TaxTMI 
TaxTMI 
2008 (9) TMI 557
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....o the shareholders, a part of the balance in General Reserve Account. It is submitted that the Scheme of Arrangement will give an opportunity to the shareholders to earn superior returns, as compared to those which the petitioner company can earn by investing in short term liquid instruments. Such reduction will further enhance the return on equity, provide an opportunity to leverage the balance sheet which in turn could further optimize the cost of capital and thus improve the economic value. To achieve the aforesaid objective, the Scheme proposes : (a)An amount of Rs. 43,23,63,000 as lying in the Share/Securities Premium Account of the petitioner company be reduced, consequent to which the shareholders of the petitioner company shall be paid off the said amount by the petitioner company in accordance with the provisions of the Act. (b)An amount of Rs. 43,08,57,000 forming part of the amount voluntarily and excessively transferred by the petitioner company to its General Reserve (i.e., the amount in excess of the prescribed 10 per cent of the profits of the company) in accordance with the provisions of the Companies (Transfer of Profits to Reserve) Rules, 1975, during the fi....
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....me, 3 shareholders representing 3 shares voted against the Scheme. 15 ballot papers were rejected as invalid. Therefore, the resolution in support of the scheme was approved by 98.2 per cent in number and 99.99 per cent in value of the shareholders present and voting, who constituted 62.67 per cent in value of the total paid-up capital of the petitioner company. 7. It is further averred that no investigation/proceedings have been instituted and/or pending in relation to the petitioner company under sections 235 to 251 of the Act. 8. Notice was directed to be issued to the Regional Director (NR) and the Official Liquidator attached to this Court. Citation was directed to be published in 'The Statesman' (English) and 'Jansatta' (Hindi) in accordance with the Companies (Court) Rules, 1959. It appears that the aforesaid requirement to invite objections from the unsecured creditors, and to consider the same, however, went unnoticed. I heard arguments in the matter and reserved orders on 22-1-2008. While preparing the order, I noticed the aforesaid omission and the matter was listed for directions on 4-4-2008. On 4-2-2008, I directed the petitioner company to comply with the afores....
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....ything in sub-section (1), be applied by the company - (a )in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares; (b )in writing off the preliminary expenses of the company; (c )in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; or (d )in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company. (3) Where a company has, before the commencement of this Act, issued any shares at a premium, this section shall apply as if the shares had been issued after the commencement of this Act : Provided that any part of the premiums which has been so applied that it does not at the commencement of this Act form an identifiable part of the company's reserves within the meaning of Schedule VI shall be dis-regarded in determining the sum to be included in the [securities] premium account." 11. It is submitted by Ms. Manisha Dhir, learned counsel for the Regional Director (NR) that the purport of section 78 of the Act is that the amount lying in the Securities Premium Account can b....
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....ccumulated profits earned by it in previous years and transferred by it to the reserves, subject to the conditions that- (i )The rate of the dividend declared shall not exceed the average of the rates at which dividend was declared by it in the five years immediately preceding that year or ten per cent of its paid-up capital, whichever is less. . . ." 14. It is submitted that in the present case the petitioner has not stated in the resolution the rate at which it is going to declare the dividend. Further, the paid-up capital of the company is Rs. 96,41,75,000 and the petitioner company intends to transfer a sum of Rs. 43,08,57,000 from the General Reserves Account to the dividend account which is more than 10 per cent of the paid-up capital of the company. Thus the second pre-condition is not satisfied. 15. The respondent has also relied upon the stated object behind the insertion of section 205A in the Companies Act by way of Companies (Amendment) Act, 1974 which reads as under : "'It has been observed that large established companies have been in practice of declaring dividends in a year in which profits are not adequate for payment of large dividends, out of reserves....
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....ce the shareholders and creditors have approved and not objected to the Scheme, there is adequate compliance of the requirement of section 102 of the Act. 17. With regard to the objection regarding the disbursement of amounts as special dividend, which were voluntarily transferred by the petitioner company to its General Reserves in excess of the prescribed 10 per cent of the profits of the Company over the years in the past, by first transferring the same to the Profit and Loss Account of the petitioner company, the petitioner submits that there is no prohibition prescribed either in the Act or under the Companies (Transfer of Profits to Reserves) Rules, 1975 for transferring back from the General Reserve Account to 'Profit and Loss Account', amounts transferred in excess of the prescribed 10 per cent of the profits of the petitioner company. It is submitted that the amounts transferred to the General Reserves Account, in excess of the requirement prescribed under the Act and the Rules are earnings of the petitioner company which the company was capable of distributing to the shareholders in the respective years in which they were earned. It is further submitted that the Genera....
