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TMI Blog2008 (9) TMI 557X X X X Extracts X X X X X X X X Extracts X X X X ..... Loss Account does not reduce the statutorily required level of General Reserve that the petitioner company is obliged to maintain. The said amounts, which are now sought to be disbursed as special dividend are assets of the company. A company is entitled to distribute its assets to its shareholders, as permitted by law. As the scheme has been approved by the shareholders by overwhelming majority and the secured creditors have given their consent to the same. No objection has been raised by any unsecured creditor despite notice. Therefore, see no impediment in the petitioner company transferring the amount of ₹ 430,857,000 from the General Reserves to the Profit and Loss Account of the company for being disbursed as special dividend to the shareholders.Therefore, sanction the scheme proposed by the petitioner company. - CP. NO. 141 OF 2007 - - - Dated:- 30-9-2008 - VIPIN SANGHI, J. Rajiv Nayyar, Anirudh Das and Sahil Sharma for the Petitioner Company. Ms. Manisha Tyagi for the Official Liquidator. R.D. Kashyap, Dy. ROC. Ms. Manisha Dhir and Ms. Preeti Dalal for the Regional Director. JUDGMENT 1. This petition under sections 391-394 of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been placed on record. 5. This Court vide order dated 23-3-2007 in company Application (M) No. 55 of 2007 and CA Nos. 314 and 340 of 2007, issued directions dispensing with the convening of meeting of the secured creditors of the petitioner company while directing the convening of the meeting of the equity shareholders of the petitioner company. So far as unsecured creditors of the petitioner company are concerned, the Court concluded that no useful purpose would be served in holding their meeting. The petitioner company, however, undertook that at the time of issuance of notice on the confirmation petition i.e., the present petition, the petitioner company would invite and consider the objections of the unsecured creditors. In view of the aforesaid, the Court dispensed with the holding of the meeting of the unsecured creditors as well, to consider the proposed scheme. 6. The meeting of the equity shareholder was held under the supervision of the chairperson appointed by this Court wherein the equity shareholders had approved the Scheme of Arrangement in accordance with the provisions of the Act. A copy of the said report has been placed on record. The original repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the petitioner company has given sufficient notice to the unsecured creditors of the proposed scheme. No objection or opposition to the proposed scheme has been received by the Court from any of the unsecured creditors of the petitioner company. 9. The Official Liquidator in his report has submitted that disbursement of Share Premium Amount to the shareholders of the petitioner company appears to be covered by section 78 read with sections 100 to 102 of the Act. However, as regards the amount voluntarily transferred by the Company to its General Reserve over and above the statutorily required rate in accordance with the provisions of the Companies (Transfer of Profits to Reserve) Rules, 1975 during the financial years 1981 to 1996, it is submitted that the proposed credit of the same in the Profit and Loss Account of the company, and its proposed declaration as special dividend does not specifically appear to fall under the provisions of the Act. 10. The Regional Director, Northern Region, Ministry of Company Affairs has, however, stoutly resisted the proposed Scheme of Arrangement of the petitioner company. To oppose the utilisation of the Share Premium Account as pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Scheme of Arrangement i.e., the proposed payment of special dividend, from the General Reserves Account after transferring the aforesaid amount to the Profit and Loss Account of the petitioner company, it is contended that there is no provision in the Act permitting the transfer of the amount credited to the General Reserve Account to the Profit and Loss Account of the company as proposed by the petitioner company under the Scheme. The utilization of General Reserve for the purposes of declaration of dividends is governed by section 205A read with Companies (Declaration of Dividends out of Reserves) Rules, 1975. The said section, insofar as it is relevant, reads as under : "205A. Unpaid dividend to be transferred to special dividend account. (1) (2)****** (3) Where, owing to inadequacy or absence of profits in any year, any company proposed to declare dividend out of the accumulated profits earned by the company in previous years and transferred by it to the reserves, such declaration of dividend shall not be made except in accordance with such rules as may be made by the Central Government in this behalf, and, where any such declaration is not in accordance with such r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment. The declaration and payment of dividend in any year, out of the reserves of the past years, cannot be made as a matter of course at the discretion of the Board of Directors, but can only be made in accordance with the rules made by the Central Government in this behalf, or in exceptional cases with the previous approval of the Central Government ." 