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2016 (12) TMI 1919 - HC - Companies LawSanction 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 CONSIDERED
The core legal questions considered by the Court were:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Entitlement to Reduce Share Capital under Section 101 of the Companies Act, 1956 The 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 Consideration The 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' Interests The 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 Standards The 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 Compliance Having 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 HOLDINGS The Court held that:
Core principles established include:
Final determinations:
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