2021 (4) TMI 814 - AT - Insolvency and Bankruptcy

Tribunal grants appeal, approves equity share capital reduction by special resolution

The Tribunal allowed the appeal, setting aside the NCLT's order and confirming the reduction of equity share capital by special resolution. The company ... Reduction of share capital - diminution of any liability in respect of unpaid share capital or not - proper genuine reason has been given for reduction of share capital or not - Consent affidavit from creditors - utilization of Security Premium Account for making payment to the non-promoter shareholders - Consent from 171 non-promoters shareholders who were not traceable, not obtained and claim of such shareholders has not been secured or determined - permissibility of Selective reduction of shareholders - maintainability of Petition for reduction of capital under Section 66 of the Act. No proper genuine reason has been given for reduction of share capital - HELD THAT:- There is no law that a Company can reduce its capital only to reduce any kind of accumulated loss - it cannot be said that the Appellant Company has not given any genuine reason for reduction of share capital. Consent affidavit from creditors has not been obtained - HELD THAT:- The debt or claim of every creditor. (i) has been discharged or (ii) determined or (iii) has been secured or (iv) his consent is obtained, if any one condition is satisfied then the Tribunal may dispense with the requirement of giving notice to creditors or publication of notice under this rule or both - It is observed that while objections have not been received from creditors, neither has any consent affidavits on their behalf been produced. With regard to reduction of share capital is erroneous. Security Premium Account cannot be utilized for making payment to the non-promoter shareholders - HELD THAT:- The SPA can be utilized for making payment to non-promoter shareholders. The submissions made by Ld. Counsel for the Respondents that the amount laying the SPA can be applied by the company, only for the purposes which are specifically provided in sub-Section 2 of Section 52 of the Act and for no other purpose, cannot be accepted. Consent from 171 non-promoters shareholders who were not traceable, has not been obtained and claim of such shareholders has not been secured or determined - HELD THAT:- The Petitioner Company has a total of 171 non-promoter shareholders, majority of them are untraceable, in this regard, in the Petition it is specifically mentioned that the amount to be paid to the untraceable nonpromoter shareholders will be kept in an Escrow Account for a period of three years and any amount remaining unclaimed in the Escrow Account for more than three years pursuant to capital reduction would be transferred to the Investor Education and Protection Fund (IEPF). Section 125 of the Act provides that the amount in the unpaid dividend account of the companies is to be transferred to the IEPF under Section 124 (5) of the Act - Ld. Tribunal was satisfied with the aforesaid provision in the scheme, therefore, the Petition has not been dismissed on this ground. Selective reduction of shareholders is permissible or not - HELD THAT:- The selective reduction is permissible if the non-promoter shareholders are being paid fair value of their shares. In the present case, none of the non-promoter shareholders of the Company have raised objection about the valuation of their shares. It is nobody’s case that the proposed reduction is unfair or inequitable. It is also made clear that the proposed reduction is for whole non-promoter shareholders of the company. Maintainability of Petition for reduction of capital under Section 66 of the Act - HELD THAT:- Admittedly, there is a provision in Article 45 and 47 of the Article of Association that the company may by special resolution reduced its capital and in the EGM held on 04.02.2019 a special resolution was duly passed for reduction of share capital. The Appellant Company has pleaded the genuine reason for reduction of share capital and has secured the rights of 171 nonpromoter shareholders who are not traceable - the Tribunal has erroneously held that the Application for reduction of share is not maintainable under Section 66 of the Act, consent affidavits from the creditors is mandatory for reduction of share capital, SPA cannot be utilized for making payment to nonpromoter shareholders, consent from 171 non-promoter shareholders who are not traceable is required, selective reduction of shareholders of non-promoter shareholders is not permissible. Appeal allowed. Issues Involved:1. Genuine reason for reduction of share capital.2. Requirement of consent affidavit from creditors.3. Utilization of Securities Premium Account (SPA) for payment to non-promoter shareholders.4. Consent from untraceable non-promoter shareholders.5. Permissibility of selective reduction of shareholders.6. Maintainability of the petition under Section 66 of the Companies Act, 2013.Detailed Analysis:1. Genuine Reason for Reduction of Share Capital:The Appellant Company argued that the reduction of share capital was proposed due to requests from non-promoter shareholders for liquidity and to make the company a wholly-owned subsidiary of its current holding company. The Tribunal found that the company had provided a genuine reason for the reduction, which was supported by emails from non-promoter shareholders requesting an opportunity to dispose of their shares. The Tribunal concluded that there is no law mandating that share capital reduction can only occur to reduce accumulated losses.2. Requirement of Consent Affidavit from Creditors:The Tribunal held that obtaining consent affidavits from creditors is not mandatory under Section 66 of the Companies Act or the Rules. The Appellant Company had complied with the Tribunal's order to serve notices to creditors and publish notices in newspapers. No objections were received from creditors within the stipulated three-month period, leading to the presumption that they had no objections to the reduction. The Tribunal found that the observation that consent affidavits from creditors had not been obtained was erroneous.3. Utilization of Securities Premium Account (SPA) for Payment to Non-Promoter Shareholders:The Tribunal referred to judgments from various High Courts, including the Delhi High Court in re. Nestle India Ltd. and the Rajasthan High Court in Vaibhav Global Ltd., which held that the SPA could be utilized for purposes other than those specifically provided in Section 52(2) of the Companies Act, 2013, with appropriate approvals. The Tribunal concluded that the SPA could be used for making payments to non-promoter shareholders, rejecting the Respondents' argument that the SPA could only be used for specific purposes outlined in Section 52(2).4. Consent from Untraceable Non-Promoter Shareholders:The Appellant Company had proposed to keep the amount payable to untraceable non-promoter shareholders in an Escrow Account for three years, after which any unclaimed amount would be transferred to the Investor Education and Protection Fund (IEPF). The Tribunal found no issue with this provision and agreed that the rights of untraceable shareholders had been adequately secured.5. Permissibility of Selective Reduction of Shareholders:The Tribunal held that selective reduction of share capital is permissible under Section 66 of the Companies Act, 2013, provided it is fair and equitable. The Tribunal referred to judgments from the Bombay High Court in Sandvik Asia Ltd. and the Delhi High Court in Reckitt Benckiser (India) Ltd., which supported the view that selective reduction is allowed if non-promoter shareholders are paid fair value for their shares. The Tribunal found that none of the non-promoter shareholders had raised objections about the valuation of their shares, and the proposed reduction was for all non-promoter shareholders.6. Maintainability of the Petition under Section 66 of the Companies Act, 2013:The Tribunal held that Section 66 of the Companies Act, 2013, provides for the reduction of share capital without it being part of any scheme of compromise or arrangement. The Tribunal referred to the Gujarat High Court's decision in re. Maneckchowk and Ahmadabad Manufacturing Company Ltd., which supported the view that Section 66 is a complete code for the reduction of share capital. The Tribunal found that the Appellant Company had complied with the necessary provisions and that the petition was maintainable under Section 66.Conclusion:The Tribunal set aside the impugned order of the NCLT, Bengaluru, and confirmed the reduction of equity share capital resolved on 04.02.2019 by the special resolution. The Tribunal directed the Company to publish the reduction of share capital in specified newspapers and deliver the certified copy of the judgment to the Registrar of Companies and other statutory authorities within 30 days. The appeal was allowed with no order as to costs.