discussed above, I find that the present petition is not
maintainable and is fit to be dismissed in limine. Apart from the fact that the
present petition is not maintainable for the reasons stated above, I find that
the conduct of the petitioner in approaching this Court under the provisions of
the Act is not bona fide. In his reply to the counter affidavit of the opposite
parties No. 1 and 2, the petitioner has himself admitted that earlier his
father D.P. Kharia had instituted Title Suit No. 96 of 1998 in the District
Court at Jamshedpur challenging the allotment of shares to Sanjay Jain and
sought an injunction restraining opposite party No. 2 from giving effect to
such increase in the equity shares and allotment thereof. On notice, the
defendants in the suit including the present opposite party No. 2 appeared and
contested his prayer with the result that the prayer for injunction was not
granted by the trial court in that suit. It was thereafter that the petitioner
came to this Court suppressing this material fact in the original petition and
obtained the order of stay. In the original petition as well as in his
rejoinders the petitioner has also tried to convey an impression that
everything respecting that transaction was done behind his back without
knowledge thereof to him. It has been contended that simply because his father
was the chairman at the meeting of the Board of Directors held on 10-10-1998
and resides with him in the same building, no knowledge of such transaction can
be imputed to him. Thereby the petitioner purports to say that he had nothing
to do with the affairs of his father and vice versa. However, in paragraph 10,
he has tried to claim majority of paid-up issued shares prior to the increase
and allotment of 18-11 -1998 on the ground that he and other members of his
family held 49 per cent of the shares issued prior to 10-11-1998. The very fact
that he has tried to club his interest with the interest of other members of
his family shows that all the members of his family including, the petitioner
and his father are hand in glove and the present petition has been filed only
with a view to obstruct raising of further capital as proposed by the Board of
Directors as per notice dated 16-12-1998 in view of the decision taken at a
joint meeting of the managing director of the B.S.F.C. the Director of
Industries, Government of Bihar, and others on 3-12-1998 for consideration of
the rehabilitation package in terms of the order of the BIFR Annexure E.
According to this decision, the company was required to raise the equity worth
Rs. 5 lakhs each year out of which equity worth Rs. 1.25 lakh was to be raised
during the current financial year ending in March, 1999.
10. In
the result, this company petition is dismissed and interim stay granted on
2-2-1999 stands vacated.
[1947]
17 COMP CAS 142 (CD)
Sound City (Films), Ltd., In re
EVERSHED,
J.
OCTOBER
28, 1946
Pascoe
Hayward, K.C., and J.B. Richardson, for the Applicant Company.
Gravenor
Hewins, for the Petitioner.
Evershed,
J.—[after stating
the facts set out above, continued]: I am bound to say that I feel considerable
sympathy with Mr. Lewisohn. The fact that he has so far marshalled no less than
166 persons to support his present petition indicates the difficulties which
stand in the way of a petitioner under this section when one is dealing with a
company having a large issued share capital. The question of hardship was
presented to the Court of Appeal in Re Suburban and Provincial Stores, Ltd., and
Lord Greene, M.R., found that it was not of sufficient moment to make him doubt
the correctness of the decision of Bennett, J. in that case. But I repeat that
I cannot help feeling some sympathy for a man who, by the terms of the section,
has but seven days in which to collect the necessary forces to support his
petition. If, however, in such a case as the present, the terms of the section
place a heavy burden on a petitioner, that is a matter for Parliament, and not
for me.
The
question involved is one which falls within a very small compass. On the facts
of the case, as admitted or proved, it is plain that the individuals, whose
names are set out in the affidavit of October 25, had in no way communicated any
authority to the petitioner at the time when he presented his petition. I
assume, for the purpose of the present petition, that each one of those persons
had, in fact, signed a document purporting to confer authority on the
petitioner before the time when he presented the petition ; but, as I have
said, it is conceded that the fact of their having so signed was unknown to him
at the date when he presented the petition, and the sole question which I have
to determine is whether, in those circumstances, it can be successfully
contended on Mr. Lewisohn's behalf that he has satisfied Section 61(2) of the
Companies Act, 1929.
