H.K. Bose, J.
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:
(i)1,89,985 Ordinary shares of Rs. 10/- each...Rs. 18,99,850/-(ii)8452 preference shares of Rs. 100/- each...Rs. 8,45,200/-(iii)35,050 deferred shares of Rs. 5/- each...Rs. 1,75,250/-
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 explanatory note was sent to each shareholder setting out the circumstances under which it became necessary to reduce the capital and to formulate the scheme of reorganisation and consolidation of the share capital. The company has made a separate application for sanction of the scheme which has also been heard along with this application. It is alleged in the petition that the Company has no debenture-holders but besides the creditors Karamchand Thappar and Bros., who are the Managing Agents, and the Industrial Finance Corporation, it has sundry creditors to the extent of Rs. 5,36,286/-. Although Muilick J. dispensed with the list of creditors, mis Court directed individual notice to be served on the Industrial Finance Corporation and it also directed advertisement to be issued in order to enable any creditor to oppose this application, if any creditor might be advised to do so. But none of the creditors have appeared to oppose this application and the Industrial Finance Corporation has also intimated in writing that they have no objection to the reduction of capital being confirmed or the scheme being sanctioned by this Court. Only one preference shareholder, Hindusthan Commercial Bank Ltd., which holds 2000 preference shares has opposed this application. It may be pointed out that the representative of this Hindusthan Commercial Bank Ltd. had taken part in the general meeting of the share-holders which was held on 14-2-1957 and this shareholder along with another preference shareholder, one Mr. Abdulla, who held 100 Preference shares in the company recorded their objection to some of the resolutions which had been passed at such meeting.
4. The first contention that has been raised by Mr. A. C. Mitter, learned counsel for the Hindusthan Commercial Bank Ltd., is that as the case of the petitioner is that the entire paid up capital is lost and is unrepresented by available assets, this application for confirmation or reduction is not maintainable. It is argued that if there is no paid up capital existing, no question of any reduction of capital can arise. It is only when a part of the capital is gone and a part is existing that there can be scope for reduction of capital. Mr. Mitter has relied on illustration (g) given in Palmer's Company Precedents, 17th Edition, Part 1, page 999, which is as follows:
'Lost capital. Cancelling capital which has been lost or is unrepresented by available assets. This is one of the commonest mode of reduction. A company whose capital amounts to ,1,00,000 in 1 shares, has lost, say, 50,000 by continued adversity or by some business disaster. In such case where a company has losti part of its capital, nothing, as Sir George Jessel said, can be more beneficial to the company than to admit the loss and to write it off, e.g. to reduce its 1 share to 10sh. and thus place itself in a position to resume payment of dividends or raise further capital.'
5. Mr. Mitter has also referred to the case of In re Eddw Vale Steel, Iron and Coal Co., (1877) 4 Ch D 827 and he has drawn the particular attention of the Court to an observation at p. 831 of Jessel, M. R. made in the course of argument which is as follows:
'You do not 'reduce' capital which has been already paid up and exhausted.'
This observation is however to be read and understood in the context in which it was made. It is to be pointed out that in the present case the reduction sought is part of a scheme of reorganisation of the snare capital and since the capital structure is being reorganised it is immaterial whether the whole paid up capital' is lost or not. Mr. Palmer has himself pointed out in illustration (q) at page 1000 that one of the types of reduction which is commonly adopted is by the cancellation of all the share capital as part of a scheme of arrangement. The learned author has referred to the case of In re Acme Spinning Co. Ltd.; In re Amalgamated Cotton Mills Trust Ltd., (1837) 81 Sol. J. 922, in support of his proposition set out in illustration (q). In this case reported in the Solicitor's Journal, upon a revaluation of the assets of Amalgamated Cotton Mills Trust Ltd., there appeared a deficiency of over 8,530,000 exceeding the issued share capital of 7,250,000 by over 1,280.000. A scheme of arrangement of an exceedingly complicated character was presented for sanction of the Court and for the confirmation of the reduction of capital.
