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2016 (11) TMI 27 - SUPREME COURT

2016 (11) TMI 27 - SUPREME COURT - TMI - Conversion of preference shares to equity shares - Held that:- The meaning sought to be given to Articles 20, 21 and 22, namely, that every share holder including the holder of a preference share has a right to vote cannot be readily accepted. The resolution of the Board dated 5.7.1994 relating to the conversion of preference shares into equity shares proceeds on the basis that dividends in respect of the 3065 shares have not been paid and in lieu thereof .....

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he company at that point of time. A number of self serving decisions by the Gupta Group and its conduct of the business of the company in a manner detrimental to the interest of the company, as discussed hereinabove, would make it extremely perilous to rely on the version available in the resolution of the Board for allotment of 3065 equity shares in place of the preference shares in question. In the above circumstances it would be just and proper to strike down the conversion of the 3065 prefer .....

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er, 2005 were heard together and are being dealt with by this common order. 2. The appellant in Civil Appeal No. 589 of 2010 is a private limited company incorporated in the year 1948 with its registered office at Calcutta. The appellants 2 to 5 (hereinafter referred to as the Gupta Group ) had come into control of the company by actions and omissions complained of by respondents 1 to 7 in the said appeal i.e. C.A. No.589 of 2010 which had led to the institution of the company petition under Sec .....

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between the parties, consisted of 4132 partly paid ordinary shares and 1868 fully paid ordinary shares besides 3065 fully paid preference shares. One M/s. Gupta Brothers originally held the 4132 partly paid shares. The said shares were forfeited sometime in the year 1966 and thereafter the same were issued to the Sanwalka Group who paid a total of ₹ 45 for each share consisting of payment at the time of application and allotment and ₹ 10/- per share on a call being made subsequently .....

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ect to the above decision taken in the E.O.G.M. to increase the share capital of the company. In the said Board meeting, a follow up decision was taken to allot bonus shares at the ratio of 60 bonus shares for every fully paid up preference and equity share held. The said bonus shares were to be issued against revaluation of the industrial plot in Okhla Industrial Area, New Delhi which was the only asset of the company at that time. This was not contemplated by the Articles of Association of the .....

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or the company. This allotment was, however, to the exclusion of the Sanwalka Group. Contending that the aforesaid acts had the effect of reducing the Sanwalka Group, which was otherwise in the majority, to a negligible minority in the company, the company petition alleging oppression was filed before the Company Law Board wherein the act of removing two members of the Sanwalka Group from the Board of Directors (w.e.f.1.7.1991) and inducting two others of the Gupta Group in their place was also .....

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plot to sister concerns on terms claimed to be prejudicial to the interest of the company and of the shareholders. 5. The eventual reliefs prayed for in the Company Petition in the light of the averments made in the said petition and the supplementary applications were for: (1) restoration of the names of the members of the Sanwalka Group in the register of members of the company; (2) cancellation of the allotment of bonus shares; (3) cancellation of the issue and allotment of 25000 partly paid .....

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holders thereof had ceased to be members of the company. Such forfeiture, according to the Gupta Group, was in the following circumstances. The said shares were held by the Sanwalka Group as beneficiaries on behalf of the original holders i.e. M/s. Gupta Brothers. As the shares held by the Gupta Brothers were partly paid, the Sanwalka Group as beneficiary holders, was liable to pay the unpaid value of the said shares along with interest therein on a call being made by the company. Such a call, .....

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e same could not have been issued again the revaluation reserve was resisted by the Gupta Group by specific reference to the relevant provisions of the Companies Act, details of which will be noticed later. It was claimed that in the Board Meeting dated 5.7.1994 proportionate allotment of bonus shares against the 4132 partly paid shares in which the Sanwalka Group held a beneficial interest was offered subject to payment of the dues against the said shares in term of the call notice dated 5.1.19 .....

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t of any part of the newly issued share capital i.e. 25,000 shares. In any case, according to the Gupta Group, as the members of the Sanwalka Group had ceased to be members of the company (1995) by the time the 25,000 shares were issued/allotted (February, 1996) they were not entitled to allotment of any of the said newly issued shares. 8. Insofar as the lease in respect of the industrial plot is concerned, it was urged on behalf of Gupta Group that the same was done in consideration of the fund .....

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ent of any right of M/s. Gupta Brothers all of which stood extinguished upon forfeiture of the shares held by the said Gupta Brothers. The CLB further held that under Article 18 of the Articles of Association of the Company, it is M/s. Gupta Brothers who were liable to pay the dues, if any, on the said forfeited shares. The Board also found that the members of the Sanwalka Group had paid ₹ 45 per share and though there were an obligation to pay the balance on a call being made the material .....

