Companies Act Case Law Bhagwati Developers Vs Peerless General Finance & Investment Co. & Ors.

CASE NO.:
Appeal (civil) 12640 of 1996

PETITIONER:
Bhagwati Developers

RESPONDENT:
Peerless General Finance & Investment Co. & Ors.

DATE OF JUDGMENT: 09/08/2005

BENCH:
S. N. Variava & Dr. A. R. Lakshmanan

JUDGMENT:
J U D G M E N T
S. N. VARIAVA, J.

This Appeal is against the Judgment dated 23rd August, 1995
passed by the Calcutta High Court.
Briefly stated the facts are as follows:
The Respondents are an Investment Company. The Reserve
Bank of India had issued certain directions to them. The Respondents
had challenged the authority and power of the Reserve Bank of India
to issue such directions. That challenge ultimately culminated in this
Court. By the Judgment reported in (1992) 2 SCC 343 [Peerless
General Finance and Investment Co. Limited vs. Reserve Bank of
India] this Court held that the Reserve Bank of India had authority and
power to issue direction in order to provide stable, identifiable and
monitor able method of operation. This Court held that such directions
would ensure security to the depositors at all times and also make the
account of the company accurate, accountable and easy to monitor.
This Court held that the directions given by the Reserve Bank of India
were just, fair and reasonable not only to the depositors but, in the
long run, to the very existence of the Respondent Company and its
continued business itself. One of the directions was that the
depositors’ monies must be shown, in their balance sheets, as a
“liability” instead of “income” as had been done by the Respondent
Company. As this Court held that the directions issued by the
Reserve Bank of India were valid the Respondents became liable to
transfer Rs. 217.34 crores to the Depositors’ A/c by debiting the Profit
& Loss A/c with Rs. 217.34 crores. The Reserve Bank of India had, by
a letter dated 11th March, 1992, called upon the Respondents to
prepare its Balance Sheet in conformity with its earlier directions. It
seems that the Respondent Company did not immediately comply with
this direction but instead took a long period to show the Depositors’
money as liability.
The Respondent Company issued a notice calling for an A.G.M.
to consider increasing the share capital of the company from Rs. 3
crores divided into 3,00,000 Equity Shares of Rs. 100/- each to Rs. 35
crores divided into 35,00,000 Equity Shares of Rs. 100/- each. The
Notice also provided as follows:
“RESOLVED”

(a) That pursuant to the provisions of Article 182(1)
of the Articles of Association of the Company, a
sum of Rs. 31,08,36,000/- out of Rs.
73,82,87,261.60p. standing to the credit of
Revaluation Reserve as per the Audited Accounts
for the financial year ending on 31st March, 1994,
be capitalized and accordingly, the Directors of
the Company be and are hereby authorized and
directed to appropriate the said sum of Rs.
31,08,36,000/- to and amongst the members of
the Company whose names shall appear on its
Register of Members on 7th November, 1994 being
the Record Date for this purpose (hereinafter
called “the said date”) in proportion to the Equity
Shares held by them respectively in the Company
as on the said date and to apply the said sum of
Rs. 31,08,36,000/- in paying up in full of the
unissued Equity Shares of the Company of Rs.
100/- each at par, such shares (hereinafter
referred to as the “Bonus Shares”) be allotted,
distributed and credited as fully paid up to and
amongst such members in proportion of 15
(Fifteen) Bonus Shares for every existing Equity
Share held by them respectively as on the said
date and that the Bonus Shares so distributed
shall, for all purposes be treated as an increase in
the nominal amount of the Capital of the
Company held by each such member and not as
income.

(b) That the Bonus Shares so allotted shall always be
subject to the terms and conditions contained in
the Memorandum and Articles of Association of
the Company and the Guidelines for Bonus Shares
issued by SEBI.

(c) That such allotment of Bonus Shares to non-
resident shareholders of the Company shall be
subject to the approval of the Reserve Bank of
India under the Foreign Exchange Regulation Act,
1973, if any.

