9911796707
TMI Blog2009 (12) TMI 527X X X X Extracts X X X X X X X X Extracts X X X X ..... off capital lost and other losses. This is not permissible under law. Therefore, this Court is not inclined to approve the Scheme of Arrangement as proposed. - COMPANY PETITION NO. 79 OF 2009 AND COMPANY APPLICATION NO. 340 OF 2009 - - - Dated:- 31-12-2009 - V.V.S. RAO, J. S. Ravi for the Petitioner. M. Anil Kumar for the Official Liquidator. ORDER 1. This petition under sections 391 to 393, read with sections 100 to 103, of the Companies Act, 1956, and Rule 79 of Companies (Court) Rules, 1959 (the Rules, for brevity) is filed by M/s. Aurobindo Pharma Limited (hereinafter, Aurobindo) praying for sanction of Scheme of Arrangement between company and its shareholders. The Scheme of Arrangement concerns with two aspects, namely, ( i ) utilizing an amount of Rs. 91 crores standing to the credit of Capital Redemption Reserve (CRR) towards adjusting the expenses enumerated in clause 1.5 of the Scheme; and ( ii ) creation of Reconstruction Reserve Account (RRA) by transferring/crediting an amount of Rs. 90.30 million standing to the credit of Capital Reserve and the benefits accruing from buy-back of Foreign Currency Convertible Bonds (FCCBs) and for util ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts shareholders to utilise the amounts standing in the credit of CRR as on 31-3-2008 towards expenses of the company especially those expenses as enumerated in clause 1.5 of the Scheme and/or transferring the said amount as well as the benefits accruing from buy-back of FCCBs to RRA towards adjusting expenses as referred to hereinabove. The details of these two aspects of the Scheme are as below. 3. Aurobindo issued 12.5 per cent redeemable non-convertible preference shares to an extent of Rs. 50 lakhs (50,000 shares of Rs. 100 each) during the financial year 1997-98 to Canara Bank. For the financial year 1998-99, the company issued preference shares to an extent of Rs. 4,50,00,000 (4,50,000 preference shares of Rs. 100 each) on 17-11-1998 to SBI Capital Marks Limited, Mumbai; and preference shares to an extent of Rs. 4,00,00,000 (4,00,000 preference shares of Rs. 100 each) to Global Trust Bank Limited, Mumbai on 24-11-1998. These are redeemable on 17-5-2000 and on 24-5-2000 respectively. The company purporting to comply with section 80(1)( d ) of the Companies Act credited out of its profit to CRR during the period commencing from financial years 1997-98 to 2000-01. The detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sections 100 to 103, of the Companies Act praying this Court to pass an order to convene the meeting of equity shareholders for the purpose of considering the scheme. The application being Company Application No. 340 of 2009 was ordered and an advocate was appointed as Chairperson to convene the meeting of shareholders. Accordingly, meeting was convened on 21-5-2009 at the place designated by the Court. After doing so, Chairperson filed a report. The meeting was attended (out of 45,300) by 109 members (76 persons, 27 proxies and 6 corporate members). In the meeting held by chairperson, members representing 3,49,87,258 number of shares of Rs. 5 each, 94.50 per cent (103 members) with Rs. 3,28,68,148 (93.92 per cent) voted in favour of resolutions which were considered. 7. Aurobindo statedly has eight secured creditors, namely, Andhra Bank, Canara Bank, ICICI Bank, IDBI Bank, HDFC Bank, State Bank of Hyderabad, State Bank of India and Standard Chartered Bank. It appears all of them accorded consent for creation of RRA. Insofar as unsecured creditors are concerned, Aurobindo perceives that they will not be affected adversely with the proposed Scheme because post-Scheme assets will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the requisite meetings as contemplated by section 391(1)( a ) have been held. 2.That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by section 391(2). 3.That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. 4.That all the necessary material indicated by section 391(1)( a ) is placed before the voters at the concerned meetings as contemplated by section 391(1). 5.That all the requisite material contemplated by the proviso to sub-section (2) of section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same. 6. That the proposed scheme of compromise and arrangement is not found to be violative of any provisions of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a veil t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the Scheme of Arrangement is an inchoate transaction affecting future, the Court can always refuse sanction. 