1. This is a petition by British India Corporation Ltd. under Section 80A of the Companies Act, 1956, seeking consent of the Company Law Board (i) to issue 8 per cent. (payable at 10.4 per cent.) cumulative redeemable preference shares in lieu of the existing 81,000 cumulative irredeemable preference shares ; and (ii) to allow the company for continuance of accumulation of arrears of dividend on the existing irredeemable cumulative preference shares as hitherto before.
2. It is stated that the petitioner-company was incorporated on February 24, 1920, as a Government company within the meaning of Section 617 of the Companies Act. The President of India holds shares to the extent of 97.47 per cent. of the equity share capital and the remaining 2.53 per cent. shares are held by the Life Insurance Corporation of India, the Unit Trust of India, nationalised banks and insurance companies. As it is a very old company, it is not possible to trace the papers relating to the issue. The terms and conditions of issue of these shares cannot be known. However, there is no provision in the memorandum of association of the company for redemption of preference shares and as such the aforesaid preference shares are irredeemable. By virtue of the provisions of Section 80A of the Companies Act, introduced with effect from June 15, 1988, 81,000--8 per cent. cumulative irredeemable preference shares of Rs. 100 each fully paid up have to be redeemed on or before June 14, 1993. The financial position of the petitioner-company is such that it is not possible for it to redeem the aforesaid cumulative preference shares and to pay the dividend remaining in arrear thereon on or before June 14, 1993. As per the balance-sheet as on March 31, 1992, the company suffered losses to the extent of Rs. 2,407.91 lakhs and the company has become a "sick industrial company" within the meaning of Section 3 read with Section 15 of the Sick Industrial Companies (Special Provisions) Act and its application to the Board for Industrial and Financial Reconstruction is under consideration. The shareholders of the company, therefore, at the extraordinary general meeting held on April 26, 1993, resolved that subject to the consent of the Company Law Board, new redeemable preference shares be issued to the holders of the existing 81,000-8 per cent. (payable at 10.4 per cent.) cumulative preference shares of Rs. 100 each or such other number as may be directed by the Company Law Board which the board of directors of the company is hereby authorised to issue, redeemable at par on June 14, 2003, or on such earlier date as may be decided later by the board in accordance with the provisions of the Companies Act, 1956, and as a consequence of which the said irredeemable preference shares shall be deemed to have been redeemed by the issue of fresh redeemable preference shares.
3. During the hearing, the authorised representative of the company submitted that though the consent of the President of India and other financial institutions has been obtained through their representatives having been present at the extraordinary general meeting held on April 26, 1993, the representative of the Life Insurance Corporation and the Unit Trust of India proposed that the resolution be amended to include the following : (i) the new issue of preference shares shall be for an amount equal to the face value of preference shares plus accrued unpaid dividends thereon up to June 14, 1993, and (ii) the new dividend rate shall not be less than the current ceiling rate for preference dividend, i.e., 14 per cent.
4. He further stated that in the petitioner's balance-sheet in note 10 of the contingent liabilities, it is stated as under : "Dividend on 8 per cent. cumulative preference shares at 10.4 per cent. (subject to deduction of income-tax) from the year 1973 to 1991-92 amounting to Rs. 16,2.16 lakhs (last year Rs. 153.74 lakhs).
The said liability up to June 14, 1993, would amount to Rs. 253.31 lakhs on account of redemption of preference shares and Rs. 172.31 lakhs on account of dividend." 5. It was contended that many companies/professionals concerned with these provisions have a view that the new redeemable preference shares should be issued equal to the nominal amount of the old preference shares and the dividend thereon (in respect of cumulative preference shares) which has not been declared but is in arrear and is shown as contingent liability in the company's balance-sheet should be continued as such. A similar view has also been expressed by the Expert Advisory Committee of the Institute of Chartered Accountants of India in their official journal in May, 1992, on pages 954-955. The interpretation for converting arrear of dividend which is not due and is only a contingent liability does not only appear not in accordance with the spirit and letter of the Act but is not capable of being followed. The petitioner-company, therefore, has prayed to continue to allow the said company to continue accumulation of arrears of dividend on the existing irredeemable cumulative preference shares as hitherto before. The authorised representative also submitted that the Sachar Committee on Companies and Monopolies and Restrictive Trade Practices Acts in its report has, inter alia, recommended that "in case a company is not in a position to effect redemption within a 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." 6. In the Companies (Amendment) Bill, 1987, the relevant portion of which is the same as the Act as passed, in the Notes on Clauses, on this clause it has been stated, inter alia, "it is also sought to be provided that irredeemable preference shares can be redeemed by issue of redeemable preference shades with the approval of the Company Law Board". Such notes are silent on the conversion of arrear of dividend which has not been declared and which is only a contingent liability and is not due.
