2003 (10) TMI 398 - HC - Companies Law

Summary

Issues Involved:
1. Whether the reduction of share capital was within the purview of Section 100(1)(a) to (c) of the Companies Act.
2. Whether there was a need to reduce the share capital.
3. Whether there was discrimination between different classes of shareholders.
4. Whether the reduction of share capital should have been conducted under Section 77A of the Companies Act.
5. Whether the compensation of Rs. 850 per share was fair and adequate.

Issue-wise Detailed Analysis:

1. Reduction of Share Capital within the Purview of Section 100(1)(a) to (c):
The petitioner argued that the reduction of share capital was permissible under Section 100 of the Companies Act, emphasizing the phrase "reduce its share capital in any way," indicating a wide general power to reduce share capital. The court referenced the judgment in Securities and Exchange Board of India (SEBI) v. Sterlite Industries (India) Ltd., which confirmed that cancellation of shares and consequent reduction of capital could be covered under Section 391 read with Section 100, rejecting the necessity to resort solely to Section 77A.

2. Necessity of Reducing Share Capital:
The petitioner contended that the reduction was approved by a majority of shareholders, reflecting commercial wisdom, and should not be questioned by the court. The SEBI had approved the offer, deeming it fair, and there was no trading to determine the real market value.

3. Discrimination Between Different Classes of Shareholders:
The opposing shareholders argued that the resolution discriminated between promoters and non-promoters, forcing the latter to accept the offer or leave the company. The court noted that the minority shareholders were not given any option but to sell their shares, which was unfair. The judgment cited British and American Trustee And Finance Corpn. v. Couper, where it was held that a company could extinguish some shares without dealing similarly with all shares of the same class if the transaction was fair and equitable.

4. Reduction of Share Capital Under Section 77A:
The petitioner argued that Section 77A was not the only method for share reduction, supported by the Sterlite Industries case. The court agreed that Section 77A was not the sole method but emphasized that a scheme under Section 391 would provide better protection for minority shareholders, as highlighted in Coimbatore Cotton Mills Ltd. & Lakshmi Mills Co. Ltd., In re.

5. Fairness and Adequacy of Compensation:
The opposing shareholders contended that the compensation of Rs. 850 per share was not fair, referencing historical trading values which were significantly higher. The court agreed that the minority shareholders were forced to leave without a fair option, making the proposal inequitable.

Conclusion:
The court found that the reduction of share capital was unfair and inequitable to the minority shareholders, who were not given any option but to sell their shares. The proposal should have been conducted under a scheme providing adequate protection to minority shareholders. Consequently, the petition was dismissed with costs.