2018 (3) TMI 1253 - HC - Companies Law

Preference shareholders cannot be called creditors to attend the meeting of the creditors of the company to be held under Section 391 of the Companies Act, 1956 - Held that - As already held that petitioner cannot be a creditor and it is rather clear that redemption cannot be made 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, the petition is not maintainable.

Issues Involved:
1. Maintainability of the petition for winding up of the company.
2. Status of the petitioner as a creditor or shareholder.
3. Applicability of Section 80 of the Companies Act, 1956 regarding redemption of preference shares.
4. Financial status and net-worth of the company.

Issue-wise Detailed Analysis:

1. Maintainability of the petition for winding up of the company:
The petitioner filed for winding up of Magikwand Media Ltd. under Section 433(e) of the Companies Act, 1956, claiming the company is unable to pay its debt. The petitioner argued that the company failed to pay the redemption amount due on preference shares, thus justifying the winding-up petition. However, the respondent contended that the petition is not maintainable, highlighting that the petitioner approached the court as a creditor, not a shareholder, and that preference shareholders cannot be considered creditors for the purpose of winding up under Section 433(e).

2. Status of the petitioner as a creditor or shareholder:
The core issue was whether the petitioner, holding preference shares, could be considered a creditor. The court noted that preference shareholders do not automatically become creditors if their shares are not redeemed. The shares can only be redeemed out of the company's profits or fresh issue of shares, a limitation not applicable to other creditors. Consequently, the court held that the petitioner, as a preference shareholder, does not assume the character of a "creditor" and thus cannot file for winding up under Section 433(e).

3. Applicability of Section 80 of the Companies Act, 1956 regarding redemption of preference shares:
Section 80(1) of the Companies Act, 1956, specifies that preference shares can only be redeemed out of the profits available for dividend or from the proceeds of a fresh issue of shares. The court emphasized that this provision restricts the redemption process, indicating that preference shareholders do not have the same rights as creditors. The court cited multiple judgments supporting this view, including the Andhra Pradesh High Court, Bombay High Court, Calcutta High Court, and Delhi High Court, which consistently held that preference shareholders are not creditors and cannot sue the company for redemption of shares.

4. Financial status and net-worth of the company:
The petitioner argued that the company's net-worth had eroded significantly, citing annual accounts from FY 2012-13 to FY 2015-16, which showed consistent losses and zero business activities. Despite these financial difficulties, the court maintained that the petitioner's status as a preference shareholder did not change to that of a creditor, and thus the petition for winding up was not maintainable.

Conclusion:
The court concluded that the petitioner, as a preference shareholder, does not have the locus standi to file for winding up under Section 433(e) of the Companies Act, 1956, as they are not considered creditors. The petition was dismissed with no order as to costs.

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