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TMI Blog2005 (2) TMI 540X X X X Extracts X X X X X X X X Extracts X X X X ..... n 13-8-1998 under the provisions of the Indian Companies Act, 1930 at a public limited company limited by shares. The authorised share capital of the company is Rs. 200,00,00,000 (Rupees Two Hundred crores) divided into 5,00,00,000 Equity shares of Rs. 10 each and 15,00,00,000 preference shares of Rs. 10 each. The paid up share capital of the company is Rs. 99,98,45,930 representing 1,19,84,593 Equity shares of Rs. 10 each and 8,80,00,000 preference shares of Rs. 10 each. Sometime in or about 2003-04 four wholly owned subsidiaries of the applicant company were merged with the applicant, thus, due to the said merger losses of all these four companies were included in the Books of Account of the applicant company and therefore substantial loss was indicated in the financial year 2002-03 in the accounts of the company. It was then decided by the company that the share premium account and the Capital Redemption Reserve of the Company should be reduced to adjust the debit balance in the Profit and Loss Account. Thus in the aforesaid manner it was decided that a debit balance of Rs. 75.58 crores in the Profit and Loss Account of the Company as on 31-3-2004 should be wiped off. The said a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the Court has power to dispense with procedural requirements as contemplated under the provisions of sub-section (2) of section 101, the procedural requirements as contemplated therein and if there is any such power then what should be the guidelines of criteria which the court should take into consideration for dispensing with such a requirement. Before I go into large number of authorities which have been cited before me it is necessary that the provisions of sections 100 and 101 of the said Act are reproduced which are as under : "100. Special resolution for reduction of share capital. (1) Subject to confirmation by the [Tribunal] a company limited by shares or a company limited by guarantee and having a share capital, may if so authorised by its articles, by special resolution, reduce its share capital in any way; and in particular and without prejudice to the generality of the foregoing power, may ( a )extinguish or reduce the liability on any of its shares in respect of share capital not paid-up; ( b )either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of the debt or claim, or if the amount is contingent or not ascertained, then, an amount fixed by the [Tribunal] after the like inquiry and adjudication as if the company were being wound-up by the [Tribunal]. (3) Where a proposed reduction of share capital involves either the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital, the [Tribunal] may, if, having regard to any special circumstances of the case, it thinks proper so to do, direct that the provisions of sub-section (2) shall not apply as regards any class or classes of creditors. 8. The first question which arises for my determination is that whether on the true scope and interpretation of the sections 100 and 101 of the Act, whether the procedure contemplated therein is required to be complied with in cases where the proposal put forward for reduction of share capital does not involve, (1) the diminution of liability in respect of unpaid share capital or (2) the payment to any shareholder of any paid-up share capital or by virtue of the words "any other cases" appearing under sub-section (2) of section 101 the procedural requirements s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n from the court to comply with the provisions of sub-section (2) of section 101 and in absence of such direction the company is not bound to comply with the provisions of sub-section (2) of section 101 and entitled to confirmation of reduction in the share capital without complying with the procedure therein. 10. Thus according to the learned counsel for the applicant in the present case since the reduction in the share capital is neither for the diminution of liability nor payment to any shareholder of the paid up share capital the provisions of sub-section (2) are not required to be complied with. In so far as third category is concerned empowering the court to give specific direction in the cases falling under the words "any other case" the learned counsel has submitted that such a power of the court must be exercised and can only be exercised in cases where reduction of share-capital is not in either of the two modes provided in the first part of sub-section (2) but still likely to affect the interest of the creditors then in that event alone the court has discretion to specifically direct a particular company to comply with the procedure of sub-section (2). It has been fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of dispensing with the procedure prescribed under sub-section (2) of section 101. It is because the language of the section is clear that such requirement is required to be complied with only if there is such a direction from the court to do so. This leads me to next facet of interpretation of sub-section (2) of section 101. It is more complex, i.e., what are the cases where a direction can be given to the company to comply the provisions of sub-section (2) of section 101 even though the same does not result in diminution of the liability and/or repayment of the share capital. For the aforesaid purpose it is necessary to interpret the words "any other case" as appearing in sub-section (2) of section 101. The learned counsel for the applicant Mr. Dwarkadas has relied upon the various authorities which I shall now revert to brieftly for the purpose of interpretation of sub-section (2) of section 101. Firstly the learned counsel for the applicant has relied upon the judgment of this court in the case of In re Tata Iron and Steel Co. Ltd. [1926] 30 Bom. L.R. 197 particularly the following paragraph appearing on page 207 on the judgment: "I now come to the second of the general ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a scheme which alters the memorandum. I have considered the other cases cited, but those discussed are the most recent authorities upon the point. I follow these cases. This objection, therefore fails." 