1958 (1) TMI 29 - HC - Companies Law

Validity of Shareholders' Rights Variation Agreement Without Resolution

The court held that the variation of the rights of ordinary shareholders was validly effected by the agreement dated 12th April 1957, ratified by the ... Alteration of memorandum and Alteration of rights of holders of special classes of shares Issues Involved:1. Validity of the variation of rights of ordinary shareholders.2. Proper procedure for effecting the variation of shareholder rights.3. Legality of the resolution passed on 18th May 1957.4. Maintainability of the petition.Detailed Analysis:1. Validity of the Variation of Rights of Ordinary Shareholders:The petitioners claimed that the resolution passed on 18th May 1957, which reduced the dividend rights of ordinary shareholders from 10% to 6%, was illegal. They argued that the resolution unfairly prejudiced the rights of ordinary shareholders and was not in their interest. The petitioners contended that the resolution was passed without proper authority and was oppressive to minority shareholders.2. Proper Procedure for Effecting the Variation of Shareholder Rights:The court examined Article 65 of the company's articles of association, which stipulates that any variation of class rights must be effected through an agreement ratified by at least three-fourths of the nominal value of the issued shares of that class or confirmed by an extraordinary resolution passed at a separate general meeting of the holders of shares of that class. The court noted that the variation in this case was purportedly effected by an agreement dated 12th April 1957, which was ratified by a large number of ordinary shareholders. The petitioners did not challenge the agreement in their petition but focused solely on the resolution passed on 18th May 1957.3. Legality of the Resolution Passed on 18th May 1957:The petitioners argued that the resolution was invalid as it was not passed at a separate meeting of the ordinary shareholders. They contended that the resolution was passed at a general meeting of all shareholders, which was contrary to Article 65. The court, however, found that the variation was effected by the agreement and not by the resolution. The resolution was merely a step to alter clause 5 of the memorandum to reflect the agreed variation. The court held that the variation was complete upon the requisite consent being given as per Section 106 of the Indian Companies Act, 1956, and did not require the passing of a special resolution.4. Maintainability of the Petition:The court upheld the preliminary objection raised by the respondents regarding the maintainability of the petition. The court noted that the petitioners did not challenge the variation effected by the agreement but only the resolution passed on 18th May 1957. Since the variation was completed by the agreement, the petitioners' focus on the resolution was misplaced. The court also pointed out that the petitioners had an opportunity to amend their petition to include a challenge to the agreement but chose not to do so. Consequently, the court dismissed the petition on the grounds of maintainability.Conclusion:The court concluded that the variation of the rights of ordinary shareholders was validly effected by the agreement dated 12th April 1957, which was ratified by the requisite number of shareholders. The resolution passed on 18th May 1957, was not necessary to complete the variation but was required to alter the memorandum. The petitioners' failure to challenge the agreement rendered their petition unsustainable. The court dismissed the application with costs, certifying the order for counsel and staying its operation for one month.