Interpretation of section 55(3) of Companies Act, 2013

In this article, let us try to Interpret the provisions of section 55(3) of Companies Act and to learn something new about this. 

Before going further let's study what section 55(3) says:

Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed:

Provided that the Tribunal shall, while giving approval under this sub-section, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.

Explanation.—For the removal of doubts, it is hereby declared that the issue of further redeemable preference shares or the redemption of preference shares under this section shall not be deemed to be an increase or, as the case may be, a reduction, in the share capital of the company.


Analysis 

Sec. 55(3) provides the situation where the Company is not in the position to redeem their preference shares then after approvals of Nclt and members the company can issue further shares.

So, 55(3) provides a sort of option to the Companies in which the Companies will be deemed that they have redeemed their preference shares due for Redemption eventhough they have not done redemption in actual.

Now Here, 

1. The cases where Company is unable in position to redeem shares can be where the preference shareholders have approached to the company for Redemption and Company has no sufficient funds or there may be the case that due date of redemption of preference shares have approached i.e. completion of 20 years and the Company has no sufficient funds to redeem them.


2. Type of shares : Sec 55(2) also states that the company can issue fresh shares (fresh shares word is used here, neither equity nor preference specified here) whereas 55(3) specifies for issue of fresh preference shares only.


3. Applicability: in the case of 55(2), company has sufficient funds and their position is financially sound, but in 55(3) company is not financially sound.


4. Necessary prior approvals: in 55(2) if the company is issuing shares company is required to obtain approval of members only, as per the cases of pvt placement, right issue etc but in 55(3) approvals of nclt along with members approvals are required.


5. Prospective investors: in 55(2) it may be existing shareholders or may be new investor in the company but in 55(3) it has to be existing preference shareholders only. 


6. Cash transfers: in 55(2) cash transactions are possible whereas same will not occur in 55(3)


So to summarize, 55(3) provides the case where the co has no sufficient funds and it is failing to comply for the redemption of preference shares then after approvals of nclt and members it can issue further preference shares to the existing preference shareholders only, and it will be deemed as due redemption of shares, just to comply with the obligation of the company to redeem those shares.

Procedure 

1. Convening of Board Meeting for approval of issuance of fresh preference shares to existing preference shareholders

2. Convening of General Meeting of preference shareholders for approval of issuance of fresh preference shares to existing preference shareholders

3. Make an application to NCLT 

4. Obtain approval from NCLT

5. Issuance of fresh preference shares.

6. Printing and delivery of fresh share certificates.

Food for thought 

1. In this case, the Company is issuing fresh preference shares, will the Company also have to pay stamp duty on the new shares so issued?

Ans. The section 55(3) provides a special case where the Company is failing to comply with the mandatory provisions of section 55 i.e. timely redemption of shares.

So to comply with the situation and also with the section, section 55(3) provides the way to issue fresh preference shares and that will be deemed that old preference shares has been duly redeemed. 

So, the new shares are so being issued are only in denoting terms and has no relevance in actual. Therefore, no stamp duty would be payable on these.

Another point is that, sec 55(3) gets triggered when the company is not having sufficient funds to redeem the shares. So why in the case, the Company would be made liable to pay stamp duty even if they are  not financially sound.



Copies of order of NCLT on the above cases can be found at following links

1. Catalyst Finance Pvt Ltd 


This blog is authored by Company Secretary Ronak Gupta. He is author of many blogs and runs many websites and youtube channels. His work is dedicated to corporate laws, legal, secretarial, professional services and also in strategy formulations for corporates. Mail him at: csronakgupta23@gmail.com or call at :9910226715

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