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TMI Blog2012 (3) TMI 593X X X X Extracts X X X X X X X X Extracts X X X X ..... ituated at TGV Mansion, III Floor, 6-2-1012, Khairatabad, Hyderabad, Andhra Pradesh. Its authorized share capital is ₹ 6,00,00,000/- divided into 60,00,000 equity shares of ₹ 10/- each. Its issued, subscribed and paid up capital is ₹ 2,25,28,800/- comprising 22,52,880 equity shares of ₹ 10/- each. The main objects of the demerged company as set out in its Memorandum of Association include, inter alia, the business of manufacturing and dealing with pharmaceuticals, power generation etc. It is presently engaged in diverse businesses such as manufacture and sale of veterinary pharmaceuticals, generation and sale of wind energy and investments in bodies corporate. Its audited accounts as on 31.03.2011 reflected a net profit of ₹ 22,53,600/-. The resulting company was incorporated on 11.03.2010 under the name and style of Brilliant Industries Limited. Its Registered Office is situated at TGV Mansion, II Floor, 6-2-1012, Khairatabad, Hyderabad, Andhra Pradesh. Its authorized share capital is ₹ 3,50,00,000/- divided into 35,00,000 equity shares of ₹ 10/- each. Its issued, subscribed and paid up capital is ₹ 2,65,00,000/-, comprising 26,50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., the State Bank of Hyderabad. The demerged company had availed working capital and term loans from it to the tune of ₹ 32,43,74,167/-. By letter dated 14.11.2012, the State Bank of Hyderabad conveyed its no objection to the scheme of arrangement. The balance sheet dated 31.03.2011 also showed that the demerged company had unsecured loans, in the form of fixed deposits and trade deposits aggregating to ₹ 3,43,26,063/-. Further, the current liabilities of the demerged company, comprising trade creditors , other creditors and creditors for expenses , were to the tune of ₹ 13,40,39,228/-. As the demerged company had not obtained letters of consent from these unsecured creditors, this Court, by order dated 26.09.2012 passed in C.A.No.928 of 2012, directed a meeting of the unsecured creditors of the demerged company to be held under the Chairpersonship of Sri T.S.V.Prasad Naik, Advocate, on 31.10.2012. The Chairperson conducted the meeting and filed his Report dated 31.10.2012 stating that unsecured creditors representing the value of ₹ 5,31,35,127.35 Ps. were present in person and unsecured creditors of the value of ₹ 5,50,82,647.35 Ps. were pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsecured creditors or current liabilities as on 25.02.2013. The Regional Director, South East Region, Ministry of Corporate Affairs, Hyderabad, filed affidavit dated 05.07.2012 stating that as per the report dated 02.07.2012 of the Registrar of Companies, Andhra Pradesh, the demerged company and the resulting company were regular in filing their statutory returns and no complaints or investigations were pending against them. The scheme of arrangement may now be examined. Thereby, the vaccines division and the wind energy division of the demerged company are proposed to be transferred to the resulting company. Part-II of the scheme deals with the demerger. Clause 3.1 thereof states that upon the coming into effect of the scheme, the demerged undertakings would stand demerged from the demerged company and be transferred to and vest in the resulting company. Clause 3.4 states that in consideration of the demerger, the resulting company shall issue its shares to the shareholders of the demerged company in terms of Clause 11.1. Clause 4 in Part-II deals with debts, liabilities, duties and obligations and states to the effect that the same shall stand transferred to the resulting com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re capital. Clause 13 deals with reduction of reserves, including share premium, of the demerged company. Clause 13.1 states that the reserves, including share premium, of the demerged company shall be reduced to the extent of ₹ 763.24 lakhs not represented by its assets. ₹ 699.99 lakhs out of the share premium account, ₹ 20 lakhs out of the Investment Subsidy and ₹ 43.25 lakhs out of the General Reserve were to be written off, being unrepresented by available assets. This reduction was deemed to be in accordance with Sections 100 to104 of the Act of 1956 and did not involve either diminution of liability in respect of unpaid share capital or payment to any shareholder of paid up share capital. Trite to state, it would be open to a company to cause reduction of its capital in the process of giving effect to a scheme of arrangement or compromise. In AL-AHALI BUSINESS TRADE LINKS P. LTD., In re [2010] 157 Comp Cas 501 (Ker) , the Kerala High Court observed: I shall first deal with the question as to whether it was proper on the part of the petitioner to seek sanction for reduction of the share capital under section 