CHANAKYA NATIONAL LAW UNIVERSITY
PATNA
SUBJECT: CORPORATE LAW-I
PROJECT ON :
PRUDENTIAL ASSURANCE CO. LTD AND OTHERS
VS.
CHATTERLEY-WHITFIELD COLLIERIES CO. LTD
Submitted to: - Submitted by:
Mr. Shantanu Braj Choubey Daksh Middha
(FACULTY OF LAW) Roll .no.- 1407
7th Semester
B.B.A. L.L.B (HONS)
ACKNOWLEDGEMENT
Writing a project is one of the most significant academic challenges I have ever faced. Though this
project is being presented by me but there are many people who remain in veil, and have given their
valuable support and have acted as guiding force, helping me to complete this project.
First of all I am very grateful to my subject teacher Mr. Shantanu Braj Choubey, without the kind
support and help of whom, the completion of the project would have been a herculean task for me. He
donated his valuable time from his busy schedule to help me to complete this project and suggested me
how to approach the topic and also from where to collect the data.
I am also very thankful to the librarian who provided me several books on this topic which proved
beneficial in completing this project.
I would also like to acknowledge the efforts of my friends who gave their valuable time and meticulous
advice which proved very useful and could not have been overlooked while completing this project.
Last but not the least, I am very much thankful to my parents and family, who have always stood aside
me and helped me a lot in accessing all sorts of resources.
I thank them all
Daksh Middha
R.No.-1407
7th Semester
B.B.A. L.L.B. ( HONS)
2
Prudential Assurance Co. LTD and Others Vs. Chatterley-Whitfield collieries co. ltd
Contents
PROJECT ON : .......................................................................................................................................... 1
CONTENTS ................................................................................................................................................ 3
RESEARCH METHODOLOGY:- ........................................................................................................... 4
INTRODUCTION ...................................................................................................................................... 5
FACTS OF THE CASE ............................................................................................................................... 5
DECISION OF THE COURT .................................................................................................................... 6
PREFERENCE SHARE CAPITAL ........................................................................................................ 7
TYPES OF PREFERENCE SHARES : ..................................................................................................... 8
CUMULATIVE AND NON-CUMULATIVE PREFERENCE SHARES ................................................... 8
REDEEMABLE AND IRREDEEMABLE PREFERENCE SHARES........................................................ 8
CONVERTIBLE AND NON-CONVERTIBLE PREFERENCE SHARES ................................................ 8
PARTICIPATING AND NON-PARTICIPATING PREFERENCE SHARES........................................... 8
PREFERENCE SHAREHOLDERS RIGHTS IN PARTICIPATION OF SURPLUS ASSETS OF
THE COMPANY ........................................................................................................................................ 9
APPLICATION IN INDIA ..................................................................................................................... 11
CONCLUSION ......................................................................................................................................... 13
BIBLIOGRAPHY..................................................................................................................................... 14
WEBSITES:................................................................................................................................................ 14
ARTICLE : ................................................................................................................................................. 14
BOOKS: ..................................................................................................................................................... 14
3
Prudential Assurance Co. LTD and Others Vs. Chatterley-Whitfield collieries co. ltd
RESEARCH METHODOLOGY:-
This project is based mainly and heavily on material on internet, books, and articles. It is based on the
doctrinal and non-Doctrinal method of research. The segments are structured and written actively. The
writing style is descriptive as well as analytical. This project has been done after a thorough research
based upon intrinsic and extrinsic aspect of the assigned topic.
