2015 (3) TMI 1447 - HC - Companies Law

Prosecution under Section 77A(11) of the Companies Act 1956 in the absence of an offer or public announcement for a buyback of shares - exoneration of the petitioners by the Appellate Tribunal - HELD THAT - It was necessary for the respondent to demonstrate that there was an offer or public announcement of buyback of equity shares. Unless that is there the offence would not be complete. As already stated there was no public announcement. Similar view has been taken by the Tribunal also. For these reasons the prosecutions against the petitioners cannot be continued as the same amounts to abuse of process of court. The proceedings pending against the petitioners in the court of Metropolitan Magistrate 47th Court Esplanade Mumbai vide criminal case no. 30/SS/06 are hereby quashed - Petition allowed.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment from the Bombay High Court addresses the following core issues:

Whether the petitioners are liable for prosecution under Section 77A(11) of the Companies Act, 1956, in the absence of an offer or public announcement for a buyback of shares.
The impact of the Securities Appellate Tribunal's exoneration of the petitioners on the criminal proceedings initiated by the respondent.
The interpretation of Section 77A of the Companies Act, 1956, in conjunction with the regulations prescribed by the Securities and Exchange Board of India (SEBI).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Liability under Section 77A(11) of the Companies Act, 1956

Relevant Legal Framework and Precedents: Section 77A of the Companies Act, 1956, empowers a company to buy back its own shares, subject to certain conditions. The provision mandates that no buyback can occur without authorization by the company's articles and a special resolution by shareholders.
Court's Interpretation and Reasoning: The court examined whether the absence of a public announcement or offer to buy back shares constituted a violation of Section 77A(11). It concluded that a buyback is not obligatory even after a special resolution by shareholders unless a public announcement is made.
Key Evidence and Findings: The court considered the absence of a public announcement or offer as critical evidence that the alleged offence under Section 77A(11) was incomplete.
Application of Law to Facts: The court applied the statutory requirements of Section 77A and found that the necessary conditions for a buyback, including a public announcement, were not met.
Treatment of Competing Arguments: The respondent argued that the Tribunal's decision was based on secondary legislation (regulations), which cannot override the Companies Act. However, the court emphasized the need for a public announcement as per the statutory framework.
Conclusions: The court concluded that without a public announcement, the prosecution under Section 77A(11) could not be sustained.

Issue 2: Impact of the Securities Appellate Tribunal's Exoneration

Relevant Legal Framework and Precedents: The Tribunal's decision, which exonerated the petitioners, was based on the interpretation of buyback regulations under SEBI.
Court's Interpretation and Reasoning: The court considered the Tribunal's reasoning that a company is not obliged to proceed with a buyback unless a public announcement is made. The Tribunal's decision was not challenged, lending weight to the petitioners' argument for exoneration.
Key Evidence and Findings: The court noted that the Tribunal's decision was consistent with the statutory framework, reinforcing the petitioners' position.
Application of Law to Facts: The court applied the Tribunal's interpretation to the facts, determining that the lack of a public announcement meant the buyback process was incomplete.
Treatment of Competing Arguments: The respondent contended that the Tribunal's decision was not binding on criminal proceedings. However, the court found the Tribunal's reasoning persuasive and aligned with the statutory requirements.
Conclusions: The court concluded that the Tribunal's exoneration, combined with the absence of a public announcement, justified quashing the criminal proceedings.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "A company is under no obligation to buy back its securities even if its shareholders have passed a special resolution authorizing it to buy back on the terms and conditions mentioned in the resolution."
Core Principles Established: The judgment reinforced the principle that a buyback requires both shareholder authorization and a public announcement. Without these, no obligation arises for the company to proceed with a buyback.
Final Determinations on Each Issue: The court quashed the criminal proceedings against the petitioners, emphasizing that the absence of a public announcement precluded a complete offence under Section 77A(11) and that continuing the prosecution would constitute an abuse of process.

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