Sahu Cylinders and Udyog (P.) Ltd. vs Registrar of Companies

F.M. Ibrahim Kalifulla, J.—This appeal has been preferred as against the order of the Company Law Board, dated 16-5-1997, passed in Company Petition No. 134/80-A/SRB/97 - Sahu Cylinders & Udyog (P.) Ltd., In re [1998] 91 Comp. Cas. 381 : [1997] 13 SCL 24 (CLB - Chennai).

The brief facts which are required to be stated are that the appellant-company, which is a private limited company, issued and allotted 18,000 irredeemable preference shares to one shareholder other than redeemable preference shares as on 6-8-1983. Subsequently, another 2,700 irredeemable preference shares other than redeemable preference shares came to be allotted to five shareholders on 14-12-1985. Section 80A came to be introduced by the Companies (Amendment) Act, 1988, with effect from 15-6-1988. The said section stipulated that all irredeemable preference shares should be redeemed by the company within a period not exceeding five years from the date of commencement of the Companies (Amendment) Act, 1988, and if such irredeemable shares which are not redeemable before the expiry of ten years from the date of issue thereon in accordance with the terms of such issue, and which have not been redeemed before such commencement, could be redeemed by the company on the date on which such share is due for redemption or within a period not exceeding ten years from the commencement of the Companies (Amendment) Act, 1988, whichever was earlier. Under the proviso to Sub-section (1) of Section 80A, it is stated that where a company is not in a position to redeem any such share within the period aforesaid and to pay the dividend, if any, due thereon, it may, with the consent of the Company Law Board, on a petition made by it in that behalf, issue further redeemable preference shares equal to the amounts due inclusive of the dividend thereon, in respect of the unredeemed preference shares. Having regard to the said amendment brought out in the year 1988, the appellant, after issuing the notice, calling for extraordinary general meeting, to all the equity shareholders as well as preference shareholders, convened a meeting for that purpose on 12-5-1993, for issuing necessary redeemable non-cumulative preference shares to the existing shareholders. The appellant after obtaining the consent from all the preference shareholders, passed necessary resolutions for the fresh issue of 12 per cent redeemable non-cumulative preference shares in lieu of the preference shares already held by the shareholders. Such resolutions came to be passed on 11 -5-1993 and 12-5-1993. Pursuant to the resolutions passed, the copies of Form No. 23 were also stated to have been filed with the Registrar of Companies. It is stated that when the annual reports for the year ended on 31-3-1993 and 31-3-1994, came to be finalised, the appellant was advised about the implication of the proviso to Section 80A of the Companies Act and in view of the same, an application came to be filed in March, 1995, before the Company Law Board seeking permission for the issuance of preference shares along with an application for condonation of delay in filing the application for permission belatedly. By the impugned order in this appeal, the Company Law Board rejected the petition for permission as well as the application for condonation of delay, which has necessitated the appellant to file the present appeal.

Mr. R. Venkataraman, learned Counsel appearing for the appellant in his submissions has referred to Section 204A, as it stood then, as well as Sections 295, 372(4) and 446(1) of the Companies Act and contended that under the Companies Act, wherever Parliament felt it necessary that any prior permission was mandatorily required, specific expressions were used in the relevant sections in order to make it abundantly clear that such prior permission or sanction should be obtained without any deviation, that even in respect of Section 446(1), wherein it is stipulated that in respect of a wound up company where no suit could be filed except by the leave of the court concerned, a Division Bench of this Court has held that such a consent can even be obtained after the filing of the suit. Reliance was placed upon the Division Bench decision in State Bank of India Vs. Official Liquidator, Straps (India) Private Ltd., . Learned Counsel further contended that going by the above referred to decision, as well as paragraph 17.13 of the report of the High Powered Expert Committee, which was the root cause for the insertion of Section 80A to the Companies Act, replacement of irredeemable preference shares to be made redeemable or with further issuance of redeemable preference shares being the object of the said provision, so long as the endeavour of the appellant was to fulfil the said objective, the Company Law Board ought not to have stood on technicalities in rejecting the appellant''s application for post-facto permission.

We also heard Mr. M.T. Arunan, learned Additional Central Government Standing Counsel appearing for the respondent. The learned standing counsel would, on the other hand, contend that when the proviso to Section 80A specifically stipulates that issuance of redeemable preference shares should be with the consent of the Company Law Board, the said provision will have to be strictly construed and the act of the appellant in not having applied for the prior consent cannot be condoned.

Having heard learned Counsel for the respective parties, we are of the view that proviso to Section 80A cannot be construed in such a strict manner as has been construed by the Company Law Board in the impugned order and as having contended by the learned Additional Central Government Standing Counsel. As rightly contended by Mr. Venkataraman, learned Counsel for the appellant, on a conjoint reading of Section 204A, as it stood prior to its deletion, as well as Sections 295, 372(4) and 446(1), in the proviso to Section 80A, the expression used is not so very stringent. To appreciate the contention, Section 80A(l) requires extraction, which reads as under:

Redemption of irredeemable preference shares, etc.-(1) Notwithstanding anything contained in the terms of issue of any preference shares, every preference share issued before the commencement of the Companies (Amendment) Act, 1988,-

(a) which is irredeemable, shall be redeemed by the company within a period not exceeding five years from such commencement, or

(b) which is not redeemable before the expiry of ten years from the date of issue thereon in accordance with the terms of its issue and which had not been redeemed before such commencement, shall be redeemed by the company on the date on which such share is due for redemption or within a period not exceeding ten years from such commencement, whichever is earlier:

Provided that, where a company is not in a position to redeem any such share within the period aforesaid and to pay the dividend, if any, due thereon (such shares being hereinafter referred to as unredeemed preference shares), it may, with the consent of the Company Law Board, on a petition made by it in this behalf and notwithstanding anything contained in this Act, issue further redeemable preference shares equal to the amounts due (including the dividend thereon), in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed shares shall be deemed to have been redeemed.

