1961 (2) TMI 32 - HC - Companies Law

Summary

Issues Involved:

1. Validity of the 1920 allotment of 42,044 ordinary shares.
2. Whether the allotment must be regarded as valid due to lapse of time.
3. Interpretation of "further surplus assets" in a winding up.
4. Company's power to allot shares by capitalising various reserves.
5. Voting rights of ordinary and preference shareholders.

Issue-wise Detailed Analysis:

1. Validity of the 1920 allotment of 42,044 ordinary shares:
The court examined whether the allotment of 42,044 ordinary shares in 1920 was in accordance with the rights of the members. Mr. Sykes, representing a preference shareholder, conceded that after such a long interval, he could not successfully contend that the 1920 capitalisation was irregular. The court declared that the allotment was in accordance with the rights of the members.

2. Whether the allotment must be regarded as valid due to lapse of time:
Given the significant passage of time and the lack of any grounds to challenge the 1920 capitalisation, the court affirmed its validity. Mr. Sykes acknowledged that no basis existed to claim irregularity, reinforcing the allotment's legitimacy.

3. Interpretation of "further surplus assets" in a winding up:
The court considered the rights of preference shareholders in a winding up. The original articles provided that preference shareholders would be paid arrears of dividends and participate rateably with other shareholders in any surplus assets after all debts, liabilities, and paid-up capital were settled. The court concluded that "further surplus assets" referred to the remaining assets after satisfying creditors, costs, arrears of preference dividends, and repaying all paid-up capital. Thus, preference shareholders were entitled to participate in these surplus assets.

4. Company's power to allot shares by capitalising various reserves:
The court addressed whether the company could capitalise reserves resulting from revaluation of capital assets, credit balance on profit and loss account, realisation of capital profits, and share premium account. The court held that article 140 authorised capitalisation under all these heads, provided it did not conflict with the rights of preference shareholders. The court disagreed with the decision in Westburn Sugar Refineries Ltd. v. Inland Revenue Commissioners, which suggested that revaluation reserves could not be capitalised. The court concluded that a reserve resulting from revaluation of capital assets could be capitalised unless it encroached upon the rights of preference shareholders.

5. Voting rights of ordinary and preference shareholders:
The court examined the voting rights under article 54, which provided one vote for every five ordinary shares and one vote for every preference share. The court found that the increase in ordinary shareholders' voting rights due to the subdivision of shares did not alter the rights attached to preference shares but decreased their effectiveness. The 1911 resolution that increased preference shareholders' voting rights did not deprive them of any existing rights but conferred additional rights. Therefore, the court declared that the voting rights were as stated in paragraph (a) of question 5.

Conclusion:
The court provided a comprehensive analysis and declared the following:
- The 1920 allotment of 42,044 ordinary shares was valid.
- Preference shareholders are entitled to participate in surplus assets in a winding up after all debts, liabilities, and paid-up capital are settled.
- The company has the power to capitalise reserves under article 140.
- Voting rights are as stated in paragraph (a) of question 5, with ordinary shareholders having one vote for every five ordinary shares and preference shareholders having one vote for every preference share.