TMI Blog2018 (3) TMI 1253X X X X Extracts X X X X X X X X Extracts X X X X ..... 433(e), namely, the company is unable to pay its debt. 2. Petitioner had subscribed and had issued 1,00,078, 6% non cumulative optionally convertible redeemable preference shares of ₹ 10/ each. As a shareholder, for each financial year, petitioner was entitled to non cumulative preferential dividend of 6%. Preference shares issued was with a conversion option under which petitioner could, in lieu of redemption, exercise the option for conversion of preference shares into equity shares between 1st October 2014 to 31st December 2014 in one or more tranche by giving prior notice to the company of not less than 60 days in writing. One preference share is to be converted into ten equity shares of ₹ 10/ each. The Board also had option to convert the preference shares partly or fully in equity shares of the company with the consent of the petitioner on mutually agreed terms and conditions even before 1st October 2014. Redemption schedule was also provided whereby ₹ 30/ per share was to be paid out on 28th February 2015, ₹ 35/ per share on 28th February 2016, ₹ 35/ per share on 28th February 2017. Admittedly, petitioner did not exercise its option to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt as a creditor and not as a shareholder'. It will be useful to reproduce paragraph 31 of the petition : 31 The Petitioner states that it is also in the process of initiating appropriate legal action against the Respondent Company for violation of the Petitioner's rights as a shareholder. The Petitioner states that the present Petition seeking winding up of the Respondent Company is being filed by it in the capacity of a creditor and not as a shareholder. The Petitioner craves leave to refer to and rely upon the said legal proceedings as and when the need arises.' (emphasis supplied) 6. Shri Sawant submitted that as provided under Section 80 of the Companies Act, 1956, no such shares can 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. Counsel also submitted that a preference shareholder is the shareholder of the company and cannot style itself as creditors and therefore, petitioner has no locus standi to maintain the petition. Counsel submitted that if payment is made other than from the profits of the company which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cept as provided in this section, apply as if the capital redemption reserve account] were paid- up share capital of the company. 9. In this case, there is no dispute to the fact that petitioner was a shareholder holding preferential redeemable preference shares. The only question that requires to be considered is whether petitioner would be a creditor of the company. Sub section 1 of Section 80 says, 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. Proviso, however, states that 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. This aspect, in my view, shows that where redeemable preference shares are issued but not honoured when they are ripe for redemption, the holder of those shares does not automatically assume the character of a creditor . The reason is that his shares can be redeemed only out of the profits of the company which would otherwise be availabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, the value of creditors vote for ascertaining requisite majority of 3/4th in value has a reference to the total debt of the company and not to the total paid up capital. A preference share is not a debt instrument. Preference share amount is a capital and not a debt. Thus, in the meeting of the creditors, it would not be possible to assign a value to the vote of a holder of preference share. If we were to hold that the preference shareholders who are not paid dividend for more than two years are also entitled to attend the meeting of the creditors under Section 391 of the Act and to vote thereat, then it would be impossible to determine what would be the value to their votes vis a vis the value of votes of creditors. It would be wrong to contend that preference shareholders have a right to vote but, valuation of their vote is unascertainable. We are therefore of the view that preference shareholders are not entitled to attend and vote at the meeting of the creditors convened under Section 391 of the Act even though dividend on the preference shares have remained unpaid for more than 2 years. (emphasis supplied) 10. The Division Bench of Calcutta High Court in Hindu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw relating to these securities, which is vastly different from that relating to share capital, will be dealt with in Chapter 12. Loan capital appears on the liabilities side of the company's balance sheet beneath share capital and reserves, but unlike share capital, it does represent indebtedness by the company, and holders of loan capital have the remedies of creditors to recover what the company owes them. (Page 164.) 12 Consequently, when the date for the redemption of redeemable preference shares has passed, their holders cannot sue the company for the repayment of their capital as creditors though they may petition for the winding up of the company as shareholders. 13 On a consideration of the provisions of the Companies Act, 1956, as also similar provisions in the English company law we cannot persuade ourselves to accept the contentions of the assessee and hold that when a company issues redeemable preference shares it is in fact obtaining a loan as it could by issuing debentures. There is a fundamental difference between the capital made available to a company by issue of a share and money obtained by a company under a loan or a debenture. Respective incide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... editors. According to the Gujarat High Court this view of the author clearly indicated that the holder of preference shares is not in the same position as that of a creditor. The learned author had also expressed the view in the aforesaid treatise, as noticed by the Gujarat High Court, that if a company defaults in redeeming the preference shares by the date fixed for redemption, the holder thereof cannot compel it to do so by suing in debt for the return of his capital or by filing for a mandatory injunction. This view of the author, according to the Gujarat High Court also negatives the contention that once the company decides to redeem its preference shares, the holder thereof would be in the position of a creditor. (emphasis supplied) 12. So far as the judgment in Anarkali Sarabhai (supra) relied upon by Shri Arsiwala, in my view, the judgment actually aids petitioner. The Apex Court has noted that under Section 80 of the Companies Act, 1956, preference shares must not 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. When a pre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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