Tribunal denies share capital reduction due to company's losses and risks

The Tribunal rejected the prayer to confirm the resolution for reduction of share capital under Section 66 of the Companies Act, 2013. The company's continuous losses, lack of assets, operations, and staff, coupled with the proposed cancellation of 99.37% of share value, were deemed detrimental to shareholders' interests. The Tribunal suggested potential winding up to prevent misleading practices and directed the company to inform major shareholders and adhere to the Companies Act guidelines for future resolutions.

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Issues Involved:
1. Reduction of share capital under Section 66 of the Companies Act, 2013.
2. Continuous losses and sale of assets.
3. Delisting of shares and impact on shareholders.
4. Financial creditors' conversion of loans into shares.
5. Compliance with corporate governance and legal procedures.

Issue-wise Detailed Analysis:

1. Reduction of Share Capital under Section 66 of the Companies Act, 2013:
The application was filed by Assambrook Limited to confirm its resolution for reducing its share capital from Rs. 15,66,12,420 to Rs. 10,00,000 by cancelling and extinguishing an amount of Rs. 15,56,12,420. The rationale was to address the accumulated losses of Rs. 32.26 crores and to present a more viable financial position for future funding. The reduction was approved by a special resolution at the AGM held on 4th September 2019, with 34 shareholders voting unanimously in favor.

2. Continuous Losses and Sale of Assets:
The company, incorporated in 1947, started incurring losses from 2002-2003. Despite selling its two tea estates, Dhullie Tea Estate and Tinkharia Tea Estate, in 2014-2015, the company continued to incur losses. The financial statements reflected a debit balance of approximately Rs. 3226 lacs due to cumulative losses. The company is not in operation, has no staff, and the losses have been increasing yearly.

3. Delisting of Shares and Impact on Shareholders:
The equity shares of the company were compulsorily delisted from BSE Limited in July 2018 and subsequently from CSE. Post delisting, the shares are not tradable on stock exchanges. The proposed reduction in share capital does not involve payment to any shareholders and does not affect the rights of creditors. However, the Tribunal noted that the resolution to cancel and adjust 99.37% of the share value was not in the interest of shareholders, especially given the company's continuous losses and lack of operation.

4. Financial Creditors' Conversion of Loans into Shares:
The company had availed loans from Allahabad Bank and Bank of India, which were later converted into shares. Allahabad Bank held 42,50,000 shares and Bank of India held 12,00,000 shares. These shares were issued upon conversion of loans, with Bank of India receiving shares at Rs. 25 per share (including a premium of Rs. 15) and Allahabad Bank at par. The Tribunal noted that these financial creditors, holding 44.38% of the total shares, were not present when the resolution was passed, raising concerns about their interests.

5. Compliance with Corporate Governance and Legal Procedures:
The Tribunal emphasized the importance of compliance with corporate governance and legal procedures. It noted that the company intended to retain the security premium reserve of Rs. 16.78 crores while wiping out almost the entire value of shares, which was seen as an attempt to present a more favorable balance sheet to attract new investors. The Tribunal considered this as a misuse of the system and a potential attempt to obtain further loans or investments without addressing the existing creditors and shareholders.

Judgment:
The Tribunal rejected the prayer to confirm the resolution for reduction of share capital. It highlighted that the company had been incurring losses for 18 years, had no assets, no operation, and no staff. The resolution to cancel 99.37% of the share value was not in the interest of shareholders and appeared to be an attempt to attract new investors by presenting a misleading financial position. The Tribunal suggested that the company might be a fit case for winding up to prevent further deception of lenders and investors. The company was directed to send a copy of the order to all shareholders holding 5% and above shares as of 31.03.2020 and to comply with the guidelines of the Companies Act for any future resolutions.

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