1965 (11) TMI 67 - HC - Companies Law

Reduction of share capital Application to Tribunal for confirming order, objections by creditors, and settlement of list of objecting creditors

Summary

Issues Involved:
1. Reduction of Capital under Section 66 of the Companies Act, 1948
2. Application for Confirmation under Section 67(2) of the Companies Act, 1948
3. Special Circumstances under Section 67(3) of the Companies Act, 1948
4. Creditor's Objections and Settlement of List of Creditors
5. Adequacy of Company's Liquid Assets
6. Landlords' Claims and Leasehold Properties
7. Precedents and Legal Interpretations

Detailed Analysis:

1. Reduction of Capital under Section 66 of the Companies Act, 1948:
The judgment begins by confirming that under Section 66 of the Companies Act, 1948, a reduction of capital requires the confirmation of the court. This is a mandatory procedure to ensure that the reduction does not adversely affect the interests of creditors and shareholders.

2. Application for Confirmation under Section 67(2) of the Companies Act, 1948:
Section 67(2) regulates applications to the court for confirmation of capital reduction. It stipulates that if the reduction involves the diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid-up share capital, every creditor entitled to any debt or claim against the company can object. The court must settle a list of such creditors and cannot confirm the reduction unless the company secures payment of the creditor's debt or claim.

3. Special Circumstances under Section 67(3) of the Companies Act, 1948:
Section 67(3) allows the court to direct that subsection (2) shall not apply to any class or classes of creditors if special circumstances justify such a direction. The court will consider the company's liquid assets and other reasons to ensure that no creditor is prejudiced by the reduction. Special circumstances include sufficient cash and trustee securities to cover all liabilities and any amount proposed to be returned to shareholders with a reasonable margin of safety.

4. Creditor's Objections and Settlement of List of Creditors:
The court is obliged to settle a list of creditors entitled to object to the reduction. If any creditor objects, the company must secure payment of the debt or claim. The amount to be secured depends on whether the company admits the full amount of the debt or claim. If not admitted, the court will fix an amount after inquiry and adjudication as if the company were being wound up.

5. Adequacy of Company's Liquid Assets:
In the present case, the company has sufficient cash resources to cover its liabilities, apart from those under the leases of its various properties, as well as the amount proposed to be returned to shareholders with an adequate margin. The court must determine if these circumstances justify dispensing with the requirements of Section 67(2).

6. Landlords' Claims and Leasehold Properties:
The company owns 29 properties, with 21 held on terms significantly below current market rates, giving the leases appreciable value. If the company were wound up, it could dispose of these leases for sums reflecting their value, or the lessors would benefit from the termination by negotiating fresh leases on more favorable terms. The remaining eight properties are either held for short periods or at full market rates, with no significant claims expected from lessors.

7. Precedents and Legal Interpretations:
The judgment references the decision in In re House Property and Investment Co. Ltd. [1954] Ch. 576, where Roxburgh J. held that a landlord could not insist on a fund being set aside to meet all future rent and obligations under a lease in a company's winding-up. The landlord could only prove for the value of the lessee's covenants, not for future rent. This precedent supports the argument that landlords' claims in the present case would be modest if the company were liquidated.

Conclusion:
The court must ensure that creditors, especially landlords, are not prejudiced by the reduction of capital. The company must demonstrate that it has sufficient liquid assets or provide suitable guarantees to cover potential claims. The judgment concludes that the current coverage is insufficient, but the company may still meet the requirements by procuring a suitable guarantee or other means.