4
Prudential Assurance Co. LTD and Others Vs. Chatterley-Whitfield collieries co. ltd
INTRODUCTION
FACTS OF THE CASE
A colliery company, whose capital was of £400,000 was divided into 20,000 six per cent. Preference
shares of £10 each and the same number of ordinary shares of a like nominal value. The
company passed a special resolution, an empowered by its articles of association, to reduce its
capital to £200,000 by returning to the preference shareholders the whole capital paid up on their
share. The articles conferred on the preference shareholders a right to a cumulative preference
dividend of 6 per rent., and on winding-up, in priority to ordinary shareholders, to repayment of
capital together with any arrears of dividend down to the date of such repayment in priority to the
claims of the holders of ordinaryshareholder, but to no other participation in the assets. On Jan, 1,
1947, under the Coal Industry Nationalisation Act, 1946, the company, colliery undertaking
become vested in the National Coal Board,a pending the payment of compensation, the
company was entitled under Section 22 (3) of the Act to interim income, and wider Section
22 (2) to interest on the amount of the compensation.
The Act provides by Section 25 : " (1) Provision shall be made by regulations for due regard
being had, as between classes of members of a company being an owner of transferred interring, to
what their relative expectations of income yield from their respective interest in the company
would have been if this act has not been passed, and for the purpose the regulations shall provide
facilities for adjusting interests of such classes in the company's asset as affected by the substitution
of the compensation under this Act for rho transferred interests of the company so as to give effect,
so far as may be, on the one hand to the said expectations and on the other hand to the rights of
priority conferred on Buell classes respectively by the . . . memorandum and articles of association of
the company."
Certain preference shareholders dissented from the resolution to reduce capital in the proposed
manner and opposed the petition to confirm it. It appeared that the company was not contemplating
liquidation, but was prospecting for coal in Ireland and had other activities in view.
To the contention that the court does not have the jurisdiction to adjudicate the matter of
proposed reduction of capital, the court applies the principle as applied in Scottish Insurance
5
Prudential Assurance Co. LTD and Others Vs. Chatterley-Whitfield collieries co. ltd
CO., Ltd. v. Wilsons & Olyde Coal Co., Ltd1.held that it was unaffected by the provisions of Sec
26. The court held that it was its duty and it cannot postpone consideration of the proposed
reduction, but after analyzing and giving due weightage to Sec 25, court declared that the exercise
of the jurisdiction in the present case was fair and equitable and confirmed it.
DECISION OF THE COURT
The court held that the claim of preference shareholder has no substance and they were entitled to
nothing more than their nominal amount of capital.
The court on asking the Appellant was informed that preference shareholders has an adjustment with
the company by which they can get £12 for every £10 of capital on their submitting to be paid off. The
court was reluctant in prejudicing any claim that may come before statutory tribunal but declared that
there was no slightest justification for such a claim. The two contention for consideration before the
court was: “rights of propriety” and “relative expectations of income” of the petition. The court was
satisfied with the first contention and declared that it was in favour of the preference shareholders and
they can claim repayment of their capital in full before any payment is made to the ordinary
shareholders.
To the second contention, the court held that it is surely the ordinary shareholders whose position has
been prejudiced by the expropriation of the company’s property. The preferential holders may or may
not eventually find a 6% investment for the money, probably they will not, but it is in the highest
degree unlikely that the ordinary shareholders will receive any income commensurate with what they
might reasonably have expected if the act had not been passed. The court not departing from the well-
known principle and familiar practice upheld the reduction of capital and declared that the preference
shareholders can get anything more than the full amount of their capital return.
1
Scottish Insurance CO., Ltd. v. Wilsons & Olyde Coal Co., Ltd, [1948] 2 All E.R. 593
6
Prudential Assurance Co. LTD and Others Vs. Chatterley-Whitfield collieries co. ltd
PREFERENCE SHARE CAPITAL
Section 43 of Companies Act 2013 provided that the share capital of a company limited by
shares shall be of two kinds only:
a. Equity share capital
I. With voting rights or
II. With differential rights as to dividend ,voting or otherwise in accordance with
such rules and subject conditions as may be prescribed.
b. Preference Share capital
A preference share must satisfy the following two dominant conditions:
(i) As regards dividends, it must carry a preferential right to a fixed amount.