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ections raised by the Gupta Group to the maintainability of the company petition was held against them. 10. The CLB by its order dated 01.03.2001 further held that the issue of bonus shares against revaluation reserve was contrary to the provisions of Article 96 of Table A of the Act of 1956. So far as the issue of 25,000 ordinary equity shares is concerned, the CLB decided the issue in favour of the Gupta Group. However, as the members of the Sanwalka Group continued to be members of the compan .....

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as correctness of the issue of 3065 ordinary equity shares against the preference shares is concerned, the Company Law Board felt that it would be inappropriate to go into the said question as a related issue was pending before the Delhi High Court with regard to the very same preference shares. In fact, the issue before the High Court involved the question as to whether the said shares did exist at all or stood extinguished prior to the date of conversion. Insofar as the lease of the industria .....

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a High Court by filing an appeal under Section 10F of the Act. Challenging the decision of the Board insofar as the issue of 3065 preference shares and the lease in respect of the industrial plot is concerned, the Sanwalka Group had filed a separate appeal. The High Court, by its impugned order dated 14.9.2005, dismissed both sets of appeal leading to the institution of the present appeals before this Court. 12. On the basis of the issues dealt with by the CLB and the High Court and the argument .....

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ity of the lease agreement executed by the company in respect of the industrial plot; (vi) Legality of the issue of 3065 ordinary equity shares as against the preference shares. 13. We have heard Shri Arvind P. Datar learned senior counsel appearing for the Gupta Group and Shri C.A. Sundaram learned senior counsel appearing for the Sanwalka Group. 14. The questions arising, as noticed above, may now be taken up for consideration. Maintainability of the Company Petition - Notwithstanding the very .....

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bers specified therein. The certificates do not contain any stipulation or condition that the same are being held either on account of a third person or as beneficiaries on behalf of any third person. The shares in question were allotted on payment of ₹ 35 being the application money (Rs.25) and allotment money (Rs.10). A further amount of ₹ 10/- per share was paid against the first call made on 7.8.1986. Therefore, the share certificates, ex facie, do not support any of the contenti .....

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identally was also ₹ 55/- per share i.e. same as the unpaid amount of the shares at the time of forfeiture when held by M/s. Gupta Brothers) along with interest. In this regard it was found by the CLB as well as the High Court that even issue of notice of the call in terms of Section 53 of the Act had not been proved by the Gupta Group. That apart, the call notice dated 5.1.1991 and forfeiture of the shares held by the Sanwalka Group, upon alleged failure to comply with the said notice, do .....

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pany may have incurred. They may also write in any such notice that in the event of failure to pay the amount so due before a particular date the Directors shall proceed to forfeit the shares. (emphasis is ours) 15. If the amount still remains unpaid the Directors may proceed to forfeit the shares. 16. A notice of the resolution of forfeiture shall be given to the member whose shares have been forfeited. 17. Any shares so forfeited shall be deemed to held the property of the company and the Dire .....

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e the payment of such moneys or any part thereof if they think fit, but shall not be under any obligation to do so. The member whose shares have been forfeited shall not be entitled to claim the sale proceeds of such shares. 15. Not only the call notice dated 5.1.1991 had not been proved to have been issued in the matter required under Section 53 of the Act, the notice also does not mention the consequences of non-payment i.e. forfeiture. Also the fastening of the liability on the Sanwalka Group .....

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would demonstrate the apparent falsity of the claim now made that the forfeiture was due to failure of the Sanwalka Group to comply with the terms of the call notice dated 5.1.1991. 16. To overcome the aforesaid difficulties, an argument has been made on behalf of Gupta Group that even if the call notice dated 5.1.1991 is not to be relied upon, in the Balance Sheet dated 31.3.1992 the amounts due have been shown as calls-in-arrears. The said document was duly circulated. The Sanwalka Group, ther .....

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details in the Articles of Association of the Company, extracted above. A balance sheet does not and cannot operate as an alternative to a call notice. 18. If the primary question i.e. maintainability of the company petition has to be answered in favour of the Sanwalka Group, as we are inclined to, the other issues highlighted in the earlier part of this order would now have to be considered. Issue of 25,000 ordinary equity shares - 19. There is no denial of the fact that notice of the E.O.G.M. .....

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tice is mandatory under Section 172(2) read with Section 41 of the Act. This is, ex facie, apparent from the reading of the said provisions of the Act. Reference to the elaborate case laid before us on this score would, therefore, not be required. 20. Specifically, so far as the issue of bonus shares is concerned, the arguments laid down before us would require a consideration whether Section 205(3) of the Act, particularly, the proviso thereto permits issue of bonus shares out of revaluation re .....

