In an important ruling, the Bombay high court has held that persons holding redeemable preference shares cannot seek winding up of the company concerned, only on the ground of failure of the company to redeem the shares held by him.
“The shareholders of redeemable preference shares of the company do not become creditors of the company in case their shares are not redeemed by the company,” said Justice KR Shriram while rejecting a petition filed by Aditya Prakash Entertainment Private Limited.
“If they do not become the creditors of the company, they cannot apply for winding up of the company under Section 433(e) of the Companies Act, 1956 (on the ground of being unable to clear its debt).”
Section 433(e) of the Companies Act, 1956 permits a company to be wound up, if it is unable to pay its debts.
Aditya Prakash Entertainment had approached the high court seeking winding up of Magikwand Media Private Limited on the ground that the latter had failed to clear its debts.
Contending that Magikwand Media had stopped doing business and its net worth was going down year after year, Aditya Prakash Entertainment claimed that it was creditor of the company, as it was holding its redeemable preference shares and had sought its winding up on the ground that the later had failed to redeem the shares on due dates, and thus failed to discharge its debt.
{{/usCountry}}Contending that Magikwand Media had stopped doing business and its net worth was going down year after year, Aditya Prakash Entertainment claimed that it was creditor of the company, as it was holding its redeemable preference shares and had sought its winding up on the ground that the later had failed to redeem the shares on due dates, and thus failed to discharge its debt.
{{/usCountry}}Justice Shriram rejected the petition being non-tenable. The judge said section 80(1) of the Companies Act, 1956 allows a company limited by shares to issue redeemable preference shares, but it also disallows such redemption except out of profits of the company, which would otherwise be available for distributing dividend, or out of the proceeds of a fresh issue of shares made for the purposes of the redemption.
“This aspect, in my view, shows that where redeemable preference shares are issued but not honoured when they are ripe for redemption, the holder of those shares does not automatically assume the character of a creditor,” said the judge.
“The reason is that his shares can be redeemed only out of the profits of the company which would otherwise be available for dividend, or by afresh issue of shares,” the judge added.
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