2005 (8) TMI 712 - HC - Companies Law

Summary

Issues Involved:
1. Confirmation of proposed reduction of securities premium account under the Companies Act, 1956.
2. Compliance with the relevant sections of the Companies Act, 1956.
3. Objections raised by the Regional Director based on accounting standards.
4. Legal standing and procedural correctness of the reduction.

Issue-wise Detailed Analysis:

1. Confirmation of Proposed Reduction of Securities Premium Account:
The company filed an application under section 78 read with sections 100 to 103 of the Companies Act, 1956, seeking confirmation for the proposed reduction of its securities premium account from Rs. 4649/- lacs to Rs. 2292.95 lacs. This reduction was necessitated due to the loss in the value of intangible assets such as goodwill, trademark, and copyright, which the company proposed to adjust against its securities premium account.

2. Compliance with Relevant Sections of the Companies Act, 1956:
- Section 78: This section mandates the creation of a securities premium account for premiums received on the issue of securities, which can be treated similarly to paid-up capital for the purposes of reduction.
- Sections 100 to 103: These sections outline the procedures for reducing share capital, including passing a special resolution, applying to the Court for confirmation, and ensuring that creditors' rights are protected. The company complied with these provisions, including advertising the notice of the petition and ensuring no objections from creditors or shareholders.

3. Objections Raised by the Regional Director Based on Accounting Standards:
- Accounting Standard 26 (AS 26): The Regional Director argued that amortization of intangible assets should be recognized as an expense through the profit and loss account, as per AS 26.
- Accounting Standard 5 (AS 5): This standard requires all items of income and expense to be included in the determination of net profit or loss unless another standard permits otherwise.
- The Regional Director contended that the company's method of adjusting the securities premium account against intangible assets was procedurally incorrect and did not conform to these accounting standards.

4. Legal Standing and Procedural Correctness of the Reduction:
- The Court noted that the purposes listed in section 100(1) for the application of the securities premium account are illustrative and not exhaustive. Therefore, the company's proposed reduction to balance the loss of intangible assets was permissible.
- The Court emphasized that the reduction was fair, equitable, and reasonable, with no prejudice to any creditor or shareholder. The reduction was for a discernible purpose, and the procedure followed was legally correct.
- The Court also addressed the Regional Director's objections, stating that the deviation from accounting standards was necessary and did not prejudice any party. The securities premium account is not share capital, and thus, the reduction did not exceed the authorized share capital.

Conclusion:
The Court allowed the application for the reduction of the securities premium account, confirming that the proposed reduction met all legal requirements and did not prejudice any creditor or shareholder. The reduction was deemed fair, equitable, and reasonable, and the Court issued an order in terms of the prayers of the petition.