6. It was proposed to write off the deficiency and reorganise the capital by cancelling the whole of 'the issued share capital and then creating and issuing fresh loan capital of about 1030000/- and share capital of about Rs. 1260000/-. Simonds J. sanctioned the scheme and confirmed the reduction subject to certain modifications.
7. Mr. Mitter has submitted that if in the case before me there had been only one application for sanction of the scheme of reorganisation and confirmation of the reduction of capital, the Court could treat the matter of reduction as part of the scheme of reorganisation. But here two separate and distinct applications for reduction and sanction of scheme have been made and so the position is different. I do not think that this is a correct assessment of the true position. The matter of reduction of capital and that of the sanction of the scheme of reorganisation are part of one arrangement or scheme. One cannot be dissociated or isolated from the other. Moreover, there is no hard and fast rule that one application has to be made for sanction of the scheme and for confirmation of the reduction if they are to be regarded as integral part of one arrangement In some cases two separate applications are made to make the proceeding less cumbrous. See observations in In re Indian National Bank Ltd., 53 Cal WN 207 and In re Bharati Central Bank Ltd., 53 Cal WN 239 in this connection. As to what is the practice which is followed while reduction of capital forms part of a scheme of reorganisation is pointed out in the case of In re Australian Estates and Mortgage Co., (1910) 1 Ch. 414 at p. 425. This first contention of Mr. Mitter must therefore fail.
8. The second contention raised by Mr. Mitter is that as the proposed reduction has the effect of varying and affecting the rights of his client as a preference share-holder, the proposal for reduction must have to be sanctioned by a resolution passed at a separate meeting of the holders of the preference shares and three-fourths of the preference share-holders must vote in favour of such resolution as required by Section 106 of the Indian Companies Act, 1956, and since 'that has not been done in this case, the Court cannot confirm the proposal for reduction. Mr. Mitter has argued that the resolution which was passed on 14-2-1957 reduces the nominal value of the preference share to Rs. 30/- from Rs. 100 and consequently reduces the quantum of the dividend. It is also pointed out that twelve years arrears of dividends were due to these preference share-holders and this right to get the arrears has also been taken away by one of the resolutions which was passed on 14-2-1957. It is further pointed out by Mr. Mitter that what is more is that the preference shares have been extinguished altogether as a result of another resolution passed on the same date and all the shares of the company were converted into ordinary shares. Accordingly, Mr. Mitter has submitted that as there has been a variation of these vital rights of the preference share-holders, the requirements of Section 106 should have been followed, before this Court could be approached for confirming the reduction. Mr. Mitter has placed reliance on the case reported in (1954) 1 Ch 169 in support of his argument, at pages 181, 185 and 195 (last paragraphs).
9. Now it appears that although by one of the resolutions passed at the meeting of 14-2-1957 it was resolved to extinguish the preference shares altogether, this resolution has in fact been superseded by another resolution passed at the meeting of the different classes of share-holders which were held under the direction of this Court on 11-12-1957. By the said subsequent resolution the preference shares have been preserved to a certain extenti. Then, again, it appears that although the right to arrears of dividend is purported to be given up by the preference share-holders the preference shareholders have been given compensation by way of reducing the nominal amount of their shares by only 70 per cent whereas in the case of ordinary and deferred shares the nominal value of the shares is reduced by 80 per cent.
10. Mr. Chaudhury, the learned counsel for the petitioner, has pointed out that this difference of 10 per cent in the reduction of the nominal value between the preference share-holders on the one hand, and the deferred and ordinary shareholders on the other, was made in order to cover the amount of arrears of dividend which was due to the preference share-holders for 12 years in some cases and for 8 years in other cases. It further appears from the scheme of reorganisation which was sanctioned in the class meetings held on 11-12-1957 that the preference share-holders have been given a higher rate of dividend of 7 per cent, in respect of their shares of the face value of Rs. 30/- each. So some of the supposed variations are not real. The only question which is to be considered is whether the reduction of the nominal value with consequent reduction of the quantum of dividend amounts to variation of the rights which require sanction of a resolution as contemplated in Section 106 of the Indian Companies Act, 1956. I do not think so. Article 74 of the Articles of Association of the company authorises the company to reduce its share capital and it is as follows:
'The company may, subject to confirmation by the Court from time to time, by special resolution reduce its capital by paying off capital or cancelling capital which has been lost or is unrepresented by available assets or reducing the liability on the shares or otherwise as may seem expedient and capital may be paid off upon the tooting that) it may be called up again or otherwise and paid up capital may be cancelled as aforesaid without reducing the nominal amount of the shares by the like amount to the extent that the unpaid and callable capital shall be increased by the like amount.'
