1974 (11) TMI 59 - HC - Companies Law

Memorandum of association - Act to override, Articles of association, Kinds of share capital - Two kinds of share capital, Dividend manner and time of payment of, Board s report, Winding up - Distribution of property of company

Summary

Issues Involved:
1. Entitlement of preference shareholders to arrears of fixed cumulative dividends during the winding-up of the company.
2. Interpretation of relevant sections of the Companies Act, 1956, and Article 7 of the Articles of Association.
3. Applicability of British precedents and authors' opinions in the Indian context.

Detailed Analysis:

1. Entitlement of Preference Shareholders to Arrears of Fixed Cumulative Dividends During Winding-Up

The primary issue was whether preference shareholders, whose shares carried a right to a fixed cumulative dividend, are entitled to arrears of such dividends during the winding-up of the company, even if the company never made any profits. The court held that preference shareholders are indeed entitled to arrears of fixed cumulative dividends during winding-up as per Article 7(i) of the Articles of Association. This article explicitly states that preference shareholders have "the right of repayment of capital and arrears of dividend whether earned, declared or not, up to the commencement of the winding-up in priority to the equity shareholders."

2. Interpretation of Relevant Sections of the Companies Act, 1956, and Article 7 of the Articles of Association

The court examined various sections of the Companies Act, 1956, including sections 9, 36, 85, 100, 102, 205, 211, 217, and 511, to determine their applicability to the issue at hand. The court noted that the Companies Act consists of provisions applicable to a company as a going concern and those applicable during its winding-up.

- Section 36(1): Establishes that the memorandum and articles bind the company and its members.
- Section 9: States that the provisions of the Act override any contrary provisions in the articles.
- Section 511: Specifies that during winding-up, the assets are distributed among members according to their rights unless the articles provide otherwise.

The court emphasized that sections 205 and 217, which restrict the payment of dividends to profits earned and declared, do not apply during winding-up. Instead, section 511 allows the articles to prevail, thereby validating Article 7(i) which provides for the payment of arrears of dividends during winding-up.

3. Applicability of British Precedents and Authors' Opinions in the Indian Context

The court considered British precedents and opinions of well-known authors on company law. It noted that historically, English law did not initially provide for the winding-up of companies, treating them like insolvent individuals. However, later developments recognized the need for distinct provisions during winding-up, leading to judicial decisions that upheld the payment of arrears of dividends during liquidation, irrespective of profits.

- British Cases: The court referred to decisions such as Birch v. Cropper, Scottish Insurance Corporation Ltd. v. Wilsons & Clyde Coal Company, and others, which distinguished between a company as a going concern and during liquidation.
- Authors' Opinions: The court cited authors like Professor R. R. Pennington and Buckley, who supported the view that arrears of dividends are payable during winding-up even if not earned or declared.

The court concluded that the distinction between the company as a going concern and during liquidation is crucial. During liquidation, the entire property of the company is treated as its assets, and the restrictions on the payment of dividends from profits do not apply. This aligns with the provisions of Article 7(i) and section 85 of the Companies Act, which recognize the right to arrears of dividends during winding-up.

Conclusion

The court upheld the decision of the learned company judge that the arrears of dividends on preference shares are payable during the winding-up under Article 7(i). The appeal by the equity shareholders was dismissed, affirming the preference shareholders' entitlement to arrears of fixed cumulative dividends during the winding-up of the company.