Sections Effected By NCLT Part III [Focus on Section 55(3)] by CS Gourav Saraf

It is always a feel good factor when you get appreciated for your creative thoughts and constant motivation from people around you to just keep creating such thoughts. Heartfelt thanks to all for liking and finding the second article very helpful. This article is independent of the other two articles but the topic dealt with is related to NCLT. This part focuses on Section 55(3) which is issue further redeemable preference shares equal to the amount due, including dividend thereon, in respect of unredeemed preference shares. The topic is getting interesting with each article which is also a good learning curve for me. In case you have missed the first article there is link of that at the end of the article.

Introduction: The article will have a spotlight on the topic but let’s first understand what are different types of preference shares and there key points. There are 8 types of preference shares as per Companies Act, 2013. The key features of each of them are stated below

Cumulative Preference Shares: The preference shareholders are entitled to get the dividend for the subsequent year(s) if the dividend could not be paid due to losses or inadequate profit. If the dividend is not paid to cumulative preference shareholders for a period of two years then they will have a voting right on all the resolution placed before the company as per Section 47 of the Companies Act, 2013.

Non - Cumulative Preference Shares: The preference shareholders are not entitled to get the dividend for the subsequent year(s) if the dividend could not be paid due to losses or inadequate profit. Therefore for non - cumulative preference shares, the right to dividend for a previous year cannot be carried forward in subsequent years.

Participating Preference Shares: These preference shareholders are entitled to receive surplus profits or dividend in the company in addition to being entitled to fixed dividend.

Non - Participating Preference Shares: These shareholders are not entitled to participate in the surplus profit of the company. They are only entitled to fixed dividend.

Redeemable Preference Shares: A company may issue these types of shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed. A company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders.

Irredeemable Preference Shares: A company in India cannot issue irredeemable preference shares. These types of preference shares cannot be redeemed by the company.

Convertible Preference Shares: These types of shares can be converted into equity shares as per the terms and condition of the issue.

Non - Convertible Preference Shares: These types of shares are not convertible into equity shares of the company but still have preferential right to payment of capital in case of winding up of the company.

Although there are many types of preference shares but in this article we will be discussing about redeemable preference shares and issue of further redeemable preference shares.

Provision of Section 55(3): Where the company is not in the position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of 3/4th in value of such preference shares and with the approval of the tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.

Provided that the Tribunal shall, while giving approval under this sub-section, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares. It is hereby declared that the issue of further redeemable preference shares or redemption of preference shares under this section shall not be deemed to be an increase or, as the case maybe, a reduction, in the share capital of the company.

Pre condition for issue of preference shares: 

According to Companies (Share Capital & Debentures) Rules, 2014 Rule 9 
there are some pre conditions prescribed for issue of preference shares which are as follows - a) Authorization by AOA b) SR IN GM c) At the time of issue no subsisting default in the redemption of preference shares issued either before or after the commencement of this act or in payment of dividend due on any preference shares. A company can issue only redeemable preference shares which are to be redeemed mandatory by the company within 20 years from the date of their issue.

Issue and redemption of company engaged in Infrastructural Projects: A company engaged in setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding twenty years but not exceeding 30 years, subject to redemption of a minimum ten percent of such preference shares per year from the twenty first year onwards or either, on proportionate basis, at the option of preference shareholders.

other conditions are as follows: i) priority with respect to payment of dividend or repayment of capital ii) participation in surplus fund iii) participation in surplus assets and profits on winding up which may remain after the entire capital has been repaid iv) payment of dividend on cumulative or non cumulative basis v) conversion of preference shares into equity shares vi) voting rights vii) redemption of preference shares.

Pre condition for redemption of preference shares: It can be redeemed only on the terms on which they were issued or as varied after due approval of preference share holders under section 48 of the act. Apart from that preference shares can be redeemed a) at a fixed time or on happening of a particular event b) any time at the company's option or c) any time at the shareholder's option d) no such shares will be redeemed unless they are fully paid up e) such shares will be redeemed by profits of the company which would be otherwise be available for dividend or out of the proceeds of fresh issue of made for the purpose of redemption.