16. In reply to the first of the above objections raised by the Official Liquidator and the Regional Director, Northern Region, Mr. Rajiv Nayyar, learned Senior Counsel appearing for the petitioner submits that section 78(1) of the Act provides that the amounts lying in the Securities Premium Account can be applied for any purpose. However, for its utilization, the provisions of the Act relating to reduction of share capital of a company shall apply, as if the Securities Premium Account were paid-up share capital of the company. But if the amounts lying in the Securities Premium Account is to be utilized for any of the four specific purposes mentioned in section 78(2), the same could be done without attracting the provisions of the Act relating to reduction of share capital of the company. Section 78(2) of the Act cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rys Confectionery Ltd., In re [2004] 122 Comp. Cas. 900 1 (Mad.); Karam Chand Appliances (P.) Ltd., In re [CP No. 73/2006, dated 9-10-2006] by this Court; Hyderabad Industries Ltd., In re [2005] 123 Comp. Cas. 458 2 (AP); Raasi Cement Ltd., In re [1999] 22 SCL 363 (AP), Novopan India Ltd., In re [1997] 88 Comp. Cas. 596 3 (AP) and Cargill India (P.) Ltd., In re [CP Nos. 175 233 of 2004, dated 15-10-2004] by this Court, in support of his aforesaid submissions on the interpretation of section 78(2) and sections 100 and 101 of the Act. On the other hand, the Regional Director (NR) has relied on Bharat Fire and General Insurance Co. Ltd. v. CIT AIR 1964 SC 1800 and CIT v. Allahabad Bank [1969] 2 SCC 143 in support of her submission on the interpretation of section 78(2) of the Act. 19. I now proceed to consider the two objections raised by the Regional Director (Northern Region). I shall take up the objection to the application of the Securities Premium Account first, and thereafter consider the objection to the disbursement of special dividend, by transferring from the General Reserves, the amount in excess of the prescribed 10 per cent of the profits of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Account can be applied only for the specific four purposes mentioned in section 78(2) of the Act and for no other purpose. To support this interpretation, the learned counsel for the Regional Director, Ms. Manisha Dhir, heavily relies on the use of the expression notwithstanding anything in sub-section (1) to submit that sub-section (2) of section 78 overrides everything stated in sub-section (1), in relation to the application of the Securities Premium Account . 22. In my view, the interpretation advanced by learned counsel for the Regional Director (NR) is not correct. If the interpretation as advanced by the Regional Director (NR) is accepted, it would render otiose the provisions contained in sub-section (1) of section 78. The entire section 78 has to be read as a whole and all the sub-sections of this section have to be read and interpreted so as to give a meaningful interpretation. Sub-sections (1) and (2) of section 78 when read together clearly show that they form part of the same scheme. As aforesaid, the scheme is that the amounts collected as premium while issuing shares, which are required to be transferred to a separate account called the Securities Premi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c instances mentioned in sub-section (2) of section 78. 23. Parrys Confectionery Ltd. s case ( supra ) the petitioner-company sought the confirmation by the Court to the reduction of the share premium account under section 78 read with section 101(1) of the Act. As on 31-3-2002, the petitioner company had a sum of Rs. 3319.52 lakhs standing to the credit of its Securities Premium Account. Consequent to financial restructuring, the petitioner proposed to apply its Securities Premium Account to firstly utilize an amount not exceeding Rs. 2500 lakhs out of the said account to set of three heads of losses/expenditure. The losses/expenditure which were sought to be offset by application of Securities Premium Account were : ( i ) loss not exceeding Rs. 700 lakhs upon the sale of assets, ( ii ) accumulated loss of Rs. 1642.20 lakhs incurred towards products withdrawal and the expenditure relating to the business method restructuring costs for the year ended 31-3-2000, ( iii ) voluntary retirement/separation expenditure to the tune of Rs. 73 lakhs as on 31-3-2003. The proposed reduction in Securities Premium Account in that case also was opposed by raising a similar argument, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the company or its ability to honour its commitments and pay off its debts in the ordinary course of business. 