(ii) As regards capital, in the event of a winding up or other arrangement, to repayment of
capital, there must be a preferential right for the repayment of the amount of capital paid-up
on such share.
Rule 9 of Companies (Share Capital and Debentures) Rules, 2014
(2) A company issuing preference shares shall set out in the resolution, particulars in respect of the
following matters relating to such shares, namely:-
(a) the priority with respect to payment of dividend or repayment of capital vis-a-vis equity shares;
(b) the participation in surplus fund;
(c) the participation in surplus assets and profits, on winding-up which may remain after the entire
capital has been repaid;
(d) the payment of dividend on cumulative or non-cumulative basis.
(e) the conversion of preference shares into equity shares.
(f) the voting rights ;
(g) the redemption of preference shares.
7
Prudential Assurance Co. LTD and Others Vs. Chatterley-Whitfield collieries co. ltd
TYPES OF PREFERENCE SHARES :
CUMULATIVE AND NON-CUMULATIVE PREFERENCE SHARES
Cummulative preference share are shares that bestows a right on the holder to get the dividends of the
previous financial years which the company was not able to pay because of the reason of no profit
earned or insufficient profits. In other word, the dividends keep amassing until they are paid in the form
of arrears, before any profit is paid on value shareholders. Non-cumulative preference shareholders
does not get the right to receive dividend of previous years. No arrears of profit are awarded. There is
no gathering of dividend and if no profit is earned by the company, no dividend is paid.
REDEEMABLE AND IRREDEEMABLE PREFERENCE SHARES
Redeemable preference shares are shares which can be reclaimed on or after a fixed period for recovery
under the terms of issue or subsequent to giving a proper notice of redemption to preference
shareholders. The Companies Act imposes certain limitations for the recovery of preference shares.
Irredeemable preference shares which cannot be redeemed during the lifetime of the company.
CONVERTIBLE AND NON-CONVERTIBLE PREFERENCE SHARES
The preference shares convertible into normal shares, inside a specified period, are known as
convertible preference shares. The holders of non-convertible preference shares does not have such
right of conversion.
PARTICIPATING AND NON-PARTICIPATING PREFERENCE SHARES
The participating preference shares have a privilege to take an interest in the surplus profits of the
company stayed in the wake of paying dividend to the ordinary shareholders shareholders and
preference shareholders at a fixed rate. The preference shares which don’t have such right to participate
in surplus profits are known as non-participating an interest preference shares.
8
Prudential Assurance Co. LTD and Others Vs. Chatterley-Whitfield collieries co. ltd
PREFERENCE SHAREHOLDERS RIGHTS IN
PARTICIPATION OF SURPLUS ASSETS OF THE
COMPANY
In determining whether preferred shareholders have a right to participate in distribution of assets,
courts are guided by the principle that absent agreement the rights and privileges of all shareholders
are equal.' The preferred shareholders' priorities are determined by their share contracts,2 and it is
therefore the share contract which must be searched for an agreement supervening the rule of parity
among shareholder3.
First judgement to lay down the above stated principle was Scottish Insurance Corporation v.
Wilsons & Clyde. In this case the term of issue provided for cumulative preference dividend to have
priority in case of liquidation but expressly declaring non-participating. The terms of issue were
silent on the point of right to participation in distribution of surplus assets in winding up. W hen
nationalization of the coal industry vested title to the company's colliery assets in the National Coal
Board, a litigation was instituted to liquidate the company. Before the liquidation, by a resolution
passed in general meeting, the company opted for reduction in capital and decided to repay the
preferred shareholders at par. Application was made to the court for approval in accordance with
companies Act 1948.Among the objections raised by the preferred shareholders was that repayment
at par deprived them of their rights to participate with the ordinary shareholders in distribution of
surplus assets upon liquid.
The court held that the burden to prove that the surplus assets did not belong entirely to the common
(Oridinary) shareholders was upon the complaining preferred shareholders. There was no provision
for redemption and the article of issue only provided for the repayment of the proposed capital. Court
further held even if the rights involved at liquidation were identical to those on winding up, the
liquidation priority of the preferred shares was prima facie an exhaustive right.