11. Article 8 of the Articles of Association which deals with the rights of the preference shareholders and other shareholders is subject to Article 74 which I have quoted above. In the case of In re Mackenzie and Co. Ltd., (1916) 2 Ch. 450, it was held that an all-round reduction is not necessarily a modification of the rights of preference shareholders so as to require their sanction under an ordinary Modification of Rights clause. Astbury J. made the following observations at p. 457:
'It is first contended that the company has no power to reduce its capital, if any of the preference shares are included in the reduction, without the consent of the holders of two-thirds or the issued shares of that class. I do not think that is the right construction of these articles. The fair and proper construction is that the special rights, privileges and advantages of the preference shareholders are those, and those only, stated in Article 62 which is confined to the right to a cumulative preferential dividend on the nominal amount of capital from time to time paid up or credited as paid up, and that is without prejudice to the right of the company, under Article 59, to reduce its capital in any manner authorised by statute, provided that the reduction obtains the sanction of the Court.'
12. Preference share-holders in the case before me have under the articles only a right to preferential dividend and they have also a right to priority as to capital in a winding up. What is being done by the process of reduction is that only the nominal value of the shares is being reduced and there is necessarily a diminution of the quantum of the dividend. But these preference shareholders have suffered rate able reduction along with the ordinary and deferred shareholders of this company and as under Article 74 of the Articles of Association the company has power to reduce its capital, it cannot be said that there has been any unfair dealing with these preference shareholders or any right attached to the preference shares has suffered variation or has been interfered with in any unlawful manner.
13. The word 'variation' has been defined in Section 2, Clause 50 of the Act of 1956 thus: 'Variation' shall include 'abrogation,' and 'vary' shall include 'abrogate.'
14. The question, however, is whether any modification of the nominal value together with the quantum of the dividend is a variation of a right of the preference share-holders. As I have pointed out already with reference to the case reported in. 1916-2 Ch. 450, any affecting of the right does not come within the ambit of the article dealing with the Modification of Rights clause. If may also be pointed out that in the case of White v. Bristol Aeroplane Co., (1953) 1 All ER 40 at pages 44, 45, Sir Raymond Eversehd M. R. following the principle in 1916-2 Ch. 450, observed that there is a sensible distinction between an affecting of the rights and an affecting of the enjoyment of the right (p. 44). In this English case, Article 68 contained the Modification of Rights clause. The learned Master of the Rolls remarked as follows:
'Without going into too much detail I cannot make those provisions consistent with the view that any variation which in any manner touches or affects the value of the preference stock or the character or enjoyment of any of the holders' privileges is within the contemplation of Article 68.'
