Redemption of preference shares can be undertaken following the general provisions for reduction of capital as per Section 100 of the Companies Act, and is subject to confirmation by the Court.

Headnote:
Redemption - Preference Shares - Companies Act, 1956, Section 80, Section 100
Fact of the Case:

The petitioner sought approval for the redemption of preference shares issued under the Companies Act, 1956. The shares were redeemed using the proceeds of a fresh issue of shares, and the petitioner argued that no time limit was prescribed for such utilization.
Finding of the Court:

The court found that the redemption of preference shares amounts to a reduction of capital and can be undertaken following general provisions for reduction of capital as per Section 100 of the Companies Act. The court also noted that the redemption of preference shares is subject to confirmation by the Court.
Issues: The key issue was whether the redemption of preference shares could be carried out in compliance with the provisions of Section 80 and Section 100 of the Companies Act, 1956.
Ratio Decidendi: The court held that redemption of preference shares can be undertaken following the general provisions for reduction of capital as per Section 100 of the Companies Act, and that the redemption is subject to confirmation by the Court.
Final Decision: The petition was allowed, and the court sanctioned the proposed reduction of the preference shares.

JUDGMENT - KARNIK D.G., J.:---A short question of law that arises for consideration in this petition is :

(1) Whether the preference shares can be redeemed otherwise than out of the profits of the company which would otherwise be available for dividends or out of the proceeds of the fresh issue of shares made for the purpose of redemption?

The relevant facts are stated below :

2. The petitioner was incorporated on 26th June, 1986 under the provisions of the Companies Act, 1956 (for short, the Act) and the authorised share capital of the petitioner is Rupees One hundred and twenty five crores divided into Five crore equity shares of Rs. 10/- each and Seventy five lacs preference shares of Rs. 100/- each. As on the date of filing of the petitioner (i.e. on 10th February, 2003) the subscribed and paid up share capital of the petitioner was Rs. 43,25,04,390/- consisting of Rs. 1,57,50,439/- equity shares of Rs. 10/ each fully paid up and Rs. 27,50,000/- fully paid up preference shares of Rs. 100- each.

3. The Balance sheet of the petitioner company as of 31st March, 2002 (annexed as Exhibit C-1 to the petition) shows that the petitioner has issued four types of preference shares as detailed below :

..........................................................................................................................

Type Nos. Total value (Rupees)

...........................................................................................................................

1) 10.5% redeemable 2,50,000 2,50,00,000/-

cumulative preference

shares of Rs. 100/-

(Series N Preference

Shares)

2) 10.75% redeemable 25,00,000 25,00,00,000/-

cumulative preference

shares of Rs. 100/-

(Series M Preference

Shares)

3) 11.50% redeemable 1,38,000 1,38,00,000/-

cumulative preference

shares of Rs. 100/-

4) 12.5% redeemable 30,000 30,00,000/-

cumulative preference

shares of Rs. 100/-

.........................................................................................................................

4. During the period between 1st April, 1002 and 30th September, 2002 the petitioner has redeemed 1,10,000 numbers of 11.5% redeemable cumulative preference shares (i.e. part of shares mentioned at Sr. No. 3 above) and 30,000 numbers of 12% redeemable cumulative preference shares (i.e. all of the shares mentioned at Sr. No. 4 above). As per the affidavit dated 8th July, 2003 shown in by Mr. Arun Bhatt, Manager (Secretarial) of the petitioner company, the redemption mentioned above was made out of fresh issue of redeemable cumulative preference shares namely 25,00,000 number of 10.75% redeemable cumulative preference shares issued on 11th August, 1999 (mentioned at Sr. No. 2 above). Copy of the resolution passed at the meeting of the Board of Directors of the petitioner company held on 10th September, 1999 shows that the proceeds of the issue of 2,50,000 numbers of 10.75% redeemable cumulative preference shares of (series M) were to be utilised for the purpose of part of full redemption of the preference shares issued earlier by the company. Learned Counsel for the petitioner submits that no time limit is prescribed under section 80 of the Act within which the proceeds of fresh issue of preference shares can be utilised for redemption of preference shares issued in the past. As such, the proceeds of the preference share issued on 11th August, 1999 have been utilised between 1st March, 2002 and 30th September, 2002 for the purpose of redemption of 11.5% and 10.5% redeemable preference shares in the manner mentioned earlier. Learned Counsel further submits that the said shares were redeemed in the manner laid down under section 80 of the Act and hence no permission of the Court was obtained for the said redemption. The said shares have been redeemed prior to the filing of the petition and are not the subject matter of this petition.

5. The entire lot of 25,00,000 number of 10.75% redeemable preference shares (hereinafter referred to as "series M preference shar

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