2012 (12) TMI 621 - HC - Companies Law

Court approves capital reduction scheme with conditions to protect minority creditors. Petitioner directed to amend name temporarily.

IL & FS Engineering & Construction Co. Ltd., In re

IL & FS Engineering & Construction Co. Ltd., In re - [2013] 117 SCL 385 (AP), [2013] 176 COMP. CAS. 156 (AP) Issues Involved:1. Scheme of Arrangement Involving Reduction of Share Capital: Scope of Enquiry.2. Articles of Association: How Should Its Clauses Be InterpretedRs.3. Utilizing a Part of the Share Premium for Payment of Dividend - Does It Amount to Payment of Paid-Up Capital to the ShareholdersRs.4. Sections 390 to 394-A: Have the Conditions Stipulated Therein Been Complied WithRs.Issue-Wise Detailed Analysis:I. Scheme of Arrangement Involving Reduction of Share Capital: Scope of Enquiry:The court emphasized that it cannot interfere with the discretion and commercial wisdom of the stakeholders and the Board of Directors. It must ensure that the procedure is legally correct, and the shareholders and creditors are not prejudiced. The court must also ensure that the scheme is fair and equitable. The scheme proposed by the petitioner involves utilizing the balance in the securities premium account to wipe off losses, thereby presenting a correct picture to the market. The court noted that the scheme's purpose is to write off past losses and revive profits for future utilization, including the declaration of dividends. The court concluded that the statutory requirements relating to the reduction of share capital and the scheme of arrangement must be satisfied.II. Articles of Association: How Should Its Clauses Be InterpretedRs.The court interpreted Clause 10 of the Articles of Association, which allows the company to reduce its share capital by special resolution, to include the reduction of share premium as well. The court emphasized that the Articles should be construed to give them reasonable business efficacy. The court noted that the notice given to the members did not specify that the resolution should be a special resolution, but concluded that the failure to do so would not invalidate the resolution since all shareholders were aware of the scheme's contents and voted in favor of it.III. Utilizing a Part of the Share Premium for Payment of Dividend - Does It Amount to Payment of Paid-Up Capital to the ShareholdersRs.The court examined whether the payment of dividends to preference shareholders constituted the payment of paid-up share capital. It concluded that the scheme envisages utilizing the share premium account for payment of dividends, which requires compliance with the provisions relating to the reduction of share capital. The court directed the petitioner to secure the interests of the minority creditors by setting apart a 'special reserve' and furnishing a bank guarantee for the disputed amount.IV. Sections 390 to 394-A: Have the Conditions Stipulated Therein Been Complied WithRs.The court reviewed the compliance with Sections 390 to 394-A, noting that the statutory majority had acted in good faith and that the scheme was just, fair, and reasonable. The court found that the petitioner had disclosed all material facts, including the latest financial position and pending investigations, as required under the proviso to Section 391(2). The court also considered the objections raised by the respondent-objector and concluded that the scheme was not contrary to any law or public policy and was in public interest.Conclusion:The court sanctioned the scheme of arrangement involving the reduction of capital, subject to the fulfillment of specific conditions to secure the interests of the minority creditors. The court directed the petitioner to add the words 'and reduced' to its name until the end of the financial year 2012-13 and to comply with the statutory requirements for the reduction of capital. The court emphasized that the scheme was fair, reasonable, and in the public interest, and that the statutory provisions had been duly complied with.