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TaxTMI 
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TaxTMI 
2009 (11) TMI 516
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....eld by public shareholders at the rate of Rs. 7 per fully paid-up share and also by cancelling and extinguishing partly paid-up shares. This Court approved the scheme subject to modifi­cation that Rockwool shall pay to public shareholders at the face value of Rs. 10 per fully paid-up share. Needless to mention that this Court had ordered publication of notice in two Newspapers and in spite of the same no objections were received from any­body. In these applications, which in effect are filed seeking review of the order of this Court have been argued in detail covering the ambit of sections 77, 77A and 100 of the Companies Act, 1956. Case of the applicants 2. The first applicant is individual investor. He and his wife promoted second applicant-company which invests in shares and securities listed on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). They individually and together held 1,63,248 shares of Rockwool which manufactures Resin Bonded Rockwool in its factory at Kaveli Village of Zaheerabad Taluk in Medak District. In 1995, due to financial crunch, its networth turned negative. Its accumulated dues to financial institutions stood at Rs. 1,918.19 lakhs. ....
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....ailability of surplus cash with the company. Fergu­son in their report dated 4-2-2006 suggested reduction of share capital as a process of capital restructuring, valued shares of Rockwool at Rs. 7 per share in respect of equity shares of Rs. 10 each fully paid-up. The Board of Directors of Rockwool then called for General Body meeting which passed a special resolution for reduction of shares of the company in the following manner : (a) By reducing issued capital from Rs. 40,90,76,870 divided into 4,09,07,687 equity shares of Rs. 10 each to Rs. 28,77,94,100 divided into 2,87,79,410 equity shares of Rs. 10 each, (b) to effect such reduction by cancelling and extinguishing Rs. 1,21,28,277 equity shares comprising 95,93,137 fully paid-up shares held by AIM, and (c) by cancelling and extinguishing 25,25,040 fully paid-up shares held by public shareholders and 10,100 partly paid-up shares to extent of Rs. 5 per share held by public, at the rate of Rs. 7 per fully paid-up share at the rate of Rs. 3.50 per fully paid-up shares. As noticed supra, alter General Body passed resolution in accordance with sections 100 and 104 of Companies Act. Rockwool presented C.P. No. 33 of 2006 and aft....
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....es from the public. 7. Prior to May 2005, first applicant had only 500 shares of Rockwool. After the Board resolution for delisting, first appli­cant acquired equity shares by following subversive methods. He purchased 16,435 shares on 27-5-2005, 4,800 shares on 3-6-2005 and 12,410 shares on 10-6-2005 through Mr. Dipak G. Cholera, who is member broker of BSE and subsequently on two occasions, some of the shares were transferred to first applicant on 10-6-2005. Second applicant then transferred some shares to Mr. Janak Mathu­radas on 17-3-2006, a few days before General Body Meeting. Mr. Dipak G. Cholera purchased and sold the equity shares of the company around 128 times during the period from May, 2005 to February, 2006 totalling to nearly five lakh shares of the compa­ny. Both the applicants with the connivance of Mr. Dipak G. Cholera artificially manipulated share prices of Rockwool on BSE with ulterior motive in an attempt to increase share price. 8. First applicant attended EGM held on 29-3-2006, which passed resolution for reduction of capital. The scrutinisers appointed by Chairman of the meeting verified all the Proxies. 1,29,103 shares held by second applican....
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.... wants of the company. These are not valid reasons for reduction of capital and results in divesting shareholders of their rights under law. Even if Rockwool had good intentions, the company ought to have resorted to section 77, read with section 77A, of Companies Act and buyback shares at a just and fair price. The allegation that they had no surplus cash is incorrect as admittedly by 2005, Rockwool became debt free company and also by reason of favourable order from Customs Appellate Tribunal had considerable accruals to its credit. 2. The company bought back shares at the time of delisting at an exit price of Rs. 7 for a share of Rs. 10 each. This amounts to buyback and sections 77 and 77A of Companies Act are attracted. By offering exit price, which is far below, Rockwool illegally got rid of shareholders. But for the Court order, Rockwool could not have compelled petitioners and similarly situated sharehold­ers to part with their shares, which were purchased at a higher price than the exit price. There is no good faith on the part of the promoters. 3. There is violation of procedure contemplated under sections 100 to 102 of Companies Act for the reason that in the meetin....
