2021 (6) TMI 687 - Tri - Companies Law

Reduction of share capital - extinguishment of shares - whether the proposed reduction of capital by way of extinguishing the shareholding of 24 per cent. shareholder is just and equitable and not prejudicial to the interest of the outgoing shareholder? - HELD THAT - In IL and FS Engineering and Construction Co. Ltd. v. Wardha Power Co. Ltd. 2012 (12) TMI 621 - ANDHRA PRADESH HIGH COURT wherein it was held that in the case of a reduction of capital, a court cannot interfere with the discretion and commercial wisdom of the stakeholders and the board of directors. If the reduction is one which is properly passed by the shareholders who are treated equitably and have had the facts explained to them, and provided the creditors are safeguarded, the court will habitually sanction reductions. The net worth of the company as at March 31, 2019 before and after giving effect to the proposed reduction of share capital are INR 3,056.01 lakhs and approximately INR 3,001.26 lakhs (subject to adjustment based on the actual dollar rate on the date of payment), respectively - The capital reduction shall not adversely affect the company's ability to honour its commitments or meet its liabilities or settle the dues of all the creditors in the ordinary course of business and the company would continue to have a positive net worth after giving effect to the capital reduction. Therefore, the present reduction of the share capital shall not prejudice any creditors of the company. The reduction of share capital is contemplated as under the articles of association of the company - the settled law as laid down in several judicial decisions and the vital aspect that the outgoing shareholder, Mr. Gopi Suri Babu, has no objection to the proposed scheme of reduction, but has consented to receive the said consideration upon negotiations and mutual agreement between the parties, this Bench approves the reduction of capital without valuation of actual shares, by carving out an exception considering the extraordinary circumstances of this case. Application disposed off.

Issues Involved:
1. Proposal for reduction, cancellation, and extinguishment of issued, subscribed, and paid-up equity share capital.
2. Compliance with Section 66 of the Companies Act, 2013.
3. Consent of shareholders and procedural compliance.
4. Impact on the financial position and creditors.
5. Legal precedents and justifiability of selective reduction of share capital.

Detailed Analysis:

1. Proposal for Reduction, Cancellation, and Extinguishment of Issued, Subscribed, and Paid-up Equity Share Capital:
The petitioner-company proposed to reduce its paid-up share capital from INR 1,00,000 divided into 1,000 equity shares of INR 100 each to INR 76,000 divided into 760 equity shares of INR 100 each. This reduction involved cancelling and extinguishing 240 equity shares of INR 100 each, returning an aggregate amount of INR 54,75,000 to a shareholder, with a premium of approximately INR 22,813 per equity share.

2. Compliance with Section 66 of the Companies Act, 2013:
The reduction was proposed in accordance with Section 66 of the Companies Act, 2013, and the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016. The board of directors considered the business model, profitability, positive cash flow, capital requirements, and other business factors, concluding that the company had surplus capital and free reserves exceeding its needs.

3. Consent of Shareholders and Procedural Compliance:
An extraordinary general meeting was convened, and the shareholders unanimously approved the reduction by a special resolution. The outgoing shareholder executed an affidavit of consent. The petitioner-company’s articles of association authorized the reduction of share capital. The Regional Director, Western Region, raised no objections, and procedural issues were addressed.

4. Impact on the Financial Position and Creditors:
The audited financial statements indicated that the company’s net worth before and after the reduction would remain positive, ensuring no adverse effect on its ability to honor commitments or meet obligations. The reduction would not prejudice creditors, as the company would continue to have a positive net worth and sufficient reserves to meet its liabilities.

5. Legal Precedents and Justifiability of Selective Reduction of Share Capital:
The tribunal relied on several legal precedents, including cases like Better World Technology P. Ltd., British and American Trustee and Finance Corporation v. Couper, Westburn Sugar Refineries Ltd., and others, which upheld the principle that a company could reduce its capital selectively if it was just, equitable, and not prejudicial to any shareholder. The tribunal found that the proposed reduction was fair, as all shareholders, including the outgoing one, consented to it.

Conclusion:
The tribunal approved the reduction of share capital, finding it just and equitable. The company’s ability to meet its obligations would not be adversely affected, and the reduction was in compliance with the legal framework. The form of the minute to be registered under Section 66(5) of the Companies Act, 2013, was provided, reflecting the reduced share capital of INR 76,000 divided into 760 equity shares of INR 100 each.

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