1961 (6) TMI 8 - HC - Companies Law

Issues Involved:
1. Interpretation of Sections 87 to 90 of the Companies Act, 1956.
2. Validity of the special resolution passed on August 5, 1951.
3. Effect of the new articles of association on voting rights.
4. Application of Section 89 to existing shares.
5. Continuation of the interim injunction.

Detailed Analysis:

1. Interpretation of Sections 87 to 90 of the Companies Act, 1956:
The judgment primarily revolves around the interpretation of Sections 87 to 90 of the Companies Act, 1956, which were introduced to address voting rights. These sections did not exist in the Indian Companies Act, 1913, and there is no corresponding provision in the English Companies Act, 1948. The court emphasized that the interpretation must be based on the language of these sections without any external judicial guidance.

Sections 87 to 90 are located in Part IV of the Act under the heading "Kinds of Share Capital." Section 85 divides share capital into preference share capital and equity share capital. Section 87(1) mandates that voting rights for equity share capital must be proportional to the paid-up capital. Section 87(2)(c) similarly addresses voting rights for preference shares. Section 88 prohibits the issuance of shares with disproportionate voting rights after the commencement of the Act. Section 89 requires existing companies to conform their voting rights to the new standards within one year of the Act's commencement.

The court highlighted that the intent of these sections is to eliminate the inequality in voting rights that existed under the old law, where a few individuals could control a company with a small investment by holding shares with disproportionately high voting rights.

2. Validity of the Special Resolution Passed on August 5, 1951:
The petitioners challenged the validity of the special resolution passed on August 5, 1951, which adopted new articles of association and altered the voting rights. They contended that the meeting was not validly convened, held, or conducted, making the resolution illegal and void. Consequently, they argued that the company should still be governed by the old articles of association, where each member had one vote irrespective of their shareholding.

3. Effect of the New Articles of Association on Voting Rights:
The new articles of association, adopted in 1951, provided that voting rights would be proportional to the paid-up capital, unlike the old articles where each member had one vote regardless of their shareholding. The petitioners argued that if the new articles were not validly adopted, the old voting rights should continue. However, the court noted that even if the new articles were not validly adopted, the provisions of Sections 87 to 90 of the Companies Act, 1956, would override the old articles.

4. Application of Section 89 to Existing Shares:
Section 89 mandates that if any shares carry voting rights in excess of those prescribed under Section 87(1), the company must reduce these rights within one year of the Act's commencement. The court emphasized that Section 89 applies to all existing shares, whether preference or equity shares, and aims to terminate disproportionately excessive voting rights. The court rejected the argument that Section 89 only applies to shares other than equity shares, stating that such a construction would defeat the legislative intent.

The court further clarified that the words "any shares by whatever name called" in Section 89(1) include all classes of shares, and the voting rights must be brought into conformity with Section 87(1). The court also noted that the provisions of Section 87(1) regarding voting rights are subject to Section 89, indicating that Section 89 operates on the same field as Section 87(1).

5. Continuation of the Interim Injunction:
The interim injunction, granted by the High Court of Bombay at Rajkot on November 5, 1956, restrained the company from holding any general meeting pending the hearing and final disposal of the petition. The court vacated this injunction, noting that from April 1, 1957, each member was bound to exercise voting rights in proportion to their share of the paid-up capital of the company, as per the provisions of Section 87.

Conclusion:
The court concluded that Sections 87 to 90 of the Companies Act, 1956, mandate that voting rights must be proportional to the paid-up capital, and this applies to all existing shares. The special resolution of August 5, 1951, and the new articles of association were rendered moot by the overriding provisions of the Companies Act, 1956. The interim injunction was vacated, allowing the company to hold general meetings with voting rights exercised in accordance with the Act.

← Previous Next →