Topics Covered in this article
The capital of a company is divided into units of a fixed category and such units are shared. A share in the share capital of a company and incorporates stock which is characterized under Section 2(84) of Companies Act, 2013.
Section 2(8) of The Companies Act 2013, characterizes that “Authorized capital” or “nominal capital” signifies such capital which is approved by the reminder of a company to be the greatest measure of share capital of the company. The companies are permitted to change the approved share capital as per the methods laid down in Section 61 to 64 read with Section 13 and 14 of the Companies Act. An increment or decline in the share capital of a company might be done as and when the company requires along these lines, prompting an alteration in the company’s share capital. The alterations to the capital proviso must be finished by the Companies Act, 2013.
Under Section 61 of the Companies Act, 2013, with Power of restricted company to modify its share capital, sub-proviso further state that (1) A restricted company having a share capital may, if so approved by its articles, adjust its update in its comprehensive gathering to—increment its approved share capital by such sum as it might suspect catalyst. A company can expand its approved share capital by adjusting the reminder of affiliation.
Section 13 of the Companies Act manages modifying the reminder of affiliation and section 14 of the above-said. A act manages adjusting the articles of affiliation. Section 13 of the Act expresses that under Section 61, a company may, by a unique goal and subsequent to consenting to the technique determined in this section, adjust the arrangements of its reminder.
In the event that there is no arrangement to change the arrangement of section 14 of the companies act, 2013, then, at that point the company is needed to make appropriate application to the concerned stock trade, where the company is recorded in a recommended structure.
In Re North Cheshire Brewery Co., 1920 WN 149. In this situation, powers are given to the individuals to modify its share capital just on the off chance that it is approved by its AOA.
In Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1981) 1 Com Cases 743 (SC): forces to alteration should be practiced in light of a legitimate concern for the company and not for the government assistance of some specific individuals.
Basically, after Andrews v. Gas Meter Co Ltd it was held in this case, that the articles may be altered to explain ambiguous portions or to supplement the memorandum with regard to those things upon which it is silent.
Facts of the case
- The company joined under the 1856 and afterward the 1862 Acts. Capital could be expanded by the general meeting. New shares would be equivalent to old shares, and there was no notice of need or inclination shares. The company was formed and registered as a limited company.
- The company wished to purchase a meter manufacturing business that was in organization from one John West, and wished to change its articles to permit particular shares to be apportioned to him, as a component of the thought for the arrangement.
- The company’s original capital, as stated in its memorandum, was 60,000/. Divided into 600 shares of 100/. Each, with power to increase the capital as provided by the articles of association.
- According to the articles, power was given to the company to increase the capital, and it was provided that any new capital should be considered as part of the original capital. The issue of preference shares was not authorized or contemplated.
- Subsequently the company desired to acquire additional works, and passed a special resolution altering the articles, and authorizing the issue of 100 shares of 100/. Each fully paid, and bearing a preferential dividend of 5%, per annum.
Issue in the case
Whether the preference share in this case is valid or not?
In consequence of the ordinary shares being more valuable than the preference shares, it was contended on behalf of the ordinary shareholder first that the shares were validly issued. Secondly,with assuming they are not preference shares or not entitled to the rights of ordinary shareholders but that this resolution was an article relating to preference share or to be read as lower the word “preference” has been struck out as defective, which would be that the holder would not be entitled to receive a dividend of more than 5% on the behalf of preference shareholders. It was contended that the company had no power to create a preference between different classes of shares and that consequently the preference shareholders were entitled to rank as ordinary shareholders.
It was first decided in hutton v. scarborough cliff Hotel co. that the company had no power to issue preference shares, secondly, that the holders of such shares but not entitled to right of honors shareholders and were not members of the company and that their only remedy was restoration of money which they had contributed to the company, The defendant finally appealed the learned judge having held that the issue of preference shares were invalid and that the holder of such shares would not be entitled to rank only its shareholders. It was then contended that firstly, the preference ballot was created, and secondly that if the holders are not in the same position as the ordinary shareholders according to the first point then he should consider himself bound by the second decision as in the present case. Meaning, that the memorandum contained no preference to the article and no power to create shares with special privileges.
