2009 (11) TMI 516 - HC - Companies Law

Reduction of Share capital - cancelling and extinguishing 95,93,137 fully paid-up shares held by promoters of the company, namely, Alghanim Industries (Mauritius) Limited (hereafter, AIM ) and by cancelling and extinguishing 25,25,040 fully paid-up shares held by public shareholders at the rate of ₹ 7 per fully paid-up share and also by cancelling and extinguishing partly paid-up shares Held that - Section 392(1)(b) of Compa nies Act does not leave any doubt that where the High Court makes an order sanctioning a compromise or an arrangement, it may at any time thereafter can give directions in regard to any matter or make such modifications in the compromise or arrangement for working of compromise or arrangement. The argument that the registration of the Minute for reduction of the capital with the RoC renders it irreversible, is, therefore, misconceived. This Court examined the Auditor s report, var ious steps Rockwool has taken from time-to-time and the way the applicants herein went on purchasing shares during May, 2005 to February, 2006 at higher price and they do not lend any support to the allegation that Rockwool played fraud on the Court. The plea of fraud is, therefore, rejected. Appeal dismissed.

Summary

Issues Involved:
1. Violation of provisions of the Companies Act
2. Exclusion of minority shareholders
3. Allegations of fraud and misrepresentation

Detailed Analysis:

Violation of Provisions of the Companies Act:
The applicants argued that the reduction of capital by Rockwool violated sections 77, 77A, and 100 of the Companies Act, 1956. They contended that Rockwool should have resorted to buyback of shares under section 77A, which mandates that a company can buy back its shares only if it has free reserves, securities premium account, or proceeds of any shares or specified securities. The applicants claimed that Rockwool had sufficient funds and was debt-free by 2005, thus the company's assertion of lacking surplus cash was incorrect. The court, however, noted that Rockwool followed the procedural requirements under sections 100 to 104 of the Companies Act for reduction of capital. The court also emphasized that every buyback involves a reduction of share capital, which requires court sanction under sections 100 to 104.

Exclusion of Minority Shareholders:
The applicants alleged that the reduction of capital was a method to exclude non-promoter shareholders, which would be contrary to the principles of a joint stock company. They argued that the scheme for reduction of capital was not approved by the minority shareholders, representing about 7% of the capital, and thus could not be deemed as a legally passed special resolution. The court observed that the majority shareholders, including AIM, voted in favor of the special resolution during the Extraordinary General Meeting (EGM). The court also noted that the applicants were present at the EGM and did not raise any objections at that time. The court concluded that the procedural requirements were followed, and the special resolution was validly passed.

Allegations of Fraud and Misrepresentation:
The applicants accused Rockwool and its promoters of fraud and misrepresentation in obtaining the court's sanction for the reduction of share capital. They claimed that the exit price of Rs. 7 per share was manipulated and below the market price, which was around Rs. 18 per share. The respondents countered that the exit price was fixed based on a reverse book-building process and was in accordance with the SEBI Guidelines. The court examined the auditor's report and various steps taken by Rockwool, concluding that there was no evidence of fraud or misrepresentation. The court emphasized that the burden of proof lies on the majority to show that the scheme is fair and protects class rights, which was satisfied in this case.

Conclusion:
The court dismissed the applications, finding that Rockwool complied with the procedural and substantive requirements of the Companies Act for the reduction of capital. The allegations of fraud and misrepresentation were not substantiated, and the special resolution for reduction of capital was validly passed with the majority shareholders' approval. The court also highlighted that the registration of the minute with the Registrar of Companies does not bar the court from re-examining the scheme in appropriate cases.