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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 ..... and Ashok Purohit for the Respondent. JUDGMENT D.K. Deshmukh, J. - By this appeal, the appellant takes exception to the order dated 16-10-2003 passed by the learned Single Judge of this Court in Company Petition No. 478 of 2003. That petition was filed by the present appellant seeking sanction of the court to the Special Resolution passed by the company at its extraordinary general meeting held on 13-6-2003 for reduction of its share capital. The Company had proposed a resolution for reduction of paid-up equity share capital. The Resolution was to the effect that the share capital of the company be reduced by paying off/returning to the holders of equity shares other than the promoters at the rate of Rs. 850 per share i.e., Rs. 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 shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the proposed reduction of the share capital. It is further submitted by the learned Counsel for the Appellant that under the special resolution passed on 13-6-2003 an overwhelming majority of equity shareholders (inclusive of majority of the non-promoter equity shareholders) in their collective commercial wisdom and in a democratic manner have duly resolved for reduction of equity share capital of appellant as embodied in the special resolution. Section 100 of the said Act does not contemplate separate class meetings of distinct classes of shareholders of a company. Assuming that separate class meeting of promoter group and the non-promoter group were to be held by the appellant, it is pertinent to note that the special resolution was passed by an 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emain a public company, albeit unlisted, even after the scheme for reduction is sanctioned, and would, therefore, be able to invite participation of the very public after having forced out the erstwhile public, by use of the brute majority/voting strength of the promoter shareholders, by compulsory purchase/reduction of their shareholding. Although section 100 of the Act speaks of reduction of share capital of "any of its shares" and "in any way", the section cannot be applied and interpreted to undermine and negate the overwhelming legislative policy and intent which can be gathered from the other provisions of the Act and related Legislation, which is directed towards preventing the forced acquisition of shares of the public or the extinguishment of the entire class of public shareholding. 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selectively to some shareholders of a class, and not all, any such scheme that does not provide for uniform treatment of shareholders, would be most narrowly scrutinized by the Court. No such scheme ought to be confirmed unless the Court is satisfied that it will not work unjustly or inequitably. The Court must examine whether the reduction is fair between classes of shareholders or whether the reduction would work injustice between different classes of shareholders. In determining whether a scheme for selective reduction of capital, which differentiates between shareholders of one class by resulting in the compulsory extinguishment of capital of some shareholders of that class, is fair and equitable, it would be most relevant to consider whether the affected shareholders were treated as a separate sub-class for the purpose 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstitute for the special resolution that would be required under the procedure of section 100 of the Act, however, this would meet with the standard of fairness so that the affected class can consider and determine the fairness of a scheme uninfluenced by the presence and voting strength of the majority, who are differently placed. This was the procedure followed in the case of Reckitt Benckiser (India) Ltd. ( supra ) and ought to have been followed in the present case as well. Lastly, the learned Counsel submitted that the scheme and in particular the manner of classification coupled with the absence of any real option to the non-promoter shareholders to remain a shareholder, is entirely unfair and oppressive to the minority shareholders. A scheme for reduction of capital cannot be a guise to forcibly acquire the minorities 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or it would operate as a reduction of capital which can only be effected with the sanction of the court and in the manner laid down in the statute ( see Palmer s Company Law , 23rd Edn., p.440), in the Guide to the Companies Act by A. Ramaiya (16th Edn., p.951) apart from Trevor s case ( supra ), Whitworth British American Trustee Finance Corpn. v. Couper [1894] AC 399 has also been referred to as a leading authority on the subject...." (p. 223) 8. The Supreme Court has thus said that the judgment of the House of Lords in the case of British American Trustee Finance Corpn. ( supra ) is a leading authority on the subject of reduction of share capital by a company. Therefore, we have to see as to what is the law laid down by the House of Lords in its judgment in the case of British American Trustee Finance Corpn. ( supra ). The facts which are relevant 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfied that all the creditors entitled to object to the reduction have either consented or been paid or secured. Later on, dealing with the case before the House, he says : "The interests of creditors are not involved, and I think it was the policy of the Legislature to entrust the prescribed majority of the shareholders with the decision whether there should be a reduction of capital, and if so, how it should be carried into effect." By way of caution he adds this observation: "There can be no doubt that any scheme which does not provide for uniform treatment of shareholders whose rights are similar would be most narrowly scrutinized by the Court, and that no such scheme ought to be confirmed unless the Court be satisfied that it will not work unjustly or inequitably. But this is quite a different thing from saying that the Court has no power to sanction it." Lord Watson takes the same 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objection put forward is made on the part of an insignificant number of holders of founders shares. There are two individuals who hold five founders share each, and there is a public company holding thirty-four founders shares. The directors, in their circular to the shareholders, stated that these shares were of no commercial value. That is not denied. It is proposed to pay the dissentient shareholders the par value of their shares out of profits, and to extinguish the founders shares, because their continued existence would render it difficult, if not impossible, for the company to raise further capital. The dissenting shareholders do not demand, and never have demanded, better pecuniary terms, but they insist on retaining their holdings, which in all reasonable probability can never bring any profit to them, and may be detrimental to the company. I think that Farwell J. was quite right in disregarding 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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