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2016 (11) TMI 27 - SC - Companies LawConversion of preference shares to equity shares - Held that - The meaning sought to be given to Articles 20 21 and 22 namely that every share holder including the holder of a preference share has a right to vote cannot be readily accepted. The resolution of the Board dated 5.7.1994 relating to the conversion of preference shares into equity shares proceeds on the basis that dividends in respect of the 3065 shares have not been paid and in lieu thereof the shareholders had agreed to receive an equivalent number of equity shares. The above statement of fact is difficult to accept. Neither is the period during which dividends had not been paid is specified nor is the amount due indicated. No material has been laid to show that the 3065 equity shares represent a fair value of the dividends claimed to be unpaid. What cannot also be lost sight of is that the preference shares in question were held by the Gupta Group who was in control of the company at that point of time. A number of self serving decisions by the Gupta Group and its conduct of the business of the company in a manner detrimental to the interest of the company as discussed hereinabove would make it extremely perilous to rely on the version available in the resolution of the Board for allotment of 3065 equity shares in place of the preference shares in question. In the above circumstances it would be just and proper to strike down the conversion of the 3065 preference shares into equity shares and revert the preference shares to its earlier status to be dealt with in the future in accordance with law. This is of course subject to the orders of the Delhi High Court in the appeal pending before it.
Issues Involved:
1. Maintainability of the company petition filed by the Sanwalka Group before the Company Law Board. 2. Legality of the issue of bonus shares by the company. 3. Legality of the issue of 25,000 new ordinary shares. 4. Legality of the removal of the representatives of the Sanwalka Group from the Board of Directors and the induction of the members of Gupta Group in their place. 5. Legality of the lease agreement executed by the company in respect of the industrial plot. 6. Legality of the issue of 3065 ordinary equity shares as against the preference shares. Issue-wise Detailed Analysis: 1. Maintainability of the Company Petition: The Supreme Court examined the share certificates issued to the Sanwalka Group, concluding that the shares were held in their own right without any connection to the forfeited shares held by M/s. Gupta Brothers. The call notice dated 5.1.1991 was not proven to have been issued in accordance with Section 53 of the Companies Act. Additionally, the Articles of Association did not support the forfeiture claim, and the balance sheet could not substitute a call notice. Therefore, the company petition was maintainable. 2. Legality of the Issue of Bonus Shares: The Court noted that the Articles of Association did not authorize the issuance of bonus shares from revaluation reserves. The resolution dated 5.7.1994, which purportedly aimed to raise funds, was deemed a sham as revaluation did not generate actual funds. The issuance of bonus shares was thus held to be impermissible. 3. Legality of the Issue of 25,000 New Ordinary Shares: The Court observed that the notice for the E.O.G.M. dated 5.7.1994, which decided on the share capital increase, was not given to the Sanwalka Group. The issuance of 25,000 ordinary shares without fair and proportionate distribution was contrary to fair play principles. The direction by the Company Law Board to proportionately allot these shares to the Sanwalka Group was upheld. 4. Legality of the Removal of Representatives from the Board: The removal of the Sanwalka Group's representatives from the Board was found invalid as they were not given notice of the E.O.G.M. The decision to re-induct them was upheld. 5. Legality of the Lease Agreement: The Company Law Board and the High Court left the determination of the lease agreement to an Extra Ordinary General Meeting. The Supreme Court did not find it necessary to address this issue further. 6. Legality of the Issue of 3065 Ordinary Equity Shares: The conversion of 3065 preference shares into equity shares was struck down. The Court noted that the preference shares did not carry voting rights except under specific conditions, which were not met. The conversion was deemed unjust, and the preference shares were reverted to their original status, subject to the Delhi High Court's pending decision. Subsidiary Issues: The Supreme Court dismissed the argument that the High Court's failure to frame a substantial question of law invalidated its order. The conduct of the Gupta Group in managing the company was found oppressive, justifying the Company Law Board's intervention under Section 397/398 of the Act. The Court also noted that the facts demonstrated a series of oppressive actions, not just a single act. Conclusion: The appeal by the Gupta Group was dismissed, and the appeal by the Sanwalka Group was disposed of with directions as per the Supreme Court's order.
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