2004 (7) TMI 354 - HC - Companies Law

Shares - seeking the relief of Confirmation of adjustment of share premium against permanent loss in value of investment - Interpretation of Articles of Association regarding the utilization of Share Premium Account - HELD THAT - In the instant case the Special Resolution has been passed in accordance with the Articles of Association. Neither the creditors nor the shareholders are before the Court objecting to passing off the resolution. Nothing is brought to the notice of the Court that the Special Resolution affects the interests of the shareholders. There is no material available on record that the Special Resolution had caused any prejudice to any of the shareholders. In the company petition it is specifically stated that the company has made an investment of Rs. 115.30 lakhs in NMCL and owing to various concerns about the economic viability of the project being put up by NMCL the pace of the work in the said project has slowed down. The company proposes to disinvest its shareholding favouring the present promoters and/or their associates at a mutually acceptable price. However the company considers it prudent to align the investment to reflect their true and fair value........the company proposes to set off the above amount against Share Premium Account. With the said adjustment the Company s accounting method in respect of investments would fall in line with Accounting Standards of Institute of Chartered Accountants of India and represent true shareholder value. The set off will not cause any prejudice to the creditors of the Company. The reduction of capital does not involve either result in the diminution of any liability in respect of unpaid capital or the payment to any shareholder of any paid-up capital. No compromise or arrangement is contemplated. There is no reduction in the value of the security which the creditors have in the Company. This Court in Company Petition No. 21 of 1998 dated 10-4-1998 allowed the application for reducing the share capital on the ground that no diminution of liability in respect of any paid up share capital was involved. Conclusion The court found that the resolution to utilize an amount not exceeding Rs. 115.30 lakhs from the Share Premium Account for adjusting the permanent loss in value of investment in NMCL did not suffer from any legal infirmity. The rights of shareholders and creditors were not prejudicially affected and there was no adverse impact on public interest. Consequently the order under appeal was set aside and Company Petition No. 169 of 2003 was allowed. The appeal was accordingly allowed.

Summary

Issues Involved:
1. Confirmation of adjustment of share premium against permanent loss in value of investment.
2. Compliance with sections 78, 100, 101, and 102 of the Companies Act, 1956.
3. Interpretation of Articles of Association regarding the utilization of Share Premium Account.
4. Protection of interests of shareholders and creditors.

Summary:

Issue 1: Confirmation of Adjustment of Share Premium Against Permanent Loss in Value of Investment
The appellant sought confirmation for adjusting the share premium against the permanent loss in value of investment in Nepal Metal Company Limited (NMCL), as approved by a Special Resolution in the Annual General Meeting (AGM). The learned Company Judge initially dismissed the application for this adjustment.

Issue 2: Compliance with Sections 78, 100, 101, and 102 of the Companies Act, 1956
The appellant argued that the reduction of capital did not involve diminution of liability in respect of unpaid capital or payment to any shareholder of paid-up capital, and that creditors were unaffected by the proposed adjustment. The court directed the publication of notices u/r 47 of the Companies (Court) Rules, 1959, and no objections were received from shareholders or creditors.

Issue 3: Interpretation of Articles of Association Regarding Utilization of Share Premium Account
The court examined whether the Articles of Association permitted the utilization of the Share Premium Account for purposes other than those provided u/s 78(2). Article 15 of the appellant's Articles of Association allowed reduction of any Capital Redemption Reserve Fund or Share Premium Account by Special Resolution. The court concluded that the Articles of Association did permit such utilization, contrary to the learned Company Judge's view.

Issue 4: Protection of Interests of Shareholders and Creditors
The court emphasized that its role was not to exercise appellate power over the company's decisions but to ensure the procedure was legally correct and that shareholders and creditors were not prejudiced. The Special Resolution was passed in accordance with the Articles of Association, and no objections were raised by shareholders or creditors. The court found no evidence that the resolution prejudiced the interests of shareholders or creditors.

Conclusion:
The court found that the resolution to utilize an amount not exceeding Rs. 115.30 lakhs from the Share Premium Account for adjusting the permanent loss in value of investment in NMCL did not suffer from any legal infirmity. The rights of shareholders and creditors were not prejudicially affected, and there was no adverse impact on public interest. Consequently, the order under appeal was set aside, and Company Petition No. 169 of 2003 was allowed. The appeal was accordingly allowed.