In a voluntary winding up, preference shareholders are entitled to arrears of dividend in priority to the equity shareholders, as per the provisions of the company's Articles of Association, unless there is any provision in the Companies Act necessitating a contrary course.

( 1 ) M/s. Globe United Engineering and Foundry Co. Ltd. , after being registered under the provisions of the Companies Act, 1956 (hereinafter called the Act) could not succeed in obtaining technical aid it expected to get and hence could not carry on business as per Articles of Association and Memorandum. At a general meeting, on 23-12-1968, the members unanimously decided to wind up the company; Shri V. Rajaraman was appointed as its Liquidator. A petition was subsequently presented to this Court by one of the promoters challenging the voluntary winding up, but it ended in a compromise that the voluntary winding up may continue subject to supervision of the Court.

( 2 ) THIS application has been filed by the Liquidator, Shri V. Rajaraman, on a request made to him, at a general meeting held on 18-9-1971, to apply to this Court under section 518 of the Act, referring the controversy between the company and some of the preference shareholders as to whether the latter are entitled to payment of dividend as per the Articles of Association and Memorandum of the company (i. e.) on a basis of priority over ordinary shareholders.

( 3 ) THE issued and called up capital, according to the Liquidator, are as follows:

( 4 ) THE rights of the preference shareholders have been provided for in clause 7 of the Articles of Association as follows:

"the preference shares shall confer on the holders thereof the right to a fixed cumulative preferential divident @9. 5% per annum free of company 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, upto the commencement of winding up in priority to the equity shareholders. "

( 5 ) THE question for consideration is whether in spite of the company not commencing business, not making any profits and there having been nothing to declare by way of dividend the preference shareholders of the company are entitled to arrears of cumulative dividend at the prescribed rates as per the said Articles of Association in priority to the ordinary shareholders. The contention on behalf of the company is that as per section 205 of the Act no dividend shall be paid or declared by the company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2) or out of the profits of the company for any previous financial year or years arrived at after providing for depreciatoin in accordance with those provisions and remaining undistributed or out of both or out of moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government. The further contention is that since as per section 9 of the Act the above Articles provision is contrary to section 205 of the Act it is invalid.

( 6 ) BEFORE discussing this question it is necessary to dispose of a subsidiary contention put forward on behalf of the company and against the preference shareholders based upon the following entry in the Prospectus:

"preference Shares will confer upon the holders thereof a right to fixed cumulative preferential dividend @9. 5 per cent per annum, calculated prorata from date of allotment of shares, on the capital paid thereon (free of Company s tax, but subject to deduction of taxes at source at the prescribed rates), and prior right on winding up to the repayment of capital and any arrears of dividend earned, whether declared or not, upto the commencement of the winding up but shall not confer any right to participate in the profits of assets of the Company. Subject to the provisions of Section 80 of the Companies Act, 1956, the Company shall have the right to redeem, the whole or any part of the preference shares at part, at any time after twelve years from the date of issue, gi