2022 (5) TMI 1654 - HC - Indian Laws

Maintainability of suit - Reduction of share capital of company - order passed by the Appellate Authority for Industrial and Financial Reconstruction accepting the reduction of the existing paid up share capital of the plaintiff company by 99% on equity capital and 99% on the preference share capital is valid and binding on the defendant. Maintainability of suit - Whether the order dated December 4 2007 passed by the Appellate Authority for Industrial and Financial Reconstruction accepting the reduction of the existing paid up share capital of the plaintiff company by 99% on equity capital and 99% on the preference share capital is valid and binding on the defendant? - HELD THAT - Although the issue of jurisdiction of this Court and limitation have not been raised separately but same is covered by issue no.3. The defendant being a resident of Loudon Street within the Ordinary Original Civil jurisdiction the suit against the said defendant can be filed and maintained in this Court. The original share holder i.e. the husband of the defendant died on 22nd June 2012. The defendant s first assertion of right claiming 500 shares was on 6th November 2016. Pursuant thereto certain letters were exchanged between the parties. Ultimately the plaintiff by a letter dated 10th February 2017 issued 50 shares of Re.1/- each to the defendant which she refused to accept and demanded 500 shares. The defendant thereafter by a letter dated 11th March 2017 once again requested the plaintiff-company to issue 500 shares which was followed by a complaint to Security Exchange Board of India (SEBI). The suit was instituted on or about 22nd September 2017 is within limitation. In respect of the relief(s) claimed the defendant is the sole party necessary. The suit is therefor maintainable. Whether the paid up equity share capital of the plaintiff stood reduced by 99% in terms of the Order dated December 4 2007 passed by the Learned Appellate Authority for Industrial and Financial Reconstruction? - To what other reliefs the plaintiff is entitled to? - HELD THAT - The suit has been admittedly filed after the introduction of IBC and repeal of SICA 1985 by the 2003 Act. Section 231 of IBC bars the jurisdiction of Civil Courts in respect of matter under its domain. After repeal of SICA the plaintiff has to approach the appropriate authority under IBC for implementation of the scheme as the reference regarding the plaintiff-company remained pending as on the date of institution of the suit. Despite the bar to jurisdiction of Civil Court the Authority under IBC cannot pass a declaratory decree inter se between the company and an individual share holder as in the case in hand. This is also the reason for holding the suit to be maintainable. In the instant case the reduction of share capital was brought by way of a Rehabilitation Scheme framed under Section 18(2)(f) and Section 18(4) of the SICA 1985 and not by following the procedure available under the Companies Act. The BIFR and the AAIFR under the provisions of Section 18(2)(f) and Section 18(4) are competent to formulate a composite scheme permitting reduction of share capital for rehabilitation of the company - It is also possible that the Rehabilitation Scheme permitting reduction of share capital may be further modified during the course of implementation which may have an effect over the portion of the scheme which permits reduction of share capital. It can therefor be said that still the scheme has been successfully implemented the reduction of share capital permitted under the said scheme does not achieve finality and is subject to being further modified. The Rehabilitation Scheme which permitted reduction of share capital was in operation at the time when the suit was instituted. The scheme remained in operation till 31st March 2022. After 31st March 2022 the operation period of the scheme can either be extended by a competent forum or the scheme will be held to have failed. In either case the right as to reduction of share capital in favour of the plaintiff- company does not crystallize. Thus taking the fact scenario at the time when the suit was instituted as also the subsequent events that may occur after 31st March 2022 it is evident that the reduction of share capital permitted under the scheme has not crystallized - Since the right in favour of the plaintiff has not crystallized and the plaintiff is not entitled to a declaration of a legal character no decree of declaration can be passed in the facts of the case. The consequential injunction cannot also be granted independently of the decree of declaration. Since the suit is dismissed the connected application filed by the defendant after conclusion of hearing also stands dismissed. Urgent photostat certified copy of this judgment and order if applied for be supplied to the parties on priority basis after compliance with all necessary formalities. Suit dismissed.

Summary

Issues Involved:
1. Reduction of paid-up equity share capital by 99%.
2. Reliefs entitled to the plaintiff.
3. Validity and binding nature of the order dated December 4, 2007, by AAIFR.
4. Maintainability of the suit in the High Court.

Issue-wise Detailed Analysis:

Issue 1: Reduction of Paid-up Equity Share Capital by 99%
The court examined whether the plaintiff's paid-up equity share capital was reduced by 99% per the AAIFR order dated December 4, 2007. The reduction of share capital in the plaintiff-company was part of a rehabilitation scheme sanctioned under Section 18(2)(f) and Section 18(4) of SICA, 1985, aimed at reviving the company. The court noted that such a reduction is permissible under the Companies Act, 1956, and 2013, provided the statutory formalities are followed. However, in this case, the reduction was contingent upon the successful implementation of the rehabilitation scheme, which remained open to modification until the scheme was fully worked out. Therefore, the reduction did not achieve finality and remained subject to change.

Issue 2: Reliefs Entitled to the Plaintiff
The plaintiff sought a declaration that the paid-up share capital stood reduced to Rs. 20.23 lakhs and that the defendant was entitled only to 50 equity shares of Re.1/- each. The court held that a declaration under the Specific Relief Act, 1963, is generally granted for crystallized rights but can also be granted for contingent rights. However, in this case, the plaintiff's right to claim a declaration was contingent upon the successful implementation of the rehabilitation scheme, which had not yet been achieved. Consequently, the court could not grant the declaration or the consequential injunction sought by the plaintiff.

Issue 3: Validity and Binding Nature of the AAIFR Order
The court addressed whether the AAIFR order dated December 4, 2007, was valid and binding on the defendant. The court affirmed that the AAIFR and BIFR were competent to formulate a rehabilitation scheme, including the reduction of share capital. The scheme remained binding until it was successfully implemented or the company was wound up. The court noted that the SICA, 1985, was repealed by the 2003 Act, and the proceedings under SICA abated with its repeal. However, the scheme continued to operate under the new legal framework, with the forum for addressing implementation issues shifting to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC), 2016. Therefore, the reduction of share capital remained a contingent act until the scheme was successfully implemented.

Issue 4: Maintainability of the Suit in the High Court
The court examined the maintainability of the suit, considering the jurisdiction and limitation. The defendant resided within the Ordinary Original Civil jurisdiction of the High Court, making the suit maintainable. The court noted that the defendant's assertion of rights began on November 6, 2016, and the suit was filed on September 22, 2017, within the limitation period. Despite the bar on civil court jurisdiction under Section 231 of IBC, the court held that it could still pass a declaratory decree regarding the rights between the company and an individual shareholder. Thus, the suit was maintainable as framed.

Conclusion:
The court dismissed the suit, holding that the plaintiff's right to a declaration and injunction had not crystallized due to the contingent nature of the rehabilitation scheme. The reduction of share capital remained subject to successful implementation of the scheme, which was still in operation. Consequently, the court could not grant the reliefs sought by the plaintiff. The connected application filed by the defendant was also dismissed.