In the case given above it was decided that the company had no power without altering its article to issue the allotted portion of the original capital with the preferential dividend and that decision was affirmed on appeal in the second case. The vice chancellor held that the company could not alter its articles so as to enable it to issue new shares as preferential dividend on the ground that such alteration was an alteration in the Constitution of the company. the decision, there was no appeal.
Summary of the case and Judgment
It was held that the company could give the particular shares. A company can’t deny itself of the ability to correct its articles by special resolution. He noted “In the off chance that, by declining to follow the second choice in Hutton v Scarborough Cliff Hotel Co, we were upsetting titles or humiliating exchange or trade we should regard it as one of those choices which, however off-base, it is devilish to overrule. However, such isn’t the situation; and it is alluring, according to all perspectives, to eliminate from companies a chain which should never to have been forced upon them, and which in practice has been disposed of by gifted artists by the inclusion of ability to give inclination shares in the first articles of association or the reminder of association itself. These gadgets will presently don’t be fundamental.”
In Hutton v. Scarborough Cliff Hotel Co, a goal was passed in a comprehensive gathering of a company that adjusted the articles by embedding the ability to give inclination shares which didn’t exist in the notice. It was held defective. Be that as it may, after Andrews v. Gas Meter Co Ltd, this view has been changed where a company was permitted by changing articles to give inclination shares when its notice was quite on point. The force of alteration of share capital that is subject just to what exactly is obviously denied by the reminder, explicitly or impliedly.
it was held that the preference shares were legitimate. There is no condition inferred, despite what is generally expected in an update of association that all shareholders are to be equivalent. Accordingly, companies who update random and unique articles don’t approve the issue of preference shares and modify its articles to do as such. A Company is obligated for the Wrongs of its Agent, whenever submitted in its administration and for its advantage, similarly like the wrong were its own.
In instance of this case law, it concerns the right of a company to change its constitution to empower giving of special shares. The company’s articles were adjusted to approve the issuance of preference shares. The case by the offended parties that the Memorandum specified equity was dismissed. This is on the grounds that the reminder was adjusted to accommodate.
The board has the powers to allot shares. This is on the grounds that the board is responsible for the everyday running of the company and it is therefore that they choose where the capital should come from. Allotting of shares is the cycle through which possible shareholders or endorsers are given the quantity of shares which they have effectively applied for and which the company has chosen to bring to the table to them. Anyway, this power must be practiced in the way concurred at gatherings and Articles of Association.
So it is well understood that alteration of share capital should be possible and should be done by giving new shares of the company on the lookout, by uniting the shares, the company can do the alteration in its capital by the transformation of past shares, the company can partition its share on the lookout, the company can drop its unused shares from the market.
In order to alter its capital clause in the Memorandum, the company requires authority in its articles. But if the articles give no power to this effect, the articles must be amended by a special resolution before the power to alter the capital clause which can be exercised by the company [Re. Patent Invert Sugar Co. (1885) 31 Ch. D. 166]. Further, the power to alter capital clauses should be exercised bona fide and in the interest of the company and not for the benefit of any group. An ordinary resolution will be enough for altering capital clauses in the Memorandum of Association.
Looking to the above case, it can be concluded that power of a company to adjust its article is certainly not an outright power; the company needs to deal with limitation forced on the alteration of articles; the company should follow every single step of the technique as clarified in the notice in the act, bombing which the company will be culpable with weighty punishment.
The consent of the classes of shareholders won’t be needed as the expansion of any sort of share capital can’t be said to ‘fluctuate’ or ‘influence’ class rights. The expanded capital may comprise preference shares, furnished that this isn’t conflicting with rights given by the Memorandum of Association.