Birla Global Finance Ltd., in re (2004) 58 CLA 154 (Bom.).

This case talks about the concept of redemption of preference shares, the preference shares can be redeemed either 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 the redemption. The judgement also says that consent of the court is not required under Section 80 of the Companies Act, 1956 if the Article of Association permits for the redemption.
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Introduction

In the Birla Global Finance Ltd. case, the petitioner company is seeking various ways and methods available for the redemption of the shares. Any company having share capital can redeem its shares if the Articles of Association of the company authorized to do so with consent from the court. Section 80 of Companies Act, 1956 lays down the conditions to be followed for issue and redemption of preference shares. Sections 100 to 104 of Companies Act, 1956 are the general provisions regarding the reduction of share capital whereas Section 80 is a special provision regarding the same. When the preference shares are to be redeemed out of the proceeds of a fresh issue of shares made for the purpose of redemption, there is no reduction in the capital of the company for an amount equivalent to or more than the amount to be utilized for the purpose of redemption. Thus, the capital of the company is maintained and the creditors are not affected. In the case, where shares are to be redeemed out of profits of the company which would otherwise be available for dividends, the creditors can be affected because existing money goes out of the company.

Facts of the case

The petitioner company was incorporated under Companies Act, 1956 on 26th June, 1986. The authorized share capital of the company is one hundred and twenty- five crores divided into five crore equity shares of Rs. 10 each and seventy-five lakhs preference shares of Rs. 100 each. As on 31st March, 2002, the balance sheet of the company shows four kinds of preference shares. The four kinds of share available are: (1) 10.5% redeemable cumulative preference shares of Rs. 100 (Series N Preference Shares), (2) 10.75% redeemable cumulative preference shares of Rs. 100 (Series M Preference shares), (3) 11.50% redeemable cumulative preference shares of Rs. 100 and (4) 12.5% redeemable cumulative preference shares of Rs. 100. The redemption of 11.5% and 12.5% redeemable cumulative preference shares was made out of a fresh issue of Series M and N redeemable cumulative preference shares. The Series M shares were allotted to Hindalco Industries Ltd. (25,00,000 in number) and Series N shares were allotted to Excell Mines and Industries (2,50,000 in number). Both the shares have a maturity period of 10 years and can also be redeemed early either by the petitioner or the shareholders by giving one month’s notice to the other party. In a meeting of Board of Directors, a resolution was passed by the petitioner company for the redemption of all 27,50,000 shares subject to the consent of the court. Both the companies agreed for the redemption and conveyed their consent in writing. Therefore, the present petition in Biral Global Finance Ltd. case has been filed for obtaining the consent of the court for the redemption of Series M and N shares and subsequent reduction of the share capital.

Issues         

  • The Birla Global Finance Ltd. case does not involve any conflict between the parties, a question of law arises for consideration in this petition that whether preference shares can be redeemed either out of the profits of the company available for dividend or out of the proceeds of fresh issue of shares.
  • Whether court should consent to the present redemption which is by way of redemption of preference share capital under Section 100 of the Act.

Contentions from the side of Petitioner

  • The learned counsel for petitioner contended that redemption of shares leads to reduction of capital therefore several general provisions mentioned in Section 100 of Companies Act, 1956 are also applicable for the same.
  • The learned counsel also contended that there is no specified time limit prescribed in Section 80 within which fresh issue of preference shares can be utilised.

Summary of the judgement

According to the honorable court in Birla Global Finance Ltd.case, the redemption of preference share means repayment of the amount for which shares are issued and it leads to a reduction in the capital of the company. The court is of the opinion that redemption of preference shares if done under the provisions of Section 80 of the Companies Act then no consent of the court is required, it should only be in uniformity with the Articles of Association of the company. The preference shares can be redeemed not only in accordance with Section 80 but also in accordance with Section 100 of the Companies Act, 1956. The honorable court in the present case consented for the redemption of preference shares and subsequently leading to the reduction of shares capital under the provisions of Section 100 of the Act. A corporation has two separate processes for the redemption of preferred stock. It may redeem the shares in compliance with the process laid down in Section 80 of the Act, which is a special provision intended to redeem preferred shares, or it may use the general provision laid down in Section 100 of the Act to which any share, including preference, can be redeemed. A stranger associated with the company knows and acknowledges that the preferential share capital will be repaid in compliance with the conditions of its issue and will be liable for reimbursement of its duties or credits. It is because of this reason that the approval of the court is not required for redemption of shares under Section 80 of the Act.

Analysis

The redeemable preference shares issued by a company need to be repaid by the company at a fixed period of time or before the maturity of the time period with the consent of both the company and the shareholders. According to section 100 of Companies Act, 1956 the company needs prior consent of the court to return back the shareholders the share money invested by them in the company. In addition to the special procedure, a refund of money to shareholders on capital account, while the company is in operation includes approval by the court. Section 80 of Companies Act, 1956 permits a company to issue preferential shares if authorized by the Articles of Association of the company which can only be redeemed at the company’s authorization if provisions of Section 80 are fulfilled. Redemption of preferential shares by a company is not taken as a reduction in the amount of its permitted share capital and as such provisions of the act relating to capital reduction are not expected to be adhered to. Shares of another sort that have already been issued cannot be transformed into redeemable preference shares.

Conclusion

The Bombay High Court in the Birla Global Finance Ltd. case granted the permission for the reduction of the share capital through the redemption of the preference shares as the Articles of Association of the company authorized to do so. The reduction took place through the redemption of preference shares before the maturity of the shares with the consent of both the parties. If the shares are redeemed through the provisions of Section 80 of Companies Act, 1956 the consent of the court is not required as articles permit for it.

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