LALCHANDSURANA v. HYDERABAD VANASPATI LTD. 69 Comp Cas 415 (AP

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This case[1] is related to the maintainability of the petition filed by three shareholders of the company named Hyderabad Vanaspati Ltd., a public limited company which was having its registered office at Hyderabad. The shareholders filed the petition for the winding up of the company on the alleged ground that the company is unable to pay its debts  under the Section 433(e)[2] of the Companies Act, 1956[3]. Against this petition filed by the shareholders, the respondent company objected regarding the maintainability of the petition.

FACTS OF THE CASE

The company Hyderabad Vanaspati Ltd. Got incorporated in June, 1970. The share capital of the company was Rs. 50 lakh, which got divided into 10,000 cumulative redeemable preference shares of Rs. 100 each, and 4,00,000 equity shares of Rs. 10 each. The three shareholders who filed against the company hold 1,000, 1800 and 2200 redeemable cumulative preference shares, respectively which amounted to Rs.5 lakh collectively. All these shares were carrying the dividend of 9.5% and these were issued on January 7, 1971 and these shares were redeemable at par after the completion of 15 years from the date of allotment. The allotment date of the shares was 8th of February 1971. 

The shareholders wanted for the redemption of the shares, but when they asked for it, the board of directors, instead of redeeming these, they postponed the payment of the dividend for five years. The equity shareholders passed a special resolution at the general body meeting convened, in that special resolution, the period of redemption of redeemable cumulative shares was extended by 5 years. Even a letter was sent to the preference shareholders for agreeing on the same, but they refused for it. Thereafter, the petitioners gave the company a legal notice and called upon the company to pay the due amount, but company did not do the same and failed to comply with the legal notice sent. The balance-sheet of the company showed the deteriorating financial situation of the Company and therefore, the petitioners submitted for winding up of the Company under Section 433(e), 434(1)(a) and 439(1)(b) of the Companies Act,1956.

Thereafter, a counter-affidavit was filed by the company denying the allegations imposed by the petitioner on the company. It is submitted by the company that the petitioners being the shareholders cannot style themselves as the “creditors” of the company and therefore, this petition has no locus standi to be maintained. The Company also submitted that the petitioners just hold the 1/3rd shareholding interest, and therefore, not in a position to ask for the winding-up of the company. The allegations related to the deteriorating financial position and other defaults are completely denied by the company.

ISSUES

The issue which came before the Hon’ble Court dealt with many facets relating to the company law and made the Court go for the interpretation of the Sections of the Companies Act, 1956 to come for the decision in this case:-

  1. Whether the petitioners being preference shareholders can call themselves “Creditors” and ask for winding up of the company under Section 434(1) and Section 439(1)(b) of the Companies Act, 1956?

CONTENTION OF THE PARTIES

Contention of the petitioners:-

The petitioners contended that they are holding preference shares which are redeemable after 15 years from the allotment date of the shares. These shares have a fixed dividend of 9.5%. When the due amount of dividend was asked by the petitioners from the Company  to be paid, the company was unable to pay and that’s why the said amount has become due. Thereafter, the petitioners have become the “creditors” of the Company.

Contention of the respondent-company:-

The respondent contended that the preference shareholders are also shareholders only and cannot become the creditors ever. The respondent stated that as per Section 80 of the Companies Act, 1956, preference shares shall be redeemed only out of the profits of the Company which would otherwise be available for the dividend or out of the proceeds of a fresh issue of shares,made for the purposes of redemption, and therefore, this can be contended that the preference shareholders do not get the position of “creditors”, even when the shares held by them are redeemable after the fixed period of time. On that basis, the petitioners cannot file the petition suing the Company for winding up of it as the creditors of the Company.

GROUNDS TAKEN IN THE COURT

There were many sections of the Companies Act, 1956 which got their reference here by the parties and they presented their interpretation before the Court of those articles, which Court listened and finally gave its verdict on that. Let us look at those articles and the interpretation the parties provided while referring these Sections:-

  • Section 80[4] of the Companies Act, 1956:-

    Power to issue redeemable preference shares.

