Court invalidates company's resolution converting preference shares to equity due to lack of shareholder consent.

The court declared the special resolution passed by the company, converting preference shares into equity shares, as illegal and not binding. The company failed to obtain the necessary consent from the holders of redeemable cumulative preference shares as required by section 106 of the Companies Act and article 80 of its articles of association. The court emphasized the importance of complying with statutory provisions and the company's articles of association when altering shareholders' rights, highlighting the need for obtaining requisite majorities to validate such resolutions.

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Issues:
Validity of a special resolution passed by a company regarding the conversion of preference shares into equity shares without obtaining the required consent of the shareholders.

Analysis:
The judgment pertains to a petition filed under section 107 of the Companies Act, 1956, by holders of 9½% redeemable cumulative preference shares in a company. The petitioners contested a resolution passed at a general meeting, converting preference share amount and accrued preference interest into equity shares, alleging that the requisite majority for the resolution was not obtained. The primary issue addressed in the judgment is whether the company acted in accordance with section 106 of the Act and article 80 of its articles of association in passing the resolution.

Section 106 of the Act allows for the variation of shareholders' rights by obtaining consent from the class of shareholders either in writing or through a special resolution at a meeting. It mandates that the consent in writing must be at least 3/4ths of the issued shares of that class. In this case, the company did not obtain the written consent of 3/4ths of the holders of redeemable 9½% cumulative preference shares. Instead, they attempted to pass the resolution at a special general meeting of that class of shareholders.

Article 80 of the company's articles of association specifies the requirements for a resolution to be considered special. It necessitates that the votes in favor of the resolution must be at least three times the number of votes cast against it. The judgment highlights that the special resolution in question was passed by a bare majority of votes, falling short of the 3/4ths majority as required by article 80. Consequently, the court declared the resolution illegal and not binding on the petitioners and other redeemable cumulative preference shareholders.

In conclusion, the court set aside the special resolution passed by the company, emphasizing that it was not in compliance with the law. The judgment underscores the importance of adhering to statutory provisions and the company's articles of association when altering shareholders' rights, ensuring that requisite majorities are obtained to validate such resolutions.

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