BANK OF BARODA VS ABAN OFFSHORE LTD, (29.01.2020 – NCLAT): MANU/NL/0067/2020

CASE NAME	Bank of Baroda vs. Aban Offshore Limited
CITATION	(29.01.2020-NCLAT): MANU/NL/0067/2020
COURT	National Company Law Appellate Tribunal, New Delhi
PETITIONER	Bank of Baroda
RESPONDENTS	Aban Offshore Limited
DECIDED ON	29 January, 2020

INTRODUCTION

The National Company Law Appellate Tribunal (NCLAT) discussed the important issue of the rights of preference shareholders under the Companies Act, 2013 in Bank of Baroda vs Aban Offshore Ltd, decided on January 29, 2020. This case involved an appeal filed by Bank of Baroda against an order of the National Company Law Tribunal (NCLT) in which it dismissed the application of the bank relating to the redemption of cumulative redeemable non-convertible preference shares issued by Aban Offshore Ltd. The matter is illustrative of the nature of the issues relating to shareholder rights, redemption of preference shares, and interpretation of the operative provisions in our corporate law. This case highlights the rights of preference shareholders under the Companies Act, 2013, particularly in the context of redemption of cumulative redeemable non-convertible preference shares. It demonstrates the legal avenues available to shareholders when companies fail to honor their obligations, and clarifies the role of the NCLT and NCLAT in protecting shareholder interests. The judgment emphasizes that shareholders have a cognizable right to seek redemption, and tribunals have inherent powers to grant relief even where statutory provisions are silent. It also underscores the importance of corporate transparency and accountability in financial obligations. Overall, the case strengthens the legal framework for protecting minority shareholders’ rights in corporate governance.

FACTS

1. Parties Involved:

Appellant: Bank of Baroda, which is a large public sector bank in India made the appeal.

Respondents: Aban Offshore Ltd., a company involved in offshore drilling and other related services located in Chennai. 

2. Nature of the Shares: Bank of Baroda subscribed to cumulative redeemable non-convertible preference shares issued by Aban Offshore Ltd. on many dates for a total subscription of ₹30 crores. The shares had two different coupon rates of 8% and 9% per annum.
3. Defaults on Redemption: The appellant argued that Aban Offshore Ltd had defaulted on the redemption of the preference shares on the basis of their terms, and moreover failed to pay dividends to its preference shareholders since the financial year 2015-16 notwithstanding the fact that it duly paid significant dividends to its equity shareholders.
4. Petition to NCLT: The Bank made an application to the NCLT for the redemption of preference shares under Section 55 of the Companies Act, 2013, which states that if a company cannot redeem existing preference shares, it can issue further redeemable preference shares if it receives a consent of 75% of the preference shareholders.
5. NCLT’s Order: The NCLT, dismissed the petition stating the appellant (Bank of Baroda) was not the proper party or had no standing to petition as preference shareholders, stating that the petition must be made by the company rather than any individual preference shareholders.
6. Amalgamation: There was also an amalgamation of Vijaya Bank with Bank of Baroda which amalgamation took effect from April 1, 2019. The appellant sought to have Vijaya Bank substituted with Bank of Baroda in its appeal because of the amalgamation.
7. Financial Condition of the Respondent: The respondent contended that the financial condition was involved especially the volatility of crude oil prices, and the delay in receiving receipts from clients in the Middle East as the reason for their inability to redeem the preference shares.
8. Legal Grounds for Appeal: The appellant was seeking appeal against NCLT’s rejection of the application and stated in the notice of appeal that preference shareholders had a cognizable right to redeem their preference shares and that NCLT was wrong in stating that it did not have locus standi to bring the application.

ISSUES

1. Preference Shareholders rights: Whether the right to redeem shares under Section 55 of the Companies Act, 2013 vest with preference shareholders?
2. Locus Standi: Can a preference shareholder apply for redemption of shares, or must it be the company only?
3. Interpretation of Relevant Sections: How Sections 55 and 245 of the Companies Act, 2013 should be interpreted with respect to the rights of preference shareholders?
4. Inherent Powers of NCLT: Do the NCLT have the inherent power to afford relief to preference shareholders without a particular right of action by statute?

