9911796707
TMI Blog1961 (6) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... The facts giving rise to this application are few and for the most part undisputed and may be briefly stated as follows: The Lakhtar Ginning Company Private Limited was incorporated as a public company limited by shares in the old Lakhtar State in December, 1912, under the company law then in force in the old Lakhtar State. The company had a share capital of Rs. 32,000 divided into 128 ordinary shares of Rs. 250 each and the entire share capital was issued, subscribed and fully paid up. The voting rights were prescribed by article 76 of the articles of association of the company and under that article each member of the company had one vote irrespective of the number of shares held by him. The voting rights of the members were not proportionate to their respective shares of the paid up capital of the company but were distributed equally amongst the members in the sense that each member had one vote irrespective of his share of the paid up capital of the company. At an extraordinary general meeting of the company held on August 5, 1951, a special resolution was passed whereby the old articles of association were deleted and new articles of association were adopted. Under the new a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, rehearse the facts relating to those contentions. Suffice it to state that the petitioners challenged the adoption of the new articles of association which altered the voting rights enjoyed by the members of the company under the old articles of association. If the new articles of association were not validly adopted at the extraordinary general meeting held on August 5, 1951, the petitioners would be entitled to voting rights in accordance with the old articles of association, i.e., the petitioners, between themselves, would have nine votes as against eight votes of the remaining members who formed the other group and the petitioners would in that event be able to control the affairs of the company. Of course, this result would follow on the assumption that the transfer of five shares made by respondent No. 1 to respondent No. 3 and himself jointly and the transfer of five shares made by respondent No. 1 to respondent No. 4 and himself jointly on July 1, 1950, were unlawful and void as contended by the petitioners. If these transfers were valid, the members other than the petitioners would be able to control the affairs of the company, for their voting strength would be au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the parties that this was pre-eminently a case fit for settlement and that they might try to see if it was possible for them to arrive at a compromise on terms mutually acceptable to them. Mr. M.P. Thakkar, learned advocate on behalf of the petitioners, thereupon asked for an adjournment since the petitioners were not in Ahmedabad and it would require some time to consult them. Mr. L M. Zareri, on behalf of the company, stated that he had no objection to the petition being adjourned, but that in the meantime the interim injunction granted against the company should be dissolved, since as a result of the operation of the interim injunction, the company was not in a position to hold any general meeting and this had the effect of paralysing the working of the company. Mr. L.M. Zaveri pointed out sections 87 to 90 of the Companies Act, 1956, and contended that having regard to these sections it was immaterial to consider whether the special resolution passed at the extraordinary general meeting of the company held on August 5, 1951, was valid or not, since by the operation of these sections the same result was brought about which was intended to be achieved by the special resolut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irrespective of his share of the paid up capital of the company, the interim injunction should not be dissolved. The sole question which, therefore, arises on this application is : What is the true interpretation and effect of sections 87 to 90 of the Companies Act, 1956? Sections 87 to 90 occur in Part IV under the heading "Kinds of Share Capital". These sections are preceded by sections 85 and 86 which also occur under the same heading. Section 85 divides the share capital of a company into two classes, namely, preference share capital and equity share capital. "Preference share capital" is defined as meaning that part of the share capital of a company which fulfils the requirements set out in section 85(1). These requirements are nothing more than the normal feature of preference shares as known to company law even prior to the commencement of the Companies Act, 1956, and the definition of "preference share capital" with reference to these requirements does not constitute any departure from the ordinary concept of preference share capital but merely re-states the concept in precise and accurate language. There was no definition of preference share or preference share capital in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o kinds of share capital, namely, preference share capital and equity share capital. Prior to the enactment of the Companies Act, 1956, it was not unusual to divide the shares in the capital of a company into two or more classes as, for example, preference shares and ordinary shares or preference shares and A ordinary shares and B ordinary shares or ordinary shares and deferred shares, or preference shares, ordinary shares and founders' shares and so on and so forth and to attach various special rights, privileges and conditions to such shares. Where a company divided its share capital into different classes, the classes were usually given distinguishing descriptions and the company was at liberty to attach to them such descriptions as appeared appropriate. The classes were often described as "ordinary shares", "preference shares", "deferred shares" and "founders' shares", as mentioned above, but sometimes a more complicated terminology was also used by the company such as "first preference shares", "ordinary preference shares", etc. The law did not attach a rigid uniformly applicable meaning to these descriptions and the rights carried by the shares were not dependent upon the des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and true interpretation of all Statutes in general (be they penal or beneficial, restrictive or enlarging of the common law) four things are to be discerned and considered: 1st. What was the common law before the making of the Act, 2nd. What was the mischief and defect for which the common law did not provide, 3rd. What remedy the Parliament hath resolved and appointed to cure the disease of the Commonwealth, and 4th. The true reason of the remedy; and then the office of all the judges is always to make such construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for continuance of the mischief, and pro privato commodo, and to add force and life to the cure and remedy, according to the true intent of the makers of the Act, pro bono publico." This rule was reaffirmed by the Earl of Halsbury in Eastman Photographic Materials Co. Ltd. v. Comptroller-General of Patents, Designs and Trade-Marks [1898] AC 571 in the following words: "My Lords, it appears to me that to construe the statute now in question, it is not only legitimate but highly convenient to refer both to the former Act and to the ascertained evils to which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital of the company was less than that of the others. It was in order to cure this mischief that sections 87 to 90 were introduced in the Companies Act, 1956. These sections were enacted with the object of removing the inequality in the voting rights attaching to different classes of shares. This object has been achieved by the legislature by making the total paid up equity capital of the company as the pivot round which the structure of voting rights should be centred. Section 87(1) provides that subject to the provisions of sections 89 and 92(2) the voting right of every member of a company holding equity share capital in the company shall on a poll be in proportion to his share of the paid up capital of the company. The voting right of every member holding equity share capital in a company is thus made commensurate with the extent of his holding in the equity share capital of the company so that there would be no inequality of voting rights as between members holding equity share capital in the company. The members holding equity share capital in the company would have voting rights in proportion to the amounts contributed by them to the paid up equity capital of the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the capital paid up in respect of the share bears to the total paid up equity capital of the company. Section 87 thus removes the inequality in voting rights not only as between members holding equity share capital, i.e., share capital other than preference share capital, inter se, but also as between members holding equity share capital and members holding preference share capital. So far there is no dispute between the parties, but the real dispute between the parties arises when one turns to the provisions of section 89. The provisions of section 89 are very material to the determination of the question which has arisen before me and the main controversy between the parties has centred round the true interpretation of this section. Ordinarily section 87 would have applied immediately on the commencement of the Companies Act, 1956, to voting rights attached to equity shares as well as preference shares and no matter what the provision was in the articles of association the voting rights in respect of both equity shares and preference shares would have had to be exercised in accordance with the provisions of section 87 right from the date of the commencement of the Act, for secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rry voting rights disproportionate to the voting rights attaching to other equity shares. The object of the legislature clearly is that there should be no inequality in voting rights attached to equity shares and that the voting rights should be in the proportion which the capital paid up in respect of the shares bears to the total paid up equity capital of the company. This object must be borne in mind while interpreting the provisions of section 89 and, if there are two possible constructions, that construction must be adopted which best carries out and effectuates this object. There is also another aspect of section 88 which must be borne in mind while interpreting the provisions of section 89. Section 88 prohibits the issue of equity shares after the commencement of the Companies Act, 1956, which carry voting rights disproportionate to the voting rights attaching to the holders of the existing equity shares. Section 88 thus requires that in the case of equity shares issued after the commencement of the Companies Act, 1956, the voting rights should not be disproportionate to the voting rights attaching to the existing equity shares. Now, how can this be possible unless the votin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights in respect of the shares first mentioned so as to bring them in conformity with the voting rights attached to such equity shares under section 87(1). As the language shows the clear and manifest purpose of the section is to terminate disproportionately excessive voting rights of the existing shares and to bring them into conformity with the voting rights as prescribed under section 87(1). The section applies to all shares "by whatever name called " and lays down one uniform rule for all shares with the object of removing the inequality in voting rights and bringing the voting rights attached to equity shares under