15. Mr. Mitter in course of his argument in reply raised a new point to the effect that not only the nominal value and the quantum of the dividend is affected but the right to vote which accrued to his client under Section 87 of the Indian Companies Act, 1956, by reason of two years' dividend falling into arrears, is also affected or varied by the scheme of reorganisation and by the reduction. I do not think that this contention of Mr. Mitter is of any substance. The right to vote which is alleged to be given to the preference share-holder under Section 87 of the new Act of 1956 has not been touched at all. It remains absolutely unaffected. The past arrears of dividend are wiped out in consideration of the preference shareholders being given 10 per cent more on the face value of their snares which, as has been pointed out by Mr. Chaudhury, covers all arrears of dividend due to the preference shareholders. The preference shareholders can exercise this right of voting alleged to be conferred on them by Section 87, in future, if two years dividend fall due in future. In my view the giving up of arrears of dividend under an arrangement entered into between the shareholders of the company does not amount to variation of rights attached to the shares. It appears to me however that this argument of Mr. Mitter about the preference shareholders in this case having this right of voting based on two years dividends being in arrears, and about the variation of such right by the arrears being wiped out, is based on a misconception. Because the preference shareholders of this Company whose shares were issued before the commencement of the Act of 1956 have not this right of voting based on arrears of two years dividend, as conferred by Section 87 of the Act of 1956. Section 90 of the Act of 1956 makes Section 87 inapplicable to shares issued before the commencement of the Act of 1956. So if these preference shareholders had no voting right as contemplated by Section 87 there cannot be any question of any variation of such right. Moreover, as has been rightly pointed Out by Mr. Chaudhury, Section 106 of the Indian Companies Act or the Article which deals with the Modification of Rights clause, applies to cases when modification or variation is made without the intervention of the Court. But when modification of class rights is sought to be made through the intervention of the Court under Section 391 of the Act of 1956 (section 153 of the Act of 1913), such variation or modification can be achieved by going through the procedure prescribed in Section 391. In other words, if separate class meetings as envisaged in Section 391 of the Act are held, that is enough. It is not necessary to have recourse to Section 106 of the Act of 1956 or the Modification of Rights clause in the Articles, because such modification is a part of the scheme of arrangement or reorganisation which is dealt with in Section 391 of the Act, and is made with the sanction of the Court.
16. Furthermore, it is to be pointed out the Modification of the Rights clause in the present case (Article 77A) has the standard saving clause, at the end, to the following effect:
'This Article is not to derogate from any power the Company would have had if this Article were omitted.'
(See also Palmer's Precedents, 17th Edition, Vol. 1, page 409 and notes, 3rd paragraph, and pp. 780-781. See also Gore Brown's Company Law, page 27).
17. It is clear, therefore, that the company's power to enter into an arrangement and to reduce the capital as part of such scheme of arrangement is preserved and is not affected by the Modification of Rights clause.
18. It was argued by Mr. Mitter that while dealing with the application for confirmation of reduction the Court is not entitled to take into consideration the application for sanction of scheme and the events that nave happened in relation thereto. But it has been pointed out by Palmer's Precedents, 17th Edition, Vol. 1, p. 998, that
'where the reduction forms part of a scheme of reorganisation the Court is bound to consider the whole scheme so as to ensure that the reduction is a proper one to confirm. Whether such a scheme of reorganisation can be effected depends upon the Memorandum and Articles of Association of the Company and where necessary it may have to be effected by a scheme of arrangement under Section 206; in this case the reduction will form part of the scheme and will be confirmed at the same time as the scheme is confirmed.'
Therefore, there is no substance in this second point of Mr. Mitter.
19. The next point that has been argued by Mr. Mitter is that the resolution which authorised the issue of new shares as a result of the scheme of arrangement and reduction and which empowers the Directors to allot 1,20,000 shares to the Managing Agents is ultra vires as it contravenes Section 81(1)(a) of the Act of 1956. Mr. Mitter argues that the Company has no power to direct allotment of new shares to any person other than the equity shareholders. Without going into the previous history of this section and without entering into a discussion of the effect of the conflicting judicial decisions on the point, it may be stated that what the section means is that if the company at a general meeting resolves that the newly issued shares can be allotted to persons other than the equity shareholders, such decision will prevail and will be a valid decision. But in the absence of any specific direction, the terms of the section should be followed. The words 'contrary to' mean contrary to what is laid down in the section. This appears to me to be the plain meaning of the section and therefore there is no force in this point of Mr. Mitter.
