2023 (4) TMI 668 - HC - Companies Law

Ineligibility to participate in the tender process since the net worth quoted by it was inclusive of the value of its preference shares - whether the value of preference shares can be included while computing net worth ? - whether the Respondent erred in declaring the Petitioner ineligible to participate in the tender process in terms of the Request for Selection? - HELD THAT - Section 43 of the Companies Act, 2013 provides that share capital can be of two kinds i.e., equity share capital and preference share capital. Explanation (ii) of Section 43 provides that preference share holders have a preferential right in respect of payment of dividend and in respect of repayment in case of winding up or repayment of capital. Explanation (iii) of Section 43 provides that the capital shall be deemed to be preference share capital notwithstanding that it is entitled to either rights in respect of dividends, in addition to the preferential rights to the amounts specified in sub-clause (a) of clause (ii), and in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in sub-clause (b) of clause (ii). A perusal of Section 55, provides that preference shares cannot be redeemed within the share capital of the company. It, therefore, means that other than two sources i.e., out of profits and out of proceeds of fresh issue of shares, no other source can be used for redemption of preference shares. Clause 4.3.1 (c) of the NIT states that net-worth is to be considered in accordance with the Companies Act, 2013. In the NIT, the tenderer has not specifically excluded preference shares from the definition of net-worth. The mode of calculation of net worth which has been adopted by the Respondents to exclude the Petitioner from further stages of the tendering process is contrary to the Sections of the Companies Act. Clause 4.3.1(c) of the NIT does not exclude preference shares from the definition of net-worth rather it states that net-worth is to be considered for this clause shall be the total net worth as calculated in accordance with the Companies Act, 2013, then the net-worth has to be calculated as per the Companies Act, 2013 and no other method can be permitted to be adopted. There is no reason as to why the tender must exclude preference shares while calculating the net-worth. Respondents cannot be permitted to adopt a method which runs contrary to the provisions - balance sheet is not an indicator of the true net worth of a company. Balance sheet reflects the share capital of a company and its treatment as an asset or liability to the company on the date of preparation of the balance sheet. It is not disputed that balance sheets are to be prepared in accordance with extant accounting standards. In the facts of the present case, the tenderer has decided to exclude preference shares from the definition of net worth on a wrong notion that preference shares is a liability which is contrary to the Sections in Companies Act. Only when the preference shares are redeemable at the instance of the shareholders then only the preference shares can be called as a liability and not in all cases. Preference shares are redeemed out of profits or out of a fresh issue meant for the purpose and not from the existing share capital. Since the entire basis of calculating net worth by the Respondent is contrary to the provisions of the statute, this Court has no other option but to hold that the decision of the tenderer to exclude preference shares from the calculation of net worth is arbitrary and irrational. The challenge of the Petitioner to its exclusion from the tendering process has to be accepted. The Respondent is directed to re-work the net-worth of the Petitioner herein by including the preference shares while calculating its net-worth and take a decision as to whether the Petitioner s financial bid can be considered or not. The writ petition is allowed.

Summary

Issues Involved:
1. Whether the value of preference shares can be included while computing "net worth."
2. Whether the Respondent erred in declaring the Petitioner ineligible to participate in the tender process.

Summary:

Issue 1: Inclusion of Preference Shares in Net Worth Calculation

The core issue is whether the value of preference shares can be included while computing "net worth." The Petitioner argued that preference shares should be included in net worth as per Sections 2(57), 2(64), and 43 of the Companies Act, which define net worth and paid-up share capital to include both equity and preference share capital. The Petitioner contended that the exclusion of preference shares by the Respondent was contrary to the Companies Act, which mandates that net worth should be calculated including paid-up share capital.

On the other hand, the Respondent argued that preference shares should be treated as liabilities based on Section 129 of the Companies Act and related accounting standards. The Respondent relied on a previous judgment (GKC Projects Limited v. National Highways Authority of India) to support their stance on restricting net worth calculations to reserves created out of revenue profits alone.

The Court examined the relevant provisions of the Companies Act and concluded that preference shares, redeemable at the option of the issuer without a fixed term, form part of paid-up share capital and should be included in net worth. The Court referred to the Supreme Court's judgment in JK Industries v. Union of India, which clarified that a balance sheet does not show the true net worth of a company. The Court also noted that the Respondent's method of excluding preference shares was contrary to the Companies Act.

Issue 2: Respondent's Error in Declaring Petitioner Ineligible

The Court found that the Respondent's decision to exclude the Petitioner from the tender process based on an erroneous calculation of net worth was arbitrary and irrational. The Court held that the Respondent's method of excluding preference shares from net worth calculation was not supported by the Companies Act. The Court directed the Respondent to re-work the net worth of the Petitioner by including preference shares and reconsider the Petitioner's eligibility for the tender process.

Conclusion:

The writ petition was allowed, and the Respondent was directed to include preference shares in the net worth calculation and reassess the Petitioner's eligibility for the tender process.