11. In British American Trustee Finance Corpn. v. John Couper [1894] AC 399 (HL), the importance and sanctity of curial sanction to a Scheme of Arrangement was explained by House of Lords in a case wherein the Scheme of Arrangement envisaged reduction of capital by paying off the shares of one group of members was approved observing as under : I do not see any danger in the conclusion that the Court has power to confirm such a scheme as that now in question, or any reason to doubt that this was the intention of the Legislature. 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. The interests of the dissenting minority of the shareholders (if there be such) are properly safeguarded by this: that the decision of the majority can only prevail if it be confirmed by the Court. 12. Thus, the law providing for Court sanction for scheme is a safeguard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital; ( ii ) by cancelling paid-up share capital which is lost or unrepresented by available assets; or ( iii ) by paying off any paid-up share capital which is in excess of wants of the company. Needless to mention that any resolution of the company to reduce share capital in any of the three ways needs confirmation of the Court which is required to follow the procedure contemplated in sections 100 to 104 the Companies Act and Rules 46 to 65 of the Companies (Court) Rules. 15. In addition to the reduction of share capital as contemplated by section 100 of the Companies Act, the company can also reduce its share capital in other two ways. Until recently, law barred a company from purchasing its own shares. Section 77 of the Companies Act prohibits a company to buy its own shares unless consequent reduction of capital is effected and sanctioned in pursuance of sections 100 to 104 of the Companies Act. By Companies (Amendment) Act, 1999, with effect from 31-10-1998, Parliament inserted sections 77A, 77AA, and 77B. Under section 77A, which is an exception to section 77, a company may purchase or buy-back its own shares out of its free reserves or securities premium account or proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken as reducing the amount of its authorized share capital. (5) The capital redemption reserve account may, notwithstanding anything in this section, be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares." 17. The provision deals with power of a company to issue and redeem preferential shares. Unless and until the Articles of Association, of a company permit to do so, preferential shares cannot be issued. Even if the preferential shares are issued, they have to be redeemed within a stipulated period. There cannot be any doubt that the amount, which the company gets by issue of preferential shares forms part of the capital of a company. It is very interesting as to how the law enables redemption of preference shares. The proviso to sub-section (1) of section 80 of the Companies Act contemplates the redemption of fully paid preference shares in two ways, namely, ( i ) from out of the proceeds of fresh issue of shares made for the purpose of redemption; and ( ii ) from out of distributable profits. Sub-section (3) of section 80 of the Companies Act is to the effect that redemption of preference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n sanction? Is it at the stage of transferring from out of the profits to CRR or at the time of redemption of preference shares utilizing the funds available in CRR? A plain reading of section 80(1)( d ) of the Companies Act would make it clear that the company is entitled to transfer funds to CRR from out of the profits if it resolves to redeem preference shares issued. As the statute itself permits the company to transfer funds to CRR as and when profits accrue, no permission is required at the stage of transfer. But, having regard to the language used in clause ( d ) of proviso to sub-section (1) of section 80 of the Companies Act, it is very clear that when once the CRR is used for redemption of preference shares, the company has to necessarily move an application before the Court and obtain permission for utilizing CRR for redemption, because if CRR, which is created out of the profits, is used for redeeming preference shares, it results in diminishing of capital. Therefore, unless and until the resolution of the company to create CRR and use the same for redemption of fully paid preference shares is sanctioned and approved by the Court, no such redemption can be resorted to. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the object that the company may pay back to the shareholders any paid-up share capital which is in excess of its wants. The redemption of preference shares is nothing but repayment of the preference capital and amounts to reducation of share capital. The three methods mentioned in clauses ( a ), ( b ) and ( c ) of sub-section (1) of section 100 of the Companies Act, 1956, are only illustrative and are not exhaustive. A company may seek to redeem the share capital in any way and even in a manner not covered by clauses ( a ), ( b ) and ( c ) of sub-section (1) of section 100. The words Pay off any paid-up capital appearing in clause ( c ) indicate that even the preference share capital can be paid off subject to the conditions laid down in section 100 of the Act. Section 100 makes no distinction between preference share capital and equity share capital. Thus, the equity share capital as well as the preference share capital of a company can be reduced in any way, if authorised by the Articles, by a Special Resolution of the company subject to sanction of the Court. The preference shares could be redeemed by the directors or the shareholders. 23. K.M. Ghosh and Dr. K.R. Chandra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also in accordance with the provisions of section 100 of the Act. If the shares are to be redeemed not out of the fresh issue of shares made for that purpose nor out of the profits which would otherwise be available for dividend as required under section 80, provisions of section 100 of the Act would have to be complied. Two independent procedures are available to a company for redemption of preference shares. It may redeem the shares by following the procedure laid down under section 80 of the Act which is a special provision meant for redemption of preference shares or if any take recourse to the general provision under section 100 of the Act which is applicable for reduction of any capital including preference capital, in any manner." [Emphasis supplied] 25. In Birla Global Finance Ltd., In re [2005] 126 Comp. Cas. 647 1 Bombay High Court dealt with the issue of redemption of preference shares by creation of CRR. It is observed therein as follows : "Money required for redemption of preference shares can be obtained out of two sources under section 80. The first source is out of the proceeds of a fresh issue of shares made for the purpose of redemption and the second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CRR in accordance with section 80(1) proviso ( d ) and redeemed preference shares, in accounting practice, no amount remains as CRR. In such a case, there cannot be any further prospect of utilising such non-existent CRR. Even if CRR which might remain in the books of account or in the Balance Sheet, such account shall have to be used for issuing bonus shares as per section 80(5A) of the Companies Act. Applying these principles, the case of the petitioner company insofar as first relief is concerned needs to be considered. Utilisation of Capital Redemption Reserve 27. It is the case of the Aurobindo that during the year 1997-98, 50,000, 12.5 per cent redeemable non-convertible preference shares of Rs. 100 each were issued to Canara Bank for value of Rs. 50,00,000 (Fifty lakhs only) and during 1998-99, 8,50,000, 12 per cent redeemable non-convertible preference shares of Rs. 100 each were issued to Global Trust Bank and SBI Capital Markets Limited for a total value of Rs. 8,50,00,000. Thus, out of authorised preference share capital of 10,00,000 preference shares of Rs. 100 each, 9,00,000 preference shares were issued by 31-3-1999. The first issue during 1997-98 was authoris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7th November, 1998 at the Registered Office of the Company at Plot No. 2, Maithrivihar, behind Maithrivanam, Ameerpet, Hyderabad-500 038. Allotment of Redeemable Convertible Preference Shares of Rs. 450.00 lakhs in favour of SBI Capital Markets Limited, Mumbai : The Board was informed that the Company has received a sum of Rs. 450.00 lakhs from SBI Capital Markets Limited as Share Application Money for allotment of 4,50,000 Redeemable Cumulative Preference Shares of Rs. 100 each per share carrying dividend at the rate of 12.00 per cent p.a. payable annually. After discussion, the Board has approved for allotment of 4,50,000 Redeemable Convertible Preference Shares of Rs. 100 each per share to SBI Capital Markets Limited and passed the following resolution : "RESOLVED THAT 4,50,000 Redeemable Convertible Preference Shares of Rs. 100 each per share carrying dividend at the rate of 12.00 per cent p.a. payable annually, aggregating to Rs. 450.00 lakhs be and are hereby allotted in the Preference Share Capital of the Company to SBI Capital Markets Limited. FURTHER RESOLVED THAT the Preference Shares Certificate(s) be signed, the Common Seal be affixed by/in the presence of Sri P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d-up Redeemable Non-convertible Preference share capital* Amount transferred from P L A/c to CRR Amount shown in Schedule annexed to Balance Sheet Value of Redeemed Shares Rs. Rs. Rs. Rs. 1. 