Selective reduction of share capital is allowed - NCLAT

Introduction

National Company Law Appellate Tribunal (“NCLAT”) set aside the order of National Company Law Tribunal (“NCLT”) in the matter of Brillio Technologies Pvt. Ltd. VS Registrar of Companies & Anr. vide Company Appeal (AT) No. 293 of 2019 dated 19-04-2021.

NCLT rejected the application of the company for selective reduction of share capital, namely the non-promoter shareholders due to following 5 critical issues:

1. Non receipt of consent affidavits from creditors
2. Utilisation of Securities Premium Account SPA for reduction of share capital
3. Whether selective reduction of share capital is permissible
4. Arrangement or compromise under Sections 230 and 232
5. Buyback as an alternative instead of reduction

NCLAT analysed all the 5 issues and held that selective reduction of share capital is allowed. The author has discussed the facts of the case and all the 5 issues in detail. 

Factual Matrix

Purpose of Appeal: The Appellant Brillio Technologies Pvt. Ltd. filed an Appeal against the NCLT order which dismissed its Application under Section 66 of the Companies Act, 2013 for selective reduction of share capital.

Reason of reduction: 95.88% shares of the Appellant are held by a foreign Company. The Appellant had received requests from the non-promoter shareholders to provide them with an opportunity to dispose of their shareholding in the Company. 

The proposed reduction of equity share capital from a selective group of equity shareholders involved repayment of excess capital which is not required for carrying on the main objects of the Company. The reduction does not involve the diminution of any liability in respect of unpaid share capital. 

Power of reduction: As per Article 45 and 47 of the Articles of Association, the Appellant is allowed to reduce its capital in any manner permitted by law. Therefore, the Directors decided to reduce the equity share capital of the Company.

No harm to the stakeholders: The Appellant had no secured creditors, however, there were 186 unsecured creditors. There were no arrears in repayment of any deposits or interest payable thereon as on the date of Petition and that a declaration to the same effect has been filed by the Directors of the Company. The Auditors had verified and certified the aforesaid facts. 

Service of notices: The Director stated that notices have been served on the ROC, Regional Director and all the unsecured creditors and also published in the daily newspapers.

Report of ROC

ROC highlighted below points in its report:

1. The Company has not filed the valuation report in support of the valuation.
2. One open charge is pending against the company and the petition mentioned that there are no secured creditors. 
3. As per the Petition the amount to be paid out will be kept in a separate Escrow Account for three years and the amount unpaid will be transferred to IEPF. Whereas as per Section 125 such amount cannot be transferred to IEPF. The Company may be asked to pay the difference amount to the members in case Hon’ble Court agrees with the proposal of reduction. 
4. The company need to extend the proposed scheme to all the non-promoters and not to the selective non-promoters. Approval of all non-promoters may be sought before the Scheme is allowed. 

Report of RD

Regional Director made the following additional observations: 

1. The Paid up capital of the Company is above Rs. 5 Crores and the Company has not appointed the Whole Time Secretary. Hence, the Company may be advised to comply with the Provisions of Section 203 read with Rule 8A of the Companies (Appointment and remuneration of managerial personnel) Rules 2014 and be directed to file an adjudication application with the Registrar of Companies and adjudicate the offence. 
2. The Company intends to pay non- promoter equity shareholders out of the Securities Premium Account, however, it can be utilized only for the conditions provided in Section 52(2) of the Act. 

Impugned Order of NCLT

NCLT held that as per Section 52 (2) of the Act, Security Premium Account may be used only for the purpose specifically provided under Section 52 (2) of the Act. 

This is an arrangement between the company and shareholders or a class of them and hence, it is not covered under Section 66 of the Act. However, the case may be covered under Sections 230-232 of the Act. Wherein compromise or arrangement between the Company and its creditors or any class of them or between a Company and its members or any class of them is permissible. 

It held that the Company failed to make out any case under Section 66 of the Act and thus, the petition is dismissed with the liberty to file appropriate application as per extant provisions of the Act. 

5 crucial issues 

1. Non receipt of consent affidavits from creditors:

Appellant submitted that there is no mandatory requirement to secure consent affidavits from the creditors under Section 66 of the Act or Rules. That the same Bengaluru Bench of NCLT in identical facts in the case of M/s Yokogawa India Ltd. Vs. The Registrar of Companies CP No. 482/BB/2018 dated 09.05.2019 approved the reduction of the share capital of the Company without filing the consent affidavits of the creditors. 

Similarly, in the case of Onicra Credit Information Company Ltd. CP 376/ND/2017, NCLT Delhi Bench has held that there is no mandatory requirement prescribed under the Act and the Rules for obtaining consent from creditors for seeking confirmation to the reduction of share capital.

NCLAT’s view: NCLAT placed reliance on Section 66(3) of the Act which has been extracted herein below:

“The Tribunal may, if it is satisfied that the debt or claim of every creditor of the company has been discharged or determined or has been secured or his consent is obtained, make an order confirming the reduction of share capital on such terms and conditions as it deems fit:

Provided that no application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such reduction is in conformity with the accounting standards specified in section 133 or any other provision of this Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal.”

