NCLT Bangalore allows plea to extend tenure for redeeming Cumulative Preference Shares by 2 years in light of COVID-19, ensuing economic slowdown

The National Company Law Tribunal (NCLT), Bangalore recently allowed a petition to extend the tenure of 5% Redeemable Cumulative Preference Shares by two years given the company's inability to mobilise funds to redeem the same on account of the COVID-19 pandemic and the resulting economic slowdown (M/s. Indiana Hospital and Heart Institute Limited v. Ministry of CorporateAffairs). .The order was passed by a Bench of Ashutosh Chandra (Judicial Member) and Rajeswara Rao Vittanala (Technical Member) after M/s. Indiana Hospital and Heart Institute Limited moved the plea in line with certain statutory requirements. .The NCLT granted approval for the move, observing that this would also be in line with the stance of taking a liberal view of matters during the pandemic period and in sync with the promotion of government initiatives for ease of doing business. .“In view of the reasons cited, namely the spread of COVID-19 pandemic and the resulting economic slowdown, leading to the Company’s inability to mobilise funds, we are of the considered view that the Petition deserves to be allowed. This is in line with our stance of taking a liberal view of matters in this pandemic period, to promote the Government’s initiatives of ease of doing business, and in the interest of equity and justice” the order stated..The petition was filed in line with statutory requirements under Section 55 (3) of the Companies Act 2013, which lays down that where a company is not in a position to redeem any preference shares or to pay dividend on such shares in accordance with the terms of issue, it can issue further redeemable preference shares equal to the amount due and on issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed. This is subject to the consent of three-fourths of the preference shareholders and the approval of the NCLT, on a petition made by the company..Also in focus was Section 48 (1) of the Companies Act, which mandates getting consent in writing from three-fourths of shareholders where their rights are sought to be varied by means of a special resolution passed in a separate meeting of the shareholders concerned..The petitioner, M/s Indiana Hospital and Heart Institute Ltd, was engaged in the business of owning, maintaining and managing hospitals..Owing to the onset of COVID-19 pandemic and the ensuing economic slump, the company was unexpectedly not able to raise the funds required to redeem 5% Redeemable Cumulative Preference Shares due on October 2020 from the company profits and the proceeds from the fresh issue of shares. .This forced the management of the company to take steps to extend the tenure to redeem existing preference shares by a further period of two years on the opinion that the situation could be well-managed by such a move..A petition was, therefore, filed to allow the company to extend the tenure of 5% Redeemable Cumulative Preference Shares by two years through the issue of further 5% Redeemable Cumulative Preference Shares in lieu of old preference shares, equal to the amount due on the original 5% Redeemable Cumulative Preference Shares..The Registrar of Companies (ROC), Karnataka initially pointed out that the requisite consent of three-fourths of shareholders affected by the proposed move had not been obtained by the petitioner-company. .In this regard, the NCLT was told that, as per a June 26, 2020 resolution of preference shareholders, only 16 preference shareholders attended the meeting with 33.13% voting right only out of 83 preference shareholders..However, the petitioner's counsel, Nebil Nizar later submitted that the consent of remaining shareholders have since been obtained, on which aspect a memo was also filed on March 4, 2021..In view of this as well, the NCLT proceeded to allow the company's prayer to extend the tenure of 5% Redeemable Cumulative Preference Shares for a period of two years. .[Read Order]