Section
61(2) is in the following terms : 'An application under this section'—that is,
to have the variation of rights cancelled—'must be made within seven days after
the date on which the consent was given or '—as in the present case—'the
resolution was passed, as the case may be, and may be made on behalf of the
shareholders entitled to make the application by such one or more of their number
as they may appoint in writing for the purpose. The phrase 'the shareholders
entitled to make the applicacation' means, as is found in the preceding
sub-section, the holders of not less in the aggregate than 15 per cent, of the
shares of the class concerned, being persons who did not consent to or vote in
favour of the resolution sought to be challenged.
The
question, therefore, is whether, on the facts which I have indicated, it can be
said that Mr. Lewisohn had been appointed in writing for the purpose of
presenting the petition by all the various persons indicated before the
expiration of seven days since the passing of the resolution. The matter comes
before the court on a motion by the company to strike out the petition on the
ground that it cannot, in any circumstances, succeed because the petitioner has
not satisfied the requirements of Section 61(2). There is before the court at
the same time a summons for leave to amend the petition by adding the
individuals whose names appear in the affidavit to the schedule in the
petition.
Counsel
on behalf of Mr. Lewisohn has first drawn my attention to the circumstances
that, on the application to strike out a petition such as the present, the
court must be satisfied beyond any reasonable doubt that the petition cannot
succeed. That aspect of such an application was recently considered by my
brother Wynn-Parry, J., in Netz v. Ede, to
which counsel referred. It is well established that the court ought not to make
use of its jurisdiction to stay proceedings at this stage in a case having some
point which ought to, and can, be argued. But, as it seems to me, when the sole
question is one of construction of a few words in Section 61(2), it would be
wrong, having reached my conclusion on it, to say that, because it involves, or
may be thought to involve, some difficult point, I must postpone the decision
till a later date. In saying that, I am much influenced by the bearing on this
element of the case of the decision in Re Suburban and Provincial Stores, Ltd. That
case was different in certain important respect from the present, for there, as
appears from the facts stated, the petitioner had not at the time when he
presented the petition purported to obtain the authority in writing of holders
of 15 per cent, of the issued ordinary stock. His claim was that he had
presented the petition on his own behalf and on behalf of other shareholders of
not less than 15 per cent., and that it would be sufficient if, by the time the
petition came to be heard, he could get their authority ratifying the assumed
agency. In the present case, Mr. Lewisohn says, not that he has failed to get
up to now any support, but that, so far as is material to the present
application, the appointment in writing had been made in fact, although not
communicated to him. But when I look at the reasoning of the decision of
Bennett, J., and of the Court of Appeal in Re Suburban and Provincial Stores
Ltd. , it
seems to me reasonably plain that both courts proceeded on the view that, since
the question at issue is title to sue, a petitioner claiming to petition on
behalf of others under this section must show that, at the date when he
presents the petition on their behalf, he was clothed with their authority to
do so.
If
that is the right view, it seems to me that the facts of this case admit of
only one answer. Counsel has claimed that because these persons had put their
names to written authorities that did clothe Mr. Lewisohn with the authority to
present the petition, although they had not communicated the fact to him, from
which, according to his counsel, it follows that he would still be entitled to
sue, although they never communicated the authority, or even destroyed the
authority, without having done so. That seems to me to be an absurd
construction, and my own view of the section is that, to clothe the petitioner
with the necessary authority, not only must that authority be in writing, as
required by the language of the section, but the fact of its having been given
must have been communicated to the person making the application. As I have
said, that view, as it seems to me, plainly flows from the language of the
reasoning in the decisions of Bennett, J., and the Court of Appeal. Bennett,
J., said (112 L.J. Ch., at p. 121; [1943] W.N. 47): " If the applicant did
not himself hold the prescribed percentage of shares, he must, at the date of
the presentation of the petition, have the written authority of other qualified
shareholders whose holdings, together with his own, must amount in the
aggregate to 15 per cent, of the issued shares of the class the rights of which
were to be varied." I take that language to mean that he must be able to
show, as a matter of fact, that he, as an individual, has been authorised in
writing by some other person, and I cannot see that that can be shown if an
instrument, though executed, has never been communicated to the petitioner.