100 of the Companies Act as a compromi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce to the required procedure for reducing share premium reserves and capital. Further, though the sanction of this Court is sought only under Sections 391 and 394 of the Act of 1956, the two companies are, in effect, seeking sanction of this Court for reduction of capital under Sections 78 and 100 to 102 of the Act of 1956 also. This order shall therefore be deemed to have been passed not only under Sections 391 to 394 of the Act of 1956 but also Sections 78 and 100 to 102 thereof. The first and foremost requirement for effecting reduction of capital would be that the Articles of Association of the company must enable it to undertake such reduction. Article 42 of the Articles of Association of the demerged company authorizes it to reduce its share capital, capital redemption reserve account or its share premium account by way of a special resolution. Similarly, Article 66 of the Articles of Association of the resulting company authorizes it to reduce its capital in any way by way of a special resolution. Article 67 elucidates that it could reduce its share capital, capital redemption reserve account or its share premium account by way of a special resolution. The two companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and incidence of the reduction. 4. The Company may reduce the share capital of all its share-holders pro rata or may reduce the shares of any individual share-holder or any class of share-holders wholly or in part. 5. That the Court has to see that interests of the minority have been protected and no unfairness has been shown to it. 6. That in doing so, the Court should keep in view the consideration that the decision has been arrived at by businessmen who are fully cognizant of their necessities and are the best custodians of their interests and should therefore be slow to interfere. The objection as to shortfall in the notice period was also overruled by the Court in the light of the change in the legal position owing to amendment of Section 81 of the Companies Act. In re PEARCE DUFF CO. LTD. (1961) 31 Comp Cas 251) was a matter involving a defective special resolution in the context of reduction of share capital. This case arose under the British Companies Act, 1948. Section 141(2) thereof provided that a resolution shall be a special resolution when it has been passed by such a majority as is required for passing of an extraordinary resolution and at a general meeti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir consent as being tantamount to a resolution of a general meeting of the company. In other words, I proceed on the basis that where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be. This is called the Duomatic Principle. Referring to this principle and case law on the subject, Neuberger, J, in RE TORVALE GROUP LTD. (1999) 2 Butterworths Company Law Cases 605 observed: The essence of the Duomatic Principle is that, where a statute or a company s articles provide that a course can be taken only with the sanction of a certain group, which sanction is to be given in accordance with a prescribed procedure, then, provided that all the members of that group agree to that course, the prescribed procedure is not normally treated as being of the essence. This is particularly likely to be the case if (i) the Court is satisfied that the sole purpose of the prescribed procedure is for the protection of the members of the relevant group, and (ii) the prescribed procedure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omplete code. The question then is whether the requirement of setting out this intention in the notice could be said to be such mandatory requirement, the failure to comply with it would invalidate the resolution. The purpose behind enacting this provision and its nature and the intention of the legislature and the general inconvenience that the failure to observe it is likely to cause to members all go to show that the requirement to set out the intention to move a resolution as special resolution could not be mandatory. The resolution ought to be adopted as special resolution and that requirement is mandatory. But the setting out of the requisite intention in the notice convening the meeting could not be mandatory but only directory. The absence of requisite intention in the notice was not likely to cause serious inconvenience to the members. Considering the provision in juxtaposition with clause (b) and (c), it appears that the provision contained in clause (a) is directory and it is sufficient if it is substantially complied with. In VASANT INVESTMENT CORPORATION LTD. V/s. OFFICIAL LIQUIDATOR, COLABA LAND AND MILL CO. LTD. (1981) 51 Comp Cas 20 (Bombay), the Bombay High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree-fourths of the shareholders present had voted in favour of