- (1.) THE appeal No. 129 of 1958 is from an order sanctioning a scheme of arrangement under section 391 of the Indian Companies Act, 1956. The appeal No. 130 of 1958 is from an order confirming' reduction of capital. Both these orders were passed by Bose, J. The two appeals have been heard together. This judgment is intended to cover both the appeals.
(2.) THE respondent company is a public company limited by shares. It was incorporated in 1945 under the Indian Companies Act, 1913. The appellant holds 2000 preference shares in the share capital of the company. The authorised share capital of the company is Rs. 50. 00,000/- divided into 3,75. 000 ordinary shares of Rs. 10/- each, 10,000 5 per cent cumulative participating preference shares of Rs. 100/- each and 50,000 deferred shares of Rs. 5/- each. The memorandum of the company states that shares have the rights, privileges and conditions attached thereto as are provided by the regulations of the company for the time being with power to increase and reduce capital of the company and to attach thereto respectively such preferential, deferred, qualified or special rights or privileges or conditions as may be determined by or increased under the regulations of the company and to vary, modify or abrogate any such rights, privileges and conditions in such manner as may for the time being be provided by the regulations of the company. Article 74 authorises the company to reduce its capital by special resolution subject to confirmation by the Court. Article 8 contains a statement of the rights and privileges of the several classes of shares. The article is expressly subject to what is thereafter provided in other articles of the company. By article 8 the preferential shares have the right to a fixed cumulative preferential dividend of five per cent per annum (income-tax free) on the capital for the time being paid up on the shares and to extra non-cumulative dividend in certain contingencies, the total dividend in any year not to exceed 7 per cent. In winding up all the preferential shares are to rank in priority both as regards the return of capital and the payment of arrears of the 5 per cent preferential dividend. The total paid up capital of the company is Rs. 29,20,300. The paid up capital consists of 1,89,985 ordinary shares of Rs. 10/- each, 8,452 preference shares of Rs. 100/- each and 35,050 deferred shares of Rs. 5/- each all fully paid up. The main business of the company is the manufacture of Radios and Radiograms and house-hold electrical accessories. The company had always the benefit of technical collaboration with well-known foreign firms of repute. The company was however, never able to declare dividends. The 5 per cent. preferential cumulative dividend on the preference shares was not paid for 12 years since 1945 upto 1957. The company sustained heavy losses. The total loss upto the 31st July, 1956 amounts to Rs. 36,00,000/- In May, 1956 the company entered into an arrangement of technical collaboration with Messrs. Simplex Electric Company Ltd. , a well known company of electrical equipment manufacturers of Birmingham. This arrangement was approved of by the Government of India. For the purpose of maintaining and increasing its production further finance is necessary and for that purpose a presentable balance-sheet is essential. For the present Messrs Simplex Electric Co. Ltd. , has agreed to the arrangement only on a royalty basis. If the financial condition of the company improves, they will also partake in the capital of the company. The company had to incur various loans. A sum of Rs. 10,80,000/- is due to the industrial Finance Corporation of India on account of loans advanced by the Corporation. The loss from Messrs Karamchand Bros. Private Ltd. , the Managing Agents of the company stands at over Rs. 75,00,000/ -. The total dues of the Sundry creditors amount to Rs. 5,36,286/ -.
(3.) IN these circumstances, in January, 1957 the Board of Directors of the company proposed a scheme of arrangement between the several classes of shareholders and as part of the scheme a reduction of the capital of the company. The proposal for the scheme of arrangement was accompanied by an explanatory circular. The scheme, as originally proposed, provided for (a) cancellation of share capital in accordance with the arrangement detailed in the circular (b) for reduction of the share capital by cancellation of the paid up capital to the extent of Rs. 70/- for every preference share of Rs. 100/- each, to the extent of Rs. 8/- for every ordinary share of Rs. 10/- each and to the extent of Rs. 4/- each for every deferred share of Rs. 5/- each (c) for consolidation of the shares and for issue of fully paid up ordinary shares of Rs. 10/- each in lieu of preference, ordinary and deferred shares and for allotment of 3 fully paid up ordinary shares of Rs. 10/- each in lieu of one preference share of Rs. 100/- each including the arrears of dividend thereon (d) for reduction of the authorised capital of the company to Rs. 37,50,000/- divided into 3,75,000 ordinary shares of Rs. 10/- each (e) for further issue of Rs. 2,83,142/- ordinary shares of Rs. 10/- each subject to the sanction of the Controller of the Capital Issues out of which 1,20,000 ordinary shares are to be allotted to the Managing Agents cur their nominees in part satisfaction of their dues from the company to the extent of Rupees 12 lacs, 66,858 ordinary shares are to be offered to the existing shareholders of the company and the remaining 96,284 ordinary shares are to be disposed of by the Directors in such manner as they deem fit. The explanatory circular pointed out that by the proposed cancellation of capital a sum of Rs. 22,51,720/- would become available for wiping out the debit balance in the Profit and Loss Account and that on making such adjustment a sum of Rs. 13,48,280/- would remain to the debit of the Profit and Loss Account. The circular states that the Managing Agents had subject to the acceptance of the scheme, agreed to forego Rs. 13 lacs out of their advance to the company and to convert Rs. 12 lacs out of the balance of the advance into ordinary shares of the company. The circular added that the Managing Agents had not charged any interest on their advance since August, 1951 and had hereby foregone interests amounting to over Rs. 10- lacs and had also foregone their monthly allowance amounting to Rs. 3,75,000/ -.;