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TMI Blog2004 (9) TMI 382X X X X Extracts X X X X X X X X Extracts X X X X ..... 01-2002 it was compelled to write off bad loans to the tune of Rs. 285.38 crores. During that year GTBL utilized general reserve to a tune of Rs. 181.95 crores and contingency reserves of Rs. 20 crores for the financial year ended 31-3-2002. Again during the subsequent financial year GTBL had to write off irrecoverable bad loans to the tune of Rs. 225 crores, which it met partially from accrued profits and partially from statutory reserves which according to them stood at Rs. 467.05 crores, including the share premium account of Rs. 130.19 crores. GTBL seeks imprimatur of this Court for its strategy adopted to write off the loans. 3. GTBL is a Public Limited Company registered under the Companies Act on 29-10-1993, having its Registered Office at Secundrabad. It is a Banking Company governed by - in addition to the provisions of the Companies Act; the provisions of the Banking Companies Regulations Act, 1949 (BR Act) and Reserve Bank of India established under Reserve Bank of India Act, 1934 (RBI Act), has the power to regulate the affairs and banking operations of GTBL. It has authorized share capital of Rs. 650 crores divided into 65,00,00,000 of equity share of Rs. 10 each o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial year-end of March, 2004, the Bank anticipates increase in Non-Performing Assets pertaining to earlier years which are irrecoverable in nature thereby requiring either 100 per cent provision or need to be written off from the books. ( f )The expected Profits for the financial year 2003-2004 will not be sufficient to adhere to the provisioning norms of RBI. It is also evident from the above that the Bank had exhausted all the Reserves except the balance in the Share Premium Account. With an intention of cleaning up its Balance Sheet and building a quality credit portfolio in the future, the Bank has obtained the approval of the Members for utilizing the balance in Share Premium Account for making provision towards Non-Performing Assets and writing off of irrecoverable bad debts." 5. The Board of Directors at the meeting held on 22-11-2003 made such proposal and the Tenth Annual General Meeting of the company which was convened on 24-12-2003 passed the resolution and notices were sent to shareholders under section 173(2) of the Act along with an explanatory note. On the appointed date, the shareholders passed resolutions as under : "RESOLVED THAT pursuant to se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Accordingly, the petition was advertised and proof of service was produced before this Court on 10-5-2004. The matter was listed for orders and it was heard at length on 14-6-2004, 16-6-2004 and 17-6-2004. 8. It is no doubt true that in law a company can always reduce its capital if the same is lost or unrepresented by available assets. In a case where banking company writes off its losses and/or bad debts as against statutory reserve, the same would result in losing the capital. Only in such an event, there can be reduction of capital. But action of company in writing off the bad debts as against share premium account, if permissible, does not immediately result in reduction of capital, and hence the same is not permissible under law. 9. Reserve is created generally out of the profits earned by the company, where as the share premium account or securities premium account created under section 78 of the Act is not a capital and has no characteristics of statutory reserve or reserve. Therefore, there may be justification for any company to write off the losses or bad debts as against statutory reserve or capital reserve created out of profits earned in yester years, but a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong the company and its members. All the affairs of such company have public character, and any action of the banking company which is derogatory to public interest gives rise to a situation of distrust by public. The Company Court cannot mechanically approve the Minute of the banking company to adjust its cumulative loss from the share premium account, especially when such company has already appropriated all the reserves for writing off its losses and bad debts. If such course is permitted by the Company Court, the same might, in a given situation, result in manipulation of accounts of the company and artificially bolstering the book value or market value of the stock of the company. 13. Hyderabad Industries Ltd. In re 2004 (3) ALD 832 the question for consideration was whether a company can draw funds out of share premium account for the purpose of utilizing the amount for applying/adjusting against permanent loss in value of the investment. In that context, this Court analyzed the provisions of sections 78 and 100 of the Act in paragraphs 10 to 13 of the judgment. Instead of again redoing the same thing, it would be appropriate to incorporate those passages in this judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y reduction of share capital as such, but any decision taken for extinguishing or reducing the liability in respect of ( i ) unpaid share capital; ( ii ) paid-up share capital which is lost and unrepresented by assets or ( iii ) payment of paid up share capital in excess of requirement. As per sub-section (2), when a company resorts to a special resolution under section 100(1) of the Act, any of the purposes ( i ), ( ii ) or ( iii ) as mentioned in sub-section (1) of section 100, such resolution is referred to as a resolution for reducing share capital . The intention of Legislature in enacting such provision is obvious. Take a situation referable to section 100(1)( a ), i.e., extinguishing liability in respect of unpaid share capital. When the company issues shares to its members, it may require the payment of face value of the shares or face value with premium as determined by the company. The company may require the member to pay face value or face value with premium at one time or on different calls depending on exigencies or requirements for the capital. Nonetheless, when once the authorized capital or part thereof is issued and subscribed, whether or not fully paid, the is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 100 makes it very clear that a company if so authorized by its Articles, may by special resolution, reduce its share capital in any of the three ways and then approach the Company Court for confirmation of the resolution for reducing share capital under section 102(1) of the Act. Whether the reduction of share capital - ( a ) by way of extinguishing or reducing the liability in respect of unpaid share capital; ( b ) by way of either with or without extinguishing or reducing liability, in respect of paid-up share capital which is lost and unrepresented by assets; or ( c ) by way of payment of any paid-up share capital which is in excess, either with or without extinguishing or reducing liability, such course should have to be specifically authorized by articles of the com-pany. 18. I have perused the Articles of Association of the company. They do not authorise or permit the petitioner company, which is a banking company to write off its losses or bad debts against share premium account. No provision of law is brought to the notice of this Court, which would authorize such course of action. The Companies (Transfer of Profits to Reserves) Rules, 1975, the Companies (Declarati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fund. (1) Every banking company incorporated in India shall create a reserve fund and shall, out of the balance of profit of each year, as disclosed in the profit and loss account prepared under section 29 and before any dividend is declared, transfer to the reserve fund a sum equivalent to not less than twenty per cent of such profit. (1A) Notwithstanding anything contained in sub-section (1), the Central Government may, on the recommendation of the Reserve Bank and having regard to the adequacy of the paid-up, capital and reserves of a banking company in relation to its deposit liabilities, declare by order in writing that the provisions of sub-section (1) shall not apply to the banking company for such period as may be specified in the order: Provided that no such order shall be made unless, at the time it is made, the amount in the reserve fund under sub-section (1), together with the amount in the share premium account is not less than the paid up capital of the banking company. (2) Where a banking company appropriates any sum from the reserve fund or the share premium account, it shall, within twenty-one days from the date of such appropriation, report the fact to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a banking company. (3A) Notwithstanding anything to the contrary contained in sub-section (3) of section 210 of the Companies Act, 1956 (1 of 1956), the period to which the profit and loss account relates shall, in the case of a banking company, be the period ending with the last working day of the year immediately preceding the year in which the annual general meeting is held. Explanation : In sub-section (3A) Year means the year or, as the case may be, the period referred to in sub-section (1). (4) The Central Government after giving not less than three months notice of its intention so to do by a notification in the Official Gazette, may from time to time by a like notification amend the Forms set out in the Third Schedule." 20. Section 29 of the BR Act deals with accounts and balance sheet of a banking company. Sub-section (3) of section 29 lays down that notwithstanding that the balance sheet of a banking company is required to be prepared in a form other than the form set out in Part I of Schedule VI to the Companies Act, the requirements of the Companies Act relating to balance sheet and profit and loss account of a company, insofar as the said balance sheet in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. In my considered opinion, the Legislature introduced the fiction treating the share premium account as paid up share capital of the company only for the purpose of section 100 of the Act and no further. The share premium account has been treated always separate from the reserve fund under the Act as well as the accounting procedures stipulated under the Act. 22. Learned counsel for the petitioner placed reliance on two unreported orders and judgments of the High Court of Judicature at Madras in Company Petition No. 21 of 2003, dated 28-2-2003 and in Company Petition No. 202 of 2003, dt. 19-6-2003 in support of the contention that it is permissible to set off losses against share premium account. These judgments cannot be precedents for such proposition for the copies produced before this Court only contain the approval of the Minute and the question did not crop up before the High Court of Madras. Similar is the situation regarding the unreported order and judgment of the High Court of Delhi in Company Petition No. 165 of 2003, dt. 6-8-2003 on which petitioner s counsel placed reliance. Attention of this Court has also been invited to the unreported judgment of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue before the Court was confirmation of reduction of capital by way of distribution from the share premium account and it is not the case of reduction of share premium account for writing off losses or bad debts. The Supreme Court of New South Wales Coca-cola Amatil Ltd. ( supra ) referred to the decision in Drown v. Gaumont-British Picture Corpn. Ltd. [1937] Ch. 402. It is apposite to quote the following passage from the said judgment, delivered by Clauson, J. "Subject always to anything in the articles of association to the contrary, there is nothing legally wrong, so far as I am aware, in a company dividing among its shareholders a premium obtained on the issue of shares. The premium from its very nature is not part of the capital paid up on the shares; it is the surplus of the sum received in respect of the share over the amount required to pay up the share to the extent to which it is treated by the company as paid up. The capital paid up on the share must not be divided in the dividend; but the premium is not capital paid-up on the share but a sum received by the company in excess of the capital paid-up on the share; and the principle that capital paid-up on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidering scheme of arrangement for amalgamation or compromise or any other arrangement or considering a Minute for reduction of share capital does a law envisage an automatic routine sanction by the Court ? The answer must be definitely in the negative. 27. In Hindustan Lever Employees Union v. Hindustan Lever Ltd. 1995 Supp. (1) SCC 499 a three-Judges Bench of the Supreme Court (majority judgment by Justice Suhas C. Sen) considered the scope of jurisdiction of the Court while considering scheme of amalgamation. The following ratio decidendi emerges ( See paras 73 to 77 of SCC). "This is against public policy. In my judgment, what has been expressly authorised by the statute cannot be struck down as being against the public policy. A foreign company under the new economic policy of the Government has been allowed to acquire controlling share of an Indian company. . . .Nor do we think that "public interest" which is to be taken into account as an element against approval of amalgamation would include a mere future possibility of merger resulting in a situation where the interests of the consumer might be adversely affected. If, however, in future the working of the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power to reject approval if such resolution is found to be unconscionable, illegal or unjust to the class of the shareholders or the creditors who may be voiceless minority shareholders or indifferently apathetic low visibility shareholders or ill-informed consumers. It must not be forgotten that a company is incorporated not just for making profits for distribution among its shareholders. A company incorporated is a juristic person with perpetual succession and it should also mould and take its decisions and actions keeping in view the future of its shareholders, who are at the relevant time find place in the register of members, and the persons who might subsequently purchase shares from the company or from shareholders of the company. This becomes more relevant in the case of a listed company. A person, it must be presumed; prefers to buy stock of a particular company having regard to its fundamentals (assets, liabilities, performance and potential). While doing so, a person necessarily looks to reserve fund, share premium accumulation and all other liquid assets of the company apart from capital assets of the company. If a company is allowed to eat into its share premium accou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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