25. Learned counsel or the Regional Director (NR) has sought to distinguish this decision on the ground that Parrys Confectionery Ltd. s case ( supra ), there was no cash outflow, and all that was being done was a restructuring which could not effect the normal operations of the petitioner company and its ability to honour its commitments and to pay its debits. However, she points out that in the present case, there is a significant cash outflow if the scheme envisaging the reduction of the Securities Premium Account were to be confirmed. 26. In my view, the judgment of Parrys Confectionery Ltd. s case ( supra ) can be used only as an illustration of an instance where the Court confirmed the reduction in the Securities Premium Account, even though the said reduction was not for the purpose of applying the Securities Premium amount for one of the specific purposes enumerated in sub-section (2) of section 78. Though the argument as advanced by the petitioner herein was raised in that case as well, the Court did not give an express finding and it is only by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th this argument of learned counsel for the Regional Director (NR). It does not matter whether the Securities Premium Account has been applied for offsetting accumulated losses or for any other purpose. What is of relevance in the present context is that the share premium account was applied for a purpose other than the four specifically mentioned purposes in section 78(2) of the Act. Moreover, the principles stated by the Division Bench of the Andhra Pradesh Hyderabad Industries Ltd. s case ( supra ) is in general terms, and is not confined to only such cases where the Securities Premium Account has been applied to offset accumulated losses. 29. In Novopan India Ltd. s case ( supra ), the Andhra Pradesh High Court observed : "Para 12: In view of the aforesaid legal position there is no prohibition or legal impediment for reduction of share capital being a part of the scheme of amalgamation. It is permissible as is clear from rule 85 of the Rules. All that is required to be done is the procedure prescribed for reduction of share capital is to be complied with. Firstly, it is to be seen whether the articles of association provides for such reduction of share capital. Once ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at a premium, that money also must be transferred to share premium account. A conspectus of the three sub-sections of section 78 would reveal that if the share premium account is to be applied to any of the purposes mentioned in sub-section (2), the company need not seek approval/confirmation of the Company Court. If the company desires to apply share premium account for any other purposes, it has to approach the Company Court for confirmation. 21. There could be myriad situation, when company may have to use share premium account or reserve or reserve fund, Schedule VI of the Act, especially, Horizontal Form of Balance Sheet, contains instructions to the effect that the word Fund (after Reserve) should be used only when such reserve is specially represented by earmarked investments. But such use must be authorized by Articles of Association and must be within four corners of law. As observed above, unless the reduction of the share capital is specifically authorized by the Articles of Association, a company cannot do so, nor this Court can approve or sanction such resolution. Likewise, unless the Articles of Association of company permit utilization of share premium account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... special resolution, if so authorized by its articles. Section 189 of the Act deals with ordinary and special resolutions. Section 189(2) states that a resolution is a special resolution when: ( a ) the intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting or other intimation given to the members of the resolution; ( b ) the notice required under this Act has been duly given of the general meeting; and ( c ) the votes cast in favour of the resolution (whether on a show of hands or on a poll, as the case may be) by members who, being entitled so to do, vote in person, or where the number of the votes, if any, cast against the resolution by members so entitled and voting. 34. In Novopan India Ltd. s case ( supra ) the Andhra Pradesh High Court was dealing with the scheme of amalgamation where reduction of share capital was also involved. The judgment quotes from Maneckchowk Ahmedabad Mfg. Co. Ltd., In re [1970] 40 Comp. Cas. 819 (Guj.), inter alia, the following principles : ( xvii )There is nothing objectionable in the company proposing a scheme of arrangement and compromise and simultaneously propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re capital is to be followed in addition to the procedure to be followed after sanctioning of the scheme." 