S. Balasubramanian, Member

1. In this petition filed under the proviso to Section 80A(1) of the Companies Act, 1956, on October 30, 1992, the petitioner seeks consent of this Bench to issue further redeemable preference shares in lieu of the unredeemed preference shares.

2. The facts leading to the filing of this petition are that the petitioner issued two lots of preference shares on October 6, 1972, and January 8, 1973, consisting of 1,50,000 and 1,49,825 preference shares of Rs. 100 each respectively. The period of redemption was fifteen years and the shares carried a dividend of 9.5%. 52.70% of the total issue was held by the Karnataka State Co-operative Marketing Federation Limited (1,28,025 shares) and the Karnataka State Agro Industries Corporation Limited (30,000 shares), both Karnataka Government State Corporations. While other bodies corporate and financial institutions held 32%, the remaining 16% was held by the public as on September 16, 1992. These preference shares in accordance with the terms of issue should have been redeemed on or before October 5, 1987, and January 7, 1988, respectively. The petitioner-company extended the date of redemption by five years with the permission of the Controller of Capital Issues with an increased rate of dividend at 13%. Therefore, the preference shares in question were to be redeemed on or before October 5, 1992, and January 7, 1993, respectively.

3. The petition says that the petitioner has paid dividends up to the financial year 1988. Thereafter since the petitioner has not made any profits, no dividend has been declared either on the equity or on the preference shares.

4. The petitioner avers that the petitioner having got into difficult days made a reference to the Board for Industrial and Financial Reconstruction (BIFR) to declare the petitioner-company as a potentially sick company.

5. However, the BIFR by its order dated June 21, 1991, dropped the proceedings, holding that the petitioner was not a sick company and leaving the adoption of revival measures to the petitioner-companys financial institutions and the banks. Having incurred cash losses for several years, the petitioner could neither declare dividend nor redeem the preference shares in question. The accumulated losses as per the balance-sheet as at March 31, 1992, stood at Rs. 8,873.05 lakhs. There was change in the management in the year 1990, when the present management of U.B. Group stepped in. It is stated that the present management is trying its best to turn the petitioner around and, therefore, the petitioner is not in a position at present to repay the preference shareholders which are due for redemption in October, 1992, and January, 1993, aggregating to about Rs. 4,80,68,732 (rupees four crores eighty lakhs sixty-eight thousand seven hundred and thirty-two only).

6. In view of its inability to redeem the preference shares in question on the prescribed dates, the petitioners annual general meeting held on April 8, 1991, empowered the petitioners board to issue further redeemable preference shares in terms of Section 80A on such terms/conditions, as it deems fit subject to obtaining consent of this Bench.

7. The board of directors, in turn, authorised the managing director of the company to issue further redeemable preference shares in terms of Section 80A on such terms and conditions as he deems fit subject to obtaining the consent of this Bench. Accordingly, this Bench has been approached for its consent for the issue of 2,99,825 redeemable preference shares of Rs. 100 each to be redeemed after a period of 10 years from the due dates in place of the existing 2 lots of preference shares with the stipulation that the arrears of accrued dividend would be paid as premium at the time of redemption.

8. The petitioner contends that no permission or approval of the preference shareholders is necessary and, therefore, no class meeting of preference shareholders has been held. For this proposition, the petitioner relies on the Sachar Committees Report.

9. This petition was posted to February 3, 1993, when Shri S. Srinivasan, practising company secretary, was heard on behalf of the petitioner. As this Bench desired to ascertain the wishes of the major preference shareholders, the petitioner was directed to issue notices to them. Accordingly, the petitioner issued notices on February 18, 1993, to eight major preference shareholders holding in all 84.25 per cent. This includes two Karnataka Government Corporations holding 52.70 per cent. and the remaining six shareholders who are either insurance companies or financial institutions. Pursuant to the said notice only the Karnataka State Cooperative Marketing Federation Limited and the Karnataka Agro Industries Corporation Limited filed their objections dated March 12, 1993, and March 13, 1993, respectively, more or less on the same lines, seeking dismissal of the petition.

10. The objections summarised are (a) that Section 80A of the Companies Act, 1956, does not apply to the present case because Section 80A applies only to preference shares which are irredeemable or to preference shares which are redeemable after the expiry of 10 years. In the present case, as the preference shares were originally issued for fifteen years followed by five years extension, Section 80A does not cover these cases, (b) Request for extension of time by the petitioner-company amounts to breach of contract. In spite of five years extension, the petitioner has failed to honour its commitment. The objector corporations require funds badly for their own business. The U.B. Group which has taken over the petitioners management in September, 1990, being one of the leading groups in India with commanding financial resources, should not find it difficult to redeem the preference shares, (c) That it had not received any dividend since 1988 and, therefore, the petition be dismissed with direction to the petitioner to redeem the preference shares without any further delay.