Disclosure in Explanatory Statement: As per section 102 an explanatory statement is to be annexed to the notice of general meeting providing material facts concerned and relevant to the issue of such shares a) issue size, no of shares, nominal value b) Nature of shares c) objective of the issue d) manner of issue of shares e) price at which such shares are proposed to be issued f) Basis of arrived price g) Terms of issue including terms and rate of dividend/share h) Terms of redemption including tenure, redemption at premium, convertible, tenure of conversion i) manner and modes of redemption j) current shareholding pattern of the company k) expected dilution in equity share capital upon conversion of preference shares.

Analysis of the provision: 

As per the sections, rules and procedure discussed above it can be said that the further issue of redeemable preference shares will be treated as normal issue only, the difference being the terms of the issue will be already fixed and some of the pre - condition for the issue will not be applicable to it. The most prominent feature will be after the further issue of redeemable preference shares the unredeemed preference shares will be redeemed and also there will be no increase or decrease in the capital. This can be a good strategy where the borrowers can subscribe to the issue of redeemable preference shares and through this there is no dilution of control of equity shares as preference shares doesn't carry any voting right and the control of the business remains with the present owner. In a situation where there are accumulated losses in the company and not in a position to obtain tax benefits from interest deduction then redeemable preference shares is good option. The other benefit of dividend on preference shares is firstly it is non accruing revenue income which may allow the company to defer their tax liabilities. Preference shares become the part of net worth and therefore decreases debt to equity ratio. This is how the overall borrowing capacity of the company increases. In case a loan is taken there needs to be given primary and collateral security but here that is not the case which makes it more attractive as the company gets the required money and the assets remains free.

Details required for NCLT Approval: 

petition in form NCLT - 1 will have to be submitted accompanied with documents mentioned in Annexure B and other information related to the company a) particulars of registration b) capital structure, different classes of shares into which the share capital is divided c) provisions of MOA or AOA authorizing the issue d) total no of shares issued e) details of preference shares which are not redeemed or unable to pay dividend f) terms and condition of issue of such existing preference shares g) total no. of such preference shares (unredeemed) and no. of holders consented for with value of such preference shares and % of holders consented for h) date or dates on which consent was given or the resolution passed.

Annexure B Documents: 

a) Copy of MOA and AOA,

b) Documents showing the terms of existing preference shares,

c) Copy of BR and resolution of GM for issued of further redeemable preference shares,

d) Copy of latest audited BS with P/L of the company with auditor's report and director's report,

e) Affidavit verifying the person,

f) Bank Draft evidencing the payment of application fee,

g) Memorandum of appearance in form NCLT - 12 with copy of BR or the executed Vakalatnama, as the case may be.

Forms Required:

NCLT - 1 - Petition for further issue of redeemable preference shares

NCLT - 6 - Affidavit

NCLT - 12 - Memorandum of Appearance

MGT - 14 - Special Resolution attachment of Notice of GM with explanatory statement, certified true copy of SR and minutes of GM

PAS -3 - Return of allotment within 30 days of passing the resolution of allotment with attachments of resolution of allotment and list of allotees

SH - 1 - Issue of share certificate within 2 months from the date of allotment of shares

MGT - 1 - Maintenance of register

Key Case law updates of previous articles:

PP Jain Exports limited: The Company had applied for conversion before the Section 14(1) second proviso got notified on 1st June, 2016. During the hearing MCA had issued a notification through which clearly said that corresponding provisions of section 31(2A) and section 31(i) provisio of Companies Act, 1956 shall remain in force till corresponding provisions of Companies Act, 2013 are notified. As per the old provision of Companies Act, 1956 conversion of private to public vise versa powers was delegated by central government to Registrar of Companies. After the publication of notification in official gazette of India, extraordinary part II dated 1st June, 2016 [SO 1934(E)] powers conferred vide section 14(2) in connection to the proposed order has superseded the old provisions. The role therefore of Rule 33 of the Companies (Incorporation) Rules, 2014 shall be limited to give effect of the order of NCLT by the registrar within 15 days on receipt. Once the provision of section 14(2) has enshrined powers to NCLT; hence, the statue prevails over the rules.

Diana Buildwell Ltd: The Company applied for conversion from public to private as per section 14 of the Companies Act, 2013.

The links of previous articles are provided below for better understanding of the above case laws. 

Click Here for Part II


Practicing Company Secretary

CS Gourav Saraf
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