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.... contemplated under sections 100 to 102 of Companies Act in a very transparent manner with good faith, and, therefore, application is misconceived. Rockwool has placed all the facts before the Court while seeking approval and has not contravened any of the provisions of the Companies Act. 3. The scheme for reduction of capital was just and fair. Though the company initiated proposal at the behest of AIM, promoters as well as non-promoters stand on the same footing, and, therefore, there cannot be a separate meeting for 11,000 shareholders. The resolution was passed by majority and, therefore, the Court was justified in passing order approving the scheme. 4. The applicants connived with others and manipulated the share price. When AIM bought shares at the time of delisting, price was fixed in an ordinary manner having regard to the market price of share during 2003-04. The allegations of fraud is based on the contention that the price was at Rs. 18 which itself was result of manipulation of applicants. The applicants approached the Court with unclean hands, and, therefore, application is liable to be dismissed. After approval of scheme by this Court, consequen­tial transaction....
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....ied securities. Furthermore, the buyback of its shares can be effected only when the Articles authorize by passing a special resolution in AGM and such buyback is less than 25 per cent of total paid-up capital and free reserves of the company. In any financial year, such buyback shall not exceed 24 per cent of its total paid-up capital in that financial year. Any such buyback shall be in accordance with SEBI (Buy-back of Securities) Regula­tions, 1998. 16. In reduction of share capital also, there is some sort of buyback. Section 100(1) of the Companies Act contemplates reduction of share capital by extinguishing or reducing the liability on any of its shares in respect of paid-up share capital, cancellation of paid-up share capital, which is lost or is not represented by available assets with or without extinguishing or reducing li­ability on any of its shares, pay any paid-up share capital, which is in excess of wants of the company with or without extin­guishing or reducing liability of any of its shares. A company which has free reserves or securities premium account or proceeds of any shares or any other specified securities, may resort to buyback of its own share....
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....he arrangement to make over American investments to American share­holders subject to payment of GBP 11,000 to the Corporation and cancellation of shares held by American shareholders, thus, reduc­ing pro tanto the capital of the company. All the creditors were either paid or assented to the arrangement. Learned Judge who heard the matter and Court of Appeal, assuming that the Court had no power to confirm the special resolution as being ultra vires, dismissed the petition for confirmation. BAT Finance carried the matter to House of Lords, who reversed the Court of Appeal and confirmed the special resolution. 19. The House of Lords referred to 1867 Act, which by sections 9 and 11 enabled the company by special resolution to reduce its capital subject to confirmation of the Court and that there is no limitation on the power of the Court to confirm reduction, and observed that, "except that it must first be satisfied that all the creditors entitled to object to the reduction have either consented or been paid or secured." As observed by Lord Herschell L.C. any scheme for reduction of capital means, "certain of the shareholders receive part of the assets of the company equiva....
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....e interests of creditors, the interests of shareholders, and the interests of the public. Creditors are protected by express provisions. Their consent must be procured or their claims must be satisfied. The public, the shareholders, and every class of shareholders indi­vidually and collectively, are protected by the necessary public­ity of the proceedings and by the discretion which is entrusted to the Court. Until confirmed by the Court the proposed reduction is not to take effect, though all the creditors have been satis­fied. When it is confirmed the memorandum is to be altered in the prescribed manner, and the company as it were makes a new depar­ture. With these safeguards, which certainly are not inconsidera­ble, the act apparently leaves the company to determine the extent, the mode, and the incidence of the reduction, and the application or deposition of any capital moneys which the pro­posed reduction may set free." 22. Yet again, it was held that, "the Court must look at the arrangement as a whole, and have regard to all the circumstances of the case, and the consequences which, the reduction involves (and) the Court must take everything into acco....
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....hat they were acting in the interests of the general body of members of that class. From first to last I can see no evidence that the trustees ever ap­plied their minds to what under company law was the right ques­tion, or that they ever had the bona fide belief that is requi­site for an effectual sanction of the reduction. Accordingly, in my judgment, there has been no effectual sanction for the modifi­cation of class rights. It may be observed that I have said nothing as to the burden of proof on the issue whether the sanc­tion to the modification of class rights has been validly given, and I propose to continue to say nothing. However, that burden lies, in my judgment there was no effectual sanction. The result is, therefore, that on the issue of fairness the burden of proof devolves on those supporting the reduction to prove that it is fair. Unless this burden is discharged, confirmation of the reduction will be refused. On the question of fairness, learned Judge observed. Now the evidence before me on the fairness of the transaction seems to me to be strongly on the side of the reduction being unfair. On behalf of the opposing trustees, a long and reasone....
