2002 (5) TMI 810 - HC - Companies Law

Issues Involved:
1. Legality of the conditions imposed by the Company Law Board (CLB) on the issuance of further 4% cumulative redeemable preference shares.
2. Validity of the resolution passed by the appellant in the shareholders' meeting.
3. Applicability of Sections 80 and 80A of the Companies Act, 1956.
4. Interpretation of Article 3(a) of the Articles of Association of the company.
5. Relevance of the Supreme Court decision in Dr. A. Lakshmanaswami Mudaliar v. LIC of India.

Issue-wise Detailed Analysis:

1. Legality of the Conditions Imposed by the CLB:
The appellant challenged the conditions imposed by the CLB, arguing they were illegal, arbitrary, and unjust. The conditions included issuing further preference shares to cover the amount due, including dividends, at a rate of 15% per annum, redeemable within ten years, and compliance with relevant provisions of the Act. The court found that the conditions imposed by the CLB were neither arbitrary nor ultra vires the Act. The CLB's decision was based on the company's financial inability to redeem the existing shares, as evidenced by its balance sheets showing significant accumulated losses.

2. Validity of the Resolution Passed by the Appellant:
The appellant convened a shareholders' meeting and passed a resolution to issue further 4% cumulative redeemable preference shares. Some preference shareholders contested the resolution, claiming it was not unanimous. The CLB rejected these objections, stating that the appellant's right to allot fresh cumulative preference shares could not be questioned even if the resolution was not unanimous. The court upheld this view, emphasizing that shareholders do not have an inherent right to seek redemption at the end of the maturity period.

3. Applicability of Sections 80 and 80A of the Companies Act, 1956:
The court analyzed Sections 80 and 80A, noting that Section 80A was specifically enacted to assist companies unable to redeem preference shares due to financial constraints. The CLB has wide and pervasive powers under Section 80A to grant consent for issuing further redeemable preference shares, with or without conditions. The court referenced a similar case (Raja Ram Corn Products (Punjab) Ltd. v. CLB) where it upheld the CLB's conditional consent, reinforcing that the CLB's discretion could only be challenged if the conditions were arbitrary, unreasonable, or capricious.

4. Interpretation of Article 3(a) of the Articles of Association:
The appellant argued that the conditions imposed by the CLB were ultra vires Article 3(a) of the company's Articles of Association. The court rejected this argument, stating that the non obstante clause in the proviso to Section 80A(1)(b) of the Act overrides the Articles of Association. Therefore, the statutory provisions would prevail over the company's internal regulations.

5. Relevance of the Supreme Court Decision in Dr. A. Lakshmanaswami Mudaliar v. LIC of India:
The appellant relied on the Supreme Court decision, arguing that the CLB's direction was ultra vires. However, the court found this case inapplicable as it did not involve a provision like the non obstante clause in Section 80A. The Supreme Court's decision dealt with the ultra vires acts of a company, which was not relevant to the statutory powers exercised by the CLB under Section 80A.

Conclusion:
The appeal was dismissed, with the court affirming the CLB's conditional consent for issuing further redeemable preference shares. The conditions imposed were found to be within the legal framework of Sections 80 and 80A of the Companies Act, 1956, and not arbitrary or unreasonable. The court also clarified that statutory provisions would override the company's Articles of Association in case of conflict.

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