2003 (11) TMI 349 - HC - Companies Law

Summary

Issues Involved:
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.

Issue-wise Detailed Analysis:

1. Redemption of Preference Shares:
The core issue in this case is whether preference shares can be redeemed by means other than using the profits available for dividends or the proceeds from a fresh issue of shares. The petitioner company was incorporated under the Companies Act, 1956, with an authorized share capital divided into equity and preference shares. The petitioner had issued various types of redeemable cumulative preference shares, and during a specified period, redeemed certain shares using proceeds from a fresh issue of shares made earlier.

2. Legal Framework:
Section 80 of the Companies Act, 1956, governs the redemption of preference shares, stipulating that such shares can only be redeemed out of profits available for dividends or the proceeds from a fresh issue of shares. The petitioner company argued that no specific time limit is prescribed under Section 80 for utilizing the proceeds from a fresh issue for redemption purposes, and therefore, their redemption actions were compliant with the law.

3. Redemption and Reduction of Capital:
The company sought to redeem the remaining preference shares (Series M and N) through a resolution passed by its Board of Directors and consent from the shareholders. The company filed a petition for the High Court's approval and sanction for this redemption and the consequent reduction of share capital by Rs. 27,50,00,000.

4. Interpretation of Section 80:
The court examined Section 80, which allows redemption of preference shares either out of profits available for dividends or the proceeds of a fresh issue. Since the petitioner was not seeking to redeem the shares through either of these methods, the court considered whether redemption could be undertaken by following general provisions for reduction of capital under Section 100 of the Companies Act.

5. Section 100 of the Companies Act:
Section 100 allows a company to reduce its share capital by special resolution and subject to court confirmation. This includes the ability to pay off any paid-up share capital that is in excess of the company's needs. Redemption of preference shares is considered a form of capital reduction, and thus, can be sanctioned under Section 100, provided the company follows the necessary procedures.

6. Court's Discretion and Sanction:
The court recognized that the preference shares could be redeemed either under Section 80 or by following the provisions of Section 100. The petitioner company had the authorization from its Articles of Association, passed a special resolution, and obtained consent from the preference shareholders for the redemption. Given these circumstances, the court saw no reason to withhold sanction for the proposed reduction.

Conclusion:
The court concluded that preference shares could be redeemed not only in accordance with Section 80 but also by following the general provisions of Section 100 of the Companies Act. The petition was allowed, granting the petitioner company the approval and sanction for the redemption of the preference shares and the consequent reduction of share capital.