section 87(1). Ordinarily the voting rights of all shares would have to be in conformity with the prescription of section 87 right from the date of the commencement of the Companies Act, 1956, by reason of the combined operation of sections 87 and 9, but by section 89 a period of one year is laid down during which the existing structure of voting rights can continue even though it may be contrary to the provisions of section 87. Even if any shares carry voting rights in excess of the voting rights attaching under section 87(1) to equity shares in respect of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be brought in conformity with the requirements of section 87. The argument of Mr. M.P. Thakkar was that section 89 was intended to remove the inequality of voting rights in respect of share capital other than equity share capital. The intention of the legislature was, argued Mr. M. P. Thakkar, to bring the voting rights in respect of such share capital into conformity with the voting rights in respect of equity share capital so that the other shares should have the same voting rights as equity shares on which the same amount of capital had been paid up. This argument was founded on a supposed contradistinction between the voting rights of shares "by whatever name called" and the voting rights "attaching under sub-section (1) of section 87 to equity shares in respect of which the same amount of capital has been paid up" to be found in section 89(1). The argument was that since the voting rights of the shares mentioned in section 89(1) are compared with the voting rights attaching under section 87(1) to equity shares in respect of which the same amount of capital has been paid up for the purpose of determining whether they are excessive, the shares first mentioned must be shares o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Companies Act, 1956, the voting rights as prescribed by the old articles of association would continue to be exercisable by the members of the company, subject of course to the validity of the special resolution substituting the new articles of association for the old articles of association. This argument is, however, not only repugnant to the object of the legislature but is also defective in ignoring a number of relevant and material considerations which in my judgment must weigh with the court in interpreting this section. The construction contended for by Mr. M.P. Thakkar ignores the crucial words "any shares by whatever name called" occurring in section 89(1). Section 89(1) in terms applies to all "shares by whatever name called " and affects their voting rights if such voting rights are in excess of the voting rights attaching under section 87(1) to equity shares in respect of which the same amount of capital has been paid up. The words "any shares by whatever name called" according to the plain and grammatical meaning would include all classes of shares as ordinary shares, preference shares, deferred shares, founders' shares, etc. Unless,therefore, there is somethi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares whose voting rights are sought to be affected and equity shares. All existing shares are brought within the scope and ambit of section 89(1) and the question whether the voting rights of such shares are disproportionately excessive or not is to be determined with reference to the yardstick of voting rights attaching under section 87(1) to equity shares in respect of which the same amount of capital has been paid up. The existing shares must by reason of the provisions of section 85 fall in either of the two classes, namely, equity shares or preference shares. If the existing shares are equity shares and they carry voting rights in excess of the voting rights prescribed under section 87(1) for equity shares in respect of which the same amount of capital has been paid up, their voting rights would have to be reduced and brought into conformity with the voting rights attaching to such equity shares under section 87(1). The yardstick of voting rights attaching under section 87(1) to equity shares in respect of which the same amount of capital has been paid up would apply and with reference to this yardstick the voting rights of the existing shares in question would have to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of what would have been exercisable by them if the capital paid up on their shares had been equity share capital", they are again used not for the purpose of bringing out any contradistinction but merely for the purpose of describing the voting rights exercisable under section 87 so that in respect of the resolutions set out in section 89(2) the holders of the shares in question should not exercise voting rights in excess of those prescribed under section 87. The test for the purpose of determining what are the voting rights which can be exercised by the holders of the shares in respect of these resolutions is formulated by providing that the voting rights shall be such as would be exercisable by them if the capital paid up on their shares had been equity share capital and the test is so formulated because the total paid up equity capital of the company is made the basis or the norm and the voting rights in respect of the shares are required to be in the same proportion as the capital paid up on the shares bears to the total paid up capital of the company. Section 89(2) therefore says: whatever be the shares in question, treat them as equity shares and the voting rights attachi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected. This result could never have been intended by the legislature. It is inconceivable that the legislature could have intended that disproportionately excessive voting rights in respect of preference shares should come to an end while disproportionately excessive voting rights in respect of equity shares which in almost all cases comprise a