2016 (12) TMI 1919 - HC - Companies Law

Company gets approval to reduce share capital from Rs. 40 crore to Rs. 2.76 crore under Section 101

In Re. Polestar Maritime Limited,

The HC sanctioned the petitioner company's application to reduce its equity and preference share capital from Rs. 40,31,36,240 to Rs. 2,76,36,240 under ... Sanction for the reduction of equity and preference share capital of the Petitioner Company under Section 101 of the Companies Act, 1956 - HELD THAT:- Since the requisite statutory procedure has been fulfilled, the Petition is made absolute in terms of prayer sought. Petitioner is directed to file a copy of this order alongwith a copy of the Form of Minutes with the concerned Registrar of Companies, electronically, along with INC-28 in addition to physical copy as per the relevant provisions of the Act. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:Whether the Petitioner Company is entitled to reduce its equity and preference share capital under Section 101 of the Companies Act, 1956, and the relevant provisions of the Companies (Court) Rules, 1959, as approved by a Special Resolution of its members.Whether the reduction of share capital by selective extinguishment and cancellation of fully paid equity and preference shares held by specific shareholders without payment of consideration is permissible under the law.Whether the procedural requirements under Section 101(2) of the Companies Act, 1956, including notice to creditors and publication, are applicable or can be dispensed with in the present case.Whether the proposed capital reduction prejudices or affects the interests of the creditors of the Petitioner Company.Whether the Petitioner Company has complied with the statutory requirements and accounting standards applicable to the reduction of share capital.Whether the Court should sanction the reduction of share capital and direct compliance with filing and publication formalities thereafter.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Entitlement to Reduce Share Capital under Section 101 of the Companies Act, 1956The relevant legal framework is Section 101 of the Companies Act, 1956, which governs the reduction of share capital by companies, and the Companies (Court) Rules, 1959, which prescribe the procedure for such reduction. The Petitioner Company's Articles of Association, specifically Article 8, empower it to reduce its share capital in any manner authorized by law.The Court noted that the Petitioner Company passed a Special Resolution unanimously at an Extraordinary General Meeting on 11th November 2016, approving the reduction of its issued, subscribed, and paid-up share capital from Rs. 40,31,36,240 to Rs. 2,76,36,240 by extinguishing specified equity and preference shares held by particular shareholders.The Court accepted that the Petitioner Company was empowered by its Articles and the Companies Act to undertake such reduction. The sanction of the Court under Section 101 was necessary and sought accordingly.Issue 2: Permissibility of Selective Extinguishment and Cancellation of Shares Without ConsiderationThe Petitioner proposed to extinguish and cancel 4,00,000 equity shares held by one shareholder, 3,00,000 equity shares held by another, and 36,85,000 preference shares held by the first shareholder, all fully paid-up, without any consideration payable to these shareholders.The Court examined the legality of such selective extinguishment. It found that the Articles of Association and the Companies Act do not prohibit selective reduction of capital by extinguishing shares held by particular shareholders, provided the procedure is complied with and the interests of creditors and shareholders are protected.The Court noted the absence of any claim for consideration by the affected shareholders and that the extinguishment was approved by a unanimous Special Resolution, indicating shareholder consent.Issue 3: Applicability and Dispensation of Procedural Requirements under Section 101(2)Section 101(2) requires certain procedural steps, including notice to creditors and publication, to safeguard their interests. However, the Petitioner contended that these requirements were not applicable or could be dispensed with.The Court considered the averments in the Company Scheme Petition, which stated that the Petitioner had only one secured creditor and fifty-one unsecured creditors, and that the proposed capital reduction did not affect or prejudice the interests of creditors or involve diminution of liability or payment to shareholders of paid-up capital.Given these facts and the absence of objection, the Court dispensed with the procedural requirements under Section 101(2) and the formalities of publication of notice of hearing in the Government Gazette and newspapers, as well as the use of the words 'And Reduced' in the capital description.Issue 4: Impact on Creditors' InterestsThe Court scrutinized whether the reduction would prejudice creditors. The Petitioner's averments stated that the reduction did not affect creditors' interests or liabilities.The Court found no evidence to suggest prejudice or diminution of creditor rights. The single secured creditor and other unsecured creditors were not adversely affected, and the reduction did not diminish any unpaid share capital liability.Issue 5: Compliance with Statutory Requirements and Accounting StandardsThe Petitioner undertook to comply with all statutory requirements under the Companies Act, 1956/2013 and applicable accounting standards. The Court accepted this undertaking and noted that the Petitioner would pass necessary accounting entries, debiting the share capital accounts and crediting the capital reserve account to reflect the reduction.This compliance ensures transparency and proper recording in the company's books, consistent with accepted accounting practices.Issue 6: Sanction of Reduction and Directions for ComplianceHaving found that the statutory procedure was fulfilled and no objections arose, the Court sanctioned the reduction of share capital as prayed. It directed the Petitioner to file the order and associated documents electronically and physically with the Registrar of Companies, and to publish notices of registration of the order and form of minutes in two local newspapers with circulation in Mumbai, within 14 days of registration.The Court also directed all regulatory authorities to act on authenticated copies of the order and minutes.3. SIGNIFICANT HOLDINGSThe Court held that:'The sanction of the Court has been sought for the reduction of equity and preference share capital of the Petitioner Company under Section 101 of the Companies Act, 1956 and relevant provisions of Companies (Court) Rules, 1959, as approved in the Special Resolution passed by its members.''The proposed capital reduction does not affect or prejudice the interests of its creditors and does not involve the diminution of liability in respect of unpaid equity and preference share capital or payment to any equity and preference shareholder of any paid up equity and preference capital.''The provisions of and the procedure prescribed under Section 101(2) of the Companies Act, 1956 was not applicable and the same was dispensed with along with publication of the notice of hearing of the Petition in the Maharashtra Government Gazette and newspapers.''The Petitioner Company shall pass the necessary accounting entries in its books of accounts to effect the reduction of equity and preference share capital by debiting the equity and preference share capital account and the difference (the surplus) being credited to the Capital Reserve Account and further, the Petitioner Company shall comply with the applicable Accounting Standards, if any.'Core principles established include:A company may reduce its share capital by selective extinguishment of shares held by particular shareholders without payment of consideration, subject to compliance with statutory provisions and shareholder approval.The Court may dispense with procedural requirements under Section 101(2) of the Companies Act, 1956 where the reduction does not prejudice creditors and statutory safeguards are otherwise met.Proper accounting treatment and compliance with accounting standards are integral to the lawful reduction of share capital.The Court's sanction is essential for effecting reduction of share capital under the Companies Act.Final determinations:The Court sanctioned the reduction of equity and preference share capital as proposed.The procedural requirements under Section 101(2) were dispensed with in the present case.The Petitioner was directed to comply with filing, publication, and accounting formalities post-sanction.