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to be noticed that in Bhagwati Developers (supra) the Articles of Association (Article 182) specifically permitted/contemplated such a course of action. In the present case, the Articles of Association of the Company do not empower the Directors to so act. No such situation i.e. issue of bonus shares out of revaluation reserve is contemplated. When the Articles of the Company do not confer any such power in the Board exercise thereof on the basis that the Act so provides would be impermissible. .....

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er and covenanted to by the company and each shareholder to observe all the provisions of the memorandum and of the articles. The articles of association constitute a contract not merely between the shareholders and the company but between the individual shareholders also. The articles are a source of power of the Directors who can as a result exercise only those powers conferred by the articles in accordance therewith. Any action referable to the articles and contrary thereto would be ultra vir .....

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unds as the additional capital available is purely fictional or notional. A self serving interest of the Gupta Group (who received all the bonus shares issued) in issuing the bonus shares, therefore, is evident. 22. So far as the issue of 25,000 equity shares is concerned, there can be no manner of doubt that the decision of the Board to issue the said shares has to be tested in the light of the wide powers of the Board to act in such matters as has been laid down by this Court in Needle Industr .....

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etract from the fundamental principle of fair play that is to be expected from the Board of Directors in making a fair and proportionate distribution/allotment of such fresh shares. The direction of the Company Law Board upheld by the High Court, namely, that allotment from the aforesaid 25,000 newly issued ordinary equity shares should be proportionate to the share holding of the two groups taking the members of the Sanwalka Group as having continued to be members of the company, will, therefor .....

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which is of the year 1996 may take some further time for resolution. In such circumstances, the apprehension of the Sanwalka group is that if the equity shares issued against the said preference shares are allowed to remain alive and valid the balance would still tilt in favour of the Gupta Group. 24. It is not known whether the High Court had been requested by the parties to make an interim arrangement and if so the result thereof. However, before us, the Gupta Group has sought to contend that .....

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esaid submission advanced on behalf of the Gupta Group in view of the provisions of Section 87 of the Act particularly sub-section (2) thereof which is in the following terms: (2) (a) Subject as aforesaid and save as provided in clause (b) of this sub-section, every member of a company limited by shares and holding any preference share capital therein shall, in respect of such capital, have a right to vote only on resolutions placed before the company which directly affect the rights attached to .....

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ue on such capital or any part of such dividend has remained unpaid : (i) in the case of cumulative preference shares, in respect of an aggregate period of not less than two years preceding the date of commencement of the meeting ; and (ii) in the case of non-cumulative preference shares, either in respect of a period of not less than two years ending with the expiry of the financial year immediately preceding the commencement of the meeting or in respect of an aggregate period of not less than .....

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specified, on the day immediately following such period. (c) where the holder of any preference share has a right to vote on any resolution in accordance with the provisions of this sub-section, his voting right on a poll, as the holder of such share, shall, subject to the provisions of section 89 and sub-section (2) of section 92, 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. 26. A reading of the af .....

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h are in the following terms: 20. The following rights are attached to these shares as regards dividends, voting rights and redemption - (a) Preference shares shall carry a fixed cumulative free of Income-tax dividend @ of 6% per annum in preference to ordinary or any other class of shares. (b) Preference shares shall be redeemable at any time after a period of 5 or 10 years from the date of allotment at the option of Directors of the company or at the option of the holder thereof respectively, .....

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nd on ordinary shares as mentioned above shall be divided between the preference and ordinary shares equally on the basis of paid up capital in the company. (e) Preference shares shall also have a preference for repayment of capital at the time of the winding up of the company in preference to any class of shares. 21. On show of hand every shareholders present in shall have one vote and upon poll every shareholder present in person or any proxy shall have one vote for each share held by him or h .....

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, that every share holder including the holder of a preference share has a right to vote cannot be readily accepted. The resolution of the Board dated 5.7.1994 relating to the conversion of preference shares into equity shares proceeds on the basis that dividends in respect of the 3065 shares have not been paid and in lieu thereof the shareholders had agreed to receive an equivalent number of equity shares. The above statement of fact is difficult to accept. Neither is the period during which di .....

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of the company, as discussed hereinabove, would make it extremely perilous to rely on the version available in the resolution of the Board for allotment of 3065 equity shares in place of the preference shares in question. In the above circumstances it would be just and proper to strike down the conversion of the 3065 preference shares into equity shares and revert the preference shares to its earlier status to be dealt with in the future in accordance with law. This is, of course, subject to the .....

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