11. The petition was subsequently heard on March 24, 1993, when Shri S. Srinivasan, practising company secretary, appeared for the petitioner while the objector, the Karnataka Agro Industries Corporation Limited, was represented by its Financial Adviser and Chief Accounts Officer, Shri J.N. Prasanna Kumar. Nobody appeared for the other objector.

12. I have considered the petition of the company, the affidavits filed by the objectors and the arguments of the representatives of all the parties.

13. The issues that emerge for decision are :

1. Whether the proviso to Section 80A applies to the facts of this case

2. Whether the consent of preference shareholders is necessary before the board decided to issue further preference shares in lieu of the old ones

3. Whether the facts and circumstances stated by the petitioner justify according consent by this Bench

14. Section 80A of thewas introduced and came into effect with effect from June 15, 1988. This amendment was the outcome of the recommendations made by the Sachar Committee in paragraphs 17.13--17.14 of its report. It is worthwhile to record certain observations of the Committee :

"... we would specifically mention that no consent of any class of members should be necessary for such conversion. Our recommendations regarding redemption should equally apply to the preference shares which are at present redeemable at the option of the company."

"... We would further suggest that when the time for redemption of preference shares comes, it should be incumbent upon the company to redeem all the shares in cash, excepting those specifically agreed to be renewed. Further, it should no longer be open to the company to take recourse to Section 106 or Section 391 to have an arrangement by a majority decision, subject to the confirmation of the court. This is to ensure that the existing irredeemable preference shares are redeemed within the five years or on the expiry of 12 years, as the case may be, after which such shares may be either renewed or paid off in cash to those who do not agree to renewal ..."

15. Clauses 12 to 14 of the Notes on Clauses (see [1987] 62 Comp Cas (St.) 81 at page 116) read as follows :

"... A new provision is sought to be introduced in the to ensure that alt existing preference shares which are irredeemable not earlier than ten years, ..."

16. It is also relevant to note that as per the provisions of Section 80A(b), the redeemable preference shares which are in currency at the time of commencement of Section 80A should be redeemed within a period of 10 years or as per the maturity date, whichever is earlier, and as per the proviso, the Company Law Board can notwithstanding anything contained in the, give its consent for extending the period of redemption by issue of fresh preference shares as per the provisions of this proviso.

17. According to the objectors, Section 80A should be read with Section 80(5A) and, therefore, Section 80A relates only to those shares which are irredeemable or which are redeemable after the expiry of 10 years from the date of issue and as such they are not applicable on the facts of the case to preference shares of this company. I am unable to agree with this contention for the simple reason that the provisions of Section 80(5A) are applicable to preference shares issued after the commencement of the Amendment Act on June 15, 1988, while Section 80A talks of issues made before the commencement of the Amendment Act. It is also amply clear from Section 80A(b) read with the proviso thereto that both the lots of preference shares issued by the company became due for redemption after the commencement of Section 80A and as, according to the company, it is not in a position to redeem the same, the company has a right to approach the Company Law Board as per the proviso to Section 80A as long as it is proved that the company is not in a position to redeem and pay the dividend within such period. Therefore, I do not sustain the objection of the objectors that the provisions of Section 80A are not applicable to the preference shares in issue in this case.

18. As far as the second issue, whether the consent of the preference shareholders is necessary, is concerned, as has been already pointed out, even the Sachar Committee did not consider the same necessary. While Section 80A makes it incumbent on the company to redeem preference shares as they become due, the proviso provides for extension by way of issue of fresh preference shares. The only condition is that the company should prove its inability to redeem the preference shares on the due dates. No other condition is attached. Therefore, I do not think that the consent of the preference shareholders is a pre-condition to this petition.

19. While that is the position of law, even otherwise on facts, the two objectors (the KSCMF and the KAIC) also hold 27,06,834 and 10,50,000 (Rs. 10 each) equity shares in the petitioners company. They never objected to the passing of the resolution on April 8, 1991, to issue fresh preference shares.

