UNIVERSITY OF PETROLEUM & ENERGY STUDIES

SCHOOL OF LAW

B.A., LL.B. (HONS.) ENERGY LAWS

SEMESTER - V
ACADEMIC YEAR: 2017-22 SESSIONS: AUG - DEC

ASSIGNMENT
FOR
COMPANY LAW – 1
(CLCC3001)
Case Analysis : Bhagwati Developers Vs. Peerless General Finance And
Investment Co. Ltd.,[2005] 62 SCL 574.
Under The Supervision Of : Ms. Aratrika Deb

NAME : PINTU RAM

ROLL : R450217075

SAP ID : 500060941

Bhagwati Developers
 ……….Petitioner

Vs.

Peerless General Finance And Investment Co. Ltd.,[2005] 62 SCL 574

……………
Respondent

Civil Appeal No. 12640 of 1996

(1992) 2 SCC 343

(Before : S. N. Variava & Dr. A. R. Lakshmanan)

FACTS :

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. 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 corers 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.

1. 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.

2. 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.

3. 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.

4. That the Bonus Shares so allotted pursuant to this resolution shall rank in all respects 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.

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.

ISSUE :

 Whether the Bonus Shares had been issued contrary to SEBI guidelines,

 That is contrary to the Circular of the Department of Company Affairs dated 6th
September, 1994 and,

 That the issue could not have been made as it is contrary to Article 182 of the
Articles of Association of the Company.
HELD :

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."

CONCLUSION :

The High Court was concluding that these words only applied 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. 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.