2022 (7) TMI 1282 - AT - Companies Law

Rejection of confirmation of scheme for reduction of share capital proposed by the Appellant Company - reduction of this Share Capital was approved unanimously by the Shareholders by way of a Special Resolution - Section 421 of the Companies Act, 2013 - HELD THAT - It is seen from the record that the Reduction of the Share Capital was approved by the Shareholders of the Appellant Company unanimously by way of a Special Resolution with the objective of reducing the overall weighted average cost of Capital and improving the earnings per share. In IN RE RECKITT BENCKISER (INDIA) LIMITED 2005 (5) TMI 665 - DELHI HIGH COURT , the Hon ble Delhi High Court has upheld the view that the question of reduction of Share Capital will be treated as a matter of domestic concern i.e., it is the decision of the majority which prevails. If majority by Special Reduction decides to reduce the Share Capital of the Company, which also has the right to decide as to how this reduction should be carried into effect - This Tribunal in RHI INDIA PRIVATE LIMITED, RHI CLASIL PRIVATE LIMITED, ORIENT REFRACTORIES LIMITED VERSUS UNION OF INDIA 2021 (1) TMI 725 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , NEW DELHI , has held that it is not for the Courts to reject Schemes on grounds not required to be delved into for the determination of the Scheme In the instant case, admittedly, the reduction of this Share Capital was approved unanimously by the Shareholders by way of a Special Resolution. It is seen from the record that the Company has complied with all the statutory requirements as per the directions of the Tribunal and has also filed necessary Affidavits to that effect. It is also pertinent to mention that none of the Creditors objected to the reduction of the Capital. Section 66(1)(b) of the Act enables a Company to reduce its Share Capital in any manner provided it is approved by the majority of Shareholders through a Special Resolution. The Appellant Company operates a 15MW power generating station and supplies electricity to GUVNL under a long-term PPA and is a going concern . Having regard to the fact that the Appellant had deposed in a Clarificatory Affidavit regarding its financial position which is not in the negative and also that the reduction of the Share Capital was approved by the Shareholders of the Appellant Company unanimously by way of a Special Resolution and that the Creditors of the Company have also not objected to the same and further that this reduction does not cause any prejudice to any class of Creditors, it is opined that the ratio laid down by the Hon ble Madras High Court in IN RE PANRUTI INDUSTRIAL CO. (PRIVATE) LTD. 1959 (9) TMI 59 - MADRAS HIGH COURT , and is applicable to the facts of the attendant case and hence, this Tribunal is of the considered view that the reduction of the Share Capital, as approved by the majority of Shareholders by way of a Special Resolution, be confirmed and the proposed Minutes be approved. This Appeal is allowed and the Order of the NCLT is set aside.

Issues Involved:
1. Negative net worth and high borrowings of the company.
2. Compliance with Section 66 of the Companies Act, 2013.
3. Approval and objections regarding the reduction of share capital.
4. Financial health and liquidity of the company.
5. Commercial wisdom of shareholders in approving the reduction.

Issue-wise Detailed Analysis:

1. Negative Net Worth and High Borrowings:
The NCLT rejected the confirmation of the scheme for the reduction of share capital proposed by the appellant company due to its negative net worth and high borrowings. The balance sheets showed a negative net worth/shareholders' funds of Rs. 1609.66 lakhs and borrowings and inter-corporate loans amounting to Rs. 11354.43 lakhs. The book value per share was also negative. The NCLT concluded that the proposed capital reduction was not in the overall interest of the company and its stakeholders.

2. Compliance with Section 66 of the Companies Act, 2013:
Section 66(1) allows a company to reduce its share capital by a special resolution, provided it is confirmed by the tribunal. The NCLT noted that the company proposed to return capital to its shareholders at Rs. 77.49 per share, totaling Rs. 5404.93 lakhs, despite having a negative net worth and high borrowings. The tribunal held that the reduction of share capital was not in compliance with the overall interest of the company and its stakeholders.

3. Approval and Objections Regarding the Reduction of Share Capital:
The appellant company argued that the reduction of share capital was approved unanimously by the shareholders by way of a special resolution. The Regional Director raised several observations, including the compliance with Section 61, the presence of foreign shareholders, and the company's liquidity for making payments towards the reduction of share capital. The appellant company responded to these observations, emphasizing that the reduction was a domestic affair and should be permitted when there were no objections from shareholders and creditors.

4. Financial Health and Liquidity of the Company:
The appellant company contended that it had sufficient funds and regular sources of cash flow from its Power Purchase Agreement (PPA) with GUVNL. The company had investments and cash balances aggregating to Rs. 5618.26 lakhs, which exceeded the amount proposed for the reduction of share capital. The appellant argued that the negative net worth was due to depreciation on the assets of the solar power plant and did not reflect the company's liquidity position.

5. Commercial Wisdom of Shareholders in Approving the Reduction:
The appellant company argued that the reduction of share capital was a matter of domestic concern and should be decided by the majority of shareholders. The tribunal referred to various precedents, emphasizing that the court should not interfere with the commercial wisdom of shareholders unless the reduction was unfair or inequitable. The tribunal noted that the reduction was approved unanimously by the shareholders and did not cause any prejudice to creditors.

Assessment and Conclusion:
The tribunal concluded that the reduction of share capital was approved by the shareholders unanimously and that the company had sufficient liquidity to undertake the reduction. The tribunal referred to various precedents, emphasizing that the reduction of share capital is a domestic affair and should be decided by the majority of shareholders. The tribunal set aside the NCLT's order and allowed the appeal, confirming the reduction of share capital as approved by the shareholders. The tribunal directed the NCLT to proceed in accordance with the law.

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