TMI Blog1959 (8) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... es in the share capital of the company. The authorised share capital of the company is Rs. 50,00,000 divided into 3,75,000 ordinary shares of Rs. 10 each, 10,000 5 per cent, cumulative participating preference shares of Rs. 100 each, and 50,000 deferred shares of Rs. 5 each. The memorandum of the company states that shares have the rights, privileges and conditions attached thereto as are provided by the regulations of the company for the time being with power to increase and reduce capital of the company and to attach thereto respectively such preferential, deferred, qualified or special rights or privileges or conditions as may be determined by or increased under the regulations of the company and to vary, modify or abrogate any such rights, privileges and conditions in such manner as may for the time being be provided by the regulations of the company. Article 74 authorises the company to reduce its capital by special resolution subject to confirmation by the court. Article 8 contains a statement of the rights and privileges of the several classes of shares. The article is expressly subject to what is thereafter provided in other articles of the company. By article 8 the prefere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The proposal for the scheme of arrangement was accompanied by an explanatory circular. The scheme, as originally proposed, provided for (a) cancellation of share capital in accordance with the arrangement detailed in the circular (b) for reduction of the share capital by cancellation of the paid up capital to the extent of Rs. 70 for every preference share of Rs. 100 each, to the extent of Rs. 8 for every ordinary share of Rs. 10 each and to the extent of Rs. 4 each for every deferred share of Rs. 5 each (c) for consolidation of the shares and for issue of fully paid up ordinary shares of Rs. 10 each in lieu of preference, .ordinary and deferred shares and for allotment of 3 fully paid up ordinary shares of Rs. 10 each in lieu of one preference share of Rs. 100 each including the arrears of dividend thereon (d) for reduction of the authorised capital of the company to Rs. 37,50,000 divided into 3,75,000 ordinary shares of Rs. 10 each (e) for further issue of 2,83,142 ordinary shares of Rs. 10 each subject to the sanction of the Controller of Capital Issues out of which 1,20,000 ordinary shares are to be allotted to the managing agents or their nominees in part satisfaction of their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant matter to be taken into consideration by the court in these appeals. On or about the 25th September, 1957, the company presented to this court two separate petitions for reduction of capital and for sanctioning the scheme of arrangement. The two petitions were admitted by Mallick J., who gave the necessary directions for the convening of the class meetings of the three classes of shareholders for approval of the scheme of arrangement. Pursuant to that order three separate class meetings were convened and held on the nth of December, 1957. The proposed scheme of arrangement with certain important modifications was approved by all the three separate meetings. The class meetings of ordinary and deferred shareholders unanimously approved of the modified scheme of arrangement. The meeting of the preference shareholders was attended by shareholders holding shares of the value of Rs. 6,42,700. Shareholders holding shares of the value of Rs. 4,42,700 voted in favour of the resolution approving the modified scheme. No one voted against the .resolution. The appellant holding preference shares of the value of Rs. 2 lakhs was represented at the meeting by one V.G. Pai. The chairman enquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncellation as provided in the original scheme. The two applications were heard and disposed of by Bose J., by two separate judgments and orders on the 13th of June, 1958. He allowed both applications. By one order he sanctioned the modified scheme of arrangement subject to the conditions that (a) within three months from the date of his order the managing agents of the company would pay off the claims of the unpaid sundry creditors of the company, (b) within one month from the date of the order the managing agents would acknowledge in writing that they forego Rs. 13 lakhs of their claim against the company, and (c) if the company does not or is unable to pay any dividend to the shareholders by December 31, 1951, this fact may be brought to the notice of the court and the court would be at liberty to give directions for changing the management of the company if it thinks fit to do so and to take such other steps as it appears to the court to be proper. By a separate order he confirmed the proposed reduction of capital. These two appeals have been preferred from those orders. Pending the appeals the operation of the order of Bose J. sanctioning the scheme of arrangement was stayed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or is unrepresented by available assets. Mr. Mitra argued that where the whole of the paid up share capita 1 has been lost, part of it cannot be cancelled. There is no substance in this contention. The company may reduce its share capital in any way. It may cancel any paid up share capital which is lost. It may cancel a part of the lost share capital. Where the whole of the capital is lost the company may cancel any part of it. The section does not place any fetter on the power of the company as is suggested by Mr. Mitra. In appeal No. 130 of 1958, Mr. Mitra further argued that the loss of capital has not been proved. In agreement with Bose J., I am of the opinion that the loss of capital has been sufficiently proved. There is cogent evidence of the loss of capital