  •  Subject to the provisions of this section, a company limited by shares may, if so authorized by its articles, issue preference shares which are, or at the option of the company are to be liable, to be redeemed:

Provided 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;
  • no such shares shall be redeemed unless they are fully paid;
  •  the premium,, if any, payable on redemption shall have been provided for out of the profits of the company or, out of the company’ s share premium account, before the shares are redeemed;
  • where any such shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall, out of profits which would otherwise have been available for dividend, be transferred to a reserve fund, to be called 1 the capital redemption reserve account, a sum equal to the nominal amount of the shares redeemed; and the provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if the capital redemption reserve account were paid- up share capital of the company.
  • Subject to the provisions of this section, the redemption of preference shares thereunder may be effected on such terms and in such manner as may be provided by the articles of the company.
  • The redemption of preference shares under this section by a company shall not be taken as reducing the amount of its authorised share capital.
  •  Where in pursuance of this section, a company has redeemed or is about to redeem any preference shares, it shall have power to issue shares up to the nominal amount of the shares redeemed or to be redeemed as if those shares had never been issued; and accordingly the share capital of the company shall not, for the purpose of calculating the fees payable under section 611, be deemed to be increased by the issue of shares in pursuance of this sub- section:

Provided that, where new shares are issued before the redemption of the old shares, the new shares shall not, so far as relates to stamp duty, be deemed to have been issued in pursuance of this sub- section unless the old shares are redeemed within one month after the issue of the new shares.

  •  The capital redemption reserve account may, notwithstanding anything in this section, be applied by the company, in paying up un-issued shares of the company to be issued to members of the company as fully paid bonus shares.

(5A)  Notwithstanding anything contained in this Act, no company limited by shares shall, after the commencement of the Companies (Amendment) Act, 1988 , issue any preference share which is irredeemable or is redeemable after the expiry of a period of ten years from the date of its issue.

  • If a company fails to comply with the provisions of this section, the company, and every officer of the company who is in default,shall be punishable with fine which may extend to one thousand rupees.

The respondent contended that Section 80 of the Companies Act, 1956 states that the preference shares shall be redeemed only out of the profits which otherwise would be available for dividend or out of the proceeds of a fresh issue of shares, which are made for the purpose of the redemption and this scenario shows that the shares held by them are redeemable after the fixed period do not give them the character of the “creditors”.

  • Section 85[5] of the Companies Act, 1956:-

  Two kinds of share capital.

  •  ” Preference share capital” means, with reference to any company limited by shares, whether formed before or after the commencement of this Act, that part of the share capital of the company which fulfills both the following requirements, namely:-
  • that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income- tax; and
  • that as respects capital, it carries or will carry, on a winding up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or both of the following amounts, namely:-

(i) any money remaining unpaid, in respect of the amounts specified in clause (a), up to the date of the winding up or repayment of capital; and

(ii)  any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company.

Explanation.- Capital shall be deemed to be preference, capital, notwithstanding that it is entitled to, either or both of the following rights, namely:-

  • that, as respects dividends, in addition to the preferential right to the amount specified in clause (a), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid;
  •  that as respects capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in clause (b), it has a right to participate,whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.
  • ” Equity share capital” means, with reference to any such company, all share capital which is not preference share capital.
  • The expressions” preference share” and” equity share” shall be construed accordingly.

In this case, the Memorandum or Articles of Association do not expressly say that these preference shares will have a preferential right to be paid a fixed amount towards dividends. These also do not say that, on winding up of the company, these shares shall be entitled to preferential right to be repaid the amount of paid-up capital. They purport to be redeemable preference shares, this means that after a specific period of 15 years, the amount due along with the accumulated dividend becomes payable. In that interpretation, these shares do not strictly fall within the meaning of the “preference shares” as per Section 85(1). Though both the parties have proceeded in the case that they are “preference shares”.

  • Section 433[6] of the Companies Act, 1956:-

   Circumstances in which company may be wound up by Court. A company may be wound up by the Court,-

  •  if the company has, by special resolution, resolved that the company be wound up by the Court;
  • if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting;
  • if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;
  •  if the number of members is reduced, in the case of a public company, below seven, and in the case of a private company, below two;
  •  if the company is unable to pay its debts;
  • if the Court is of opinion that it is just and equitable that the company should be wound up.
  • Section 434[7] of the Companies Act, 1956:-

  Company when deemed unable to pay its debts.