20. The last point of Mr. Mitter is that although the application for confirmation of reduction is based on the allegation of loss of capital which is unrepresented by available assets, there is no evidence or proof of loss given by the petitioner before the Court and so this application cannot succeed. Mr. Mitter relies on In re Barrow Hematite Steel Co., (1901) 2 Ch 746; Caldwell v. Caldwell and Co., 1916 WN 70 and Marwari Stores Ltd. v. Gouri Shanker Goenka : AIR1936Cal327 . In the last mentioned case which is a decision of Costello, J. and Panckridge J., Costello, J., after quoting 1916 WN 70, observed:
'I have no doubt in the proposition that where a reduction of capital is based on ground that capital has been lost or unrepresented by available assets, it is always prudent to proceed on evidence. That is a sound procedure and one which should ordinarily be acted upon. In the present instance, we are not however called upon to lay down any general principle with regard to that particular point, because there is clear evidence in this case of Marwari Stores Ltd. that there had in fact been a loss of capital (page 665).
21. The evidence that was before the Court, in that case, of loss, was the affidavit of the Managing Director. There was reference to the balance sheets for certain years in paragraph 8 of the petition which referred to loss incurred in the years 1922, 1923 and 1924. There was evasive denial of this paragraph 8 of the petition in paragraph 3 of the affidavit in opposition of the shareholder who opposed the application.
22. In the case before me there is the affidavit of the Director who has supported the petition. The balance sheets of the years 1946, 1947, 1948 1949, 1950, 1951, 1952, 1953, 1954, 1955 and 1956 have been produced before the Court and they show how the loss has progressively increased from 1948 and came to the figure of Rs. 36,857/- and odd in the year 1956. These balance sheets have been placed year after year before the shareholders in general meetings and they have been passed without anyobjection. The Hindusthan Commercial Bank, which is a shareholder also, does not appear to have objected to the correctness of these balance sheets at any point of time. A detailed explanatory note was also circulated at all the meetings and was available to the shareholders. Attempt was made to give the shareholders a graphic picture of the position of the company during the past years. There is no question therefore of the shareholders being influenced by any mistake or misrepresentation in the matter of voting in favour of the reduction of capital and the scheme of reorganisation. None except the Hidusthan Commercial Bank has appeared to oppose the application. In their affidavit in opposition, paragraph 11, they only require proof of loss and suggest that an investigation should be made but they have not placed any materials before the Court making out any ground or case for investigation. I am satisfied that there is prima facie evidence of loss before the Court and the evidence is sufficient to justify an order in favour of reduction. See in this connection In the matter of Bengal-Burma Steam Navigation Co. Ltd., AIR 1939 Rang 417 at pp. 419, 420.
23. It has been 'suggested that the application is not bona fide and it is really made in the interest of Karamchand Thappar and Co. and its group whose inefficiency in the management has brought the Company to this state of insolvency. It is suggested that the application is really for their benefit and it is not in the interest of the company or the public. I do not think that there is any force in this suggestion. It is true that as a result of the sanctioning of the reduction and of the scheme, the Managing Agents will get 12 lakhs worth of newly issued ordinary shares allotted to them and they will acquire a majority control over the Company. But it is to be remembered that but for their financial assistance the Company would not have been able to drag on its existence up to the present day. Moreover, the Managing Agents have by their counsel and also in their affidavit undertaken or agreed to forego Rs. 13,00,000/- of their claim and they are also willing to pay the entire dues of the sundry creditors in case the reduction of capital is confirmed by this Court and the scheme goes through. This is not a consideration which can be easily brushed aside. If the company is forced to go into liquidation now the Industrial Finance Corporation and the Managing Agents and other creditors will swallow up all the assets towards satisfaction of their claims. The shareholders will not get any benefit in the event of a winding up. It is true, that if the scheme is sanctioned, the Managing Agents will again come into power, but it is to be remembered that there is also the nominee of the Industrial Finance Corporation who is a member in the Board of Directors, and who is watching the activities of the Company and also the interest of the Corporation. It appears to me that to kill a company engaged in the industry with which this company is concerned at a time when the country needs encouragement of such industry is far from desirable and, in my opinion, opportunity should be given to this Company to resuscitate in the interest of the shareholders of the company and in the interest of the public.
24. There will, therefore, be an order in termsof prayer (a) and prayer (c) of the petition. Thecosts of the petitioner and of the opposing shareholder Hindusthan Commercial Bank, will comeout of the assets of the Company. Certified forcounsel. The operation of the order is stayed forthree weeks.