1985 (8) TMI 297 - HC - Companies Law

Reduction of share capital - Application to Tribunal for confirming order, objections by creditors, and settlement of list of objecting creditors, Compromise and arrangement

Summary

Issues:
1. Procedure under section 101 of the Companies Act for reduction of capital.
2. Interpretation of the term "arrangement" under section 391 of the Companies Act.
3. Compliance with debenture issuance regulations and authority approvals.

Analysis:

1. Procedure under Section 101 for Reduction of Capital:
The petitioner-company sought to cancel preference shares and issue debentures instead. The Company Law Board argued that the company failed to follow the procedure under section 101 of the Companies Act, which is crucial to ensure fairness and guard against prejudice to minority shareholders. However, the court found that the procedure under section 101 can be dispensed with if deemed fit and proper by the court. In this case, after examining the company's financial health and considering shareholder resolutions, the court dispensed with the procedure under section 101. The Company Law Board's contention of unfairness or prejudice was rejected due to lack of specific complaints or evidence.

2. Interpretation of "Arrangement" under Section 391:
The Company Law Board contended that the proposed scheme did not fall under section 391 as it did not involve a reorganization of share capital but rather an adjustment of rights. However, the court disagreed, stating that the inclusive definition of "arrangement" in section 390(b) encompasses all arrangements, not limited to reorganization of share capital. Previous case law supported the view that schemes modifying shareholder rights can be brought under section 391. The court dismissed the argument that the scheme did not qualify as an "arrangement" under section 391.

3. Compliance with Debenture Issuance Regulations:
The Company Law Board raised concerns that by sanctioning the scheme of arrangement, the court would bypass the necessary approvals for debenture issuance from authorities like the Controller of Capital Issues. The court clarified that the scheme was conditional upon obtaining required approvals from relevant authorities. If such approvals were not granted, the scheme would fail. The court emphasized that the company must adhere to the prescribed procedures for debenture issuance, and the question of circumventing authority approvals did not arise.

In conclusion, the court made the petition absolute, approving the scheme of arrangement and directing the petitioner to pay costs. The judgment highlighted the court's discretion to dispense with procedural requirements, the broad interpretation of "arrangement" under section 391, and the importance of complying with regulatory approvals for debenture issuance.