7. The submissions made on behalf of the petitioner were carefully considered.
(i) The purpose of a non obstante clause is to give the enacting part of the section in case of conflict an overriding effect over the provision or Act mentioned in the non obstante clause. It is equivalent to saying that "in spite of the provision of the Act mentioned in the non obstante clause the enactment following it will have its full operation or that the provisions embraced in the non obstante clause will not be an impediment in the operation of the enactment" (South India Corporation (P) Ltd. v. Secretary, Board of Revenue, Trivandrum. AIR 1964 SC 207). The presence of a non obstante clause is noticeable in the proviso to Section 80A(1) which qualifies not only the issue of further shares but also the value of the further shares that is including the dividend. This clause, therefore, overrides the provision under Sections 81(1A) and 205(1).
The contention of the petitioner is that the word "due" has to be given its meaning as per accounting principles. This contention does not appear to be sustain-able in view of the opinion of the Expert Advisory Committee of the Institute of Chartered Accountants cited by the petitioners. According to the Committee, "the aforesaid section clearly mentions that the preference shares may be issued to cover the arrears of preference dividend also. The Committee notes that the liability for arrear of dividend on old preference shares has crystallised due to operation of law".
(ii) Section 80A was introduced by the Companies (Amendment) Act of 1988. This amendment was introduced to rectify a situation which was not in the interest of the investors. When there is an amendment to rectify a situation, in interpreting the amendment, the rule in Heydon's case [1584] 3 Co Rep 7a, 7b applies. Accordingly, in the absence of the amendment, if the preference shares used to be renewed when they become due, the arrears of cumulative dividend entitlement used to be continued. By complying with the provisions of the Amendment Act, it would be against the purpose of the amendment to disentitle the shareholders to the dividend.
(iii) The company has contended that the arrears of dividend would be continued as dividend liability. This argument is not acceptable ; since the shares are already redeemed, no further claim on those shares could be continued. The shares in question are in the nature of cumulative preference shares. Accordingly, the entitlement to dividend accumulates and cannot be denied to those shareholders.
(iv) By inclusion of the dividend in the new preference shares no priority is given to the dividend over and above the creditors, because ultimately the redemption of the new preference shares even in case of a winding up can be done only after settlement of other liabilities. The provision only envisages inclusion of dividend in the face value of the preference shares rather than its remaining as a contingent liability.
8. The amendment has struck a via media between total denial of the dividend and the immediate payment in cash overlooking the interest of creditors. By this process, a solution is sought to be arrived at to the long outstanding preference shares whether redeemable or irredeemable. At the same time the possible inability of a company to meet the financial commitment is also kept in view.
9. The Bench is also satisfied on scrutiny of the balance-sheet that the company was not in a position to redeem the preference shares and pay the dividend due to accumulated losses of Rs. 2,407.91 lakhs.
(i) The company may issue with effect from June 15, 1993, further redeemable preference shares equal to the amount due (including arrears of dividend) in lieu of 81,000--8 per cent. cumulative preference shares issued by the company in 1920. Fractions shall be suitably dealt with by the company.
(ii) The further redeemable preference shares shall carry a dividend of 14 per cent. with effect from June 14, 1993, per annum and shall be redeemed at the discretion of the board of directors on June 14, 2003, or on such earlier date as may be decided by the board in accordance with the provisions of the Companies Act, 1956.
(iii) The company shall make the above issue within sixty days of the receipt of a copy of this order and shall comply with the necessary provisions of the Companies Act, consequent to the allotment. The company is at liberty to deal with fractions only.
10. The above order is without prejudice to any approval/consent which may be required to be obtained by the company under the provisions of any other enactment.
11. A copy of this order shall be sent to the Registrar of Companies for his information.