36. In the instant case the articles of association of the petitioner company provides for reduction of share capital vide article 58, which reads : "58. The Company may from time to time, by special resolution, reduce its share capital, any capital redemption reserves fund or any share premium account in any manner and with, and subject to any incident authorized, and consent required by law." 37. Requisite special resolution has been passed in accordance with the Article of association and also as per the provisions of the Act by the shareholders in the especially convened meeting to seek the approval of the scheme by overwhelming majority. The requirement of section 189(2) of the Act stand complied with. Neither the creditors nor the shareholders have objected to the passing of the Resolution. The reduction of the Securities Premium Account does not involve the diminution of any liability in respect of unpaid capital. There is no material available on record to show the Scheme may cause any prejudice to any of the shareholders or creditors. In fact the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits of the company in the years 1981 to 1996 to the Profit and Loss Account, I see no force in the contention of the Regional Director (NR) that the said arrangement is not in conformity with the provisions of the Act. 40. Reliance placed by the Regional Director (NR) on section 205A(3) appears to be misplaced. The said provision begins with words where owing to inadequacy or absence of profit in any year .? Therefore, the precondition for the application of the said provision is that there is an inadequacy or absence of profit in the year in which the company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by it to the reserves. The facts of the present case show that it is not a case falling under section 205A(3). It is not the case of the petitioner company that it is seeking to tap into the general reserves of the company to declare dividend on account of inadequacy or absence of profits in any year. Since the present case is not covered by section 205A(3) of the Act, reliance placed by the respondent on the Companies (Declaration of Dividend Out of Reserves) Rules, 1975 also appears to be misplaced. These ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e paid-up capital, the amount to be transferred to the reserves shall not be less than 2.5 per cent of the current profits; ( ii )Where the dividend proposed exceeds 12.5 per cent but does not exceed 15 per cent of the paid-up capital, the amount to be transferred to the reserves shall not be less than 5 per cent of the current profits; ( iii )Where the dividend proposed exceeds 15 per cent but does not exceed 20 per cent of the paid-up capital, the amount to be transferred to the reserves shall not be less than 7.5 per cent of the current profits; and ( iv )Where the dividend proposed exceeds 20 per cent of the paid-up capital, the amount to be transferred to reserves shall not be less than 10 per cent of the current profits." 42. The petitioner has placed on record a statement dated 12-1-2007 tabulating the amount transferred to General Reserves between the years 1981 to 1996. The said tabulation shows the amount that the petitioner company was obliged to transfer to the General Reserves in accordance with the Companies (Transfer of Profits to Reserves) Rule, 1975 in each of these years, as also the amounts actually transferred in each of these years to the general res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the law. Pertinently, what the petitioner proposes to do is to firstly transfer to the Profit and Loss Account and then to disburse as special dividend, only that part of the General Reserves which are in excess of the statutorily required amount of General Reserve that it is obliged to maintain. The amount of Rs. 430,857,000 that it is proposing to disburse as special dividend from the out of the General Reserve by transferring the same to the Profit and Loss Account does not reduce the statutorily required level of General Reserve that the petitioner company is obliged to maintain. The said amounts, which are now sought to be disbursed as special dividend are assets of the company. A company is entitled to distribute its assets to its shareholders, as permitted by law. There is no prohibition to disbursement of the same and no provision of the Act or Rules made thereunder prohibit the disbursement of the aforesaid amount as special dividend, once the statutory procedures prescribed therefore have been complied with. 47. As aforesaid, the scheme has been approved by the shareholders by overwhelming majority and the secured creditors have given their consent to the same. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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