14. Thereafter the learned counsel has relied upon the judgment of this court in the case of In re, Katni Cement and Industrial Co. Ltd. [1936] 39 Bom. L.R. 677, particularly the following paragraph : "On a careful consideration of the cases referred by Buckley as authorities for the statement of the law and practice in the above passage, and others cited at the bar, it seems to be well established in England that ( see Palace Hotel, Limited) In re Scheweppes Limited, In re and J.A. Nordberg Limited, In re) the court can under this section sanction a scheme, even though it involves acts which, apart from such provisions, would be ultra vires the company; but this rule is subject to the limitation that if the Companies Act contains express provisions enabling the doing of any act in a particular way, the provisions of the enabling section, and not those of section 153, must be followed. The decision in the three cases to which I have referred above would seem to show that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have already referred to earlier, provides that when reduction of share capital is to be effected as part of a scheme of compromise and arrangement, procedure prescribed for the same in the Companies Act and Rules should be carried out as stated earlier. This provision is made for very good reasons. It unmistakably indicates that re-organization of share capital can be brought about as part of the scheme of compromise and arrangement. But even if it is to be done as part of the scheme of compromise and arrangement this special provision in rule 85 enjoins a duty to carry out the procedure contained in section 100 onwards of the Companies Act. Ordinarily, reduction or share capital affects members of the company and it can be brought about by a compromise or arrangement between the company and its members ignoring the creditors. Now, if reduction of share capital involves repayment of a part of paid up capital or extinguish or reduce the liability on any of the shares in respect of unpaid share capital it would adversely affect the creditors. Yet the creditors would have no voice in the matter. If the procedure as provided in section 100 onwards has got to be carried out the court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l any paid up share capital which is lost, or is unrepresented by available assets; or with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company. The reduction of the share capital can be effected by a special resolution at a general meeting which must be sanctioned by the court. Section 101 provides that, if the proposed reduction of share capital involves either diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid up share capital, the provisions therein prescribe shall have effect, subject to the powers of the court having regard to the special circumstances in the case to direct that the provisions of sub-section (2) shall not apply as regards any class or classes of creditors. (p. 870) 17. The learned counsel has thereafter relied upon the judgment of the learned Single Judge in the case of Vasant Investment Corpn. Ltd. v. Official Liquidator, Colaba Land and Mill Co. Ltd. [1981] 51 Comp. Cas. 20 (Bom.) and has drawn my attention that the judgment of the Gujarat High Court has been confirmed and approved by the learned single ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are substantially complied with. In the above case, the rights of the creditors were not affected by the scheme. Hence, the provisions laid down in sections 100 to 102 for the protection of the creditors did not require any consideration...." (p. 26) 18. The aforesaid judgments in my opinion does not answer the question directly which is posed before me i.e. whether under the provisions of sections 100 to 101 the circumstances under which the court is empowered to issue direction for compliance of the said provisions where the cases fall under the third category i.e. falling in "any other case". This issue did not come up for direct interpretation in the above mentioned cases i.e. Maneckchowk Ahmedabad Mfg. Co. Ltd. s case ( supra ) or in the case of Vasant Investment Corpn. Ltd. s case ( supra ). The learned counsel has also fairly drawn my attention to the judgment of this court in the case of PMP Auto Industries Ltd. [1994] 80 Comp. Cas. 289 . The learned counsel pointed out that in the said judgment there is no discussion pertaining to interpretation of section 100 and section 101 of the Act. The issue before the court arose under the provisions of section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act." (p. 299) 19. The learned counsel has thereafter relied upon the judgment of the another Single Judge of this court in the case of Hindustan Dorr-Oliver Ltd., In re [2002] 40 SCL 521 . The aforesaid judgment though considers the provision of section 102, however on facts of that case the issue I propose to consider did not arise. In that case in fact the reduction in the share capital was directly resulting in diminution of liability and thus the issue was whether the power should be exercised under sub-section (3) of section 101 or not. In my opinion the said issue do not directly or squarely arise in the present case as admittedly in the present case the reduction in the share capital neither results in diminution of liability nor payment to any shareholder of any paid-up share capital but falls in the third category "any other cases". 