on the record of this case. The balance sheets tell their own tale. There is also the affidavit of a director of the company in support of the petition. Even prima facie evidence of the loss of capital is sufficient where the power of the court under section 100 of the (Indian) Companies Act is invoked. See Caldwell v. Caldwell and Co. (Paper Makers) Ltd. [1916] WN 70 (HL), Marwari Stores Ltd. v. Gourishan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al No. 130 of 1958, Mr. Mitra contended that clause (1) of the modified scheme of arrangement passed at the class meetings held on the nth December, itself involves reduction of capital and as such the modified scheme ought not to be sanctioned because there is no special resolution for reduction of capital by the modified scheme and because the formalities required for the confirmation of such reduction have not been complied with. He relies on the decision of Simonds J. in In re St. James Court Estate Ltd. [1944] 1 Ch 6; [1943] 13 Comp Cas 218 . In that case Simonds J. refused to sanction a scheme of arrangement which provided for conversion of preference shares into redeemable preference shares. Such a conversion was in substance a surrender of the existing preference shares in exchange for the redeemable preference shares and amounted to a reduction and simultaneous increase of capital. Nothing of that kind took place by clause (1) of the modified scheme. Clause (1) of the modified scheme provides for reorganisation and subdivision of preference shares of Rs. 30 into preference shares of Rs. 10 each arid also for extinguishment and/or modification of the special rights, priv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial dividend. The scheme cancels 70 per cent. of the paid up capital of the preference share without cancelling the entire paid up capital of the ordinary and the deferred shareholders. The scheme, therefore, abrogates, modifies and affects the right of preference shareholders to preferential return of capital. The decision of In re Mackenzie Co. Ltd. [1916] 2 Ch. 450 is distinguishable. In that case the share capital of the company was divided into ordinary and preference shares. The preference shares were entitled to a fixed cumulative preferential dividend on the nominal amount of the capital from time to time paid up on them but they had no priority as to capital. Astbury J. held that in the circumstances of the case a rateable reduction of capital of both preference and ordinary shares did not alter the rights attached to the preference shares. In the instant case the right of the preference shareholder to preferential return of capital on winding up is abrogated, modified and affected by the cancellation I of part of the capital paid up on the preference shares before cancelling the entire capital paid up on the deferred and the ordinary shares. Mr. Mitra then re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le runs thus: "This article is not to derogate from any power the company would have had if this article were omitted." Mr. Mitra argued that the modification of the special rights attached to the preference shares could only be made with the sanction of the majority of the holders of three-fourths of the issued preference shares in accordance with article 77A of the articles of association read with section 106 of the (Indian) Companies Act, 1956, and as the sanction of the requisite majority was not obtained, the scheme of arrangement as a whole including the reduction of capital cannot be sanctioned by this court. Now, rights may be attached to classes of shares either by the articles or by the memorandum. Where rights are attached to a class of shares by the articles, in view of section 31 of the (Indian) Companies Act, 1956, it is permissible for the company to alter those rights by special resolution. And where rights are attached to a class of shares by the memorandum, in view of sections 13 and 16 of the (Indian) Companies Act, 1956, such a provision of the memorandum is not deemed to be one of its conditions and may, therefore, be altered in the same manner as the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resolutions for reduction of capital which had been confirmed by the court. The company passed a third resolution for reduction of capital which purported to extinguish those stocks. This resolution was not passed with the assent of separate meetings of those classes or with the consent of the holders of three-fourths shares of those classes. The English Court of Appeal refused to confirm the reduction. The court held that the reduction modified or abrogated the special rights of those classes. On this finding it was conceded that the total elimination of the preference capital was incompetent without the approval of those classes under article 6. Evershed M.R. observed that the special rights could only be taken away under the articles by observing the restrictions of article 6. Jenkins L.J. observed that in order validly to carry out the reduction it was necessary to put the proposals to those two classes of stock in accordance with article 6 and to procure the approval of those two classes to the proposals by the requisite majority. It should be noticed that article 6 provided that the special rights might be modified or abrogated in the manner provided in that article but not o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 each to the extent of 8-10s. per share and for consolidation and conversion of the reduced shares into shares of 10 each all ranking pari passu as regards dividends and capital. The reduction there, as in this case, was conditional on the scheme of arrangement being approved by the shareholders of the company and sanctioned by the court. The scheme provided for the extinguishment of all arrears of dividend