Companies Act, 1956: Section 94
Section 94 of the 1956 Act empowered a company limited by shares to alter its capital in any of the manner as stipulated under the section. Such power had to be exercised by the company in its general meeting. The section, however, clarified that cancellation of shares pursuant to the section would not amount to reduction of share capital under the Act.
Companies Act, 2013: Section 61
Section 61 of the 2013 Act was notified vide SO 902 (E) and has been in effect from 01- 4-2014 except that proviso to clause (b) of sub-section (1) of the s. 61 has not been notified at the time of going to press.
Section 61 of the 2013 Act corresponds to s. 94 of the 1956 Act with the addition that if the consolidation or division results in change in the voting percentage of shareholders, the same would require prior approval of the Tribunal. Section 61 of the 2013 Act has to be read with the definition of the term alter or ‘alteration’ given under s. 2(3) of the Act.
Approval of Tribunal in specific cases
Provision section 61(1)(b) of the 2013 Act requires that consolidation and division which results in changes in the voting percentage of shareholders shall take effect only when it is approved by the Tribunal on an application being made. This is an additional requirement in the 2013 Act, which was not provided for in s. 94 of the 1956 Act.
Section 94 of Companies Act, 1956
Alteration of share capital
The powers under this section [in the Indian context- s. 94 of the 1956 Act, and s. 61 of the 2013 Act] can be exercised only if authorized by the articles. It has been held that if the articles do not contain any such authorization, the articles must first be amended, before the power can be exercised. But there is no reason why in a single meeting both a special resolution amending the articles and a resolution for exercise of any of the powers to alter share capital should not be passed. However in Re. Metropolitan Cemetery Co.. (1934) SC 65 (Scot) the company passed special resolutions to reduce and also to increase its capital and the court, while confirming the former, refused to include a reference to the latter as the company was not authorized by its articles to increase its capital and strict compliance with the main enactment was necessary.
The power should be exercised bona fide in the interest of the company and not for benefiting any group. That is why an agreement between shareholders requiring a written consent of all the shareholders before this power was exercised was held to be void. But a shareholders agreement as to how to vote on occasions like this may bind them as between themselves and without fettering the company’s powers.
Increased of authorized share capital
The consent of meetings of classes of shareholders will not be requisite as the increases of any kind of share capital cannot be said to ‘vary’ or ‘affect’ class rights. Subject to any directions that may be given by the company in general meeting the increased share capital will have to be issued in accordance with the provisions of section 81 of the 1956 Act. In the case of a public company it appears that the provisions of s. 81 of the 1956 Act [under the 2013 Act, section 62 of 2013Act) are mandatory and the general body cannot give any contrary directions. The section [i.e, s. 121 of the English Companies Act, 1985] authorizes companies to meet their capital requirements by increasing share capital by such amount as expedient. This power has to be exercised in general meeting. The increased capital may be expressed in the same currency as the existing capital but it may as well be expressed in any other currency. According to the provisions in Regulations 44 and 45 of Table A of the 1956 [under 2013 Act, Regs. 35 and 36 (which is subject to the provisions of s. 61 of the 2013 Act) of Table F) the power of increase, etc., given by this section [i.e, s. 94 in the context of the 1956 Act, and s. 61 in the context of the 2013 Act] can be implemented by an ordinary resolution.
In case where Table A of the 1956 Act [under the 2013 Act, Table F] is not applicable it would appear that a special resolution may become necessary because the capital clause of the memorandum would have to be altered. The increased capital may consist of preference shares, provided that this is not inconsistent with rights given by the memorandum of association. The notice convening the meeting to pass the resolution for increase must specify the amount of the proposed increase.
Where shares were issued beyond the authorized amount and a resolution was subsequently passed at a general meeting ratifying the issue, it was held that although the original issue was not in accordance with the articles, the ratification was effective and the allottees bound. Shareholders who have acquiesced in the irregular increase of the share capital cannot later challenge such an increase. Where a company proposed to increase its issued and paid-up share capital and some shareholders filed a petition against it, saying that it would be of oppressive nature, the CLB said that the power of the Board of Directors was not to be restricted by the CLB. An injunction was not granted. Rather, the CLB permitted raise in issued and pick-up capital for bona fide reasons.