20. The learned counsel has thereafter relied upon the Division Bench judgment in the case of SEBI v. Sterlite Industries (India) Ltd. [2003] 45 SCL 475 (Bom.). The said judgment once again is not directly relevant to the facts of the present case. However the learned counsel has relied upon the said judgment only to the limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the procedure prescribed in that group of sections [ vide section 101(3)]. Undoubtedly, the court would use the discretion only upon proof of special circumstances as contemplated by section 101(3), but when such discretion is used, the creditors would have no opportunity to object to the reduction. The opportunity to object would thus depend upon the court exercising its discretion one way or the other. It may be noticed that until the company submits its resolution for reduction of share capital to the Court, the creditors have no say in the matter and, therefore, the court is empowered to ascertain the wishes of the creditors by following the procedure prescribed in sections 101 to 104. The object behind prescribing this procedure requiring, save in special circumstances as contemplated in section 101(3), the Court to give notice to the creditors is that the members of the Company may not unilaterally act to the detriment of the creditors behind their back. If such a procedure were not prescribed, the court might, unaware of all the facts, be persuaded by the members to confirm the resolution and that might cause serious prejudice to the creditors. But such a situation would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w a very startling proposition. The court has made hundreds of similar orders from time to time and there appears to be no authority in the books and no record of any reported case, in which debenture holders have successfully or otherwise been permitted to oppose a reduction of capital which does not involve a reduction of unpaid share capital or a repayment of paid-up share capital to shareholders. I think it is quite clear from section 49(1) that there is power in the court to permit a creditor to object to a reduction where no such diminution of assets is about to take place, but from the framing of the section, and after considering the observations of Lord Macnaghten in Poole v. National Bank of China (1) I think that I am at least right in saying that prima facie creditors are not supposed to be concerned in these questions of reduction of capital where no diminution of unpaid share capital or repayment to shareholders of paid-up capital is involved; in other words, if the court is to allow a secured creditor in particular to object to a reduction which does not involve such a diminution of assets as is referred to in section 49(1) it is at least incumbent on him to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s intended, as where there is a provision specifically excepting certain classes clearly not within the suggested genus." 25. This principle of ejusdem generis is also accepted by the Apex Court in the case of Collector of Central Excise v. Maharashtra Fur Fabrics Ltd. [2002] 7 SCC 444, wherein the Apex Court has held as under: "A careful reading of the proviso to the notification would show that by resorting not only to the process of bleaching, dyeing, printing, shrink-proofing, tentering, heat-setting, crease resistant processing, but also to "any other process or any two or one of these processes", the respondent would lose the benefit of the exemption. It is a well established principle that general terms following particular expressions take their colour and meaning as that of the preceding expressions, applying the principle of ejusdem generis rule, therefore, in construing the words "or any other process", the import of the specific expressions will have to be kept in mind. It follows that the words "or any other process" would have to be understood in the same sense in which the process, including tentering would be understood. Thus understood, a process akin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed scheme. It is a peculiar case of amalgamation where a holding company in amalgamated with a subsidiary company. Therefore, I am clear is mind that the contention raised by Mr. Venkathalamoorty is not well-founded. As already mentioned this case on hand is not a case where there is reduction in capital. Further the procedure prescribed under sections 101 and 102 read with rule 85 do not stand attracted to a case of scheme of amalgamation, where there is no release of assets but which involves transfer of all assets and liabilities." 28. In view of the aforesaid discussion I am of the view that in the present case since, there is no diminution of liability or payment to any shareholder of any paid up share capital and that the reduction of share capital is only for set off of accumulated losses against the Capital Redemption Reserve Account and Share Premium Account thus the interest of the creditor is not likely to be affected and therefore it is not necessary to comply the procedure prescribed under section 101(2) of the Companies Act-I of 1956. 29. Thus in my opinion on a true and correct interpretation of sub-section (2) of section 101 of the Act the question of dispen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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