(d) That the Bonus Shares so allotted pursuant to this
resolution shall rank in all respects pari passu
with the existing fully paid Equity Shares of the
Company and shall also be entitled for the
dividend in respect of the financial year ending on
31st March, 1995.

xxx xxx xxx”
The Appellant, who is one of the shareholders of the Company,
filed a Suit against the Respondents for a declaration that they are not
entitled to issue Bonus Shares out of Revaluation Reserve. In the Suit
it was prayed that the impugned notice be cancelled. The Appellant
applied for interlocutory injunction which was refused by a single
Judge. The Appellants then filed a Letters Patent Appeal. The
Appellate Court also did not grant an injunction. It only directed that
the resolution passed at the Meeting would abide by the result of the
Appeal. Accordingly the Meeting was held. The Appellant attended
and objected to the Resolution being passed. But the Resolution was
passed by a majority. The Appeal was subsequently withdrawn by the
Appellant with a liberty to file a fresh Appeal. The Appellant then filed
a fresh Appeal, wherein he applied for an injunction restraining the
Respondents from issuing the Bonus Shares. The Division Bench of
the Calcutta High Court permitted the Respondents to process all
formalities but not to effect the delivery of the Bonus share scrips
without obtaining prior leave of the Court. This Court refused to
interfere in the Special Leave Petition filed by the Appellant but
directed the High Court to dispose of the Appeal expeditiously. The
Appeal was then disposed of by the impugned Judgment wherein it has
been held that the Respondents were entitled to issue Bonus Shares
out of Revaluation Reserve.
The Appellant challenges the power of the Respondent Company
to issue Bonus Shares out of Revaluation Reserve on three grounds
viz. (a) that the Bonus Shares had been issued contrary to SEBI
guidelines, (b) their issue is contrary to the Circular of the Department
of Company Affairs dated 6th September, 1994 and (c) that the issue
could not have been made as it is contrary to Article 182 of the
Articles of Association of the Company.
The SEBI guidelines, which have been relied upon, were clarified
on 13th August, 1992 wherein it has been stated that these guidelines
do not apply to issue of securities by existing private/closely held and
other unlisted companies. In view of this clarification, we see no
infirmity in the impugned Judgment wherein it has been held that the
SEBI guidelines were not applicable to the Respondent Company.
We are also in agreement with the observation, in the impugned
Judgment, to the effect that the Circular dated 6th September, 1994
does not have any mandatory effect. These Circulars are merely
advisory in character.
The relevant portion of Article 182 of the Articles of Association
of the Company which has been strongly relied upon reads as follows:
“182.(1) Any General Meeting may resolve that any
amounts standing to the credit of the shares premium
account or the Capital Redemption Reserve Account or
any monies, investments or other assets forming part of
the undivided profits including profits or surplus monies
arising from the realization and (where permitted by law
from the appreciation in value of any capital assets of the
Company) standing to the credit of the General Reserve,
Reserve or any Reserve Fund or any other Fund of the
Company or in the hands of the Company and available for
dividend by capitalized :-

(i) by the issue and distribution as fully paid up
of shares, debentures, debenture stock,
bonds or other obligations of the Company,
or
(ii) by crediting shares of the Company which
may have been issued and not fully paid up,
with the whole or any part of the sum
remaining unpaid thereon.