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....to the judgment of High Court in the case of SEBI v. Sterlite (referred to above) wherein it was a scheme under section 391, read with section 100, of the Companies Act, in that context the Court held that there was no necessity to buyback only under section 77A of the Companies Act . . . . Therefore, the promoters group could virtually bulldoze the minority shareholders and purchase their shares at the price dictated by them, which Mr. Dwarkadas contended, is totally unfair and unjust." 25. The judgment of learned Company Judge in Sandvik Asia Ltd., In re (supra) was assailed in appeal as Sandvik Asia Limited v. Bharat Kumar Padamsi 2009 (4) Bom. LR 14211. The Division Bench allowed the appeal and approved the resolution for rejection of paid-up equity share capital as proposed by majority. A reference was made to BAT Finance (supra), Poole v. National Bank of China Limited (1907) AC 229 (HL) and Ramesh B. Desai's case (supra) and observed as follows : "In our opinion, once it is established that non-promoter share­holders are being paid for value of their shares, at no point of time it is even suggested by them that the amount that is being paid is any way less and that eve....
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....ths for transferring 9,000 equity shares held by CVMPL in SIL. It was also agreed that Bipinbhai was not in a position to pay or depos­it Rs. 20,00,000 without which he could not have got the control­ling interest in SIL. It is alleged that Bipinbhai devised a scheme whereunder SIL paid an amount of Rs. 20,00,000 to M/s. Santosh Starch Products, which in turn paid the said amount to Bipinbhai and his family. This amount was transferred to CVMPL for getting control over SIL. Ramesh Desai and others alleged that funds of the company are used by Bipinbhai in paying amount to CVMPL for acquiring SIL. It was alleged that Bipinbhai devised the scheme whereunder the funds of SIL were used for acquiring the shares of the company in violation of section 77(2) of the Act. While the company petition was pending, Bipinbhai and anoth­er moved company application to dismiss company petition on the ground that the same was barred by limitation. The same was allowed by the Company Judge and in appeal, the Division Bench confirmed the same, aggrieved by which the matter was carried to Supreme Court. 27. Before the Supreme Court, it was contended that as the appel­lants have taken ....
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....ority shareholders, which necessarily includes promoters' group, the same cannot ordinarily be disap­proved only on that ground. 29. In the case of Rockwool, when this Court granted its approval in C.P. No. 33 of 2006, this Court ensured procedural compliance as well as compliance with substantive. There is evidence on record to show that when EGM was convened by Rockwool, majority shareholders, voted in favour of special resolution. The allegation made by Rockwool that applicants were present in the EGM either personal­ly or through their proxies remains unrebutted. Therefore, before filing company petition before this Court, required procedure was followed. After this Court ordered publication of notice, no objections were received. The applicants who appeared to have sought information from Rockwool did not bother approaching Court to raise objections. No grounds are made out to review the order passed by this Court earlier. 30. However, this Court is of considered opinion that certain vital aspects concerning buyback of shares or reduction of capi­tal need to be revisited. Before doing so, it needs to be clari­fied that the registration of the minute as confi....
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....his law also-by fiction; assumed that majority ensured the class rights and the requirement of Court's confirma­tion of the Minute guaranteed fairness to minority/non-promoter group of shareholders. These principles are also found in section 102 of the Companies Act. In modern times, entities incorporated offshore with transborder operations and global dealings with sole aim of accumulating profits for the benefit of the promoter groups mainly are coming into existence in plenty. In the case of Rockwool, one shareholder AIM with more than 90 per cent controls and manages the company. AIM is not a company incorporated in India and it a company incorporated in Mauritius and its holding company is Dubai based. If the petitioners' apprehension is true in one go, taking advantage of the Corporate procedure for the same. AIM got rid of all small investors with cumulative stake of more than 7 per cent by following route of reduction of capital (not buyback, which is more than advantageous) and reduced small investors to no-entity divesting them of their rights in the company. A foreign company, therefore, to obtain total control and management of a company, which was initially promote....
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....or of production and that is labour. Then there are the financial institutions and depositors, who provide the additional finance required for production and lastly, there are the consum­ers and the rest of the members of the community who are vitally interested in the product manufactured in the concern. Then how can it be said that capital, which is only one of the factors of production, should be regarded as owner having an exclusive dominion over the concern, as if the concern belongs to it? A company, according to the new socio-economic thinking, is a social institution having duties and responsibilities towards the commu­nity in which it functions." 34. Justice Chinnappa Reddy, who wrote concurrent opinion ob­served as under : "Private corporations hitherto regarded as bastions of private property and leaders of capitalist economy are undergoing transfor­mation and, are surely acquiring the character of public institu­tions. The public interest element is now quite a predominant factor in the Companies Act itself. There are several provisions in the Companies Act, which take notice of the element of public interest. There are other enactments like the Mo....