JUDGMENT 

K. A. ABDUL GAFOOR, J. - This is an application under section 391 of the Companies Act, 1956, for sanction of a scheme of arrangement and compromise between the company and its preferential shareholders. The company, according to the affidavit, is not functioning on profitable basis. It is impossible for the company to discharge its liabilities towards the preferential shareholders. Therefore, an arrangement has been thought of to release the preferential shareholders by converting their stake in the company as loan due to them from the company. This will protect, according to the company, the preferential shareholders. It is in that respect this application under section 391 of the Companies Act has been filed to record and sanction that compromise. 

2. A notification for the meeting of the preferential shareholders has been issued and a meeting had been convened. The Chairman has filed his report. In the meeting, not only the preferential shareholders but also the equity shareholders and the secured creditors were present. The unanimous decision endorsed the proposal made by the company as aforesaid. Therefore, under section 392 of the Companies Act, the company prays for an order to sanction the said scheme. 

3. Notice had been issued to the Central Government and other necessary parties. It is contended on behalf of the Central Government that preference shares can be redeemed only in terms of section 80 (1) of the Companies Act, 1956. Such redemption shall be out of the profits earned by the company or out of the funds collected by issuing further shares. In the proposal made by the company preferential shares are not sought to be redeemed out of the funds obtained in either of the two manners. Therefore, the proposal is opposed to section 80 (1). 

4. The provisions contained in section 80 (1) are to protect the preferential shareholders and their interests from any unilateral action of the company and the equity shareholders. When the company unilaterally, without the participation of the preferential shareholders, decides to redeem their stake, naturally, it shall be in terms of section 80 (1) of the Companies Act and not otherwise. An arrangement under section 80 (1) shall be without the participation, knowledge and consent of the preferential shareholders. In this case, the meeting of the preferential shareholders was held and all of them including the equity shareholders and the secured creditors have consented for (to) the arrangement. The preferential shareholders who are, if at all, adversely affected, have no objection in the arrangement proposed by the company. In such circumstances, it is not to the prejudicial interest of such shareholders, but it is as consented to by them. Therefore, there is no reason to withhold the sanction in terms of section 391 (2) of the Companies Act. Accordingly, I order to sanction the scheme as proposed by the company and I issue an order in terms of rule 81 of the Companies (Court) Rules, 1959, in tune with the scheme of arrangement. A copy of this order shall be forwarded to the Registrar of Companies, Ernakulam. The company shall make payment to the preferential shareholders at the earliest.