20. The rejoinder, in fact, says that the former corporation holding 42.70 per cent. of the preference shares in the petitioner-company was duly represented at the annual general meeting in its capacity as an equity shareholder and further approved the resolution. Therefore, they should be deemed to have known the financial position of the petitioner-company even in April, 1991. It is very pertinent to note from the petition that even though the petitioner was registered in the year 1966, it was incurring heavy losses even from the initial years. About 55 per cent. of the equity shares were held by the objectors and other financial institutions, the remaining 45% was held by others. In 1978, the financial institutions/banks came to the petitioners rescue and the petitioner was able to wipe off its losses only by 1985 and could declare its maiden dividend of 12 per cent. in 1986. It is mentioned that in the year 1986, the petitioner imported large quantities of fertilizers which piled up due to drought conditions prevailing in the country. Owing to prolonged storage, there was deterioration in the quality and, therefore, they had to be disposed of at uneconomical prices. Then between 1988 and 1990 there were labour unrest, plant breakdowns, water shortage in the summer, and non-availability of phosphoric acid. The cumulative effect was that the petitioner suffered heavy losses and finally the net worth of the petitioner got eroded. Then for revival of the petitioner, a rehabilitation scheme was drawn up with the financial assistance of the Industrial Development Bank of India, the State Bank of India, etc., in consultation with the Government of Karnataka including the objectors and with the consent of the BIFR, eventually resulting in the present management stepping in on September 27, 1990. It is in this situation that the petitioner which has been obliged to redeem the preference shares, is unable to do so.

21. The question that is to be considered is whether the company is bound to redeem the preference shares notwithstanding the financial position of the company as is evident from the recommendations of the Sachar Committee and also the Notes on Clauses. The very purpose of introduction of Section 80A is to ensure that all preference shares, whether redeemable or irredeemable, which were in existence on the commencement of the should be redeemed within such period as stipulated in the section itself. The proviso is only a saving clause to take care of instances where a company is not in a position to redeem any such shares within the period aforesaid and to pay the dividend. This proviso is a non obstante proviso to the effect that notwithstanding anything contained in the once the Company Law Board is satisfied that a company is unable to redeem its preference shares, the company can issue further redeemable preference shares in place of the existing preference shares. From the petition of the company it is clear that the financial position of the company is not sound and as a matter of fact a new group has already taken over the management of the company and even the proposal of the company to go in for a "rights issue" us indicated in its annual report for the year 1091-92 has not materialised due to uncertainty of the revival process started by the new group. The company in its annual report has highlighted the problems it is facing with regard to mobilisation of working capital and also the efforts taken in respect of the rehabilitation efforts.

22. Section 80A was inserted by the 1988 Amendment Act, which came into effect from June 15, 1988, enabling companies in financial distress, if they are unable to redeem such shares on the due dates, to issue further (fresh) preference shares in lieu of the old ones, with the consent of the Company Law Board. The power conferred on the Company Law Board under the proviso to Section 80A(1) is not only discretionary but also extraordinary and is intended to obviate hardship to companies which are in financial difficulties. The phrase "Notwithstanding anything contained in this Act" used in the proviso read with Sub-section (2) thereof is of great significance. They give absolute and unfettered powers to the Company Law Board in dealing with such cases.

23. Therefore, while exercising this discretionary power, the paramount consideration should be the interest of the company while the interest of all others is only secondary or subordinate.

24. I am convinced that the company has not been in a position to redeem the preference shares when they are due along with dividend thereon. Non-grant of some time for redemption of these preference shares and immediate payment thereon would, in my view, on the basis of the facts narrated in the petition and also as found in its annual report, affect drastically the financial position of the company and, therefore, I am inclined to give my consent to the prayer of the company for the issue of 2,99,825--13 per cent. redeemable preference shares, in place of the existing ones.

25. However, I do not consent to the latter part of the companys proposal for treating the dividend due as premium to be paid at the time of redemption. As per the proviso to Section 80A, the accumulated dividend is also to be converted into preference shares and the total number of preference shares should comprise the face value of the existing preference shares plus the accumulated dividend. I, therefore, considering the facts and circumstances of the case, give my consent to the issue of 2 lots of redeemable preference shares in place of the existing two lots of preference shares--the first lot being 1.5 lakhs of preference shares of Rs. 100 each plus such number of preference shares as may be necessary to cover arrears of unpaid accumulated dividends on the maturity date, i.e., October 5, 1992 ; and the second lot of 1,49,825 preference shares of Rs. 100 each plus such number of preference shares as may be necessary to cover arrears of unpaid accumulated dividends on the maturity date, i.e., January 7, 1993.

26. With regard to the period of redemption of the proposed shares, viz., ten years as prayed for by the company, having regard to all the facts and circumstances of the case and taking into consideration the oral submissions of Shri S. Srinivasan, as also the provisions of Section 80(5A) of the Act, I feel that a period of eight years from the due dates of redemption of the 2 lots should be sufficient.

27. Accordingly, these preference shares shall be redeemed not later than 8 years from the dates on which the earlier lots became due for redemption, i.e., October 5, 1992, and January 7, 1993, respectively. These redeemable preference shares will be issued within a period of three months from the date of receipt of this order and on issue of these preference shares, the earlier lots would be deemed to have been redeemed on the dates on which they became due for redemption.

28. In the result, the petition is allowed with the above directions.