TMI Blog2006 (6) TMI 515X X X X Extracts X X X X X X X X Extracts X X X X ..... to carry on business in web related services including internet based training and education etc. The copy of the Memorandum of Articles of Association is enclosed as a Annexure A in the petition. The authorised capital of the company is ₹ 100,00,00,000/- consisting of 9,00,00,000 equity shares of ₹ 10/- each, 9,90,000, 11% redeemable preference shares of ₹ 100/- each and 10000, 15% cumulative redeemable preference shares of ₹ 100/- each as on 31stMarch 2005. It is stated that by Article 6 of the Articles of Association, the company is empowered to reduced its capital in any manner permitted by law by passing a special resolution. 3. It is stated that the petitioner company was earning substantial profits from export of software and education on advanced computing skills. It is further stated that the violent incidents at US on 11th September 2001, had its serious impact on the industrial activity world over and this line of activity was no exception. It is stated that consequent on this global trend, the petitioner's interest suffered a serious set back. It is also stated that in particular time on going software projects were not funded overseas. St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ized share capital of the Company be changed from ₹ 100,00,00,000/-divided into 9,00,00,000 equity shares of ₹ 10/-, 10,000 cumulative preference shares of ₹ 100/- each and 9,90,000 Redeemable preference shares of ₹ 100/- each to ₹ 100,00,00,000/- divided into 90,00,00,000 equity shares of ₹ 1/- each, 10,000 cumulative preference shares of ₹ 100/- each and 9,90,000 Redeemable preference shares of ₹ 100/- each with power to issue new shares upon such terms and conditions and such rights and privileges attached thereto as the Board shall determine subject to any directions of the Company at General Meeting at the time of issue thereof. 6. It is stated that the petitioner company originally had authorised capital of 100,00,00,000/- consisting of 9,00,00,000/- equity shares of ₹ 10/- each, 9,90,000 11% redeemable preference shares of ₹ 100/- each and 10,000 15% cumulative redeemable preference shares of ₹ 100/- each as on 31stMarch 2005. It has issued, subscribed and paid-up capital of ₹ 60,37,63,350/- consisting of 1,18,91,000 shares of ₹ 10/- each fully paid up, 5570 shares 15% preference shares of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d senior counsel pointed out to the balance sheet and submitted that there are no explanation on the companies to which shares were allotted. The objectors also pointed out that the petitioner company had invested nearly -Rs.7 crores in cash in Kaashyap inter serve Technologies Limited. The source of this funds and the reason as to why these investments were made are not explained at all. Pointing out to the balance sheet details, the learned senior counsel submitted that the petitioner had acquired 40% of equity in the case of Shri Ram EPC Limited by passing a special resolution. However, there are no details as to the source of making such application or the details of the assets taken over from Shriram EPC Limited. The learned senior counsel submitted that the details of these acquisitions were not reflected in the balance sheet of the company. He questioned the investment that as a matter of admitted fact, the petitioner had stated that the branches were abandoned by the companies' employees and the salaries to the employees could not be paid, that the assets have been totally lost, if so, the aftermath of September 11, 2001, in U.S had leading to crash in his business acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of business in US and to write off bad debts. 16. The learned senior counsel submitted that there are absolutely no details as regards investment and current assets for one to really understand the state of affairs of the company. There are no details as regards scheme for the payment to the creditors. 17. The submission of the learned senior counsel in fine is that the reduction as prayed for cannot be permitted considering the huge loss suffered by the company and such reduction of the company should not be permitted to go in or further worsening of the situation to the detriment of the creditors herein as well as to the general public at large. 18. A perusal of the objection show that there are creditors of the company institutional as well as private. It is admitted in the petition that the reduction of share capital does not involve the diminution of any liability of the shareholders as regards unpaid share capital. However, it is the case of the objectors that the course of action adopted is against the interest of creditors, depositors as as prospective lenders and investments. The objector also stated that in September 2000, the Managing Director of the company m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... softwear developed by this company had been transferred to other entity, leaving the companies virtually indebted on account of high costs. It is stated that the business of the company was not in any way offended by the September 2000 events and that they were consciously being wound up by the promoters. It is submitted that the petitioner had suppressed the vital details and proceedings pending against the company. They also questioned the need for acquiring the engineering, construction and energy division of Shriram EPC Limited for ₹ 15 crores when they are in default as regards repayment by the depositors. The balance sheets makes no reference to the assets in its schedule. It also pointed out that the receivables for the year 2004-2005 was projected as ₹ 2.79 crores whereas it has received a paltry sum of ₹ 15,532/-. It has also stated that the company had stated to have entered into an agreement with Shriram group which would collect receivables on its behalf. Pointing out to the issuance of shares by the company worth ₹ 28,33,80,250, for consideration other than cash, the objectors submitted that the identity of these persons and the nature of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he investments did not yield results since the business in all these companies failed. The petitioner further submitted that a sum of ₹ 29.98 crores investments in Kashyap Interserve Tech Limited and Satnet Services Limited are to be written off in view of the huge financial difficulty expressed on account of general slump in softwear industry. The learned Counsel submitted that fixed assets, current assets, loans and advances in the Indian and International branches of the company were not good enough even to meet the salaries of the personnel in various branches. The learned Counsel for the petitioner pointed out to the difficult situation created by the legal proceedings, that the branches were abandoned by the personnel, ultimately leading to all fixed assets, current assets, loans and advances totally lost in its value. The learned Counsel filed a detailed reply to the specific points raised by the Objector in the course of the proceedings before this Court. 24. A reply affidavit has also been filed on behalf of the petitioner by one Dakshinamurthy, Director of the Company. The deponent stated therein that the objectors were not creditors of the petitioner company. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The petitioner also recorded the undertaking that in the event of this Court sanctioning the reduction of capital, the petitioner company shall not borrow any further sum from any creditor or accept any deposit afresh without the prior permission of this Court. In the circumstances, the petitioner prayed for sanctioning of the scheme. 26. Before going into the merits of the claims of the parties herein, one may have to advert to the statutory scheme for sanctioning the reduction of share capital as given in Sections 101 to 104. 27. Section 100 provides reduction of the share capital of a company by a special resolution by a statutory majority. The special resolution under Section is referred to as a resolution for reducing a share capital. The reduction has to be subject to the confirmation by the Court. The resolution must be one authorised by the articles. Hence, for a company to reduce its share capital in any manner set out in Section 100, it must have the necessary powers reserved under its article to do so. 28. The need for reduction of the share capital may arise where the capital is lost due to the trading losses, heavy capital expenses, that the assets of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the decision has been arrived at by businessmen who are fully cognisant of their necessities and are the best custodians of their interests and should therefore be slow to interfere. 35. Courts have also taken the view that where the reduction does not involve diminution of any liability in respect of unpaid capital or payment to any shareholders of any paid up capital which would be detrimental to the interest of the creditors as a class or where the creditors are not concerned at all, the only question to be considered are (i) Ought the Court to refuse its sanction to the reduction out of regard to the interests of those members of the public who may be induced to take shares in the company? and (ii) Is the reduction fair and equitable as between the different clause of shareholders? (vide XXIII TLR 567 by Lord Macgnaten). 36. Hence, the questions to be considered by the Court in the matter of granting approval are (1) whether the reduction is fair and equitble as between different classes of shareholders? and (2) should the Court refuse the sanctioning to the reduction out of regard to the interests of those members of the public who may be induced to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tters relating to the accounts that in any event, the creditors could not object to the reduction when no money is paid to the shareholders consequently on the reduction to the detriment of the objectors. 39. I do not think the stand of the petitioner is correct. It is no doubt true that the reduction does not result in any payment to the share holders or lead to a situation prejudicial to the creditors interest as on this day. Yet a reading of the objection raised by the creditors show that they point out more particularly, to the balance sheet details, which call for explanation from the petitioner company. Considering the huge amount of indebtedness to the creditors, that a fresh investment had been shown in the balance sheet and hence to be properly explained to this Court, it is fit and proper that the creditors have a say in the matter of considering the prayer in this petition. The allegations are quite serious that may be need to be looked into with reference to the balance sheet figures. The petitioner has filed specific reply to the allegations on the balance sheet figures. 40. In course of hearing, the learned Counsel appearing for the objectors placed reliance on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Bombay High Court reported in 125 C C 268 in the case of Rallis India Limited., In Re, interpreting Section 101 to the phrase in any other case , the Court held that the phrase which are general in character must take its colour from the earlier part of Sub-section (2); that where the reduction of capital is set off of accumulated losses, there is no diminution of liability or payment to any shareholder. Consequently, the interest of the creditors are not affected to necessiate compliance of the procedure prescribed under Section 101(2) of the Act. 46. A perusal of the balance sheet shows that the company had its income of ₹ 15,532 only for the year ended 31.3.2005. It also reveals that the fact is the company is totally depleted of its liquidity and there are no materials to show the actual receipt of consideration. Annexures C1 to C4 are the copies of minutes of the meeting of the Board of Directors as regards certain investment in three companies. A sum of ₹ 7 crores in the form of equity shares was invested in Kashyap Interserve Technologies Limited by way of cash investments as per the resolution dated 15thMay 2001. Further investment by way of allotme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to go for reduction. Compelled by the circumstances of huge losses and the necessity of projecting the true state of affairs, the only available method to the company is to go for a reduction in share capital, so that, a realistic picture is presented of the capital reflective of the value of the shares of the company. The company is empowered under its articles of association to reduce the share capital by passing a special resolution in accordance with law. This had been done by the company. In the context of such exercise undertaken and particularly in the context of the majority of the shareholders approving such course of action, and the same not having any adverse effect worse than what these financial institutions are already in, I do not find any reason to reject the petition at this stage, there being no payment going to the shareholders on a fresh borrowing consequent on the reduction. The reduction undertaken on the stated reasons cannot be controverted or the exercise called unjust and unfair. The claim of the petitioner merit acceptance. The company bona fide entertains the belief that such reduction would pave way for inducing investors in the conduct of business in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be put on notice by necessary publicity of the proceedings and when the reduction is confirmed, the memorandum has to be altered in the prescribed manner. With these safeguards, I do not find that one need to visualise any negative serious impact on the interest of the investing public. 56. The petitioner has stated in the affidavit that the attempt to restructure the company is only based on certain investors evincing interest in certain projects related to software and E-learning that have been developed by the petitioner company. The petitioner company undertakes that in the event of this Court sanctioning the reduction of capital, the petitioner company shall not borrow any sum from any creditor or accept any deposit afresh without the prior permission of this Court. This undertaking is suffice to clear all the misapprehensions of the objectors. Taking note of this undertaking, the special resolution passed by the company on 15.2.2006 for reduction of its share capital is hereby put on notice as directed below. This Court directs that the petitioner shall publish the case number in The Hindu having All India edition as well as in Financial Express and Daily Thanthi the order ..... X X X X Extracts X X X X X X X X Extracts X X X X
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