2
BALLANMIE, CORPORATIONS ? 212 (Rev. ed. 1946); Participating Rights of Preference Shares, 209 L.T. 36 (1950).
3
Lyman v. Southern Ry. Co.,279, 141 S.E.
9
Prudential Assurance Co. LTD and Others Vs. Chatterley-Whitfield collieries co. ltd
It was Scottish Insurance opinion that was upheld on the same day by the House of Lords' in
Prudential Assurance Co. v. Chatterley-Whitfield Collieries 4 . This case differs from Scottish
insurance case only on the fact that in this case preference shareholders were expressly non-
participating as to surplus assets on liquidation, as well as to dividends.
If this parallelism between preferred shareholders' rights on reduction of capital and their rights on
liquidation is complete, repayment by a going concern of shares expressly participating on
liquidation would require compensation for the unrealized right to surplus assets. Such a rule would
prevent defeat of the participation right by repaying preferred shares at par prior to dissolution.
Protection might also be achieved by use of a conversion privilege.
Subsequently, English Court of Appeal in Isle of Thanet Electric Co. 5 clarified the opinion of non-
participation of House of Lords in Scottish Insurance Corporation v. Wilsons & Clyde and Prudential
Assurance Co. v. Chatterley-Whitfield Collieries. In this case , the preference shareholders right to
surplus assets were involved. The company was already in voluntary liquidation contract of
preference shareholders provided for participating Cumulative preferred dividend. The contract
stated liquidation priority , but was silent as to rights to participate beyond the priority on winding up.
The court referring to both the previous judgement held that the burden of establishing a participation
right on liquidation was on the preference shareholders and they have failed in discharging their duty.
Therefore preference shares were not entitled to share in the surplus assets.
The opinion delivered by Justice Wynn-Perry clearly indicated the applicable principles: first, that, in
construing an article which deals with rights to share in profits, i.e., dividend rights and rights to
share in the company's property in a liquidation, the same principle is applicable; and secondly, that
that principle is that, where the article sets out the rights attached to a class of shares to participate in
profits while the company is a going concern, or to share in the property of the company in
liquidation, prima facie the rights so set out in each case are exhaustive.
The rule developed in the Scottish Insurance and Thanet Electric Case is supported by several other
considerations. Specific priority in consideration of surrender of parity rights, in the dividend cases is
logically inferable. It is likely that if the investor in preferred shares has no expectations beyond the
specified dividends he has no expectations beyond the specified liquidation priority. Furthermore, as
4
Prudential Assurance Co. v. Chatterley-Whitfield Collieries, [1948] 2 All ER 593
5
Re Isle of Thanet Electric Co, 4 [1949] 2 All E.R. 106.
10
Prudential Assurance Co. LTD and Others Vs. Chatterley-Whitfield collieries co. ltd
in the case Scottish Insurance, the surplus assets ordinarily represent accumulations which could have
been distributed to the ordinary shareholders as dividend. Preference shareholders cannot be allowed
to incure benefits of the surplus assets which have been the result of ordinary shareholders being
abstained from dividend so that the accumulations can be used in the business and for protection of
preference shareholders. On the other hand, if the preferred shares are expressly participating in
dividends, as in the Thanet Electric case, the silence of the share contract as to surplus assets on
liquidation seems deliberate and a strong indication that no participation as to them was intended.
Many English writers have raised concern over the ruling of House of Lords in Scottish Insurance
and Thanet Electric case. They object that the assimilation deprives the preference shareholders the
right to share in extraordinary profits while being reasonably assured a minimum return. The
preference shareholders while investing are well aware whether their rights are exhaustive or
inclusive. The Court understood that if there is an express participation provision in the contract,
there would arise no real objective as to participation of preference shareholder in surplus assets. But
in case of contrary situation, the burden to prove that this right persist has been thrown on the
preference shareholder and it is to be presumed in the absence of expression provision that the
preference shareholders does not have such right in the surplus assets of the company.
