2016 (4) TMI 481 - HC - Companies Law

Reduction of share capital - Held that - There is no legal impediment in the petitioner company seeking a reduction in its share capital, which is to be utilized towards distribution of assets which are in excess of its needs. The RD, in its reply/ report, clearly admits as much by making a specific reference to the fact that reduction in capital may be effected by paying up paid-up capital, which is in excess of one s needs, and that, this can be achieved either with or without extinguishing or reducing liability qua its shares. The petitioner company had already denied that it would be effecting reduction in share capital either by writing off its long term loan and advances or cash, which is shown in the assets side of the balance sheet. 9.1 Even as per the RD, the petitioner company had no accumulated loss on the date of the preparation of the provisional balance sheet. As to the observation of the RD, that the reduction in share capital is being sought to distribute brought forward profits of the petitioner company, to escape payment of tax on distribution of profits, is an observation which is not backed by any relevant provision of the Income Tax Act, 1961. As a matter of fact, because such an observation had been made by the RD in his reply/ affidavit, the matter was re-listed in court for directions on 29.03.2016. Consequent thereto, an affidavit dated 31.03.2016 has been filed on behalf of the petitioner company. The petitioner company has undertaken via the said affidavit to pay all income tax liabilities, if any, that may arise upon approval of the prayer made for reduction in share capital. Therefore, for all these reasons, the reduction of unwanted paid-up capital against excess assets appearing in the balance sheet of petitioner company, as obtaining on 31.10.2013, is approved in terms of the special resolution dated 19.12.2013 passed in the EOGM of its shareholders.

Summary

Issues:
Petition for reduction of share capital under Sections 100 to 104 of the Companies Act, 1956 with Rules 46 and 47 of the Companies (Courts) Rules, 1959.

Analysis:
1. Background and Approval Process:
- The petitioner company sought reduction of share capital from ?49,00,000 to ?11,28,520 for distributing excess assets.
- Board of Directors approved the reduction, and a special resolution was passed at the Extraordinary General Meeting (EOGM) on 19.12.2013.
- Shareholders' consent was obtained, and a resolution was passed as per the provisions of the Companies Act, 1956.

2. Contentions and Clarifications:
- The Regional Director (RD) raised concerns regarding the alteration in the Articles of Association and the motive behind the reduction.
- RD highlighted the need to write off long term loans and advances for the reduction, suspecting tax evasion motives.
- The petitioner clarified the power to reduce capital under Article 4, not Article 6A, and denied tax evasion intentions.

3. Legal Impediments and Compliance:
- The court confirmed the company's power to reduce capital and the shareholders' approval at the EOGM.
- The company's Chartered Accountant certified the absence of debts, and the reduction was not based on accumulated losses.
- The court dismissed RD's tax evasion concerns, noting the lack of legal backing for such claims.

4. Court's Decision and Disposal of Petition:
- The court approved the reduction of unwanted paid-up capital against excess assets as per the special resolution.
- Minutes of the EOGM were approved for registration, and the requirement to add a suffix to the capital structure was waived.
- The court disposed of all prayers in the petition, concluding that the reduction was lawful and compliant with the Companies Act, 1956.

This detailed analysis covers the background, contentions, legal compliance, and the court's decision regarding the petition for the reduction of share capital, ensuring transparency and adherence to legal procedures throughout the process.