CONTENTIONS

APPELLANT’S CONTENTIONS

1. Right to Redemption: The appellant argued that under Section 55(3) of the Companies Act, preference shareholders can seek redemption of their shares assuming they could not do so under the conditions specified in the statute, including obtaining the majority of shareholders’ consent to do so.
2. Standing: The appellant argued that the NCLT did not take into account the fact that preference shareholders do have legal standing to make an application for redemption, and they should have the opportunity to protect their rights and be able to bring litigation when they are being affected.
3. Legislative Intent: The appellant argued that the purpose of the Companies Act was to provide shareholders – and preference shareholders – with a comprehensive means of protecting their rights. Thus, it was necessary to involve the NCLT by allowing applications made by preference shareholders to protect them.
4. The Respondent’s Financial Obligations: The appellant pointed out that the respondent did not redeem the preference shares, and that they had paid dividends inconsistently, and asserted that these were breaches of the Companies Act and warranted NCLT intervention.
5. Need for Protection from Oppressive Conduct: The appellant referred to Section 245 of the Companies Act dealing with class action, and stated that unlike shareholders (i.e. non-preference shareholders), preference shareholders should all be able to act together to complain against elements which act in their collective interest.

RESPONDENT’S CONTENTIONS

1. Standing and the Application Process: The respondent contended that the ruling of the NCLT was correct, to which it was determined that only the company could file an application under Section 55 regarding the redemption of preference shares. There were no other preference shares redeemable for independent applications or independent preference shareholders to represent the class. Each preference shareholder was bound collectively to act as the preference class and redeem those preference shares via the company.
2. Consent: The respondent pointed out that Section 55(3), which states that three-fourths of the preference shareholders consent before any redeemable preference shares could be issued again. In the absence of consent, the appellant (preference shareholder) could not proceed with actions.
3. Financial Hardship: The respondent emphasized the (business) hardship due to variances in crude oil prices and outstanding receivables which were delaying their abilities to redeem the preference shares. The respondent noted, they would like to redeem them once they improved their business financial standing.
4. Judicial Practices: The respondent noted previous judgements also including a decision of the NCALT that held only those representing a specified shareholder number can make an application under Section 245. The respondent argued that the affirmation of this number was not achieved by the appellant.
5. Intent to Redeem: The respondent stated they had every intent of redeeming the preference shares, but were simply not in a position to do so presently. They claimed to have also maintained communication with the preference shareholders to arrive at a resolution.

JUDGMENT

1. Confirmation of Preference Shareholder Rights: The NCLAT confirmed that preference shareholder have the right to redeem their preferred shares under Section 55 of the Companies Act, 2013 and reiterated the necessity of protecting shareholder rights and shareholders’ statutory obligations. 
2. Locus Standi: The tribunal found it was incorrect to dismiss the applications’ appeal simply based on the NCLT’s finding of a lack of locus standi, as preference shareholders are entitled to make an application for redemption – especially if their rights may be adversely impacted. 
3. Legislative Purpose: The NCLAT examined the legislative intent of the provisions found in Sections 55 and 245 as well as stating that the purpose of the companies act, under any provision of the act, should always be focused on the protection of shareholders including the preference shareholders in this case. The tribunal declared the law should afford some type of remedy to any preference shareholder when they are confronted with a non-redemption and to leave preference shareholders without the possibility of a remedy is patently absurd. 
4. NCLT’s Inherent Power: The NCLAT confirmed that the NCLT has inherent power to provide any remedy for a preference shareholder, even in those inadvertent cases where the statute does not denote an individual remedy.
5. Return of the Matter to NCLT: The NCLAT set aside the order of the NCLT and remitted the matter back for reconsideration. The NCLT was instructed to examine the appellant’s application based on the principles established in the judgment regarding the rights of preference shareholders.
6. Costs: The NCLAT did not impose any costs on either party, maintaining that the matter should be decided on its merits without penalizing either party for the proceedings thus far.

CONCLUSION

This verdict acts as a precedent that clarifies the rights of preference shareholders under the Companies Act, 2013. It clarifies the formalities that follow within corporations and restores the rights of shareholders that protect their interests and holds them accountable to redeem their preference shares under the law. Hence, It is clear that preference shareholders are able to take a course of action when their rights are infringed, thus upholding the principles of corporate governance as well as accountability. 

The judgment takes account of the need for companies to be transparent with its shareholders, particularly regarding the commitments they made to them when issuing preference shares.

The judgment shows the NCLT found that it has the right to exercise inherent jurisdiction where it was necessary to provide relief to shareholders, thus ensuring justice was being done and that shareholders have an avenue for review in cases of corporate non-compliance.

In essence, the judgment provides a better avenue for preference shareholders to further their rights and the baby steps for people managing companies, with regards to their commitment to their shareholders. The impact of this judgment will remain relevant in future cases related to shareholders rights, corporate governance and the interpretation of the Companies Act in India.

‘This article has been written by Tamanna Jain from University Five Year Law College, University of Rajasthan.’