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TMI Blog1964 (4) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... s of preference shares towards return of capital and arrears of dividend. The relevant facts in this connection are as follows : There are many contributories in this company who own both preference shares as well as ordinary shares. The present position of the share capital of the company is as follows : The capital is Rs. 5,80,835 divided into : ( i ) 426 preference shares of Rs. 1,000 each of the paid-up value of Rs. 2,13,000; ( ii ) 7,159 ordinary A class shares of the value of Rs. 100 each of the paid-up value of Rs. 3,57,960 ; and ( iii ) 1, 977 ordinary B class shares of Rs. 1,000 each of the paid-up value of Rs. 9,885. Admittedly, in respect of the preference shares, Rs. 500 have been called and paid and Rs. 500 have not been called. Similarly, in respect of the ordinary A class shares, Rs. 50 have been called and Rs. 50 remain to be called. In respect of the ordinary B class shares Rs. 5 have been called and Rs. 5 remain to be called. The position of the affairs of the company at the date of the summons is that from out of the assets come to his hands the liquidator has paid off all the creditors of the company. The liquidator has in his hands a sum of Rs. 1,96,550. From ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he further contention made is that the relevant provisions in the Companies Act do not authorise any call being made in liquidation for repayment of capital or arrears of dividend to preference shareholders. The provisions of the Act which authorise making of a call for adjustment of rights of contributories, according to these parties, only entitle a call being made for adjustment of rights of contributories of the same class. Their submission is that these provisions in the Act do not provide for a call being made for adjustment of rights between different classes of shareholders like preference shareholders and ordinary shareholders. Mr. Shah has also contended that having regard to the provisions in sections 156( vii ), 186(2) and 216, owners of ordinary shares who also own preference shares have a right to set off against calls that may be made against them the amount repayable to them towards capital contributed and arrears of dividends. This submission has been denied on behalf of the liquidator. In connection with the above rival contentions, several authorities have been cited on both sides. It has appeared from all these authorities that the question in all cases is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( b ) Subject as aforesaid, the ordinary shares class 'A' shall confer on the holders thereof the right out of the profits in each year in which it shall be determined to distribute a dividend, to a non-cumulative dividend for such year at the rate of Rs. 15 per each such share or at a proportionately lesser sum per each such share if the profits available for dividend be insufficient to pay dividend at Rs. 15 per each such share. The ordinary shares class 'A' shall rank as regards the dividend thereon provided in this sub-clause, and as regards payment of capital in a winding up next after the 5" per cent, cumulative preference shares and in priority to ordinary shares class 'B'. ( c ) ................... ( d ) Any surplus assets in a winding up that may remain after paying off the amounts of capital paid-up or credited as paid-up on the 5 per cent, cumulative preference shares, ordinary shares class 'A' and ordinary shares class 'B' respectively, shall be divided as to 70 per cent, thereof between the holders of the ordinary shares class 'A' and as to the other 30 per cent, of such surplus assets between the holders of the ordinary shares class 'B' ..." "143. (1) The profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in clause (2)( a ) may be read after omission of the irrelevant part as follows : "The 5 per cent, cumulative preference shares shall confer on the holders thereof the right, ... to payment of capital and arrears of dividend (whether declared or undeclared) up to the commencement of the winding up . . . but shall not confer any further right to participate in the profits or assets..." The last words of the above quoted portion of clause (2)( a ) indicate restrictions on the rights of the preference shareholders in participating in the profits and assets of the company in winding up. As against those restrictions, priority is provided in the other portion quoted above in favour of preference shareholders as regards repayment to them of the capital and arrears of dividend. The phrase "arrears of dividend" and the word describing the arrears of dividend also as "undeclared" clearly deal with situation where the directors and the company have not determined the question of declaration and/or payment of dividends to the holders of preference shares. Now it is well established that dividends cannot be paid except out of profits and that the question of distribution of dividends mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hilst the assets of the company are being distributed appears to me to be without any substance. In fact it appears to me that the use of the phrase "arrears of dividend undeclared" in connection with the rights of the preference shareholders in. the winding up of the company was intended to create a right in them to payment of cumulative dividend at the rate of 5% on the capital contributed by them. This was an absolute right created by the language of clause 2( a ). It is difficult, under the circumstances, to accept the contentions made on behalf of the opposing