2004 (9) TMI 382 - HC - Companies Law

Summary

Issues Involved:
1. Utilization of share premium for writing off bad debts.
2. Compliance with sections 78 and 100 of the Companies Act, 1956.
3. Legal permissibility of writing off bad debts against the share premium account.
4. Public interest implications for a banking company.
5. Jurisdiction and discretion of the Company Court in approving resolutions.

Detailed Analysis:

1. Utilization of Share Premium for Writing Off Bad Debts:
The petitioner, a banking company, sought the court's approval to utilize the share premium account for writing off bad and doubtful debts. The petitioner argued that due to substantial bad loans written off in the financial years 2001-2002 and 2002-2003, the free and statutory reserves had been exhausted. Consequently, the company proposed to use the balance in the share premium account for the financial year ending 31-3-2004. The Board of Directors and shareholders had approved this proposal through a special resolution.

2. Compliance with Sections 78 and 100 of the Companies Act, 1956:
The court examined the legal framework under sections 78 and 100 of the Companies Act, 1956. Section 78(1) deems the share premium account as paid-up share capital for the purposes of sections 100 to 105. The court emphasized that any reduction of share capital, including the utilization of the share premium account, must comply with the mandatory provisions of section 100. The court noted that the share premium account cannot be treated as a reserve fund and cannot be used to write off bad debts.

3. Legal Permissibility of Writing Off Bad Debts Against the Share Premium Account:
The court held that a company cannot write off its bad debts against the share premium account as it lacks the characteristics of a statutory reserve or reserve created out of profits. The court found it illogical and unsound business practice to use the share premium account for writing off bad debts. The court cited the fundamental principles that the share premium account can only be utilized for purposes specified under section 78(2) of the Act, such as issuing bonus shares or writing off preliminary expenses.

4. Public Interest Implications for a Banking Company:
The court underscored the public character of a banking company's affairs, governed by the Banking Regulation Act, 1949, and the Reserve Bank of India Act, 1934. The court expressed concerns that allowing the banking company to adjust its cumulative loss from the share premium account could result in manipulation of accounts and artificially bolstering the market value of the company's stock. The court emphasized that such actions could erode public trust and be detrimental to public interest.

5. Jurisdiction and Discretion of the Company Court in Approving Resolutions:
The court reiterated that while considering applications for reduction of share capital, including those involving share premium accounts, it must ensure compliance with legal provisions and principles of fairness and justice. The court referred to precedents, including the Supreme Court's judgments in Hindustan Lever Employees' Union v. Hindustan Lever Ltd. and Miheer H. Mafatlal v. Mafatlal Industries Ltd., which highlighted the court's duty to ensure that resolutions are lawful, just, and not contrary to public policy.

Conclusion:
The court concluded that the company petition was misconceived and that the proposed utilization of the share premium account for writing off bad debts was illegal, unfair, and not authorized by law. Consequently, the court dismissed the petition, denying approval of the resolution passed by the company's shareholders.