Fetters on exercise of power to increase capital
A restructuring agreement was entered into for the restructuring of the company. The parties to the agreement were the company, its bankers and its senior executives who held the entire issued share capital of the company. A clause in the restructuring agreement provided that no further share capital should be created or issued without the written consent of all the parties to the agreement. The company proposed to increase its capital and one of the parties to the restructuring agreement sought an injunction to prevent the company from doing so on the ground that it violated the important clause of the agreement. It was held that the clause of the agreement sought to be invoked constituted an unlawful fetter on the statutory power of the company to increase its share capital by ordinary resolution and as such it was void and unenforceable. The company was not prevented from exercising its statutory powers. Russell v. Northern Bank Development Corpn. Ltd, 1992 BCLC 431 (CA) (NI). The House of Lords in [Russell v. Northern Bank Development Corpn., 1992 BCLC 1016 affirmed this aspect of the matter but held that a voting agreement outside the articles may be binding. Their Lordships said that although any provision in a company’s articles which restricts its statutory power to alter its articles would be invalid, an agreement outside the articles between shareholders as to how they would exercise their voting rights on a resolution to alter the articles is not necessarily invalid. Accordingly, so far as the original shareholders were concerned, their agreement did not constitute an unlawful and invalid fetter on the company’s statutory power to increase its share capital but was merely a personal agreement outside the articles between the shareholders who executed it as to how they would exercise their voting rights in relation to the creation or issue of shares in the company and did not purport to bind future shareholders. The company’s agreement that it would not increase its capital without the consent of each of the shareholders was unenforceable as being contrary to the Northern Ireland’s company law because it amounted to an undertaking not to exercise its statutory power for a period which could last for as long as any of the parties to the agreement remained a shareholder although the control of the company had passed to other shareholders.
Injunction to prevent certain shareholders from voting
In another inter-connected matter reported as Standard Chartered Bank v. Walker: TŠB Bank plc. v. Walker, 1992 company’s shareholders was summoned to approve a restructuring agreement between company and the substantial number of banks to which it was indebted. Two non-executive directors were also sought to be removed. One of those directors and his associate company had 5% and 10% of the votes that could be cast at the meeting. There was evidence to suggest that if the structuring plan was not approved, the company would vote in favor of the scheme or alternatively they should be enjoined from voting the conduct of the shareholder is manifestly injurious to the interests of the collapse. Two of the banks sought an order that the director and his associate company against the scheme. The court said that it would only be in most extreme case court would grant an injunction to prevent a shareholder from voting his shares. But company, the court can intervene. The court granted the injunction because it was in the interests of the company as well as its creditors.
Effect of provisions in articles on power to increase capital vis-a-vis statutory provisions
In a case before the Bombay High Court, Miheer Hemant Mafatlal versus Mafatlal Industries Ltd, the articles of a company happened to contain two contradictory provisions one of them permitting increase of capital by an ordinary resolution in the terms of s. 94 of the 1956 Act and another placing a limit beyond which the capital of the company would not be increased. The court held that such textually inconsistent provisions must be read subject to cross references reconciling them. Further, the article which restricted the power to increase the capital of the company beyond a certain amount would be void in itself because it has the effect of taking away the power conferred by s. 94 of the 1956 Act upon every company to increase its capital by an ordinary resolution and, in addition to that, it was also inconsistent with clause 5 of this particular company’s memorandum of association. It was no doubt true that this clause of the articles could have been altered only by a special resolution but the clause being void and therefore inoperative, the capital could be increased by an ordinary resolution in spite of this clause. It was not necessary for the company first to pass a special resolution, delete that particular provision and then exercise the power of increasing capital. The propositions of law which emerge from the judgment can be summarized as follows:
1) It is well-settled position in law that the increase of share capital referred to in section 94 of the 1956 Act is the increase of authorized share capital and not increase of the issued share capital.
2) Where an article in the articles of association of a limited company is substantially in pari materia, with sub-section. (1) of s. 94 of the 1956 Act, and it provides that the company may in general meeting increase its share capital by issue of new shares, the similarity in language clearly leads to conclusion that what is referred to in the article is share capital as referred to in s. 94(1) of the 1956 Act, namely, the authorized share capital or the nominal share capital of the company and not the issued share capital. Such an article in the articles of association of a limited company does confer a power on the company to amend capital clause in its memorandum of association.
(3) When an article in the articles of association of a limited company, dealing with powers to increase share capital does not specify that the increase in the share capital is to be effected by any particular type of resolution, namely, whether this should be done by an ordinary resolution or by a special resolution, it must follow that the power to increase share capital can be exercised by an ordinary resolution.
(4) Where there is no particular type of resolution referred to in the articles of association as being required in order to enable the company to do any particular act, an ordinary resolution to that effect will suffice. Merely because another article in the articles of association of the company limiting share capital of the company to a specified limit cannot be amended except by a special resolution, it cannot lead to the conclusion that the provisions of that article must be read in such a manner as to limit the power of the company to increase the share capital only by passing a special resolution.
(5) It is true that the articles of a company can be altered only by passing of a special resolution in view of the provisions of s. 31 of the 1956 Act. if two provisions in the articles of association are textually inconsistent they must be read subject to cross references reconciling them. For any clarification about company registration visit our site and feel free to contact us. We are here to help you.