JUVANSINHJI BALUSINHJI Vs. BALBHADRASINHJI INDRASINHJI

JUDGEMENT

(1.) This application raises a short and interesting question of law regarding the right construction to be put on sections 87 to 90 of the Companies Act 1956 These sections which relate to voting rights did not and a place in the Indian Companies Act 1913 and have been introduced for the first time in the Companies Act 1956 There is no provision in the English Companies Act 1948 corresponding to these sections nor is there any authority of any High Court in this country which throws light on the interpretation of these sections. The question of construction posed by this application has therefore to be decided by me on the language of these sections unaided by any authority or dicta of any Court in this country or in England. The facts giving rise to this application are few and for the most part undisputed and may be briefly stated as follows:

(2.) Sections 87 to 90 occur in Part IV under the heading Kinds of share capital. These sections are preceeded by sections 85 and 86 which also occur under the same heading. Section 85 divides the share capital of a Company into two classes namely preference share capital and equity share capital. Preference share capital is defined as meaning that part of the share capital of a Company which fulfils the requirements set out in section 85(1). These requirements are nothing more than the normal feature of preference shares as known to Company law even prior to the commencement of the Companies Act 1956 and the definition of preference share capital with reference to these requirements does not constitute any departure from the ordinary concept of preference share capital but merely restates the concept in precise and accurate language. There was no definition of preference shares or preference share capital in the Indian Companies Act 1913 and the preference shares were described as such by reason only of the fact that they carried some preferential rights in relation to other classes of shares particularly in relation to ordinary shares. These preferential rights were of great variety but referred normally to one or two of the principal rights carried by the shares namely the right to dividend and the right on winding up to receive the amount of the capital paid up or deemed to have been paid up. Now by section 85 a more precise and accurate definition is introduced and these characteristics are made statutory tests for determining the preference share capital The tests are whether the share capital fulfils the following requirements namely

(3.) It is also declared by section 85 (1) that the fact that a preference share is entitled in addition to the preferential right to the fixed dividend to a portion of the dividend depending upon the quantum of the profits or that on a winding up it carries in addition to the preferential right to repayment of capital a right to participate in the surplus assets after the entire capital has been paid in full will not have the effect of making the defini tion of preference share capital inapplicable to the case. Equity share capital is denied by section 85(2) as meaning all share capital which is not preference share capital. The definition of equity share capital is thus an exclusive definition and comprehends within its scope all share capital other than preference share capital. There are therefore now under the Companies Act 1956 only two kinds of share capital namely preference share capital and equity share capital. Prior to the enactment of the Companies Act 1956 it was not unusual to divide the shares in the capital of a Company into two or more classes as for example preference shares and ordinary shares or preference shares and A ordinary shares and B ordinary shares or ordinary shares and deferred shares or preference shares ordinary shares and founders shares and so on and so forth and to attach various special rights privileges and conditions to such shares. Where a Company divided its share capital into different classes the classes were usually given distinguishing descriptions and the Company was at liberty to attach to them such descriptions as appeared appropriate. The classes were often described as ordinary shares preference shares deferred shares and founders shares as mentioned above but sometimes a more complicated terminology was also used by the Company such as first preference shares ordinary preference shares etc. The law did not attach a rigid uniformly applicable meaning to these descriptions and the rights carried by the shares were not dependant upon the descriptions but were always to be gathered from the terms of issue which normally reproduced the relevant provisions of the Memorandum and Articles of Association. These different descriptions are however now abolished by the Companies Act 1956 That part of the share capital of the Company which satisfies the requirements set out in section 85(1) is now described as preference share capital and the rest of the share capital is described as equity share capital no matter what its description or nomenclature was before the commencement of the Companies Act 1956 Even if any shares were issued as deferred or founders shares or any other description of shares prior to the commencement of the Companies Act 1956 they would be considered as equity shares for the purpose of the Companies Act 1956 unless they fall within the definition in section 85(1) in which event they would be considered as preference shares. All share capital issued before the commencement of the Companies Act 1956 must therefore fall in either of two classes namely preference share capital or equity share capital and the incidents of one or the other of the two classes must attach to such share capital. This insistence upon classification of share capital into preference share capital and equity share capital is also to be found in regard to future issue of share capital for section 86 prescribes that the share capital of a Company formed after the commencement of the Companies Act 1956 or issued after such commencement shall be of two kinds only namely preference share capital and equity share capital. The scheme of the Companies Act 1956 therefore is that there should be only two kinds of share capital namely preference share capital and equity share capital and It is in relation to these two kinds of share capital that voting rights are prescribed by sections 87 to 90. If this contextual background of sections 87 to 90 is borne in mind the interpretation of those Sections does not present any difficulty.