Company loses bid for declaration on 99% share capital reduction under 2007 AAIFR rehabilitation scheme

The HC dismissed a suit filed by a company seeking declaration that its share capital was reduced by 99% under a 2007 AAIFR order. The court held that while the suit was maintainable and within limitation, the company's right to share capital reduction had not crystallized as the rehabilitation scheme remained subject to modification until its operation period ended in March 2022. Since the right was not crystallized, no declaratory decree could be granted, and the consequential injunction was also denied.

---

---

Issues Involved:
1. Reduction of paid-up equity share capital by 99%.
2. Reliefs entitled to the plaintiff.
3. Validity and binding nature of the order dated December 4, 2007, by AAIFR.
4. Maintainability of the suit in the High Court.

Issue-wise Detailed Analysis:

Issue 1: Reduction of Paid-up Equity Share Capital by 99%
The court examined whether the plaintiff's paid-up equity share capital was reduced by 99% per the AAIFR order dated December 4, 2007. The reduction of share capital in the plaintiff-company was part of a rehabilitation scheme sanctioned under Section 18(2)(f) and Section 18(4) of SICA, 1985, aimed at reviving the company. The court noted that such a reduction is permissible under the Companies Act, 1956, and 2013, provided the statutory formalities are followed. However, in this case, the reduction was contingent upon the successful implementation of the rehabilitation scheme, which remained open to modification until the scheme was fully worked out. Therefore, the reduction did not achieve finality and remained subject to change.

Issue 2: Reliefs Entitled to the Plaintiff
The plaintiff sought a declaration that the paid-up share capital stood reduced to Rs. 20.23 lakhs and that the defendant was entitled only to 50 equity shares of Re.1/- each. The court held that a declaration under the Specific Relief Act, 1963, is generally granted for crystallized rights but can also be granted for contingent rights. However, in this case, the plaintiff's right to claim a declaration was contingent upon the successful implementation of the rehabilitation scheme, which had not yet been achieved. Consequently, the court could not grant the declaration or the consequential injunction sought by the plaintiff.

Issue 3: Validity and Binding Nature of the AAIFR Order
The court addressed whether the AAIFR order dated December 4, 2007, was valid and binding on the defendant. The court affirmed that the AAIFR and BIFR were competent to formulate a rehabilitation scheme, including the reduction of share capital. The scheme remained binding until it was successfully implemented or the company was wound up. The court noted that the SICA, 1985, was repealed by the 2003 Act, and the proceedings under SICA abated with its repeal. However, the scheme continued to operate under the new legal framework, with the forum for addressing implementation issues shifting to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC), 2016. Therefore, the reduction of share capital remained a contingent act until the scheme was successfully implemented.

Issue 4: Maintainability of the Suit in the High Court
The court examined the maintainability of the suit, considering the jurisdiction and limitation. The defendant resided within the Ordinary Original Civil jurisdiction of the High Court, making the suit maintainable. The court noted that the defendant's assertion of rights began on November 6, 2016, and the suit was filed on September 22, 2017, within the limitation period. Despite the bar on civil court jurisdiction under Section 231 of IBC, the court held that it could still pass a declaratory decree regarding the rights between the company and an individual shareholder. Thus, the suit was maintainable as framed.

Conclusion:
The court dismissed the suit, holding that the plaintiff's right to a declaration and injunction had not crystallized due to the contingent nature of the rehabilitation scheme. The reduction of share capital remained subject to successful implementation of the scheme, which was still in operation. Consequently, the court could not grant the reliefs sought by the plaintiff. The connected application filed by the defendant was also dismissed.

---