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TMI Blog2009 (4) TMI 440X X X X Extracts X X X X X X X X Extracts X X X X ..... . 100 by way of face value + Rs. 750 premium per share, thereby extinguishing all such shares. The company petition was filed under section 100 of the Companies Act seeking sanction of the court. 2. That petition was opposed by the respondents, who are non-promoter shareholders of the company. The company petition was decided by order dated 16-10-2003 and the learned Single Judge declined to sanction the resolution for reduction of the share capital. The company, therefore, is in appeal against that order. 3. The learned Counsel for the appellant submits that under section 100 of the Companies Act, a company may if so authorised by its Articles of Association, by special resolution, reduce its share capital in any way. The three instances of reduction of share capital enumerated in section 100 are only indicative and without prejudice to the generality of the power of the company to reduce its share capital. It is, therefore, submitted by the learned Counsel that every possible method of reduction of share capital of a company is duly encompassed under said section 100, and is subject to and governed by the provisions of sections 100 to 104 of the said Act. A company, subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overwhelming majority of 99.95 per cent of the votes polled by the equity shareholders present and voting (i.e., significantly well above 95.54 per cent of the total paid up equity share capital of the appellant held by the Sandvik Promoter Companies); and that only about 0.05 per cent of the votes polled by the equity shareholders present and voting were against and opposed the special resolution. The appellant submitted that the reduction of equity share capital proposed by the Appellant is fair and equitable to the non-promoter equity shareholders. The Appellant with effect from 9-9-2002 has been delisted on the stock exchanges, with result that the equity shares of the Appellant on and from 9-9-2002 could not be freely traded. The Appellant by the proposed reduction of equity share capital provided a valuable and reasonable mode of exit to the non-promoter equity shareholders of the Appellant. The Appellant for the proposed reduction of equity share capital duly evaluated a lucrative price of Rs. 850 per equity share of the Appellant, which was much more than the book value of an equity share of the Appellant (the book value per equity share of the Appellant as on 31-8-2003 was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reholding. The learned Counsel, therefore, submits that in this connection it is pertinent to note that a basic attribute of a public company is : (i) that it is enable a Pvt. Co. entitled to invite the public to subscribe to its shares, and (ii) that its shares are freely transferable under section 111A(2) of the Act. It is submitted that the right to transfer shares freely, includes the right to retain or hold shares. A scheme of reduction that forcibly acquires shares of the entire class of public shareholding, would abrogate this basic principle, which allows shareholders of a public company to retain its shares. It is further submitted that in the light of the above provisions, a scheme for reduction like in the present case, cannot be resorted to in order to extinguish entire class of public shareholders. Section 100 of the Act, while recognizing that it is for a company to frame a scheme for reduction and much autonomy is left to the company in this regard, cannot be applied to undermine and destroy the basis fabric of the Act and related provisions of law that are intended to protect the rights of the public's shareholding in a public limited company. In addition to above, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of meetings to approve the scheme or whether the scheme contained any other safeguard to prevent a forced acquisition of shares of the targeted shareholders. Applying the above principles, it is submitted that the inherent unfairness of the scheme is in the fact that the Promoters voted in favour of the scheme for reduction of capital only because their share had been excluded from the scheme of reduction. The Respondent No. 5, would, if excluded from the purview of the scheme of reduction, have also voted in favour of the scheme to afford to other shareholders an opportunity to liquidated their shareholding and exit the company. However, the scheme if intended to be for and equitable to the public shareholders ought to have provided the following works in bracketed portion of the proposed resolution viz., "as well as those shareholders who wish to retain their shares" in which case the scheme of reduction would have been as inapplicable to public shareholders as the promoter group. A proper and fair scheme would, therefore, have been one where all other shareholders, other than the Promoters, who wanted to retain their shares, were excluded from the Resolution so that their sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' shareholding so as to enable the majority (promoter) group to become a 100 per cent owner of the company. Apart from this, there is no other commercial or business reason for the selective reduction of capital that would eliminate all outside and non-promoter shareholding of the Appellant. 7. The law relating to reduction of share capital of a company is contained in sections 100 to 105 of the Companies Act. Section 100 authorises the company limited by shares having a share capital, if so authorised by its Articles of Association by special resolution to reduce its shares capital in any way. So a company can reduce its share capital, (i)If there is a provision in its Articles of Association permitting it to do so; (ii)If it has passed a special resolution for that purpose; and (iii)If such a resolution is sanctioned by the court. Perusal of section 100 further shows that a company can reduce its share capital in any way. In the present case, it is nobody's case that the special resolution passed by the company is invalid or has not been passed by following the procedure laid down by the Companies Act. It is also nobody's case that in the Articles of Association of the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and material in that case were as follows :- "A company limited by shares had power under its articles to reduce its capital by paying off capital. The shares were divided into ordinary shares partly paid up, and founders' shares fully paid up. The company had carried on business both in England and the United States, but, it being found impossible to do so in both countries with advantage it was determined that the company should cease to carry on business in the United States, that the American investments should be made over to the American shareholders, their shares being cancelled, and that the English shareholders should take the English assets, receiving an agreed sum by way of adjustment. This arrangement was carried out by special resolution providing that the capital should be reduced by paying off the shares (both ordinary and founders) held by the American shareholders (the capital represented thereby being in excess of the wants of the company), and that such shares and all liability thereon be wholly extinguished. The company presented a petition praying the Court to confirm the resolution. All the creditors were either paid or assented to the arrangement. The con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me view. His words are these : "Apart from the interest of creditors, the question whether each member shall have his share proportionately reduced or whether some members shall retain their shares unreduced, the shares of others being extinguished upon their receiving a just equivalent is a purely domestic matter, and it might be greatly for the advantage of the company that the latter alternative should be adopted." Lord Maenaghten said, "The creditors are protected by express provisions. Their consent must be procured or their claims must be satisfied. The public, the shareholders, and every class of shareholders individually and collectively, are protected by the necessary publicity of the proceedings and by the discretion which is entrusted to the Court. Until confirmed by the Court the proposed reduction is not to take effect though all the creditors have been satisfied. When it is confirmed the memorandum is to be altered in the prescribed manner and the company, as it were, makes a new departure. With these safeguards, which certainly are not inconsiderable, the Act apparently leaves the company to determine the extent, the mode, and the incidence of the reduction, and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g their opposition. The learned judges of the Court of Appeal did not dissent from the view of Farwell J., but there was some expression of doubt and hesitation." 9. In our opinion, the above quoted observation of the House of Lords from its judgment in the case of Poole referred to above, squarely apply to the present case. In our opinion, once it is established that non-promoter shareholders are being paid fair value of their shares, at no point of time it is even suggested by them that the amount that is being paid is any way less and that even overwhelming majority of the non-promoter shareholders having voted in favour of the resolution shows that the court will not be justified in withholding its sanction to the resolution. As the Supreme Court has recognised that the judgment of the House of Lords in the case of British & American Trustee & Finance Corpn. (supra) is a leading judgment on the subject, we are justified in considering ourselves bound by the law laid down in that judgment. As we find that there is similarity in the facts in which the observations were made in the judgment in the case of British & American Trustee & Finance Corpn. (supra) we will be well advised ..... X X X X Extracts X X X X X X X X Extracts X X X X
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