parties that the phrase "arrears of dividend undeclared" as used in this clause was meant to apply to undistributed profits and not to the available assets of the company. It remains to be stated that in this connection reliance was placed on Compulsory Regulation 97 in the 1913 Act corresponding with section 205 of the 1956 Act, which provides that "No dividend shall be declared or paid except out of the profits of the company . . ." Reliance has also been placed on In re W.J. Hall Co, Limited [1909] 1 Ch. 521 . In that case also the capital of the company consisted, inter alia, of 5% cumulative preference shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of surplus assets, the court does not deal with distribution of profits. The prohibition against payment of dividends out of assets other than profits does not arise in a winding up. The cases in which these adverse comments are made are : In re New Chinese Antimony Company Limited [1916] 2 Ch. 115 , In re Springbok Agricultural Estates Limited, [1920] 1 Ch. 563 and In re Wharfedale Brewery Co. Ltd. [1952] 1 Ch. 913. It is unnecessary to go into the details of these cases. The result of these authorities is summarised in Buckley on the Companies Acts, 13th edition, at page 549, as follows : "The effect of the modern authorities is that a provision that preference shareholders should have the right to a fixed cumulative preferential dividend and should rank both as regards dividend and capital in priority to other shares is to be read so that in a winding up the preference shares rank both as regards dividend and capital in priority to the other shares and are excluded from further participation in profits or assets; accordingly, in such a case, the preference shareholders are entitled to arrears of dividend out of the surplus assets whether they include profits available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egards the rights of different kinds of shareholders, one may again refer to the provisions in sub-clauses ( a ), ( b ), ( c ) and ( d ) of clause (2) of article 5 and article 174, which have been quoted above. The contention on behalf of the liquidator is that having regard to the provisions in sections 156 and 187, it is clear that the court is entitled to make calls for adjustment of the rights of the contributories amongst themselves. The rights referred to in these sections which must be adjusted are the rights that the con tributaries have under the articles of association, in so far as the articles provide for distribution of assets amongst the contributories. These rights are, obviously, to be found in the provisions of article 5. It is relevant to point out that sub-clause ( b ) of clause (2) of article 5 gives priority to ordinary shares class "A" in winding up in the following words : "shall rank as regards the dividend thereon provided in this sub-clause, and as regards payment of capital in a winding up, next after the 5% cumulative preference shares and in priority to ordinary shares class 'B'." Sub-clause ( d ) makes provisions as regards the surplus assets. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of shareholders of different classes and also shareholders in single class. The next question would be, how to enforce these different rights of different shareholders and, if necessary, to make a call for adjustment of these rights and having regard to this petition, it has been held in favour of holders of fully paid shares against the holders of partly paid shares that a call could be made against them for adjustment of rights between them and the fully paid shareholders. (See In re Anglesea Colliery Co. [1866] LR 2 Eq. 379 , In re Consolidated Goldfields of New Zealand Ltd. [1953] Ch. 689 and Commentary in Buckley on the Companies Acts, 13th edition, page 545). Mr. Shah has, in this connection, contended that for adjustment of rights of the preference shareholders in connection with repayment of capital or arrears of dividend, a call cannot be made, because the right is to participate in the existing assets of the company. Call liability is not an existing asset of the company. The preference shareholder has no right to participate in capital that can be called by way of making a call. This contention appears to me to be unjustified, having regard to the language of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oney due on any account whatever to a contributory from the company may be allowed to him by way of set-off against any subsequent call. " Section 216 empowers the liquidator or any contributory to apply to the court to determine the questions arising in the winding up of a company, including enforcement of calls. Reliance has been placed on the proviso in sub-section (2) of section 186 and it is contended that money is due to several preference shareholders who are also holding ordinary shares in respect of their holding of the preference shares. The contention is that such each one of the preference shareholders is entitled to be repaid without any reservation the whole of the capital contributed plus 5 per cent, cumulative dividend and that must be held to be money due on any account whatsoever to a contributory from a company and must be allowed to be set off against the call that is proposed to be made. As against the above contention, on behalf of the liquidator it is submitted that nothing is due by way of debt by the company to the holders of preference shares. The liability to repay the capital and cumulative dividend to the preference shareholders is not a debt. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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