  •  A company shall be deemed to be unable to pay its debts-
  •  if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor;
  • if execution or other process issued on a decree or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part; or
  •  if it is proved to the satisfaction of the Court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company.
  • The demand referred to in clause (a) of sub- section (1) shall be deemed to have been duly given under the hand of the creditor if it is signed by any agent or legal adviser duly authorized on his behalf, or in the case of a firm, if it is signed by any such agent or legal adviser or by any member of the firm. Transfer of Proceedings
  • Section 439(1)(b)[8] of the Companies Act, 1956:-

   Provisions as to applications for winding up.

  •  An application to the Court for the winding up of a company shall be by petition presented, subject to the provisions of this section,-
  •  by the company; or
  • by any creditor or creditors, including any contingent or prospective creditor or creditors; or
  • by any contributory or contributories; or
  •  by all or any of the parties specified in clauses (a), (b) and (c), whether together or separately; or
  • by the Registrar; or
  • in a case falling under section 243, by any person authorized by the Central Government in that behalf.

  The petitioner also cited the Globe United Engineering and Foundry C. Ltd. V. Industrial Finance Corporation of India, in this case, it was held that a provision shareholders viding for such a preference is valid, and that the preference shareholders are entitled to priority in the matter of repayment of capital over the equity shareholders, in the course of winding up of the company. The Court stated  that the preference shares are really part of the company’s share capital; those are not loans.

DECISION

The Court in this case relied on the view of the Court in the case of the Globe United Engineering and Foundary C.Ltd. V. Industrial Finance Corporation of India where it was stated that the preference shares are part of the Company’s share capital and they are not loans. Taking into consideration and while keeping the regard to the opinion expressed above, the Court in this case stated that the petition must be held to be non-maintainable in law. Therefore, the petition is dismissed. There shall be no order as to costs.

CONCLUSION

The Hon’ble Andhra High Court has taken into consideration the various Sections of the Companies Act,1956 and also the different arguments and cases presented by the parties to strengthen their sides.  The Court after taking all the relevant facts into consideration understood that the preference shares holder can have the position of the creditors even when their dividends are due. The shares would be shares, which are part of the Company and can never make the preference shareholders the “creditors” of the company. Therefore, the Court’s decision came as strengthening the companies, so that not everyone comes up with the petition of winding up of the companies, when their dividends or interests are not paid.

ANALYSIS

In this case, there was violation of the rights of the petitioner as well as the preference shares holder has the advantage of getting their dividends, no matter whether the company has the profit that year or not. The petitioner was also facing the problem due to the stand of the Company, but the way they approached the Court and demanded the winding-up of the Company showed that they started putting themselves as the position of the “creditors” by asking for the winding-up of the company. The Company allots the preference shares, equity shares and debentures for raising the money from the market for the company, but that does not make the shareholders or the debenture holders the creditors of the Company. Those shares are part of the company and they are willingly put their money in it for gaining the profit as well. Therefore, in this case Court after analysing Sections 433(e), 439(1)(b), 80, 85, and 434(1)(a), and also after taking consideration of the points put by the parties and the cases gave the right decision of not maintaining the petition as in my opinion, this would have given rises to more petitions like this where any shareholder not getting the amount due would approach the Court for winding-up the Company, which is not practical.


[1] LalchandSurana v Hyderabad Vanaspati Ltd., (1990) 69 Comp Cas 415 (AP).

[2] Companies Act, 1956, s. 433(e).

[3] Companies Act, 1956 (Act No 1 of 1956).

[4] Companies Act, 1956, s. 80.

[5] Companies Act, 1956, s. 85.

[6] Companies Act, 1956, s. 433.

[7] Companies Act, 1956, s. 434.

[8] Companies Act, 1956, s. 439(1)(b).

Also Read  ATUL B. MUNIM vs REGISTRAR OF COMPANIES & ORS.(2000)102 BOMLR 288

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