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....count' would be regulated by the provisions of the Act, which deal with the aspect of reduction in the securities capital of a company. However, the provisions of the Act relating to reduction of securities capital would not apply to the 'Securities Premium Account', when the same is utilized as provided in the section itself. Section 78(2) enumerates four specific purposes for which the amount lying in the 'Securities Premium Account' may be applied 'notwithstanding anything in sub-section (1)'. This means, that the provisions of the Act relating to the reduction of the securities capital are not applicable where the application of the 'Securities Premium Account' is for one or more of the four specific purposes enumerated in section 78(2). A co-joint reading of section 78(1) and 78(2) of the Act, therefore, leads to the inference that the amounts lying in the 'Securities Premium Account', for their application, must comply with the provisions in the Act relating to reduction of securities capital of a company, except when the application of the 'Securities Premium Account' is for one or more or the four specific instances enumerated in sub-section (2) of section 78. When the appl....
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.... purpose, it could lead to absurd situations. Take for instance, the case of a company which has issued shares at a premium and which does not have any unissued shares, which it proposes to issue as bonus share or any outstanding preliminary expenses which could be written off or any expenses towards commission or discount paid or allowed on issue of shares or debentures of the company, which could be written off and any obligation for payment of premium on redemption of any redeemable preference shares or debentures of the company. If the submission of the learned counsel for the Regional Director (NR) is accepted, it would mean that such a company, which does not have any outstanding obligation or liability of the kind enumerated in clauses (a) to (d) of section 78(2), can never hope to be able to apply the amount lying in the 'Securities Premium Account', and that the same should continue to remain locked till a situation arises wherein the company can utilize it in terms of sub-section (2) of section 78. Such an interpretation would give rise to absurd and impracticable results. That does not appear to be the purpose of section 78(2) of the Act. Sub-section (2) of section 78 is....
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....ich are the purposes extracted in the affidavit of the Asstt. Registrar of Companies. Therefore, while reading the two sub-sections together, the conclusion that would follows would be that where a company proposes to apply its Securities Premium Account in the manner provided for in sub-section (2), the provisions relating to reduction of capital would not be attracted and the company can do so without either being required to pass a special resolution or seek the confirmation of Court. Section 78(2) is however not exhaustive of the methods in which the Securities Premium Account can be applied by the company and is only exhaustive of the methods in which such application can take place without following the reduction procedure. Where, however, a company proposes to apply its Securities Premium Account in a manner other than that contemplated in sub-section (2), then the provisions relating to reduction of share capital would have to be followed in respect of such application." (p. 39) 24. Though the Court did not specifically deal with the aforesaid submission, as a matter of fact the Madras High Court confirmed the reduction in the Securities Premium Account, even though the ....
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....ch approval is granted or can be granted for repayment and repatriation of the share premium, this portion of the scheme shall stand nullify and cancelled. 27. Hyderabad Industries Ltd. (supra) was a case where the appellant company sought confirmation of adjustment of share premium against permanent lost in value of investment made by it in another company. In paragraph 12 of the judgment the Division Bench of the Andhra Pradesh High Court interpreted section 78 in the manner as suggested by petitioner herein. Para 13 of the said judgment reads as under :- "The learned Company Judge on a true interpretation of section 78 of the Act read with sections 100, 101 and 102 correctly came to the conclusion that if the Share Premium Account is to be applied to any of the purposes mentioned in sub-section (2) of section 78, the company need not seek the approval/confirmation of the Company Court. It is only in case the company desires to apply Share Premium Account for any other purpose, it has to approach the Company Court for confirmation. The learned Company Judge had also rightly observed that there could be myriad situation where the company may have to use Share Premium Account....
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.... two persons whose interest are going to affected, insofar a reduction of share capital is concerned, are shareholders and creditors of the company." 30. The aforesaid decisions are relied upon by this Court in Cargill India (P.) Ltd.'s case (supra). Learned counsel for the petitioner also relies on another decision of the Andhra Pradesh High Court in Hyderabad Industries Ltd., In re [2005] 123 Comp. Cas. 446 ^1. In this decision the Court held: "20. Reverting back to section 78 again, sub-section (1) thereof is in two parts. First part imposed a legal obligation for transferring the share premium to the account called share premium account. The second part says that except as provided in section 78, the provisions relating to reduction of share capital would apply. Sub-section (2) of section 78 contains a non obstante clause. It lays down that notwithstanding sub-section (1), share premium account may be applied is paying up unissued shares of the company to be issued to the members as fully paid bonus shares; or writing off preliminary expenses of the company; or writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of....
