Inclusion of Preference Shares in Net Worth Calculation Deemed Necessary

The Court held that preference shares should be included in net worth calculation as they form part of paid-up share capital, contrary to the Respondent's exclusion method. The Respondent's decision to declare the Petitioner ineligible for the tender process based on this erroneous calculation was deemed arbitrary. The Court directed the Respondent to reconsider the Petitioner's eligibility by including preference shares in the net worth calculation. Consequently, the writ petition was allowed in favor of the Petitioner.

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Issues Involved:
1. Whether the value of preference shares can be included while computing "net worth."
2. Whether the Respondent erred in declaring the Petitioner ineligible to participate in the tender process.

Summary:

Issue 1: Inclusion of Preference Shares in Net Worth Calculation

The core issue is whether the value of preference shares can be included while computing "net worth." The Petitioner argued that preference shares should be included in net worth as per Sections 2(57), 2(64), and 43 of the Companies Act, which define net worth and paid-up share capital to include both equity and preference share capital. The Petitioner contended that the exclusion of preference shares by the Respondent was contrary to the Companies Act, which mandates that net worth should be calculated including paid-up share capital.

On the other hand, the Respondent argued that preference shares should be treated as liabilities based on Section 129 of the Companies Act and related accounting standards. The Respondent relied on a previous judgment (GKC Projects Limited v. National Highways Authority of India) to support their stance on restricting net worth calculations to reserves created out of revenue profits alone.

The Court examined the relevant provisions of the Companies Act and concluded that preference shares, redeemable at the option of the issuer without a fixed term, form part of paid-up share capital and should be included in net worth. The Court referred to the Supreme Court's judgment in JK Industries v. Union of India, which clarified that a balance sheet does not show the true net worth of a company. The Court also noted that the Respondent's method of excluding preference shares was contrary to the Companies Act.

Issue 2: Respondent's Error in Declaring Petitioner Ineligible

The Court found that the Respondent's decision to exclude the Petitioner from the tender process based on an erroneous calculation of net worth was arbitrary and irrational. The Court held that the Respondent's method of excluding preference shares from net worth calculation was not supported by the Companies Act. The Court directed the Respondent to re-work the net worth of the Petitioner by including preference shares and reconsider the Petitioner's eligibility for the tender process.

Conclusion:

The writ petition was allowed, and the Respondent was directed to include preference shares in the net worth calculation and reassess the Petitioner's eligibility for the tender process.

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