Compliances for Conversion of Preference shares to equity shares in a Private Limited Company

With increased competition, more demanding shareholders, rising inorganic growth and business complexities, there is a need of change and need for business restructuring. So generally, one can perform restructuring either by reorganisation of Assets, or, New Ownership, or re-working on financial claims, or maybe Strategies like JVs, ESOP, Share Purchase Agreement etc.
Eventually everyday there are corporate restructuring happening in corporates including Private Limited Companies during the last few years.
Recently, we came across a similar Practical situation;
A Private Limited Company has paid up redeemable preference share capital of Rs. 1 Crores and it is not in position to redeem preference share or pay dividend.
What is best possible solution for such company as per Companies Act 2013?

As per Sec 43 of Companies Act 2013, the share capital is of two kinds;
- Equity Share capital
- Preference Share Capital@
Preference Share Capital means a part of the issued share capital of the company which carries or would carry a preferential right with respect to;
- Payment of Dividend
- Repayment in case of winding up or repayment of Capital
@However, vide Notification dated 5th June 2015, Sec 43 shall not apply to Private Company and for Private Company, it shall be followed as per MOA & AOA and if in case MOA & AOA are silent about Preference share capital then, Companies Act 2013 to be followed.

Given that the company has redeemable preference shares on their  Balance Sheet and also they are not in position to repay or pay dividend and they wish to find out a best possible solution. We suggested any of the following;
A. Issue further Redeemable Preference shares equal to amount due for new term(Sec 55(3)); OR
B. Convert Redeemable Preference shares into Equity
The objective behind such suggestions were to safeguard the interests of Shareholders and also to restructure the balance sheet. Since the subject matter is Preference Shareholders in both the cases, we need to take consent from Preference Shareholders.
For Solution A i.e. Issue further Redeemable Preference Shares for another timeline i.e. extension of term, Sec 55(3) of Companies Act 2013 read with Rule 69 of NCLT Rules, 2016
As per Sec 55(3), when the company is not in a position to redeem preference shares,

(3) 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.

As per NCLT Rules, 2016, Rule 69, it says that petition shall be given in Form No. NCLT 1 and shall be accompanied by list of documents as specified.
The issue of further Redeemable Preference Shares with the consent of 3/4th of value of the Preference shareholders and with the approval of Tribunal(Here Tribunal means NCLT) on a petition being made and convert them into Equity by passing Special Resolution and file eForm MGT 14 & eForm PAS 3 for re-organising the share capital.
It is to be noted that issue of redeemable preference shares under this section 55(3), shall not be deemed to be an increase or as the case may be reduction in the share capital of the company.

While, if the company resort to convert the preference shares into Equity they can do so by taking consent from Preference shareholders;

Step 1: Pass a BR for conversion of Preference Shares and also convene General Meeting for obtaining permission of the Preference shareholders
Step 2: Conduct Meeting of Preference Shareholders for obtaining the permission in regard to conversion before any event date (the redemption date)
Step 3: File MGT 14 & PAS 3 with MCA
It is important to check that authorised share capital (both Preference & Equity) value before you resort to convert.

For more details, contact CS Neha Seth at 9871903449 or email us at csnehaseth@gmail.com