Similarly, Section 204A can also be extracted for making a comparison:

Restrictions on the appointment offormer managing agents or secretaries and treasurers of any office.-(1) Except with the previous approval of the-

(a) company in general meeting, and

(b) Central Government,

no company shall, during a period of five years from the commencement of the Companies (Amendment) Act, 1974, appoint as secretary, consultant or adviser or to any other office, by whatever name called,-....

On a comparative consideration of the above two provisions as well as Sections 295 and 372(4), we find that in the proviso to Section 80A, it is only stated that the consent of the Company Law Board for issuance of redeemable shares may be obtained by the company for such issuance. In the said proviso. Parliament has consciously omitted to use the expression "previous" or "prior" or "subject to consent". We are, therefore, convinced that while the consent of the Company Law Board may have to be obtained by a company, by virtue of the stipulations contained in Section 80A of the Companies Act, it cannot be held that such a consent should have been mandatorily obtained in advance, and in the absence of any such prior consent, any company can be wholly prevented from applying for such consent after the issuance of the redeemable preference shares. In this context, as rightly contended by learned Counsel for the appellant if such a strict construction is made, that would virtually defeat the very object and purpose for which the very amendment came to be introduced in the year 1988 by inserting Section 80A in the Companies Act. In this context, paragraph 17.13 of the report of the High Powered Expert Committee, which was the root cause for the insertion of Section 80A to the statute book needs reference. In the said paragraph, it has been stated as under:

17.13 ...At the same time, it was unanimously urged that the existence of irredeemable preference shares, was an anomaly as the shareholders are compelled to be satisfied with the amount of return which is totally unrealistic and unrelated to the prevailing circumstances. We find there is sufficient justification for such a complaint. There are also instances where the companies, even though the time for redemption had ripened, have not gone in for redemption but have extended the time by a further period. We are of the view that the continuance of irredeemable preference shares is not helpful to the investing class. We, therefore, suggest that all irredeemable preference shares will become redeemable at the end of five years from the date of the commencement of the new Act if they are not already made so redeemable, within the said period. However, a situation might arise where a company may have to redeem the existing redeemable preference shares as well as the existing non-redeemable preference snares within the period of five years. This would cast a heavy burden on the finances of the company. We, therefore, suggest that a provision should also be incorporated to the effect that in case a company is not in a position to effect redemption within the stipulated period of five years, the company should have the option to convert such irredeemable preference shares into redeemable preference shares. The period of redemption in such cases should not exceed twelve years and interest at a rate not less than ten per cent would be payable on such shares....

A reading of the said paragraph of the report thus suggests that it was in the interest of the holders of the irredeemable preference shares that Section 80A itself came to be introduced providing for the issuance of further redeemable shares to the value of the irredeemable preference shares already held by the shareholders. Therefore, such an issuance of the redeemable preference shares by a company, which came to be issued in the interest of the shareholders, cannot be defeated or its issuance be held to be in violation of Section 80A of the Companies Act by holding that such issuance came to be made without the previous consent of the Company Law Board. That apart, as rightly contended by learned Counsel for the appellant, when the expression used in the proviso to Section 80A merely states "may with the consent of the Company Law Board", it cannot be construed to mean that such stipulation should be construed as prior consent alone. In this context, the decision of the Division Bench in State Bank of India v. Official Liquidator, Straps (India) (P.) Ltd. [1979] 49 Comp. Cas. 514 (Mad.) fully supports the contention of learned Counsel for the appellant. The Division Bench dealt with Section 446(1)(a) wherein it is stipulated to the effect that "when a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator,...no suit or other legal proceeding shall be proceeded with or commenced against the company, except by leave of the court and subject to such terms as the court may impose". In interpreting the said set of expressions, the Division Bench has held as under:

Consequently, we hold that the application filed by the appellant herein for obtaining leave of the court for proceeding with the suit which it had already filed, namely, O.S. No. 233 of 1974, was competent and the court had the power to grant such leave so as to render the suit already filed effective from the date of such granting of leave.(p. 528)

Therefore, even in respect of the provision where it is provided that a launching of a suit in respect of a wound up company cannot be made except with the leave of the court, when it came to be interpreted that such consent can even be obtained after the filing of the suit, in the same analogy, we hold that the consent to be obtained under the proviso to Section 80A from the Company Law Board can equally be obtained after the issuance of the redeemable preference shares in lieu of the irredeemable preference shares already issued, so long as such issuance was bona fide and in order to fulfil the object and purpose of the amendment with which the said Section 80A came to be introduced.

Having regard to our abovesaid conclusions, we do not find any justification in the order impugned in this appeal. Therefore, while setting aside the order impugned, we direct the Company Law Board to restore the application to its file and issue appropriate orders granting permission in consonance with Section 80A of the Companies Act and the proviso contained therein. The civil miscellaneous appeal is allowed. We fix the fee of the learned standing counsel at a sum of Rs. 5,000.