In
the Court of Appeal to statement of fact contains the following : ' When the
motion came before Bennett, J., on February 9, the petitioner had received the
support of well over 15 per cent, of the ordinary stockholders to the petition.
Bennett, J., struck the petition out, on the ground that, the petitioner having
no locus standi at the time of the presentation, it was not proper to leave on
the file a petition which could not possibly succeed.' The argument of counsel
for the petitioner in that case was that it would be sufficient if, ex post
facto, the assumed agency was in writing and was ratified afterwards. The
answer of Lord Greene, M.R. (112 L. J. Ch., at p. 147 ; [1943] Ch., at p. 159),
to that argument made no reservation of any kind to cover any case in which,
unknown to the petitioner, some writing did exist. The Master of the Rolls took
the view that the terms of the section did not contemplate ex post facto ratification:
' If more shareholders than one make up the necessary 15 per cent., they can
either all join in the presentation of a petition or appoint one or more of
their number in writing to make the application on their behalf.' He went on to
say that the question was one of title to sue, and said: 'If he'—that is, the
petitioner—'is not' [the holder of 15 per cent.] 'the only way in which he can
obtain a title to sue is by having authority in the statutory form—namely, an
appointment in writing—from the number of shareholders necessary to make up 15
per cent, of the shareholding affected.'
Reading
those passages together in the light of the facts and arguments, it seems to me
that Lord Greene, M.R., indubitably proceeded on the footing that the
petitioner must be clothed with authority both given and communicated to him,
before he can begin the proceedings by presentation of the petition. Holding
the view which I do, and I confess, in the light of those decisions, I feel
clear in my own mind that that is the right view of the meaning of the section,
I do not think that it would be proper for me to postpone the decision of this
point on the ground that it is arguable and might be more conveniently dealt
with at the hearing of the petition. I think I ought, having reached that
decision, to accede to the company's motion to strike out.
APPENDIX
The
judgment of the Court of Appeal in Suburban and Provincial Stores, Ltd., In re,
which was delivered on March 1, 1943, was as follows:—
Lord
Greene, M.R.—The
jurisdiction of the Court to stay an action in limine on the ground that it is
an abuse of the process of the Court is one which must be exercised with the
greatest care, for an action should not be stopped if there is a presentable
case, however unlikely it may be to succeed. On the other hand, there are cases
in which the plaintiff cannot possibly succeed and has. no right to bring
proceedings. The present matter, in my opinion, falls into the latter class.
The
only question for our determination arises on the construction of Section 61 of
the Companies Act, 1929, under which the petition purports to be presented.
That, a new section, was intended to deal with the misuse of the rights of
majorities in connection with resolutions varying rights attaching to shares of
a particular class. The section confers on a specified proportion of the
holders of shares of the class affected a right bring the matter before the
Court which can cancel the resolution for the variation if it thinks proper to
do so.
It
is argued by Mr. Holmes that an aggrieved shareholder who holds less than 15
per cent, of the shares affected by such a resolution and who presents a
petition within the seven days prescribed by Section 61, subsection (2), is
entitled to proceed with that petition if, after its presentation, he obtains
authority from the number of shareholders which is required to make up 15 per
cent, of the aggregate holding, the argument being that that authority operates
retrospectively in the same way as a ratification operates when an act has been
done in terms on behalf of a person who has not at the time given authority for
it to be done on his behalf. In my opinion, that construction of the section is
manifestly wrong. The holding of 15 per cent, of the shares of the class
affected, either by the petitioner or by a group of shareholders, is a
necessary pre-requisite to the commencement of proceedings under the section.