on the two classes of preference shares and for issue of participation certificates to the two classes of shareholders. Palmer's Company Precedents, 16th Edition, pages 1103-1104, gives a form of an order sanctioning a scheme of arrangement and altering the rights of shareholders as fixed by the memorandum. The share capital of the company was divided into ordinary and deferred shares and the scheme varied the rights attached to ordinary shares by conferring on them a right to a preferential dividend at the rate of 7 per cent. on this paid up capital in modification of clause 5 of the memorandum. I am conscious that the majority required by section 391(2) is the majority in number representing three-fourths in value of the class of members present and voting at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital and the scheme of arrangement are unfair and inequitable inasmuch as they cancel part of the capital paid up on the preference shares without cancelling the entire capital paid upon the deferred and the ordinary shares though, under the constitution of the company, the losses should fall in the first instance upon the ordinary and the deferred shareholders. He argued secondly that apart from this major consideration, having regard to all the circumstances of the case, the court ought not to confirm the reduction of capital or sanction the scheme of arrangement. In this case the statutory formalities with regard to the reduction of capital as also the scheme of arrangement have all been complied with. The creditors do not object and are not prejudiced. Still before confirming the reduction of capital the court is under the duty of satisfying itself that reduction is fair and equitable between the different classes of shareholders: per Lord Simonds in Scottish Insurance Corporation Ltd. v. Wilson Clyde and Coal Co. Ltd. [1949] AC 462, 486; 19 Comp. Cas. 202 And before sanctioning the scheme of arrangement the court is under the duty of satisfying itself that the schem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y shares should be cancelled before any part of the capital paid up on the preference shares is cancelled. This prima facie rule has not been observed. Only 80 per cent. of the capital paid up on the ordinary and the deferred shares have been cancelled. Without cancelling the remaining 20 per cent. of their paid up capital there has been cancellation of 70 per cent, of the capital paid up on the preference shares. But I have come to the conclusion that we ought not to withhold our sanction to the scheme of reduction on the ground that the entire capital paid up on the ordinary and deferred shares should have been cancelled in the first instance for the following reasons: This ground was not taken and was not argued before Bose J. There is no reference to this ground in the two judgments delivered by him. Mr. Mitra conceded before us that he did not argue this point before the learned judge and that this is a new point taken by him for the first time in appeal. The present contention appears to be contrary to the submissions made on behalf of the appellant by one Bhagatatula Venketa Sanyasi Rao in his affidavit affirmed on the nth January, 1958. In paragraph 24 of his affidavi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lakhs. The total uncancelled paid up share capital of the ordinary and deferred shareholders amounts to roughly about Rs. 4,15,020. If the abstract claim of the preference shareholders is upheld, loss to the extent of Rs. 4,15,020 should be further borne by the ordinary and the deferred shareholders but by the sanction of the scheme of arrangement the company is getting the additional benefit of Rs. 13 lakhs. The preference shareholders are, therefore, not really made to bear an additional burden of the loss by reason of the retention of 20 per cent. of the paid up capital of the ordinary and the deferred shares to the extent of 4,15,020. In effect, what has been allowed to be retained by the ordinary and the deferred shareholders have come out of the concession of Rs. 13 lakhs made by the managing agents. The scheme was approved at the separate class meeting of preference shareholders. At that meeting no one voted against the resolution. The appellant was represented at the meeting but its representative chose to remain neutral. The appellant now accepts the position that the minutes of the meeting correctly represents what happened at that meeting. Having done that the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be paid up by the managing agents. The other creditors do not object to the scheme of arrangement. In these circumstances, I have come to the conclusion that the court in the exercise of its discretionary power ought to confirm the reduction of capital and ought also to sanction the scheme of arrangement. I have, therefore, come to the conclusion that the two orders passed by Bose J. ought to be sustained and both these appeals should be dismissed. In appeal No. 129 of 1958, I propose that the following orders be passed. The appeal be dismissed. Each party do pay and bear its own costs of the appeal. We direct that the time fixed by the order of Bose J., by which the managing agents are to pay off the sundry creditors be extended up to three months from today. We further direct that the condition imposed by Bose J., that if the appellant company does not or is unable to pay any dividend to its shareholders by December 31, 1961, the same may be brought to the notice of the court and the court will then be at liberty to give directions, be modified and that the condition be read as a condition that if the appellant company does not or is unable to pay any dividend to its sh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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