large bulk of the share capital should continue to remain unaffected. What possible object could the legislature have had in view in leaving out equity shares from the scope and ambit of section 89(1)? I cannot think of any. If the legislature thought that disproportionate voting .rights resulted in mischief for which the law as it stood prior to the commencement of the Companies Act, 1956, did not provide and that it was a defect in the law which required to be remedied and provided the remedy for such mischief and defect by enacting sections 87 to 90, could it ever have been intended by the legislature that so far as the existing shares are concerned, this remedy should apply to preference shares but not to equity shares? I must put such construction as will "suppress the mischief and advance the remedy... and... add force and life to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se any voting rights in respect of these resolutions unless the dividend due on the preference shares has remained unpaid to the extent provided by section 87(2)(b). Now it is not a normal feature of companies that dividend on preference shares should remain unpaid to the extent provided by section 87(2)(b). In fact such cases would be quite rare. In most of the cases dividend on preference shares would not be in arrears to the extent provided in section 87(2)(b) and the holders of preference shares would not, there fore, be entitled to exercise any voting rights in respect of the resolutions set out in section 89(2). If that is the position it is difficult to see why the legislature should have made any provision in section 89(2) for restricting the voting rights of preference shares in respect of these resolutions. Such voting rights would be exercisable only in the remote contingency of dividend remaining unpaid to the extent provided in section 87(2)(b) and the legislature could not have possibly made this provision with a view to providing for such remote contingency. These resolutions are important resolutions and the legislature, therefore, obviously wanted that in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t section 88 would be rendered meaningless and ineffectual, for there would be no one standard of comparison for the purpose of determining whether the voting rights carried by new equity shares issued after the commencement of the Companies Act, 1956, are disproportionate to the voting rights attaching to the holders of existing equity shares. Now it is a well known principle of interpretation of statutes that the court should always lean against a construction which has the effect of rendering any provision of the statute meaningless or ineffectual. All the parts of the statute must be read together so as to make as far as possible a consistent enactment of the whole statute giving full meaning and effect to every part and not rendering any part meaningless or superfluous. The construction suggested by the company accords with this well known principle of interpretation and gives full meaning and effect to section 88. Section 88 clearly shows the legislative intent that the voting rights of all existing equity shares should be proportionately uniform and this legislative intent is best carried out by the construction contended for by the company. I must, therefore, hold that sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such shares were not proportionate to the amounts of capital paid up on the shares, sections 87 to 90 would apply. Mr. M.P. Thakkar argued that in the present case the same amount of capital was paid upon all the shares and section 89(1) did not, therefore, apply so as to affect the voting rights of such shares. This argument of Mr. M.P. Thakkar is fallacious and cannot be accepted. Section 87 requires that the voting rights of all shares shall be in the same proportion as the capital paid up in respect of the shares bears to the total paid up equity capital of the company and by reason of section 89 the voting rights of even existing shares are required to conform to this requirement though in respect of resolutions other than those set out in section 89(2), the existing voting rights of such shares may continue for a period of one year from the date of the commencement of the Companies Act, 1956. Even if the same amount of capital is paid up on all the shares, yet if the voting rights attached to such shares are different, the voting rights would obviously not be in the same proportion as the capital paid up in respect of the shares bears to the total paid up equity capital of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prescribed by section 87(1) within the period of one year prescribed by section 89(1) but that cannot make any difference. Even if the company did not bring the voting rights of the shares into conformity with the voting rights prescribed by section 87(1) as required by section 89(1), the voting rights could not be exercised by the members of the company in accordance with the old articles of association after the expiration of the period of one year from the date of the commencement of the Companies Act, 1956, in view of the provisions of section 9. The company could not by refusing to carry out the provisions of section 89(1) perpetuate the disproportionate voting rights provided under the old articles of association. It was only for a period of one year from the date of the commencement of the Companies Act, 1956, that the old voting rights could continue and thereafter the voting rights had to be exercised in accordance with the provisions of section 87. The period of one year expired on April 1, 1957, and each member of the company was, therefore, from and after that date, not entitled to exercise voting rights in respect of the shares held by him in accordance with the old a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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