1997-98 50,00,000 46,575 46,575 2. 1998-99 8,50,00,000 1,33,88,127 1,34,34,702 3. 1999-2000 6,54,75,000 7,89,10,000 4. 2000-01 1,10,90,000 9,00,00,000 9,00,00,000 5. 2001-02 Nil Nil Nil 6. 2002-03 9,00,00,000** *Authorised Preference Share Capital is Rs. 10,00,00,000 divided into 10,00,000 shares of Rs. 100 each. **In subsequent financial years also, an amount of Rs. 9,00,00,000 was shown in Balance Sheet and relevant schedule thereto. 28. This Court has thoroughly perused the Annual Reports for the above years, especially the Balance Sheet and Schedules ( a ), ( b ) or (1) (2) thereto which give the details of the authorised and issued share capital, rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CRR. This procedure was not followed by Aurobindo. As seen from the three resolutions extracted hereinabove, though the Board of Directors passed resolution for issue of redeemable non-convertible preference shards to Banks, there was no specific authorization to transfer funds to CRR. The language of section 80(1) provisos ( a ) and ( d ) is very clear that if the preference shares are redeemed by issue of shares for the purpose, no permission is required but when the preference shares are to be redeemed otherwise than from the proceeds of the fresh issue of shares, the profits can be transferred to CRR only when the resolution of the Board of Directors. Such a resolution is absent, and therefore, the creation of CRR and transfer of profits itself ultra vires the provisions of the Companies Act. 30. Aurobindo admittedly redeemed preferential shares issued on two occasions in May, 2000 and December, 2000 during 2000-01. This was done without there being compliance with section 103 of the Companies Act. Such non-compliance with mandatory requirements of law amounts to contravention and attracts sub-section (6) of section 80(1) proviso ( d ) read with sections 100 to 103 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sued FCCBs in two tranches. US$ 15,00,00,000 in US$ convertible bonds due 2011 of 100 US$ each in tranch A and US$ 50 million (5,00,00,000) forward convertible bonds due 2011. FCCBs in tranch B are convertible at any time on or after 27-6-2006 and up to 10-5-2011 into shares of the company at a conversion price to be determined on 17-5-2007 with fixed rate of exchange of conversion of Rs. 45.145 = US 1$. 33. RBI issued Circular bearing No. AP (DIR. Series) Circular No. 39, dated 8-12-2008 permitting Authorised Dealer (AD) Category-I Banks to allow Indian Companies to prematurely buy-back FCCBs, if the buy-back value of the FCCBs is minimum discount of 15 per cent of the book value. The funds used for the buy-back shall be out of existing foreign currency funds held by the company either in India or out of fresh External Commercial Borrowings (ECBs) in conformity with ECB norms. This is under automatic route and does not require approval of Reserve Bank of India. The buy-back of FCCBs under approval route was also permitted. In this category, buy-back value of FCCB shall be at a minimum discount of 25 per cent on the book value and the funds used for buy-back shall be out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulations, the issue of foreign security is prohibited except with the permission of RBI. Regulation 4 permits any person resident in India either to purchase or to sell foreign security. Part I of the Regulations deals with direct investment outside India whereas Parts II and III deal with investments abroad by individuals and investments in foreign securities other than by direct investment. Regulation 21(2)( i ) of the Regulations enables Indian company to issue FCCBs not exceeding US$ 500 million and/or to issue FCCBs beyond US$ 500 million with the approval of the Bank. That is to say, if the total value of FCCBs does not exceed US$ 500 million, it is automatic route not requiring prior permission of RBI but subject to the conditions stipulated in Schedule I to the Regulations. If a company issues FCCBs either through automatic route or regulated route, within thirty (30) days after such issue, a company has to furnish a report to RBI giving the details and documents with regard to the total amount for which FCCBs are issued, names of the investors and number of FCCBs and the amount repatriated to India through normal banking channels and/or the amounts received by debit thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enable