2025 (1) TMI 554 - AT - Companies Law

Reduction of share capital - Compliance with Section 66(1)(b)(ii) of the Companies Act, 2013 or not - permissibility of conversion of reduced share capital into interest-bearing unsecured loans - HELD THAT - The company has a power to reduce its shareholding capital in any manner, it being a domestic issue. Thus considering the fact none of the creditors ever raised any objection, even the Regional Director (Western Region) and the Registrar of Companies did not object to such reduction and also a special resolution dated 29.11.2022, having been passed by 100% majority of shareholders, it is found that there is no impediment to grant permission to the appellant for reduction of its shares by confirming the special resolution dated 29.11.2022. Conclusion - The impugned order set aside, permitting the reduction of share capital as proposed by the appellant company. Appeal allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the proposed reduction of share capital by the appellant company complies with Section 66(1)(b)(ii) of the Companies Act, 2013.
Whether the conversion of reduced share capital into interest-bearing unsecured loans is permissible under the Companies Act, 2013.
Whether the National Company Law Tribunal (NCLT) erred in dismissing the appellant's petition for confirmation of the special resolution passed for share capital reduction.
Whether the decision of the majority shareholders to reduce share capital should prevail in the absence of objections from creditors and regulatory authorities.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Compliance with Section 66(1)(b)(ii) of the Companies Act, 2013

Relevant legal framework and precedents: Section 66(1)(b)(ii) allows a company to pay off any paid-up share capital which is in excess of the wants of the company. Precedents cited include Indian National Press (Indore) Ltd and Reckitt Berickiser (India) Ltd, which highlight the domestic nature of share capital reduction and the discretion afforded to companies.
Court's interpretation and reasoning: The Tribunal found that the proposed reduction was based on anticipated future cash flows rather than current excess capital. Thus, it did not meet the requirement of being "in excess of the wants of the company" as of the date of the special resolution.
Key evidence and findings: The appellant company argued that the reduction was necessary due to surplus cash from operations and future growth projections. However, the NCLT noted that the current cash accruals were insufficient to justify the reduction.
Application of law to facts: The Tribunal applied Section 66(1)(b)(ii) strictly, emphasizing the need for current excess capital rather than future projections.
Treatment of competing arguments: The appellant contended that the reduction was a common industry practice and had been approved in similar cases. The Tribunal, however, focused on the statutory requirements and the specific circumstances of the case.
Conclusions: The NCLT concluded that the proposed reduction was not permissible under Section 66(1)(b)(ii) due to reliance on future cash flows.

Issue 2: Conversion of Reduced Share Capital into Loans

Relevant legal framework and precedents: The Companies Act, 2013, and External Commercial Borrowings guidelines under the Foreign Exchange Management Act were considered. Precedents from similar cases were also examined.
Court's interpretation and reasoning: The Tribunal viewed the conversion of share capital into loans as potentially affecting the company's financial ratios and operating metrics.
Key evidence and findings: The appellant proposed converting the reduced share capital into unsecured loans with interest, which the Tribunal found problematic under the current legal framework.
Application of law to facts: The Tribunal determined that the proposed conversion was akin to indirect lending, which required compliance with specific guidelines.
Treatment of competing arguments: The appellant argued that similar conversions had been approved in other cases. However, the Tribunal focused on the statutory interpretation and potential financial implications.
Conclusions: The Tribunal found the conversion of reduced share capital into loans impermissible under the Companies Act, 2013, and related guidelines.

Issue 3: NCLT's Dismissal of the Petition

Relevant legal framework and precedents: The discretionary power of the NCLT under Section 66 of the Companies Act, 2013, was central to this issue.
Court's interpretation and reasoning: The NCLT dismissed the petition based on non-compliance with statutory requirements and potential impact on the company's financial health.
Key evidence and findings: The NCLT noted the absence of current excess capital and the potential financial impact of the proposed conversion.
Application of law to facts: The Tribunal applied its discretion to protect the interests of creditors and ensure compliance with statutory provisions.
Treatment of competing arguments: The appellant argued for consistency with prior approvals in similar cases. The Tribunal, however, emphasized the need for statutory compliance and financial prudence.
Conclusions: The NCLT's dismissal was upheld due to non-compliance with statutory requirements and potential financial implications.

Issue 4: Majority Shareholders' Decision

Relevant legal framework and precedents: The principle of majority rule in corporate governance was considered, with reference to precedents like Reckitt Berickiser (India) Ltd.
Court's interpretation and reasoning: The Tribunal acknowledged the majority's decision but emphasized the need for compliance with statutory provisions and protection of creditors' interests.
Key evidence and findings: The unanimous approval by shareholders and lack of objections from creditors and regulatory authorities were noted.
Application of law to facts: The Tribunal balanced the majority's decision with statutory compliance and financial prudence.
Treatment of competing arguments: The appellant argued for deference to the majority's decision, while the Tribunal focused on statutory requirements and financial implications.
Conclusions: The Tribunal upheld the need for statutory compliance despite the majority's decision.

3. SIGNIFICANT HOLDINGS

Verbatim quotes of crucial legal reasoning: "The scheme of section 66(1)(b)(ii) of the Companies Act, 2013 only enables a company to pay off excess capital to its shareholders, which is considered in excess of wants of the company."
Core principles established: The reduction of share capital must be based on current excess capital, not future projections. Conversion into loans requires compliance with statutory guidelines.
Final determinations on each issue: The appeal was allowed, and the impugned order set aside, permitting the reduction of share capital as proposed by the appellant company.

← Previous Next →