Provided that any amounts standing to the credit of
the share premium account or the Capital Redemption
Reserve Account shall be applied only in crediting the
payment of capital on shares of the Company to be issued
to members (as herein provided) as fully paid bonus
shares.

xxx xxx xxx
xxx xxx xxx”
Reference must also be made to the definition of “Dividend”
under Article 2, wherein it has been stated that the word “Dividend”
includes “Bonus”. On behalf of the Appellant it has been submitted
that Article 182 permits capitalization of profits by issuance and
distribution of fully paid up shares, debentures, debenture stock
amongst others out of the Revaluation of Capital Assets only in such
cases where the “funds are available for dividends”. It was submitted
that the words “available for dividends” under Article 182 cover all the
categories of funds which could be capitalized for the purpose of issue
of fully paid up shares. It was submitted that any fund which was not
available for dividend could not be used for purposes of issue of fully
paid up shares. Reliance was then placed upon Article 175 wherein it
was provided that no dividend would be payable except out of profits
arising from the business of the company. It was submitted that both
the Articles have to be read together and, if read together, it is clear
that dividends as well as issue of fully paid up shares could only be
made out of profits arising from the business of the company and not
from the revaluation of capital assets. It was submitted that the High
Court erred in holding that the words “available for dividends” only
applied to words “other funds of the company or in the hands of the
company” and that it did not apply or restrict the other categories laid
down under Article 182.
On the other hand, on behalf of the Respondents it is submitted
that the High Court was right in coming to the conclusion that the
words “available for dividends” did not apply to any other categories
except the category of funds of the company in the hands of the
company.
Both sides have also relied on various provisions of the
Companies Act, some other Articles in the Articles of Association and
various authorities. In our view it is not necessary to set those out or
deal with them as the decision will have to be based on an
interpretation of Article 182. For consideration of the rival arguments
Article 182 would have to be broken up in the following manner:
“Any General Meeting may resolve that any amounts standing to the
credit of
(a) Share Premium Account,
(b) Capital Redemption Reserve Account and
(c) any monies, investments of other assets forming part of the
undivided profits including profit or surplus monies arising
from (i) realization and (ii) where permitted by law, from the
appreciation in value of any capital assets standing to the
credit of General Reserve, Reserve or any Reserve Fund or
any other Fund of the Company or in the hands of the
Company and available for dividends.”
If read in this manner it is clear that the words “available for
dividends” would be applicable to all categories. The High Court was
thus wrong in concluding that these words only applied to the last
category i.e. funds of the company or in the hands of the company.
However, it must be seen that the word “Dividend” wherever it
appears in the Articles also includes “Bonus”. Thus the words
“available for dividends” would necessarily mean “available for
dividend/bonus”. Article 182 itself provides that where the law
permits issuing of bonus from appreciation of value in the capital
assets the same could be done. If read in the manner suggested by
the Appellants this portion of Article 182 i.e. issuing of bonus out of
Revaluation Reserves would be rendered otiose. So would certain
other portions of Article 182 viz. the provision regarding issuing of
bonus out of Share Premium Account and Capital Redemption Reserve
Account. Section 205 of the Companies Act provides that the dividend
could only be issued out of profits of the company. The proviso to
sub-section 3 of Section 205 permits capitalization of profits or reserve
of a company for the purpose of issuing fully paid up bonus shares or
paying up any amount for the time being unpaid on any shares held by
the members of the company. Thus the Companies Act specifically
permits utilization of reserve arising from revaluation of assets for
purpose of issuing fully paid up bonus shares. When the law so
permits, Article 182 authorizes the company to issue Bonus shares out
of reserves arising from revaluation of capital assets. Thus, even
though the interpretation given by the High Court on Article 182 is not
correct, still the final conclusion that Article 182 does not prohibit
issuance of Bonus shares is correct and requires no interference.
It was next submitted on behalf of the Appellant that as the
directions of the Reserve Bank of India had not been complied with the
balance sheet of the Company did not reflect the true picture and in
actual fact when the bonus shares were sought to be issued the
Company was in a loss. On the other hand it was submitted on behalf
of the Respondents that the Company had complied with the directions
and had been granted time of 7 years to regularize its accounts. In our
view it is not necessary for us to go into this controversy as it will
always be open to the Reserve Bank of India to take such action as is
available to it in law, if it feels that its directions were not complied
with.
In this view of the matter, we see no reason to interfere. The
Appeal stands dismissed. There will be no order as to costs.

 

 

 

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