Case: Aditya Prakash Entertainment Private Limited Vs. Magikwand Media Private Limited

1. The petition has been filed by petitioner for winding up of theMedia Ltd. (the company). Though in the cause title, it is mentioned, In the matter of Section 433(f) and 434 of the Companies Act, Shri Arsiwala appearing for petitioner started by saying it is under Section 433(e), namely, the company is unable to pay its debt.2. Petitioner had subscribed and had issued 1,00,078, 6% noncumulative optionally convertible redeemable preference shares of Rs. 10/each. As a shareholder, for each financial year, petitioner was entitled to noncumulative preferential dividend of 6%. Preference shares issued was with a conversion option under which petitioner could, in lieu of redemption, exercise the option for conversion of preference shares into equity shares between 1st October 2014 to 31st December 2014 in one or more tranche by giving prior notice to the company of not less than 60 days in writing. One preference share is to be converted into ten equity shares of Rs.10/each. The Board also had option to convert the preference shares partly or fully in equity shares of the company with the consent of the petitioner on mutually agreed terms and conditions even before 1st October 2014. Redemption schedule was also provided whereby Rs.30/per share was to be paid out on 28th February 2015, Rs.35/per share on 28th February 2016, Rs. 35/per share on 28th February 2017. Admittedly, petitioner did not exercise its option to convert the preference shares into equity shares and admittedly, the company also did not exercise its option to convert preference shares partly or fully into equity shares.3. At no point, the company declared any dividend even to the equity shareholders or preferential shareholders. At the time when this petition came to be filed, only the first redemption had become become finally due, i.e., redemption due on 28th February 2015 at Rs. 30/per share. During the pendency of this petition, the other two installments have also fallen due. Effectively, the entire amount of Rs.1,00,07,800/has become due and payable.

Court's reasoning:
11. Share capital, then, is the amount contributed by the shareholders to the companys resources. The money with which the contribution is made becomes the companys property forthwith, but the company does not become the shareholders debtor for its repayment. The shareholder has a number of contractual and statutory rights against the company, among which are a right to share in its assets when it is wound up, and a right to receive dividends out of its profits when duly declared in accordance with the articles and it is primarily these two rights which give his shares a value, and make them saleable." (Pagescapital or share capital, the expression loan capital is not a legal term of art, but a commercial expression used to indicate the total amount borrowed by a company otherwise than by short and medium term borrowing. Loan capital will be represented by mortgages, debentures and loan stock, and the law relating to these securities, which is vastly different from that relating to share capital, will be dealt with in Chapter 12. Loan capital appears on the liabilities side of the companys balance sheet beneath share capital and reserves, but unlike share capital, it does represent indebtedness by the company, and holders of loan capital have the remedies of creditors to recover what the company owes them." (Page 164.)12. Consequently, when the date for the redemption of redeemable preference shares has passed, their holders cannot sue the company for the repayment of their capital as creditors though they may petition for the winding up of the company as shareholders."13. On a consideration of the provisions of the Companies Act, 1956, as also similar provisions in the English company law we cannot persuade ourselves to accept the contentions of the assessee and hold that when a company issues redeemable preference shares it is in fact obtaining a loan as it could by issuing debentures. There is a fundamental difference between the capital made available to a company by issue of a share and money obtained by a company under a loan or a debenture. Respective incidences and consequences of issuing a share and borrowing money on loan or on a debenture are different and distinctive. Aas a creditor has a right to sue the company, whereas a shareholder has no such right. Apart from that the scheme of the Companies Act and in particular the forms and contents of itsare extremely rigid and, in our view, by reason of the specific compartments in such accounts it is not possible to convert an item of capital into an item of loan as has been suggested on behalf of the assessee.(emphasis supplied)11. The Division Bench of Delhi High Court in National Cooperative Development Corporation (supra), while considering appeal filed under Section 260(A) of the Income Tax of Delhi, 1981, approved finding of the Gujarat High Court. If a company defaults in redeeming the preference shares by the date fixed for redemption, the holder thereof cannot compel it to do so by suing in debt for the return of his capital or by filing for a mandatory injunction.Paragraph 10 reads as under :10. We may also refer to a judgment of the Gujarat High Court in Anarkali Sarabhai v. CIT Gujarat [1982] 138 ITR 437.   That case arose under the Income Tax Act and the question was whether the assessee was liable to pay capital gains tax on receipt of an amount equal to the face value of the preference shares when the company redeem them. The assessee received from the company an amount which exceeded the amount which he had paid for these shares. In deciding this question the Gujarat High Court had to examine the nature of redeemable preference shares issued by a company. The Court referred to Palmers Company Law (page 356, paragraph 1, 22nd Edition) wherein it was observed that "from the financial point of view, redeemable preference shares are a hybrid form of shares and debentures, incorporating features of both, and ITA Nos.512/2011, 513/2011, 810/2011, being closer to the latter than other preference shares, but from the legal point of view they are shares and are treated as such". The Court further noted the view of the learned author in Penningtons Company Law, 4 th Edition, page 195 that if redemption of the petitioners shares would make a company insolvent, it may not be allowed to redeem those shares because repayment of preference capital would be a fraud upon the companys creditors. According to the Gujarat High Court this view of the author clearly indicated that the holder of preference shares is not in the same position as that of a creditor. The learned author had also expressed the view in the aforesaid treatise, as noticed by the Gujarat High Court, that if a company defaults in redeeming the preference shares by the date fixed for redemption, the holder thereof cannot compel it to do so by suing in debt for the return of his capital or by filing for a mandatory injunction. This view of the author, according to the Gujarat High Court also negatives the contention that once the company decides to redeem its preference shares, the holder thereof would be in the position of a creditor.(emphasis supplied)12. So far as the judgment in Anarkali Sarabhai (supra) relied upon by Shri Arsiwala, in my view, the judgment actually aids petitioner. The Apex Court has noted that under Section 80 of the Companies Act, 1956, preference shares must not be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. When a preference share is redeemed by a company, what a shareholder does in effect is to sell the share to the company. Such a transaction is nothing but sale of the preference shares by the shareholders to the company. The Apex Court also held that if redemption of preference shares did not amount to sale, it would not have been necessary to specifically provide that the restriction imposed upon a company in respect of buying its own shares will not apply to redemption of shares issued under Section 80.13. Petitioner has approached this Court on the basis that the company is not doing any business and the networth of the company is going down year after year. Petitioner has approached this Court as creditor of the company as could be seen from paragraph 31 of the petition where it saysPetitioner states that the present Petition seeking winding up of the Respondent Company is being filed by it in the capacity of a creditor and not as a shareholder.... As already held that petitioner cannot be a creditor and it is rather clear that redemption cannot be made except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption, in my view, the petition is not maintainable.