The Landmark judgement for section 66 which shocked NCLT.
This time things turned out to be different. NCLT judges were in for a shock.
Some great questions got cleared out in this judgement which any professional dealing in company law should be aware of!
This case answered many crucial questions related to the section 66 which deals with reduction of share capital.
This case deals with questions such as whether Security Premium Account can be utilized for making payment to the non-promoter shareholders, Selective reduction of shareholders is not permissible etc where even Regional Director opposed the capital reduction scheme.
So, let’s look at this amazing case law.
However what was the case about?
A Quick background:
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But on what grounds did NCLT reject the application ?
Here are the grounds:
(i): No proper genuine reason has been given for reduction of share capital.
(ii): Consent affidavit from creditors has not been obtained.
(iii): Security Premium Account cannot be utilized for making payment to the nonpromoted shareholders.
(iv): Selective reduction of shareholders is not permissible.
(v): The Petition for reduction of capital under Section 66 of the Act, is not maintainable. However, it may be filed under Section 230-232 of the Act.
However the directors won in NCLAT.
NCLAT(National company appellate law tribunal) answered the grounds raised as follows:
(i): No proper genuine reason has been given for reduction of share capital.
Ans: The non-promoter shareholders requested the company to provide them an opportunity to dispose of their shareholding in the petitioner company. There is no law that a Company can reduce its capital only to reduce any kind of accumulated loss. With the aforesaid it cannot be said that the Appellant Company has not given any genuine reason for reduction of share capital.
(ii): Consent affidavit from creditors has not been obtained.
Ans: Admittedly, after service of notice, no representation has been received from the creditors within three months. Therefore, as per proviso to Section 66(2) of the Act, it shall be presumed that they have no objection to the reduction.
(iii): Security Premium Account cannot be utilized for making payment to the non-promoter shareholders.
Ans:
a)???The argument of the Regional Director (NR) is that the “Securities Premium Account” can be applied only for the specific four purposes mentioned in Section 78(2) of the Act and for no other purpose.
?b)??In NCLAT’s view, the interpretation advanced by learned counsel for the Regional Director (NR) is not correct. If the interpretation as advanced by the Regional Director (NR) is accepted, it would render otiose the provisions contained in sub-Section (1) of Section 78.
?c)????The entire Section 78 has to be read as a whole and all the sub-Sections of this Section have to be read and interpreted so as to give a meaningful interpretation.
?d)??In the light of the aforesaid Judgments, NCLAT were of the view that the SPA can be utilized for making payment to non-promoter shareholders.
?e)???We are unable to convince with the submissions made by Ld. Counsel for the Respondents that the amount laying the SPA can be applied by the company, only for the purposes which are specifically provided in sub-Section 2 of Section 52 of the Act and for no other purpose.
(iv): Selective reduction of shareholders is not permissible.
Ans:
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a)???Here majority shareholders have decided to reduce the share capital. Normally, decision of the majority is to prevail.
b)??It is also their right to decide the manner in which the shareholding is to be reduced and, in the process, they can decide to target a particular group (of course it is to be seen that this is not with mala fide and unfair motive which aspect is discussed hereinafter).
c)????Thus, such a step cannot be treated as buying back the shares and the provisions of Section 77A of the Act would not be attracted. Similarly, there is no question of following provisions of Section 391 of the Act, although in the instant case even the procedure prescribed therein has been substantially followed.
?d)???Likewise, provisions of Article 300A of the Constitution of India would not be attracted.
?e)????In the light of aforesaid proposition of law, NCLAT held that selective reduction is permissible if the non-promoter shareholders are being paid fair value of their shares.
?f)?????In the present case, none of the non-promoter shareholders of the Company have raised objection about the valuation of their shares. It is nobody’s case that the proposed reduction is unfair or inequitable. It is also made clear that the proposed reduction is for whole non-promoter shareholders of the company.
(v): The Petition for reduction of capital under Section 66 of the Act, is not maintainable. However, it may be filed under Section 230-232 of the Act.
Ans:
a)???NCLAT held that Section 66 of the Companies Act, 2013 makes provision for reduction of share capital simpliciter without it being part of any scheme of compromise and arrangement.
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b)???The option of buyback of shares as provided in Section 68 of the Act, is less beneficial for the shareholders who have requested the exit opportunity.
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c)????Admittedly, there is a provision in Article 45 and 47 of the Article of Association that the company may by special resolution reduced its capital and, in the EGM, held on 04.02.2019 a special resolution was duly passed for reduction of share capital.
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d)??The Appellant Company has pleaded the genuine reason for reduction of share capital and has secured the rights of 171 non- promoter shareholders who are not traceable.
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With the aforesaid NCLAT was of the view that the NCLT has erroneously held that:
?Last but not the least the case law is:
??????????????????????????Brillio Technologies Pvt.Ltd (Appellant)
????????????????????????????????????????????????vs.
????????????????????????????Registrar Of Companies& Anr (Respondent)
Hope these small efforts were of some value.????????????????????????????????????????????????????
With warm regards,
Keep Smiling,
Saeed Shaikh
FOOTNOTES
1. Brillio Technologies Pvt.Ltd (Appellant) vs. Registrar of Companies & Anr (Respondent), Company Appeal (AT) No. 293 of 2019 of NCLAT.