1964 (4) TMI 60 - HC - Companies Law

Kinds of share capital - Two kinds of share capital, Winding up Power of Tribunal to make calls and Delivery of property to liquidator

Issues Involved:
1. Priority of payment to contributories holding 5% cumulative preference shares for capital credited as paid-up and arrears of dividends not declared over ordinary shareholders.
2. Priority of payment between ordinary A class shares and ordinary B class shares.
3. Entitlement of ordinary shareholders to set off amounts payable upon a call against amounts payable to them as holders of preference shares.

Detailed Analysis:

1. Priority of Payment to Contributories Holding 5% Cumulative Preference Shares:
The official liquidator sought determination on whether holders of 5% cumulative preference shares should be given priority in payment of capital credited as paid-up and arrears of dividends not declared over ordinary shareholders. The liquidator argued that the preference shareholders are entitled to repayment of the capital contributed by them in full and arrears of dividends calculated at 5% up to the date of the winding-up order. The liquidator also submitted that a call should be made against ordinary A and B class shareholders to repay the preference shareholders.

The court referred to the memorandum and articles of association, particularly clause 5 of the memorandum and articles 5, 143, 144, 146, and 174. Article 5(2)(a) provided that 5% cumulative preference shares confer the right to payment of capital and arrears of dividends (whether declared or undeclared) up to the commencement of the winding-up in priority over ordinary shareholders. The court concluded that the phrase "arrears of dividend undeclared" was intended to create an absolute right for preference shareholders to receive cumulative dividends at the rate of 5% on the capital contributed by them, even in the absence of profits.

The court cited various authorities, including In re W.J. Hall & Co, Limited, and subsequent cases which clarified that preference shareholders are entitled to arrears of dividends out of the surplus assets, whether they include profits available for the purpose or not. The court held that the preference shareholders are entitled to payment of capital credited as paid-up and arrears of dividends in priority over ordinary shareholders.

2. Priority of Payment Between Ordinary A Class Shares and Ordinary B Class Shares:
The liquidator also sought determination on the priority of payment between ordinary A class shares and ordinary B class shares. Article 5(2)(b) provided that ordinary A class shares shall rank next after the 5% cumulative preference shares in priority to ordinary B class shares regarding payment of capital in a winding-up.

The court upheld this provision, affirming that ordinary A class shares shall rank next after the 5% cumulative preference shares and in priority to ordinary B class shares.

3. Entitlement of Ordinary Shareholders to Set Off Amounts Payable Upon a Call:
The ordinary shareholders contended that they should be allowed to set off the amounts payable upon a call against the amounts payable to them as holders of preference shares towards return of capital and arrears of dividends. They relied on sections 156, 186, and 216 of the Companies Act, 1913, which they argued allowed for such a set-off.

The court examined the relevant provisions, particularly the proviso to section 186(2), which allows set-off of any money due to a contributory from the company against any subsequent call. However, the court noted that the liability to repay capital and cumulative dividends to preference shareholders arises by way of adjustment of rights between contributories and not as a debt. The court concluded that money was never due to the preference shareholders as such, and the preference shareholders have no right to set off their call liability against amounts payable to them for return of capital and arrears of dividends.

Judgment:
- The contributories holding 5% cumulative preference shares are entitled to payment of capital credited as paid-up and arrears of dividends at the rate of 5% cumulative up to the date of the winding-up order in priority over contributories holding ordinary A class shares and ordinary B class shares.
- The contributories holding ordinary A class shares shall rank next after the 5% cumulative preference shareholders and in priority to ordinary shareholders class B.
- The holders of ordinary shares are not entitled to set off the amounts that may be called against them against the amounts payable to them towards return of capital and arrears of dividends for their holding of 5% cumulative preference shares.
- The costs of each of the opposing parties are fixed at Rs. 600, and the liquidator's cost will be as between attorney and client. All costs are to come out of the assets of the company.

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