Preference shareholders entitled to arrears of dividends over equity shareholders. Liquidator's reference denied.

The court ruled in favor of the preference shareholders, affirming their entitlement to arrears of cumulative dividends up to the commencement of winding up, in priority to equity shareholders, as per Article 7 of the Articles of Association. The Liquidator's reference was decided against the company, with costs to be covered by the company's funds, while other parties were to bear their own costs.

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Issues Involved:
1. Validity of preference shareholders' entitlement to arrears of cumulative dividends in the event of winding up.
2. Interpretation of the Articles of Association versus the Prospectus.
3. Applicability of Section 205 of the Companies Act, 1956, to a company in liquidation.
4. Rights of preference shareholders in the context of winding up.

Detailed Analysis:

1. Validity of Preference Shareholders' Entitlement to Arrears of Cumulative Dividends in the Event of Winding Up:
The core issue revolves around whether preference shareholders are entitled to arrears of cumulative dividends, as per the Articles of Association, even if the company has not commenced business or made any profits. The Articles of Association, specifically clause 7, state that preference shareholders have the right to a fixed cumulative preferential dividend at 9.5% per annum and, in the event of winding up, the right to repayment of capital and arrears of dividend, whether earned, declared, or not, up to the commencement of winding up, in priority to equity shareholders. The court concluded that there is nothing illegal in Article 7 permitting arrears of dividends, whether earned, declared, or not, to be paid in priority to equity shareholders.

2. Interpretation of the Articles of Association Versus the Prospectus:
The court highlighted a discrepancy between the Prospectus and the Articles of Association. The Prospectus mentions "repayment of capital and any arrears of dividend earned, whether declared or not," while Article 7 states "repayment of capital and arrears of dividend whether earned, declared or not." The court clarified that the terms of the Articles of Association take precedence over the Prospectus. The language in the Articles is deemed correct and necessary to avoid controversy, as supported by precedents and authoritative texts on company law.

3. Applicability of Section 205 of the Companies Act, 1956, to a Company in Liquidation:
The company argued that Section 205, which restricts the payment of dividends to profits, invalidates the provision in the Articles allowing for arrears of dividends to be paid in winding up. However, the court noted that Section 205 applies only to a company as a going concern and not to one in liquidation. Section 511, which governs the distribution of assets in winding up, allows for the Articles to dictate the distribution among members according to their rights and interests. Therefore, Article 7 is not contrary to the Act as it applies specifically to winding up and not to the management and administration of the company.

4. Rights of Preference Shareholders in the Context of Winding Up:
The court examined the rights of preference shareholders as set out in the Articles and relevant case law. It was established that preference shareholders are entitled to arrears of dividends in a winding up, even if such dividends were not declared or the company did not earn sufficient profits while it was a going concern. This interpretation aligns with various judicial precedents and authoritative texts, which emphasize that the rights of shareholders must be determined by the terms of the Articles of Association. The court affirmed that the protection given to preference shareholders by Article 7 cannot be ignored or curtailed unless there is a statutory provision necessitating such a course.

Conclusion:
The court ruled in favor of the preference shareholders, affirming their right to arrears of cumulative dividends up to the commencement of winding up, in priority to the equity shareholders, as per Article 7 of the Articles of Association. The reference by the Liquidator was answered against the company, and the costs of the reference were to come out of the company's funds, with other parties bearing their own costs.

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