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TMI Blog2018 (3) TMI 1253X X X X Extracts X X X X X X X X Extracts X X X X ..... he option for conversion of preference shares into equity shares between 1st October 2014 to 31st December 2014 in one or more tranche by giving prior notice to the company of not less than 60 days in writing. One preference share is to be converted into ten equity shares of Rs. 10/ each. The Board also had option to convert the preference shares partly or fully in equity shares of the company with the consent of the petitioner on mutually agreed terms and conditions even before 1st October 2014. Redemption schedule was also provided whereby Rs. 30/ per share was to be paid out on 28th February 2015, Rs. 35/ per share on 28th February 2016, Rs. 35/ per share on 28th February 2017. Admittedly, petitioner did not exercise its option to convert the preference shares into equity shares and admittedly, the company also did not exercise its option to convert preference shares partly or fully into equity shares. 3. At no point, the company declared any dividend even to the equity shareholders or preferential shareholders. At the time when this petition came to be filed, only the first redemption had become become finally due, i.e., redemption due on 28th February 2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y it in the capacity of a creditor and not as a shareholder. The Petitioner craves leave to refer to and rely upon the said legal proceedings as and when the need arises.' (emphasis supplied) 6. Shri Sawant submitted that as provided under Section 80 of the Companies Act, 1956, no such shares can be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. Counsel also submitted that a preference shareholder is the shareholder of the company and cannot style itself as creditors and therefore, petitioner has no locus standi to maintain the petition. Counsel submitted that if payment is made other than from the profits of the company which would be available for dividend or out of the proceeds of a fresh issue of shares made for the purpose of redemption, it would amount to a fraud on the creditors of the company. Shri Sawant relied on judgments of (i) Andhra Pradesh High Court in Lalchand Surana & Ors. Vs. M/s. Hyderabad Vanaspathy Ltd., Moulali, Hyderabad 1990 (68) Company Cases 415; (ii) of a Division Bench of this Court in State Bank of India & Ors. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limited by shares may, if so authorised by its articles, issue preference shares which are, or at the option of the company are to be liable, to be redeemed. Proviso, however, states that no such shares shall be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. This aspect, in my view, shows that where redeemable preference shares are issued but not honoured when they are ripe for redemption, the holder of those shares does not automatically assume the character of a "creditor". The reason is that his shares can be redeemed only out of the profits of the company which would otherwise be available for dividend, or by afresh issue of shares. This is a limitation which is not applicable to any other creditor of the company. The shareholders of redeemable preference shares of the company do not become creditors of the company in case their shares are not redeemed by the company at the appropriate time. They continue to be shareholders, no doubt subject to certain preferential rights mentioned in Section 85 of the Companies Act, 1956. If they do not bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who are not paid dividend for more than two years are also entitled to attend the meeting of the creditors under Section 391 of the Act and to vote thereat, then it would be impossible to determine what would be the value to their votes visavis the value of votes of creditors. It would be wrong to contend that preference shareholders have a right to vote but, valuation of their vote is unascertainable. We are therefore of the view that preference shareholders are not entitled to attend and vote at the meeting of the creditors convened under Section 391 of the Act even though dividend on the preference shares have remained unpaid for more than 2 years. (emphasis supplied) 10. The Division Bench of Calcutta High Court in Hindustan Gas and Industries Ltd.(supra) has also held that a debentureholder, as a creditor, has a right to sue the company, whereas a shareholder has no such right and preference shareholder is a shareholder of the company. Paragraphs 10, 11, 12 and 13 of the said judgement read as under : 10 Mr. Sengupta also submitted that the holder of a redeemable preference share did not stand on the same footing as a creditor and could not sue the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the date for the redemption of redeemable preference shares has passed, their holders cannot sue the company for the repayment of their capital as creditors though they may petition for the winding up of the company as shareholders." 13 On a consideration of the provisions of the Companies Act, 1956, as also similar provisions in the English company law we cannot persuade ourselves to accept the contentions of the assessee and hold that when a company issues redeemable preference shares it is in fact obtaining a loan as it could by issuing debentures. There is a fundamental difference between the capital made available to a company by issue of a share and money obtained by a company under a loan or a debenture. Respective incidences and consequences of issuing a share and borrowing money on loan or on a debenture are different and distinctive. A debentureholder as a creditor has a right to sue the company, whereas a shareholder has no such right. Apart from that the scheme of the Companies Act and in particular the forms and contents of its balancesheets are extremely rigid and, in our view, by reason of the specific compartments in such accounts it is not possible to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of his capital or by filing for a mandatory injunction. This view of the author, according to the Gujarat High Court also negatives the contention that once the company decides to redeem its preference shares, the holder thereof would be in the position of a creditor." (emphasis supplied) 12. So far as the judgment in Anarkali Sarabhai (supra) relied upon by Shri Arsiwala, in my view, the judgment actually aids petitioner. The Apex Court has noted that under Section 80 of the Companies Act, 1956, preference shares must not be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. When a preference share is redeemed by a company, what a shareholder does in effect is to sell the share to the company. Such a transaction is nothing but sale of the preference shares by the shareholders to the company. The Apex Court also held that if redemption of preference shares did not amount to sale, it would not have been necessary to specifically provide that the restriction imposed upon a company in respect of buying its own shares will not apply to redemption of s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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