2009 (11) TMI 506 - HC - Companies Law

Compromise and arrangement - Held that - No reason to decline to exercise my discretion or to modify the scheme in any manner. No ground has been brought to my notice to deny relief to the petitioner. There is no reason to hold that the shareholders or creditors would be prejudicially affected or that the reduction is not fair or equitable. Accordingly the reduction of the paid up share capital of the company by ₹ 12,69,00,810 and conversion of the same as unsecured loans from the respective shareholders is confirmed as approved by the shareholders by resolution dated 19-12-2008 and the reduction of share capital and the compromise and arrangement with the shareholders are hereby sanctioned without any modification. The sanctioned scheme of arrangement and compromise with the shareholders shall be published in one issue of Mathrubhumi daily and one issue of Indian Express daily in their editions having circulation in and around Thrissur within two weeks after registration of the same with the Registrar of Companies, for which purpose a certified copy of this order shall be delivered to him within 21 days from today. Publication in the Official Gazette is dispensed with. The company petition is allowed as above. The Registry shall issue order in the appropriate from prescribed under the Companies (Court) Rules.

Issues Involved:
1. Whether the scheme of compromise and arrangement involving the reduction of share capital and its conversion to unsecured loans is legally valid.
2. Whether the procedure followed by the petitioner for the reduction of share capital under sections 391 and 394 of the Companies Act is appropriate.
3. Whether the interests of the shareholders and creditors are protected under the proposed scheme.

Issue-Wise Detailed Analysis:

1. Validity of the Scheme of Compromise and Arrangement:

The petitioner company sought the sanction of a scheme of compromise and arrangement with its equity shareholders. The scheme involved reducing the issued, subscribed, and paid-up capital from Rs. 14,10,00,900 to Rs. 1,41,00,900 and converting 90% of the paid-up share capital into unsecured loans from the shareholders. The terms included that the unsecured loans would carry an interest rate not exceeding 18% per annum and remain with the company for a minimum of five years. The scheme was unanimously approved by the equity shareholders in a meeting convened by the Advocate chairman appointed by the Court.

The Registrar of Companies objected, arguing that the scheme did not involve a cash outflow, which is typically expected in a reduction of share capital, and thus was not in accordance with law. The Amicus Curiae pointed out that the reduction of share capital and its conversion to unsecured loans is a composite transaction that can be considered under sections 391 and 394 of the Companies Act, as it involves a compromise or arrangement with the shareholders.

The Court concluded that the scheme was not merely a reduction of share capital but a reciprocal arrangement with the shareholders. Therefore, the procedure followed by the petitioner under sections 391 and 394 was appropriate. The Court found that the scheme was in substantial compliance with the requirements for both the reduction of share capital and the scheme of compromise and arrangement.

2. Appropriateness of the Procedure Followed:

The Registrar of Companies contended that the procedure prescribed under section 100 of the Companies Act should have been followed, which pertains specifically to the reduction of share capital. However, the Amicus Curiae and the counsel for the petitioner argued that the scheme involved a compromise or arrangement with the shareholders, making sections 391 and 394 applicable.

The Court agreed with the petitioner and the Amicus Curiae, stating that the scheme's dual nature of reducing share capital and converting it to unsecured loans constituted a compromise or arrangement. Hence, the procedure followed under sections 391 and 394 was deemed appropriate. The Court emphasized that the two parts of the transaction were reciprocal and could be considered together under the relevant sections of the Companies Act.

3. Protection of Shareholders' and Creditors' Interests:

The Court's primary duty was to ensure that the interests of minority shareholders and creditors were protected and that the scheme was fair and equitable. The Court referred to judicial precedents, particularly the Madras High Court's decision in Panruti Industrial Co. (P.) Ltd., which established that the reduction of share capital is a domestic matter for the shareholders to decide by majority. The Court's role is to protect minority shareholders and creditors and ensure that the reduction does not prejudicially affect them.

The Court found no reason to believe that the shareholders or creditors would be prejudicially affected by the scheme. The reduction of share capital and its conversion to unsecured loans was found to be fair and equitable. The Court exercised its discretion to sanction the scheme, confirming the reduction of the paid-up share capital and the compromise and arrangement with the shareholders as approved by the resolution dated 19-12-2008.

Conclusion:

The Court sanctioned the scheme of arrangement and compromise with the shareholders without any modification. The sanctioned scheme was to be published in specified newspapers within two weeks after registration with the Registrar of Companies. The Court appreciated the efforts of the Amicus Curiae, Advocate Sri P. Gopinatha Menon, for his assistance in the matter.

The company petition was allowed as per the terms outlined in the judgment.

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