9911796707
TMI Blog1974 (11) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company which did not make any profits at any time at all. The appellant-company, Messrs. Globe Motors Ltd., are the equity shareholders of respondent No. 1, Messrs. Globe United Engineering Foundry Company Ltd. Respondents Nos. 2 to 7 are the holders of the company's (respondent No. 1) preference shares carrying a fixed cumulative dividend as per article 7( i ) of the articles of association which is as follows: "The preference shares shall confer on the holders thereof the right to a fixed cumulative preferential dividend of 9'5% per annum free of company's tax but subject to deduction of taxes at source at the prescribed rates on the capital paid up thereon, and in the event of winding up, 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." As the expected foreign technical collaboration did not materialise, the company did not go into business at all but went into voluntary liquidation which was later put under the supervision of the court. The liquidator made a reference to this court under section 518 of the Act as to whether the preference s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neral meeting or by its board of directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act; and ( b )any provision contained in the memorandum, articles, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be." At the first blush, one may think that every provision of the Act would override every provision in the articles to the extent of repugnancy between the two. We would like to emphasise that this is not so. The reason is that the Companies Act, like all law relating to companies, consists of two distinct parts, namely, (1) relating to the formation and the management of a company as a going concern, and (2) relating to its winding-up. The difference between the two is the same as between running and stopping. The memorandum of a company sets forth the objects to be achieved by the working of the company during its lifetime. It does not usually provide for what is to happen during its winding-up. Parts I to VI of the Companies Act contain provisions regulating the formation and the management of companies. Part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e prospectus inviting the public to subscribe capital and buy the shares of the company would not change the terms of the contract between the company and the members which are already settled. The prospectus did not become a contract between the company and the members inasmuch as the subscribers buying the shares did so with the knowledge that the contract would consist of the memorandum and the articles of association and not of the representations made in the prospectus. Any variation between the language of the prospectus and article 7( i ) is, therefore, to be construed as the article prevailing over the prospectus. Originally, the statutes relating to companies in England made provisions only for the formation and the working of the companies. Insolvent companies were left to be governed like ordinary persons by the law relating to insolvency. It was only later that it was realised that a company may have to be wound up even though it may not have become insolvent. This led to statutory provisions for the liquidation of companies. Historically, therefore, the conception of a limited liability company is essentially one of a working company which, as a legal person, functio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he preference shareholders dividend at a fixed rate. Why is the dividend to be "cumulative" and "preferential" ? The reason is that another primary principle of company law both in our country and in England is that the capital of a company must be maintained. Sections 100 to 102 ensure that the capital of a company is not to be reduced except with the consent of a competent court and if any dividend were to be paid by a company as a going concern without making any profits, then such dividend would come out of the capital of the company. This would result in a reduction of the capital without the consent of the court and would be illegal even if such a payment were to be provided for in the memorandum and articles of association which themselves would be overridden by sections 100 and 102. If this was so why was it necessary to enact further section 205 to ensure that no dividend shall be paid except out of profits ? The reason seems to be that the word "profits" is itself capable of having different meanings depending on the different methods of how they are calculated ( Gore-Browne on Companies, 42nd edition, pages 285-291 and 618 to 624). This is why section 205 specifies how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertained or readily ascertained sums of money. Thus a debt or a liability to pay money passes through four stages. First, there is a debt not yet due. The debt has not yet become a part of the obligor's 'things' because no net liability has yet arisen. The second stage is when the liability may have arisen but is not either ascertained or admitted. Here again the amount due has not become a part of the obligor's things. The third stage is reached when the liability is both ascertained and admitted. Then it is property proper of the debtor in the creditor's hands. The law begins to recognise such property in insolvency, in dealing with it in fraud of creditors, fraudulent preference of one creditor against another, subrogation, equitable estoppel, stoppage, intransitu, etc. A credit-debt is then a debt fully provable and which is fixed and absolutely owing. The last stage is when the debt becomes a judgment debt by reason of a decree of a court. Thus an American judge held 'outstanding uncollected accounts' as property ( Standard Marine Insurance Co. v. Board of Assessors 123 La 717). It is because of this that the French law includes such obligations in mobiles." What is the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividend when the company is a going concern and to the same right when the company is in liquidation. It reads as follows : "Preference share capital means, with reference to any company limited by shares, whether formed before or after the commencement of this Act, that part of the share capital of the company which fulfils both the following requirements, namely : ( a )that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income-tax ; and ( b )that as respects capital, it carries or will carry, on a winding-up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or both of the following amounts, namely : ( i ) any money remaining unpaid, in respect of the amounts specified in clause ( a ), up to the date of the winding-up or repayment of capital; and ( ii ) any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company." The words "whether or not there is a pref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits had been made. This view was expressed in In re W. J. Hall Co. Ltd. [1909] 1 Ch 521. The distinction between the company as a going concern and a company during liquidation was, however, soon realised and this decision was dissented from successively in the subsequent decisions in In re New Chinese Antimony Co. Ltd. [1916] 2 Ch 115 (Ch D), in In re Springbok Agricultural Estates Ltd. [1920] 1 Ch 563 (Ch D) and finally in In re Wharfedale Brewery Co. Ltd. [1952] 2 All ER 635 (Ch D) , all of which suggested or concluded that arrears of dividend were payable to the preference shareholders during winding-up irrespective of profits having been made. This view was followed in India by K. K. Desai J. of the Bombay High Court in In re Bombay Chlorine Products Ltd. [1965] 35 Comp. Cas. 282 (Bom.). The same view was also expressed in In re F. De Jong Co. Ltd. [1946] 1 All ER 556; [1946] 16 Comp. Cas. 158 (CA) and in In re E. W. Savory Ltd. [1951] 2 All. ER 1036 (Ch D). It is in the light of this development of judicial decisions that Palmer's Company Precedents, 17th edition, states the following conclusion at pages 779-780 : "Prima facie a preference dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the dividends are in arrears.......shall be stated". This is a statutory recognition of the fact that in the balance-sheet of a company, provision has to be made for payment of the liability consisting of the arrears of fixed cumulative dividends. This may or may not mean that there is an enforceable debt due to a preferential shareholder against a company while it is a going concern. But it does mean that a provision has to be made by the company for the payment of the arrears of cumulative dividend in its balance-sheet with a view to provide for payment of such cumulative dividends in the event of winding-up. Shri Sanghi then argued that the English decisions should not be allowed to influence the construction of article 7( i ) inasmuch as there was no provision in the English Companies Act, 1948, corresponding to section 205 of our Companies Act. This argument ignores the fact that article 116 of Table A of Schedule I of the English Companies Act corresponds to section 205 of our Companies Act. The reason why the distinction between profits on the one hand and the capital and the other assets of the company on the other hand so important when the company is a going co ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