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....following observation of the Court in para 8 of the said judgment. "Section 78 was apparently borrowed from section 56 of the English Companies Act, 1948 (11 and 12 Geo 6 Chh. 38). Before the Companies Act of 1956 there was no provision in the Indian Companies Act, 1913 which required a Company to maintain a separate share premium account. After the coming into force of the Companies Act 1 of 1956 a share premium account had to be maintained and the share premium could not be used otherwise than for the specific purposes mentioned in section 78(2)". 32. In my view the said observation does not constitute a binding precedent since that is not the ratio decidendi of the said decision. In that decision, the Supreme Court was construing the meaning of the expression 'Standing to the Credit of the Share Premium Account' used in the Explanation to paragraph D, Part II of the Finance Act (2) of 1957. The issue with regard to the scope of section 78(1) in the light of section 78(2) and their interplay was not being considered by the Supreme Court. It is well settled that an authority is a binding precedent for what it actually decided. For the aforesaid reasons this decision is not a....
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.... "When once the reduction in share capital does not involve the diminution of liability in respect of unpaid share capital or payment of any shareholder to any paid up share capital, the question of their interest being affected is not here. Even otherwise, in a petition under section 391 a meeting is called for of the shareholders and creditors of the company. Therefore, the scheme of amalgamation along with notice a draft copy of the scheme of amalgamation as mandatory requirement is sent to each shareholder and creditor of the company who on going through the same will have a clear picture of the terms of the scheme of amalgamation. They have a right to participate in the said meeting and vote for or against the resolution. Therefore, transparency is achieved in this process. Therefore, the procedure prescribed under section 100 of the Act is substantially complied with. That is what rule 85 provides for. This provision is made for very good reasons. Thus, reduction of share capital can be brought about as part of scheme of compromise, arrangement or amalgamation. Once shareholder and creditors of the company by a statutory majority approve the scheme of amalgamation and the sa....
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....with those for the year ended 31-12-2005. During the course of hearing, the petitioner had also produced a copy of the unaudited financial results for the quarter ended 30-9-2007. They show even higher net sales compared to the same period in the previous years. Total income as on 30-9-2007 for the quarter ended 30-9-2007 stood at Rs. 9,124 million, whereas the corresponding figure for the quarter ended 30-9-2006 was Rs. 7,273.3 million. The net profit for the quarter ended 30-9-2007 stood at Rs. 1160.60 million as against Rs. 829.8 million for the quarter ended 30-9-2006. These results were reviewed by the audit committee of the Board of Directors of the petitioner company and approved at the Board meeting held on 30-10-2007. The aforesaid financial picture of the petitioner even otherwise shows that there are sufficient assets possessed by the petitioner and it is in a financially sound state to meet its liabilities towards its creditors both secured and unsecured. It is presumably for this reason that the secured creditors have given their consent to the proposed scheme and the unsecured creditors have not objected to the scheme despite notice. The shareholders of the petitioner....
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....al year only from out of the profits of the company for that year, arrived at after providing for depreciation or out of accumulated profits for the previous years, after providing for depreciation in accordance with the said section. Sub-section (2A) of section 205, in effect, states that no dividend shall be declared or paid by a company for any financial year out of the profits of the company for that year arrived at after providing for depreciation, except after the transfer to the reserves of the company of such percentage of its profits for that year, not exceeding 10 per cent, as may be prescribed. A company is not prohibited from voluntarily transferring a higher percentage of its profits to the reserves in accordance with such rules as may be made by the Central Government in this behalf. 'The Companies (Transfer of Profits to Reserves) Rules, 1975' have been framed by the Central Government in exercise of power conferred by inter alia, sub-section (2A) of section 205 of the Act. Rule 2 of these Rules reads as follows : "2. Percentage of profits to be transferred to reserves.-No dividend shall be declared or paid by a company for any financial year out of the profits of....
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....Rule, 1975. 44. The Department of Company Affairs has issued certain clarifications on the interpretation of section 205(2A) which have been extracted as Annexure-J to the written submissions filed by the petitioner. One of the queries which has been answered by the said department and the answer in respect thereof read : "Query 10 : Whether after transfer of 10 per cent of the current profits to reserve, the remaining undistributed profits could be carried forward in the profit and loss account ? Answer : The rules do not prohibit a company from carrying forward any balance of current profit and loss account without transferring them to reserves." 45. The department has further clarified vide Circular No. 21/76 [8/30/(205A)/75-CLB], dated 1976 that the term 'reserves' mentioned in the Companies (Transfer of Profits to Reserves) Rules framed in pursuance to section 205(2A) means only 'free reserves'. 46. From the answer to query No. 10 as above extracted it is clear that a company has the option to either transfer more than the requisite 10 per cent of its current profits to reserve (where it declares a dividend in excess of 20 per cent) or to carry the same forward ....