Consensual scheme for preference shareholders approved despite redemption objection under the Companies Act.

A scheme of arrangement under the Companies Act, 1956 was approved for converting preference shareholders' stake into a loan and arranging payment to them. The objection based on section 80(1), that preference shares could be redeemed only out of profits or proceeds of a fresh issue, was rejected because the shareholders themselves participated in and unanimously consented to the compromise. Section 80(1) was treated as a protection against unilateral corporate action, not a bar to a consensual arrangement that was not prejudicial to the preference shareholders' interests. The scheme was sanctioned and the company was directed to make payment at the earliest.

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Issues: Whether the scheme of arrangement and compromise for converting the preferential shareholders' stake into a loan, and sanctioning payment to them, could be approved notwithstanding the objection based on redemption of preference shares under section 80(1) of the Companies Act, 1956.

Analysis: The application was moved under section 391 of the Companies Act, 1956 for sanction of a scheme between the company and its preferential shareholders. A meeting of the preferential shareholders was convened and the proposal received unanimous approval, with equity shareholders and secured creditors also present and consenting. The objection under section 80(1) was that preference shares could be redeemed only out of profits or proceeds of fresh issue of shares. The objection was rejected because section 80(1) is designed to protect preference shareholders from unilateral action by the company, whereas here the shareholders themselves participated in and consented to the arrangement. In those circumstances, the proposed arrangement was not prejudicial to their interests.

Conclusion: The scheme of arrangement was sanctioned and the company was directed to make payment to the preferential shareholders at the earliest.

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