2009 (12) TMI 527 - HC - Companies Law

Scheme of Arrangement - Held that - When the equity shareholders approved special resolution with regard to adjusting CRR, nothing prevented passing a similar special resolution with regard to transfer of capital reserve and/or FCCB benefit to RRA. When the Scheme of Arrangement is proposed by Board of Directors with regard to three aspects, and a special resolution is passed only with reference to one subject concurrence of majority shareholders cannot be inferred with reference to other aspects. This is also one of the reasons which would disqualify the petition for approval. This Court has carefully perused the annual reports and Balance Sheets of Aurobindo for the years 2000-01 to 2007-08. In none of these, there is no indication for utilizing capital reserve for the purposes intended now by transferring to RRA. As capital is not a free reserve, it cannot be allowed for payment of any future liability or for depreciation of assets or for bad debts. As noticed supra, Aurobindo proposes to transfer capital reserve account to RRA to write-off capital lost and other losses. This is not permissible under law. Therefore, this Court is not inclined to approve the Scheme of Arrangement as proposed.

Issues Involved:
1. Sanction of Scheme of Arrangement under sections 391 to 393, read with sections 100 to 103, of the Companies Act, 1956.
2. Utilization of Capital Redemption Reserve (CRR).
3. Creation of Reconstruction Reserve Account (RRA).
4. Compliance with statutory requirements for reduction of share capital.
5. Legality of redeeming preference shares without court sanction.
6. Validity of transferring Capital Reserve Account (CRA) to RRA.
7. Utilization of benefits from buy-back of Foreign Currency Convertible Bonds (FCCBs).

Issue-wise Detailed Analysis:

1. Sanction of Scheme of Arrangement:
The petition filed by Aurobindo Pharma Limited sought the court's sanction for a Scheme of Arrangement between the company and its shareholders. The scheme aimed to utilize Rs. 91 crores from CRR for specific expenses and to create an RRA by transferring Rs. 90.30 million from the CRA and benefits from FCCBs buy-back.

2. Utilization of Capital Redemption Reserve (CRR):
Aurobindo proposed to use the CRR to adjust various expenses. The court examined the legality of this proposal, considering that CRR was created from profits to redeem preference shares. The court noted that once CRR is used for redemption, it cannot be reused, and any such utilization without court sanction is illegal.

3. Creation of Reconstruction Reserve Account (RRA):
The scheme proposed creating an RRA by transferring amounts from the CRA and benefits from FCCBs buy-back. The court scrutinized whether CRA could be used for purposes like writing off intangible assets, unrealizable loans, and other expenses. It concluded that CRA, being a capital reserve, cannot be used for such purposes.

4. Compliance with Statutory Requirements for Reduction of Share Capital:
The Companies Act allows reduction of share capital in specific ways, including extinguishing unpaid share capital, canceling paid-up share capital, or paying off excess paid-up share capital. Any such reduction requires court sanction. The court emphasized that Aurobindo did not comply with these statutory requirements when redeeming preference shares from CRR.

5. Legality of Redeeming Preference Shares without Court Sanction:
Aurobindo redeemed preference shares in 2000-01 without obtaining court sanction, which is mandatory under sections 100 to 103 of the Companies Act. The court found this action illegal and noted that no further utilization of CRR could be approved due to this non-compliance.

6. Validity of Transferring Capital Reserve Account (CRA) to RRA:
The court examined whether CRA could be transferred to RRA for the purposes outlined in the scheme. It concluded that CRA, being a non-distributable reserve, cannot be used for writing off losses or depreciation, making the proposed transfer invalid.

7. Utilization of Benefits from Buy-back of Foreign Currency Convertible Bonds (FCCBs):
Aurobindo proposed using the benefits from FCCBs buy-back to create RRA. The court required detailed disclosures on the buy-back process, compliance with RBI guidelines, and actual benefits accrued. In the absence of such details, the court could not approve this aspect of the scheme.

Conclusion:
The court dismissed the petition, finding that Aurobindo's actions, including the creation and utilization of CRR and CRA, were not compliant with statutory requirements. The proposed scheme was not approved due to the illegal redemption of preference shares without court sanction and the improper use of capital reserves. The court emphasized the importance of adhering to legal provisions for any reduction of share capital and the necessity of court approval for such actions.

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