the scheme. Hence, even assuming that the scheme involves a reduction of share capital, the provisions relating to it have been substantially complied with. In MEKASTER VALVES AND ENGINEERING SERVICES P. LTD., In re (2009) 149 Comp Cas 593 (Guj) it was observed: Having gone through the petition and the annexures attached therewith and having considered the above referred authorities, the court is satisfied that since all these changes are proposed to be effected as an integral part of the scheme, the approval granted by the shareholders at the meeting to the scheme as a whole amounts to approval to all such incidental proposals and no separate procedure is required to be followed as envisaged by Sections 17, 31, 94, 97, 81(1A), 100 and 149(2A), respectively. It goes without saying that when this court sanctions the scheme, the scheme is sanctioned as a whole with all its clauses and proposals. Though no specific reference was made to the Duomatic Principle, this Court also gave effect to the said principle in fitting cases. In NOVOPAN INDIA LIMITED, In re (1997) 88 Comp Cas 596 (AP) , this Court observed: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of is achieved indirectly or informally. Viewed in the backdrop of the above legal position, this Court finds that there is sufficient compliance with the statutory requirements by both the companies for effecting reduction of their share premium/capital. Though the meeting of the shareholders of the demerged company convened pursuant to the order dated 25.04.2012 of this Court in C.A.No.513 of 2012 was not specified to be for the purpose of passing a special resolution, it was attended by shareholders representing the share value of ₹ 2,23,30,540/- out of the total paid up share capital of ₹ 2,25,28,800/- and all the shareholders were aware that the meeting was convened for the sole purpose of considering and approving the scheme which involved reduction of the company s share premium reserves. Similarly, the shareholders of the resulting company, though no general meeting was convened for the purpose, approved the scheme unanimously. Their knowledge and approval of the proposed reduction of the resulting company s capital is therefore implicit in their unconditional consent. The Duomatic Principle would therefore be squarely applicable to the cases on hand. It may als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he subject scheme of arrangement involving reduction of the demerged company s reserves, including a massive reduction of its share premium account, and reduction and reconstruction of the resulting company s capital. It is however to be noticed that under the scheme, the resulting company is required to issue equity shares to the shareholders of the demerged company entailing payment of stamp duty under Article 20(d) of Schedule I-A of the Indian Stamp Act, 1899. Proof of such payment must therefore be enclosed along with the certified copy of this sanction order when filed with the Registrar of Companies, Andhra Pradesh. A certified copy of this order, including the minutes as approved, shall be delivered to the Registrar of Companies, Andhra Pradesh, within 30 days from the date of receipt of this order. Notice of the registration by the Registrar of Companies, Andhra Pradesh, of this order and of the minute shall be published in the Hyderabad editions of Business Standard (English Daily) and Andhra Bhoomi (Telugu Daily) within 14 days of the registration as aforestated. ORDER CONFIRMING REDUCTION OF THE SHARE PREMIUM ACCOUNT AND APPROVING MINUTE i. Upon the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereof filed on the 11th day of June, 2012, and upon perusing Business Standard and Andhra Bhoomi (Hyderabad Editions) containing the notice of the date of hearing of the petition, and the Court being satisfied with respect to every creditor entitled to object to the reduction that either his consent to the reduction has been obtained or his debt or claim has been discharged or has determined; THIS COURT DOTH ORDER: 1. That the reduction of the share capital of the above company resolved on and effected by the resolution passed by the Board of Directors of the company on the 24th day of March, 2012 in terms of the scheme of arrangement, whereby the paid up capital of the company would stand reduced by ₹ 79,34.000/- be and the same is hereby confirmed. 2. That the minute set forth in the schedule hereto be and is hereby approved. 3. That a certified copy of this order including the minute as approved be delivered to the Registrar of Companies, Andhra Pradesh, within 30 days from the date of receipt of the order. 4. That notice of the registration by the Registrar of Companies, Andhra Pradesh, of this order and of the said minute be published once each in Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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