Court approves company scheme without preference shareholders; directors restricted in share dealings, capital structure amended.

The court had jurisdiction to sanction a scheme of arrangement between a company and its ordinary shareholders without involving the preference shareholders, as the preference shareholders had no further rights due to being fully paid back. The court ruled that the scheme did not constitute a reduction of share capital and directed the company to secure the Central Government's excess payment claim. It also restricted the directors from dealing with unissued ordinary shares without court approval and ordered the amendment of the memorandum and articles of association to reflect the new capital structure. The appeal was allowed, and parties were to bear their own costs.

---

---

Issues Involved:
1. Jurisdiction to Sanction Scheme
2. Rights of Preference Shareholders
3. Reduction of Share Capital
4. Securing Excess Payment Claim by Central Government
5. Issuance and Control of Ordinary Shares
6. Amendment of Memorandum and Articles of Association

Issue-wise Detailed Analysis:

1. Jurisdiction to Sanction Scheme:
The court examined whether it had the jurisdiction to sanction a scheme of arrangement between the company and its ordinary shareholders without involving the preference shareholders. The court held that under Section 391 of the Companies Act, 1956, a scheme could be framed between a company and any class of its members. The preference shareholders, having been fully paid back their investment, had no further right to participate in the surplus assets or profits. Thus, the court had jurisdiction to sanction the scheme without calling a meeting of the preference shareholders.

2. Rights of Preference Shareholders:
The preference shareholders had been fully paid back their investment and, according to the memorandum and articles of association, had no right to further participation in profits or surplus assets. The court relied on precedents such as Scottish Insurance Corporation Ltd. v. Wilsons and Clyde Coal Co. Ltd. and In re Isle of Thanet Electric Supply Co. Ltd. to conclude that the preference shareholders had no claim in the surplus assets and thus, their consent was not necessary for the scheme.

3. Reduction of Share Capital:
The respondents argued that the scheme involved a reduction in share capital, which required compliance with Sections 100, 101, and 102 of the Companies Act. The court found that the company's proposal to carry on business with the surplus in the hands of the liquidators, and not with the existing share capital, did not constitute a reduction of share capital. However, the memorandum and articles of association needed to be amended to reflect the new capital structure under the scheme.

4. Securing Excess Payment Claim by Central Government:
The Central Government claimed an excess payment of Rs. 1,47,605. The court held that this claim should be secured. It directed the company to deposit Rs. 1,48,000 in a fixed deposit account for five years with the State Bank of India. This amount would be used to satisfy the government's claim upon adjudication.

5. Issuance and Control of Ordinary Shares:
Concerns were raised about the arbitrary power given to the directors to deal with unissued ordinary shares. The court directed that any balance of ordinary shares not issued should not be dealt with by the directors without obtaining an order from the court. This was to ensure that the directors did not control the entire surplus assets without proper oversight.

6. Amendment of Memorandum and Articles of Association:
The court noted that the existing memorandum and articles of association contemplated two classes of shareholders, while the scheme proposed only ordinary shareholders with shares priced at Rs. 3 each. The court directed that the memorandum and articles be amended to accurately reflect the new capital structure of the company under the scheme.

Conclusion:
The scheme proposed by the company was sanctioned subject to specific conditions:
1. Deposit of Rs. 1,48,000 in a fixed deposit account to secure the Central Government's claim.
2. Directors to obtain court orders before dealing with unissued ordinary shares.
3. Amendment of the memorandum and articles of association to reflect the new capital structure.

The court ordered the stay of winding up of the company and directed the respondents to hand over all assets, documents, and bank balances to the company's directors. The appeal was allowed, and the judgment and order under appeal were set aside, with each party bearing its own costs.

---