2012 (12) TMI 621 - HC - Companies Law

Scheme of arrangement - reduction of capital or a scheme of arrangement or both - provisions of Article of Association - Utilizing a part of the share premium for payment of Dividend, does it amount to payment of paid up capital to the shareholders - conditions stipulated in section 390 to 394A - held that - The court ought not, usually, to require that a reserve be set aside indefinitely to safeguard the interests of future creditors and shareholders. Anyone who gives credit to or acquires shares in the company after the reduction takes effect is, prima facie, adequately protected by existing statutory safeguards. (Grosvenor Press Plc. In Re (supra)). It is unnecessary, therefore, to set apart any further sums in the special reserve . Instead of directing publication, of the causes and the reasons for reduction of capital, in the newspapers I consider it appropriate to direct the petitioner to add to its name, as its last words, the words and reduced for the period upto and until the end of the financial year 2012-13, and in the balance sheet, the profit and loss account, and the annexures thereto for the said year. Such usage would suffice to protect the interests of prospective investors and would safeguard public interest. All that this Court is required to do, in an application seeking its sanction for a scheme of arrangement involving reduction of capital, is to ensure that the statutory provisions have been complied with, and the scheme as a whole is fair and reasonable. The wisdom or otherwise of the scheme is for the shareholders to decide and, since all the shareholders, all the secured creditors, and around 80% of the unsecured creditors, who attended the respective meetings, have supported the scheme, it is not for this Court to go into the merits of the scheme or to sit in judgment over the wisdom of the shareholders of the company in seeking reduction of capital. Scheme of arragment involving reduction of capital allowed. Subject to conditions.

Issues Involved:
1. Scheme of Arrangement Involving Reduction of Share Capital: Scope of Enquiry.
2. Articles of Association: How Should Its Clauses Be Interpreted?
3. Utilizing a Part of the Share Premium for Payment of Dividend - Does It Amount to Payment of Paid-Up Capital to the Shareholders?
4. Sections 390 to 394-A: Have the Conditions Stipulated Therein Been Complied With?

Issue-Wise Detailed Analysis:

I. Scheme of Arrangement Involving Reduction of Share Capital: Scope of Enquiry:

The court emphasized that it cannot interfere with the discretion and commercial wisdom of the stakeholders and the Board of Directors. It must ensure that the procedure is legally correct, and the shareholders and creditors are not prejudiced. The court must also ensure that the scheme is fair and equitable. The scheme proposed by the petitioner involves utilizing the balance in the securities premium account to wipe off losses, thereby presenting a correct picture to the market. The court noted that the scheme's purpose is to write off past losses and revive profits for future utilization, including the declaration of dividends. The court concluded that the statutory requirements relating to the reduction of share capital and the scheme of arrangement must be satisfied.

II. Articles of Association: How Should Its Clauses Be Interpreted?

The court interpreted Clause 10 of the Articles of Association, which allows the company to reduce its share capital by special resolution, to include the reduction of share premium as well. The court emphasized that the Articles should be construed to give them reasonable business efficacy. The court noted that the notice given to the members did not specify that the resolution should be a special resolution, but concluded that the failure to do so would not invalidate the resolution since all shareholders were aware of the scheme's contents and voted in favor of it.

III. Utilizing a Part of the Share Premium for Payment of Dividend - Does It Amount to Payment of Paid-Up Capital to the Shareholders?

The court examined whether the payment of dividends to preference shareholders constituted the payment of paid-up share capital. It concluded that the scheme envisages utilizing the share premium account for payment of dividends, which requires compliance with the provisions relating to the reduction of share capital. The court directed the petitioner to secure the interests of the minority creditors by setting apart a "special reserve" and furnishing a bank guarantee for the disputed amount.

IV. Sections 390 to 394-A: Have the Conditions Stipulated Therein Been Complied With?

The court reviewed the compliance with Sections 390 to 394-A, noting that the statutory majority had acted in good faith and that the scheme was just, fair, and reasonable. The court found that the petitioner had disclosed all material facts, including the latest financial position and pending investigations, as required under the proviso to Section 391(2). The court also considered the objections raised by the respondent-objector and concluded that the scheme was not contrary to any law or public policy and was in public interest.

Conclusion:

The court sanctioned the scheme of arrangement involving the reduction of capital, subject to the fulfillment of specific conditions to secure the interests of the minority creditors. The court directed the petitioner to add the words "and reduced" to its name until the end of the financial year 2012-13 and to comply with the statutory requirements for the reduction of capital. The court emphasized that the scheme was fair, reasonable, and in the public interest, and that the statutory provisions had been duly complied with.

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