2021 (9) TMI 335 - Tri - Companies Law

Reduction of share capital - Section 66 of the Companies Act, 2013 - HELD THAT - The Petitioner Company availed loans from Allahabad Bank and Bank of India and it could not repay the same. Subsequently these loans were converted into shares and even the company collected share premium of ₹ 15.00 per share from the Bank of India. These shareholders are really Financial Creditors for practical purpose - the company has been incurring loss for last 18 years. There is no operation and no staff. The management has failed to operate and earn profit. At this stage, the Company passes Resolution to cancel the shares including the shares of the Financial Creditors almost 100% with an intention to mobilize fresh funds/investment from new Financial Creditors/Investors showing a Rosy Balance Sheet to the Public. This Company is considered to be a fit case for winding up so that further Lenders or Investors are not duped and attracted to the proposed Window Dressing Balance Sheet to sanction loan or invest. This is a company is of 73 years old and it may earn some amount by way of sale/transfer of Brand Value of Brook Bond Estates India Ltd./Assambrook Ltd. on winding up or Resolution and distribute the proceeds among the Creditors and Shareholder. The prayer made by the Applicant to confirm the resolution passed is rejected - Petitioner is hereby directed to send the copy of this Order to all shareholders having shares of 5% and above as on 31.03.2020 including the SASF besides uploading the Order at the Company's Website and file the proof of delivery of the Order to such shareholders with the Registry within 15 days from today.

Issues Involved:
1. Reduction of share capital under Section 66 of the Companies Act, 2013.
2. Continuous losses and sale of assets.
3. Delisting of shares and impact on shareholders.
4. Financial creditors' conversion of loans into shares.
5. Compliance with corporate governance and legal procedures.

Issue-wise Detailed Analysis:

1. Reduction of Share Capital under Section 66 of the Companies Act, 2013:
The application was filed by Assambrook Limited to confirm its resolution for reducing its share capital from ?15,66,12,420 to ?10,00,000 by cancelling and extinguishing an amount of ?15,56,12,420. The rationale was to address the accumulated losses of ?32.26 crores and to present a more viable financial position for future funding. The reduction was approved by a special resolution at the AGM held on 4th September 2019, with 34 shareholders voting unanimously in favor.

2. Continuous Losses and Sale of Assets:
The company, incorporated in 1947, started incurring losses from 2002-2003. Despite selling its two tea estates, Dhullie Tea Estate and Tinkharia Tea Estate, in 2014-2015, the company continued to incur losses. The financial statements reflected a debit balance of approximately ?3226 lacs due to cumulative losses. The company is not in operation, has no staff, and the losses have been increasing yearly.

3. Delisting of Shares and Impact on Shareholders:
The equity shares of the company were compulsorily delisted from BSE Limited in July 2018 and subsequently from CSE. Post delisting, the shares are not tradable on stock exchanges. The proposed reduction in share capital does not involve payment to any shareholders and does not affect the rights of creditors. However, the Tribunal noted that the resolution to cancel and adjust 99.37% of the share value was not in the interest of shareholders, especially given the company's continuous losses and lack of operation.

4. Financial Creditors' Conversion of Loans into Shares:
The company had availed loans from Allahabad Bank and Bank of India, which were later converted into shares. Allahabad Bank held 42,50,000 shares and Bank of India held 12,00,000 shares. These shares were issued upon conversion of loans, with Bank of India receiving shares at ?25 per share (including a premium of ?15) and Allahabad Bank at par. The Tribunal noted that these financial creditors, holding 44.38% of the total shares, were not present when the resolution was passed, raising concerns about their interests.

5. Compliance with Corporate Governance and Legal Procedures:
The Tribunal emphasized the importance of compliance with corporate governance and legal procedures. It noted that the company intended to retain the security premium reserve of ?16.78 crores while wiping out almost the entire value of shares, which was seen as an attempt to present a more favorable balance sheet to attract new investors. The Tribunal considered this as a misuse of the system and a potential attempt to obtain further loans or investments without addressing the existing creditors and shareholders.

Judgment:
The Tribunal rejected the prayer to confirm the resolution for reduction of share capital. It highlighted that the company had been incurring losses for 18 years, had no assets, no operation, and no staff. The resolution to cancel 99.37% of the share value was not in the interest of shareholders and appeared to be an attempt to attract new investors by presenting a misleading financial position. The Tribunal suggested that the company might be a fit case for winding up to prevent further deception of lenders and investors. The company was directed to send a copy of the order to all shareholders holding 5% and above shares as of 31.03.2020 and to comply with the guidelines of the Companies Act for any future resolutions.

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