the Court to consider its vires before granting approval. It is not clear as to how much benefit would accrue to Aurobindo. It is also not clear whether such accruals can be permitted to be utilized for creation of RRA authorizing the Board of Directors to use the funds for the purpose enumerated in clause 1.5 of the Scheme of Arrangement. In the absence of all the details, this Court is not inclined to approve the Scheme of Arrangement with regard to creation of RRA by transferring the benefits to be accrued from buy-back of FCCBs. Capital Reserve Account 38. The Scheme was approved by Board of Directors of Aurobindo on 31-3-2009 and the Managing Director and/or CFO and/or Company Secretary are authorized to take all necessary steps in compliance with the Companies Act and Company Rules. The Board of Directors also resolved for constitution of restructuring committee to give effect to the Scheme. It is not clear from the resolution whether the Board considered pointedly the transfer of capital reserve as on 31-3-2008 to RRA for the year ended 31-3-2009 for being utilized towards adjusting expenses as mentioned in clause 1.5. Assuming that the Board of Directors h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t regarded as free for distribution through the profit and loss account; and the expression "revenue reserve" shall mean any reserve other than a capital reserve; and this sub-clause the expression "liability" shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities." The Compendium of Guidance Notes (Accounting) published by Institute of Chartered Accountants of India (ICAI) (July 2006 edn.,) defines reserve as under : "Reserve : The portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability. The reserves are primarily of two types : capital reserves and revenue reserves. " [Emphasis supplied] 41. The term capital reserve is defined in ICAI Guidance Notes as a reserve of a corporate enterprises which is not available for distribution as dividend. This means when once capital reserve is created, the same cannot be utilized for any other purpose except for the purpose for which it is intended. Capital reserve can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as plant and machinery within the meaning of said provision. The appellate authority agreed with Income-tax Officer, but on further appeal, the Income-tax Appellate Tribunal referred the question to the High Court as to whether the assessee can claim allowance even though necessary reserve was not created as required under law. Madras High Court answered reference against the assessee and it was held : "It will be apparent from the terms of the proviso that the object of the Legislature in allowing a development rebate is a real one, that is, to facilitate the improvement of the assessee s business from out of the reserve fund. The entries in the account books required by the proviso are not an idle formality. The assessee being obliged to credit the reserve fund for a specific purpose, he cannot draw upon the same for purposes other than those of the business, and if the assessee were a company for exemption that amount could not be distributed by way of dividend. It is also clear from the terms of the proviso that the reserve should be made at the time of making up the profit and loss account. The Tribunal was clearly in error when it held that account by making the reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 412 equity shares of Rs. 5 each aggregating to Rs. 17,49,42,060 attended the meeting. Out of them, 93.92 per cent of shareholders voted and approved the following resolutions : " Resolution 1. Resolved that the Scheme of Arrangement by and between Aurobindo Pharma Limited and its shareholders tabled before the meeting and initiated by the Chairman for identification purpose be and is hereby approved. Special Resolution 2. Resolved that the Applicant company be and is hereby authorized to exercise all the powers conferred under sections 100 to 103 of the Companies Act, 1956, to adjust the amount standing to the credit of Capital Redemption Reserve Account as on March 31, 2008 against the expenses as provided for in the Scheme of Arrangement between Aurobindo Pharma Limited and its Shareholders on March 31, 2009. Special Resolution 3. Resolved that the Board of Directors of the Applicant Company (hereinafter referred to as the Board which expression shall also include any Restructuring Committee constituted thereof) be and is hereby authorized to do all such acts, deeds, matters and things, which the Board considers necessary, requisite, desirable or appropriate and to m ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
