TMI Blog2004 (4) TMI 311X X X X Extracts X X X X X X X X Extracts X X X X ..... under the provisions of the Hyderabad Companies Act, 1320 Fasli. In 1985 the name of the company was changed to Hyderabad Industries Limited with effect from 11-11-1985. The authorised capital of the company is Rs. 1,000 lakhs divided into Rs. 95,00,000 equity shares of Rs. 10 each and 50,000 preference shares of Rs. 100 each. 71,47,631 equity shares are fully paid up, but no preference shares have been issued. The company was incorporated with the object of carrying business of manufacturing and marketing of dyers, printers, finishers, and impregnators of asbestos, cement, cotton, jute etc., and the business of mining and working of asbestos and other minerals. According to article 15 of Articles of Association of the Company, it may by special resolution and subject of confirmation by the Company Court reduce its share capital. 3. The petitioner-company made investment of Rs. 115.30 lakhs; presumably from out of its reserve capital, in NMCL, a company promoted by petitioner-company in Nepal jointly with His Majesty s, Government of Nepal and others. NMCL however, could not make much headway due to various reasons, as a result of which, allegedly the value of investment made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare Premium Account as permissible to be utilized for the purpose and be applied/adjusted against permanent loss in value of investment in shares of NMCL. 6. This Court admitted this matter on 4-11-2003. This Court also permitted the learned counsel for the petitioner to carryout publication of petition/notice in English daily of Times of India and Telugu daily of Eenadu as contemplated under rule 47 of the Companies (Court) Rules, 1959. On 9-12-2003 proof of publication of admission of the petition was filed before the Court. Submission Sustaining Petition 7. The application per se is not one for reduction of share capital. It is not even an application filed for seeking permission of the Court for the other purposes than those contemplated under sub-section (2) of section 78 or sub-section (1) of section 100 of the Act. This is an application seeking permission of this Court to draw an amount not exceeding Rs. 115.30 lakhs out of share premium amount to be utilized and to be applied/adjusted against permanent loss in value of investment in shares of NMCL. Prima facie, therefore, application under section 78 read with section 100 of the Act would not lie. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny ? Findings and Conclusion on the Petition 10. There cannot be any dispute that the provisions to reduction of share capital would apply when the shares premium account is to be utilized. Section 78(1) introduces a fiction and the share premium account is deemed to be paid-up share capital of the Company . Sections 100, 101, 102, 103, 104 and 105 deal with reduction of share capital and the procedure to be adopted, when an application is made to the Company Court, for confirming the resolution/minutes of the Members of the Company for reduction of share capital. Reading section 78(1) and (2) together with sections 100, 101 and 102, it becomes clear that even when the share premium account is to be applied either for the purpose of writing off the loss (in case a course is permissible) or otherwise, the procedure under sections 100(2) and 105 has to be followed. Indeed, any misrepresentation before the Court for the purpose of obtaining imprimature of the Court is made a penal offence (under section 105) with imprisonment for a term, which may extend to one year, or with fine, or with both. Keeping this in mind, section 100 be read which is as under : " Special resoluti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital forms part of subscribed capital and for all purposes it is the capital of the company. When the company decides to extinguish unpaid shares, assuming that such unpaid shares were initially issued for premium, in the event of the resolution of the company to cancel unpaid shares to the extent of those shares cancelled, the share premium account also gets reduced. Similar is the case in the event of cancellation of paid up share capital when proportionate premium amount gets reduced or in the event of payment by the company for the fully paid up shares capital, again to that extent there is reduction in the shares premium account. 12. It must be noticed that when sections 78 and 100 of the Act speak of share capital whether unpaid, fully paid or excessively issued share capital, the provisions refer to share capital of the company and not the investment made by the company by subscribing to the share capital of another company. Obviously, therefore, if the subscribed shares capital in another company is lost or not properly represented by assets, the same cannot and should not fall under section 78, read with section 100 of the Act. When the company writes off its loss, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g power : ( a )extinguish or reduce the liability on any of its shares in respect of share capital not paid up; ( b )either with or without extinguishing or reducing the liability on any of its shares, cancel any paid-up share capital which is lost or is unrepresented by available assets; or ( c )either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company; and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly. (2) By Special Resolution reduce in any manner and with, and subject to, any incident authorized and consent required by law: ( a )any Capital Redemption Reserve Fund; or ( b )any Share Premium Account." 15. Except article 15, there is no article empowering the Company to appropriate funds from share premium account for the purpose of writing off its losses. Be it also noted that the company reduce share premium account only when authorized by law. Does section 78 permit the Company to write off the loss sustained by the Company by investing in another Company by utilizing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "as if it is paid up share capital of the company". But, a company can also use share premium account for issue of dividend or issue of bonus shares [See for instance section 78(2)]. But, a company, which transfers profits available for dividend to the reserve fund, cannot use reserve for distribution of dividend. The condition precedent for utilizing the share premium account is only when the Company reduces its capital under various situations as explained above. In the absence of any proposal for reduction of shares capital, the share premium account cannot be utilized for the purpose of writing off the loss. 19. The share premium account can be applied ( i ) for paying of bonus shares issued to members as fully paid shares; or ( ii ) writing off preliminary expenses or expenses of or the commission paid or discount allowed on, any issue of shares of debentures of the Company; or ( iii ) providing for premium payable by the company on reduction of redeemable preference shares or of debentures. According to Palmer, the object of the provisions relating to share premium account is to prevent dividends being paid out of premiums received on an issue of shares and it is quasi-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iad situation, when company may have to use share premium account or reserve or reserve fund. Schedule VI of the Act, especially, Horizontal Form of Balance Sheet, contains instructions to the effect that the word Fund (after Reserve) should be used only when such reserve is specially represented by earmarked investments. But such use must be authorised by articles of association and must be within four corners of law. As observed above, unless the reduction of the share capital is specifically authorized by the articles of association, a company cannot do so, nor this Court can approve or sanction such resolution. Likewise, unless the articles of association of company permit utilization of shares premium account for purposes other than section 78(2), the Court cannot approve or sanction such resolution. Indeed, any adjustment out of the share premium account must be authorized by law and subject to law. Article 15(2) of the articles of association of petitioner company clearly shows that the company by special resolution and subject to law may reduce the capital reduction, reserve fund or share premium account. This only means it is for the purposes authorized under sections 78 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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