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HIGH COURT OF CALCUTTA
H. K. Bose
HINDUSTHAN GENERAL ELECTRIC CORPORATION LTD. - Appellant
Versus
STATE OF WEST BENGAL - Respondent
Matter 330 Of 1957
Decided On : JUNE 12, 1958
COMPANY - Reduction of capital - Scheme of reorganisation and consolidation of share capital - Whether reduction of capital can be confirmed when the entire paid up capital is lost and is unrepresented by available assets - Whether reduction of nominal value of preference shares with consequent reduction of dividend amounts to variation of rights requiring sanction of resolution under Section 106 of the Indian Companies Act, 1956 - Whether resolution authorising issue of new shares to Managing Agents is ultra vires Section 81(1)(a) of the Act - Whether evidence of loss is necessary to confirm reduction of capital.
Fact of the Case:
The petitioner, a public limited company, applied for confirmation of a reduction of capital. The company's paid-up capital was Rs. 29,20,300, made up of ordinary, preference, and deferred shares. The company had suffered a loss of about Rs. 36,00,000 and was under technical collaboration with foreign firms. The directors proposed a reduction of the share capital by cancellation of the paid-up capital and a scheme of arrangement for reorganisation and consolidation of the share capital. The company had no debenture-holders, but it had creditors, including the Managing Agents and the Industrial Finance Corporation. Only one preference shareholder, Hindusthan Commercial Bank Ltd., opposed the application.
Finding of the Court:
The court held that the reduction of capital could be confirmed even though the entire paid-up capital was lost and was unrepresented by available assets, as the reduction was part of a scheme of reorganisation of the share capital. The court also held that the reduction of the nominal value of preference shares with consequent reduction of dividend did not amount to a variation of rights requiring sanction of a resolution under Section 106 of the Indian Companies Act, 1956, as the preference shareholders had suffered a rate-able reduction along with the ordinary and deferred shareholders and there was no unfair dealing with them. The court further held that the resolution authorising the issue of new shares to the Managing Agents was not ultra vires Section 81(1)(a) of the Act, as the company had the power to direct allotment of new shares to persons other than the equity shareholders. Finally, the court held that there was sufficient evidence of loss before the court to justify an order in favour of reduction.
Issues: 1. Whether reduction of capital can be confirmed when the entire paid up capital is lost and is unrepresented by available assets? 2. Whether reduction of nominal value of preference shares with consequent reduction of dividend amounts to variation of rights requiring sanction of resolution under Section 106 of the Indian Companies Act, 1956? 3. Whether resolution authorising issue of new shares to Managing Agents is ultra vires Section 81(1)(a) of the Act? 4. Whether evidence of loss is necessary to confirm reduction of capital?
Ratio Decidendi: 1. The court held that reduction of capital can be confirmed even though the entire paid-up capital is lost and is unrepresented by available assets, as the reduction was part of a scheme of reorganisation of the share capital. 2. The court held that the reduction of the nominal value of preference shares with consequent reduction of dividend did not amount to a variation of rights requiring sanction of a resolution under Section 106 of the Indian Companies Act, 1956, as the preference shareholders had suffered a rate-able reduction along with the ordinary and deferred shareholders and there was no unfair dealing with them. 3. The court held that the resolution authorising the issue of new shares to the Managing Agents was not ultra vires Section 81(1)(a) of the Act, as the company had the power to direct allotment of new shares to persons other than the equity shareholders. 4. The court held that there was sufficient evidence of loss before the court to justify an order in favour of reduction.
Final Decision: The court ordered that the reduction of capital be confirmed in terms of the petition. The costs of the petitioner and of the opposing shareholder Hindusthan Commercial Bank were to come out of the assets of the Company.
( 1 ) THIS is an application for confirmation of a reduction of capital. The petitioner is a public limited company which was incorporated in June 1945 under the Indian Companies Act, 1913. Its registered office is at 12, India Exchange Place, Calcutta. It carries on business of manufacturers, importers and exporters of radios, radiograms, gramophones, refrigerators, cables, electric switches, switch gears and other electrical goods and equipments. The authorised capital of the company is Rs. 50,00,000/- divided into 3,75,000 ordinary shares of Rs. 10/- each, 10,000 five per tent, cumulative participating preference shares of Rs. 100/- each and 50,000 deferred shares of Rs. 5/-each. The total paid up capital of the company is Rs. 29,20,300/- made up as follows:
.
Rs .
(1) 1,89,985 Ordinary shares of Rs. 10/- each 18,99,850 (2) 8452 preference shares of Rs. 100/- each 8,45,200 (3) 35,050 deferred shares of Rs. 5/- each 1,75,250 Total 29,20,300
( 2 ) THE company's factory is at Karampura in the State of Bihar. Since October 1947 the Company has entered into technical collaboration arrangement with foreign firms of repute for carrying on its business and although it has received liberal financial assistance by way of loan from its Managing Agents, Karamchand Thappar and Bros, to the extent of about Rs. 75,00,000/- and from Industrial Finance Corporation to the extent of about Rs. 12,00,000/ -. the Company has unfortunately failed to turn itself into a profitable concern so tar. On the other hand, its balance sheet for the year 1956 discloses that it has suffered a loss of about Rs. 36,00,000/ -. At present the company is under technical collaboration arrangement with well-known firms of Saba of West Germany and Messrs. Simplex Electric Co. , Ltd. of Birmingham and its expectation is that it will be able to capture the market by its products if it is put on a sound financial basis by writing off the loss which it has sustained so far and if it succeeds in obtaining further finance for its business to the extent of about Rupees 15,00,000/ -. It is alleged in the petition that the whole of the paid up share capital of the company is lost and is not represented by any available assets. In the circumstances the Directors proposed reduction of the share capital by cancellation of the paid up capital and a scheme of arrangement for reorganisation and consolidation of the share capital of the company. It may be noted that a nominee of the Industrial Finance Corporation, one Mr. Khanna, is a member of the Board of Directors of this Company and he is there obviously to look after the interests of the Industrial Finance Corporation to whom more than 10 lakhs of rupees is still due and owing by the company on account of the loan advanced by the said Corporation It appears that on 14-2-1957, there were held three separate meetings of ordinary, preference and deferred share-holders for approving the reduction and the scheme of reorganisation and consolidation of share capital and on the same day an extraordinary general meeting of the shareholders was also held at which the following special resolution concerning the reduction of capital was passed. "in terms of the said arrangement all the existing preference, ordinary and deferred subscribed and paid up shares of the company be and are hereby reduced as follows: (a) by cancellation of the paid up capital to the extent of Rs. 70/- for every 8452 preference shares of Rs. 100/- each which have been issued and are now outstanding: (b) by cancellation of the paid up capital to the extent of Rs. 8/- for every 1,89,985 ordinary shares of Rs. 10/- each which have been issued and are now outstanding; (c) by cancellation of the paid up capital to the extent of Rs. 4/- for every 35,050 deferred shares of Rs. 5/- each which have been issued and are now outstanding. "
( 3 ) IT appears that along with the notice issued convening the general meeting held on 14-2-1957, an exp
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