APPLICATION IN INDIA
Surplus asset are the assets that are left after all the debts of the company have been paid and all
capital, both in respect of preference and ordinary share have been repaid. The principle laid down in
Scottish Insurance Corporation v. Wilsons & Clyde and further upheld in Prudential Assurance Co.
v. Chatterley-Whitfield Collieries is adopted in India. In India also Preference shareholders have no
right to participate in surplus profits unless the right to participate in surplus profits is expressly set
out in the articles.
The Companies (Share Capital & Debentures) Rules, 2014; mandates that regulations in respect of the
following matters relating to preference shares are to be included in the Articles of Association of a
company:-
1. The voting rights;
2. The redemption of preference shares.
3. The priority with respect to the payment of dividend or repayment of capital vis-à-vis equity shares.
11
Prudential Assurance Co. LTD and Others Vs. Chatterley-Whitfield collieries co. ltd
4. The payment of dividend on the cumulative or non-cumulative basis.
5. The conversion of preference shares into equity shares. The participation in the surplus fund.
6. The participation in surplus assets and profit, on winding-up.
In case of absence of the express provision of Memorandum of Association, the court will presume that the
preference shareholder has no rights in the surplus assets and profit of the company. The burden of proof is
on the contending preference shareholder to prove to the contrary.
12
Prudential Assurance Co. LTD and Others Vs. Chatterley-Whitfield collieries co. ltd
CONCLUSION
It could be concluded that the preference shareholders are not entitled to any share in the distribution
of any such surplus assets, unless there is a clear provision in the memorandum or the terms of issue
or the articles conferring upon them the right to participation. Generally fixed amount of dividend has
been paid to the preference shareholders. In case of surplus assets, at the winding of the company if
preference shareholders are entitles to surplus assets in accordance with the memorandum or the
terms of issue or the articles, they are known as Participating shareholders.
13
Prudential Assurance Co. LTD and Others Vs. Chatterley-Whitfield collieries co. ltd
BIBLIOGRAPHY :
WEBSITES:
1. http://www.mondaq.com/x/467970/Shareholders/Ordinary+Shares+And+Preference+Shares+H
ow+Do+They+Affect+Shareholders+Rights
2. https://www.jstor.org/stable/1596300?seq=1#metadata_info_tab_contents
3. https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1468-2230.1963.tb00727.x
4. http://lawtimesjournal.in/hierarchy-preference-shareholders/
5. http://ca2013.com/rule-9-companies-share-capital-and-debentures-rules-2014/
ARTICLE :
I. THE RIGHTS OF PREFERENCE SHAREHOLDERSREALITY OR MIRAGE?, available at
http://classic.austlii.edu.au/au/journals/UWALawRw/1969/11.pd ( assessed on 1st September
2018, At 11:30 P.M.)
II. THE PROBLEM OF THE PREFERENCE SHARE, Modern Law Review,( Vol. 26) pg 499.
III. PARTICIPATION OF PREFERRED SHAREHOLDERS BEYOND STATED PREFERENCE,
The University Of Chicago Law Review Volume 2 December 1934, available at
https://www.jstor.org/stable/pdf/1596300.pdf?refreqid=excelsior%3A661c68134896c38f1862c
ecb90884698 ( assessed on 3rd September 2018 at 4:50 P.M.)
BOOKS:
I. AVTAR SINGH, COMPANY LAW, Eastern Book Company, (Seventeenth Edition 2017), pg
691.
II. RAMAIYA (REVISED BY ARVIND P DATAR & S. BALASUBRAMANIAN), A
RAMAIYA GUIDE TO THE COMPANIES ACT, Lexus Nexus,(Ed 2016)
14
Prudential Assurance Co. LTD and Others Vs. Chatterley-Whitfield collieries co. ltd
