2008 (9) TMI 557 - HC - Companies Law

Scheme of Arrangement - Application of Share premium - Held that - As it is clear that a company has the option to either transfer more than the requisite 10 per cent of its current profits to reserve (where it declares a dividend in excess of 20 per cent) or to carry the same forward in the Profit and Loss Account. It is also clear that the said reserve is a free reserve which means, that there is no lien marked on, or obligation or limitation attached to such reserves. The company is not prohibited by any provision of the Act or the Rules from dealing with its free reserves in a manner, which is not opposed to any provision of the law. Pertinently, what the petitioner proposes to do is to firstly transfer to the Profit and Loss Account and then to disburse as special dividend, only that part of the General Reserves which are in excess of the statutorily required amount of General Reserve that it is obliged to maintain. The amount of ₹ 430,857,000 that it is proposing to disburse as special dividend from the out of the General Reserve by transferring the same to the Profit and Loss Account does not reduce the statutorily required level of General Reserve that the petitioner company is obliged to maintain. The said amounts, which are now sought to be disbursed as special dividend are assets of the company. A company is entitled to distribute its assets to its shareholders, as permitted by law. As the scheme has been approved by the shareholders by overwhelming majority and the secured creditors have given their consent to the same. No objection has been raised by any unsecured creditor despite notice. Therefore, see no impediment in the petitioner company transferring the amount of ₹ 430,857,000 from the General Reserves to the Profit and Loss Account of the company for being disbursed as special dividend to the shareholders.Therefore, sanction the scheme proposed by the petitioner company.

Summary

Issues Involved:
1. Sanction and approval of the Scheme of Arrangement under sections 391-394 of the Companies Act, 1956.
2. Utilization of the Securities Premium Account.
3. Distribution of special dividend from the General Reserves Account.

Issue-wise Detailed Analysis:

1. Sanction and Approval of the Scheme of Arrangement:
The petitioner, Nestle India Ltd., sought the court's sanction for a Scheme of Arrangement between the company and its equity shareholders. The scheme aimed to reduce the Securities Premium Account and distribute a special dividend from the General Reserves Account. The Board of Directors approved the scheme, and the equity shareholders overwhelmingly supported it in a meeting convened by the court. No objections were raised by the unsecured creditors after due notice.

2. Utilization of the Securities Premium Account:
The scheme proposed reducing the Securities Premium Account by Rs. 43,23,63,000 and paying this amount to the shareholders. The Regional Director opposed this, arguing that section 78 of the Companies Act limits the use of the Securities Premium Account to four specific purposes. The court analyzed sections 78(1) and 78(2) of the Act, concluding that while section 78(2) provides specific instances where the account can be used without following the reduction of share capital procedures, it does not prohibit other uses if the reduction procedures are followed. The court cited precedents, including Parrys Confectionery Ltd. and Hyderabad Industries Ltd., which supported the broader interpretation of section 78.

3. Distribution of Special Dividend from the General Reserves Account:
The scheme proposed transferring Rs. 43,08,57,000 from the General Reserves to the Profit and Loss Account and distributing it as a special dividend. The Regional Director argued that this was not permissible under the Act, particularly section 205A(3) and the Companies (Declaration of Dividend out of Reserves) Rules, 1975. The court found that these provisions apply only in cases of inadequacy or absence of profits, which was not the situation here. The court noted that the General Reserves included amounts voluntarily transferred in excess of the statutory requirement, which could be distributed as special dividends. The court cited clarifications from the Department of Company Affairs and concluded that there was no legal impediment to the proposed distribution.

Conclusion:
The court sanctioned the scheme, allowing the reduction of the Securities Premium Account and the distribution of a special dividend from the General Reserves. The court emphasized that no liabilities of the company, statutory or otherwise, would be compromised by the approval of the scheme.