NCLT Kochi Allows MFAR Enterprises To Issue Fresh Preference Shares Under Section 55(3) Companies Act

The National Company Law Tribunal (NCLT) at Kochi on 8 May held that Section 55(3) of the Companies Act, 2013 operates as an independent remedial mechanism where a company is unable to redeem existing preference shares, and permitted issuance of further redeemable preference shares in substitution of unredeemed shares.

A Bench of Judicial Member Vinay Goel and Technical Member Ravichandran Ramasamy allowed MFAR Enterprises Private Limited's petition seeking permission to issue further redeemable preference shares for a period of five years and directed that the existing unredeemed preference shares be treated as deemed redeemed. It observed:

“We find no illegality in the earlier extensions granted by the Company with the concurrence of the shareholders and approved by special resolution at the relevant time, and such changes were duly reported to the ROC. Accordingly, we find no legal impediment to granting this petition.”

MFAR Enterprises filed the petition under Section 55(3) of the Companies Act seeking permission to issue further redeemable preference shares in respect of its unredeemed preference shares. The company also sought a declaration that the existing unredeemed preference shares be treated as deemed redeemed.

The company had issued 50 lakh 9% redeemable cumulative preference shares in 2005 to MFAR Hotels & Resorts Private Limited. The shares were originally due for redemption in October 2015. Through special resolutions passed in 2015 and 2021, the company extended the redemption date to 15 October 2025.

In 2016, the company redeemed 37.50 lakh preference shares, leaving 12.50 lakh preference shares outstanding. The company submitted that it could not redeem the remaining shares or pay dividend due to economic slowdown and insufficient profits.

The company stated that its Board of Directors had approved the proposal for issuance of further preference shares and that the sole preference shareholder had also furnished written consent.

The Registrar of Companies objected to the petition, arguing that since the preference shares were issued in 2005, the maximum 20-year redemption period expired on 15 October 2025, and any extension beyond that date would violate Section 55(2) of the Companies Act.

Rejecting the objection, the Tribunal held that Section 55(3) is a remedial provision intended to address situations where a company is unable to redeem preference shares or pay dividends, and permits issuance of further redeemable preference shares in such cases.

The Bench noted that the earlier extensions were carried out with the consent of the sole preference shareholder through special resolutions and that the RoC had accepted the changes without objection.

Holding that issuance of further redeemable preference shares under Section 55(3) operates as a substitution mechanism and not as an extension of the original term of issue, the Bench observed:

“The objection of the Registrar of Companies regarding the expiry of the twenty-year period under Section 55(2) of the Companies Act, 2013 cannot defeat the operation of Section 55(3) of the Act, which functions as an independent enabling provision.”

Accordingly, the NCLT allowed the petition and permitted the company to issue further redeemable preference shares for a period of five years, directing that upon such issuance, the existing unredeemed preference shares would stand deemed redeemed.

For Petitioner: Yogindunath S, PCS

For Respondents: Savvy J Alappat, Junior Technical Assistant and Rincy C Aboobacker, CS