If more shareholders than one make up the necessary 15 per cent, they can
either all join in the presentation of a petition or appoint one or more of
their number in writing to make the application on their behalf, but in any
case there must be a qualified shareholder or a qualified group of shareholders
who either by themselves or by their appointed representative or representatives,
are the persons instituting the proceedings at the time when the proceedings
are instituted. If this matter is regarded on the lines of a pleading, the
title to sue is purely statutory, If an individual is suing, he must show his
title to sue on the face of his petition. Under the statute that title is
derived from one of two alternative states of affairs. If he is himself the
holder of 15 per cent, of the shares affected, he has a title to sue, but if he
is not, the only way in which he can obtain a title to sue is by having the
authority in the statutory form—namely, an appointment in writing—from the
number of shareholders necessary to make up 15 per cent, of the shareholding
affected. The petition would be demurrable unless on the face of it it showed a
title in the petitioner to sue, that title taking one or other of the two
forms, which I have mentioned.
In
the present case, when one looks at the attempt which the petitioner made to
bring himself within the statute and to make his petition good on the face of
it, the vice of it appears in the plainest possible manner. He states that he
is the holder of ordinary stock to the amount of £400. That clearly gives him
no title to present this petition. He goes on to say : "It has not been possible
to obtain the appointment in writing by holders of 15 per cent, of the issued
ordinary stock who did not consent to or vote in favour of the resolution to
make this application on their behalf, but this appointment will be obtained
without delay." In other words, he is saying: "I have not got any
title to present this petition at the present moment, but I hope to get it
retroactively at some future time." He adds this curious sentence :
"Your petitioner makes this application on behalf of the shareholders
entitled to make it." I do not know what that means. The shareholders
entitled to make the application would be the holders of fifteen per cent, of
the ordinary stock, but the petitioner does not state that he has authority to
act on behalf of fifteen per cent, of that number of shareholders.
The
petition, therefore, appears to me to be bad in law on the face of it. I may
cite, not as an authority, but to say that, in my opinion, it is perfectly
correct, a passage from the Annual Practice, 1942, p. 1032. Among the matters
specified as necessary to be included in such a petition as this, is :
"The appointment of the petitioner by the necessary percentage of
dissentients, unless the petitioner himself holds fifteen per cent, of the
shares of the class." That, in my opinion, is right and common form
because without an allegation to that effect the petitioner does not show his
title to sue.
It
is said that the section cannot bear the meaning which I have placed on it
because, if it did, the seven days allowed to obtain the appointment by the
holders of fifteen per cent, of the shares would be insufficient for that
purpose, and, therefore, the section would be ineffective. In my opinion, there
is no substance in that argument. In the great majority of cases such as this,
where there is serious opposition, that opposition has been organized
beforehand. In the present case it had been very carefully organized. There was
a committee which had been circularizing the dissentient stockholders and was
in active operation before the meeting took place. It would have been possible
for that committee, having regard to the proxies which it had obtained, to
ensure that the necessary fifteen per cent, of stockholders was available
within the seven days, assuming that fifteen per cent, of them were prepared to
act. The period of seven days mentioned in Section 61, sub-section (2), is
peremptory. There is no power in any Court to extend that period. The object of
the provision is clear. It is to make certain that applications of this kind
should be brought with the greatest promptitude. If that were not done,
dealings in shares might be held up indefinitely while the decision of the
Court was being awaited. In connexion with that it is worth pointing out that
under Section 61, subsection (4), the decision of the Court on any application
under sub-sections (1) and (2), is to be final. I only refer to these matters
to meet the argument that there is some practical impossibility in obtaining an
appointment under this section unless it is to construed as Mr. Holmes would
have it construed. In my opinion, Bennett, J., took the right view. The point
raised by the petitioner is clearly unarguable, and Bennett, J., took the right
course in ordering the petition to be struck out and removed from the file. The
appeal, accordingly, must be dismissed with costs.
Mackinnon,
L.J.—I agree.
Goddard,
L.J.—I agree.