2004 (4) TMI 311 - HC - Companies Law

Summary

Issues Involved:
1. Adjustment of share premium against permanent loss in investment.
2. Applicability of sections 78 and 100 of the Companies Act, 1956.
3. Requirement of court approval for adjusting share premium.
4. Legal interpretation of share premium account and reserve funds.
5. Authority provided by Articles of Association for reduction of share capital.

Issue-wise Detailed Analysis:

1. Adjustment of Share Premium Against Permanent Loss in Investment:
The petitioner company sought confirmation to adjust the share premium against the permanent loss in investment made in Nepal Metal Company Limited (NMCL). The company argued that this adjustment would align with accounting standards and not prejudice creditors or shareholders.

2. Applicability of Sections 78 and 100 of the Companies Act, 1956:
The court examined whether the application under section 78 read with section 100 of the Companies Act, 1956, was appropriate for seeking approval to adjust the share premium account against the loss. The court noted that section 78(1) deems the share premium account as paid-up share capital, and sections 100 to 105 outline the procedure for reducing share capital, which must be followed when applying the share premium account for purposes other than those specified in section 78(2).

3. Requirement of Court Approval for Adjusting Share Premium:
The court emphasized that any adjustment of the share premium account must follow the procedure under sections 100 and 105, which includes obtaining court approval. The court also highlighted that any misrepresentation in obtaining court approval is a penal offense under section 105.

4. Legal Interpretation of Share Premium Account and Reserve Funds:
The court distinguished between share premium accounts and reserve funds. It clarified that while share premium accounts can be used for specific purposes outlined in section 78(2), they cannot be equated with reserve funds for writing off losses. The court referred to authoritative texts and previous judgments to support this interpretation, concluding that the share premium account cannot be used to write off losses unless it involves a reduction of share capital.

5. Authority Provided by Articles of Association for Reduction of Share Capital:
The court examined the Articles of Association of the petitioner company, particularly Article 15, which allows for the reduction of share capital by special resolution and court confirmation. However, the court noted that the Articles did not specifically authorize the use of the share premium account for writing off losses. The court concluded that without specific authorization in the Articles of Association, the company could not utilize the share premium account for purposes other than those specified in section 78(2).

Findings and Conclusion:
The court found that the petitioner's application did not fall within the purview of sections 78 and 100 of the Companies Act, 1956. The court held that the petitioner company was not entitled to an order confirming the minute of the company dated 25-9-2003, and the petition was rejected. The court emphasized that any adjustment of the share premium account must be authorized by law and the Articles of Association, and must follow the procedure for reduction of share capital.