It stated that if the claim of every creditor (i) has been discharged or (ii) determined or (iii) has been secured or (iv) his consent is obtained, then the Tribunal may dispense with the requirement of giving notice to creditors or publication of notice under this rule or both. And in this case NCLT directed the company to serve notice to the Creditors and to cause publication in newspapers. Admittedly, after service of notice, no representation was received from the creditors within 3 months. Therefore, as per proviso to Section 66(2) of the Act, it shall be presumed that they have no objection to the reduction. 

Thus, NCLAT held that the rejection of NCLT due to non-receipt of consent affidavits is erroneous.

2. Utilisation of Securities Premium Account SPA for reduction of share capital

Appellant submitted that the Securities Premium Account can be utilized for reduction of share capital. SPA is quasi capital and section 52(1) specifically provides that SPA has to be treated as if it was the paid up share capital of the Company. Such an Account can be statutorily utilized for the purposes set out in Section 52(2) and (3) of the Act and hence reduced without Tribunal’s approval but for other purposes it can be utilized by resort to the reduction of share capital. 

Reliance was placed on the critical remarks of the Hon’ble High Court of Delhi in Nestle India Ltd. (2008) 4 Comp. LJ 490 (DL), which are as follows:

“If the submission of the learned counsel for the Regional Director (NR) is accepted, it would mean that such a company, which does not have any outstanding obligation or liability of the kind enumerated in clause(a) to (d) of Section 78(2), can never hope to be able to apply the amount lying in the “Securities Premium Account”, and that the same should continue to remain locked till a situation arises wherein the company can utilize it in terms of subSection (2) of Section 78. Such an interpretation would give rise to absurd and impracticable results. That does not appear to be the purpose of Section 78(2) of the Act. Sub-Section(2) of Section 78 is engrafted so as to provide greater flexibility to a company, and reduce the need to comply with the rigors of procedure provided for in sub-Section (1) of Section 78 in certain specific cases of application of the “Share Premium Account”. The object of Section 78 does not appear to be to unnecessarily and unreasonably limit the flexibility that a company enjoys in dealing with the “Securities Premium Account” by limiting its application only to the four specific instances mentioned in sub-Section (2) of Section 78.”

The High Court of Rajasthan reiterated the same view in Vaibhav Global Ltd. (Company Petition No. 4 of 2016)

NCLAT’s view: NCLAT relied on the aforesaid judgements and held that the SPA can be utilized for making payment to non-promoter shareholders.

3. Whether selective reduction of share capital is permissible

Appellant submitted that the reduction of share capital is proposed consequent to requests received from non-promoter shareholders, who have no liquidity. Apart from non-promoter shareholders, only the Holding company holds 95.88% share, which has categorically agreed to the reduction. 

Section 66 provides that subject to confirmation by the Tribunal on an application, the Company may by a special resolution, reduce the share capital in “any manner”. Section 66(1)(a),(b) are mere illustrations and not the only manner in which share capital may be reduced. 

NCLAT’s view: NCLAT observed that the only objection is that the scheme for reduction of share capital wipes out a class of shareholders namely the non-promoter shareholders and this, according to the objector, is unfair and inequitable. 

Reliance was placed on the Judgment of Hon’ble Bombay High Court in the case of Sandvik Asia Ltd. Vs. Bharat Kumar Padamsi & Ors. (2009) SCC Online Bom. 541 wherein it was held that “Perusal of Section 100 further shows that a company can reduce its share capital in any way”. 

Hon’ble Delhi High Court in the case of Reckitt Benchkiser (India) Ltd. (2005) SCC Online Del. 674 laid down following 5 principles for the reduction of share capital:

(i) The question of reduction of share capital is treated as matter of domestic concern, i.e. it is the decision of the majority which prevails. 

(ii) If majority by special resolution decides to reduce share capital of the company, it has also right to decide as to how this reduction should be carried into effect. 

(iii) While reducing the share capital company can decide to extinguish some of its shares without dealing in the same manner as with all other shares of the same class. Consequently, it is purely a domestic matter and is to be decided as to whether each member shall have his share proportionately reduced, or whether some members shall retain their shares unreduced, the shares of others being extinguished totally, receiving a just equivalent. 

(iv) The company limited by shares is permitted to reduce its share capital in any manner, meaning thereby a selective reduction is permissible within the framework of law (see Re. Denver Hotel Co., 1893 (1) Chancery Division 495). 

(v) When the matter comes to the Court, before confirming the proposed reduction the Court has to be satisfied that (i) there is no unfair or inequitable transaction and (ii) all the creditors entitled to object to the reduction have either consented or been paid or secured. 

NCLAT held that in the light of aforesaid proposition of law it can be safely concluded that selective reduction is permissible if the non-promoter shareholders are being paid fair value of their shares.

4. Arrangement or compromise under Sections 230 and 232

Appellant further submitted that only reduction of share capital cannot be constituted as arrangement or compromise under Sections 230 and 232 of the Act. The reduction of share capital envisaged in the instant case squarely falls within the purview of Section 66 of the Act. Compromise and arrangement under Section 230 and 232 of the Act, are much broader terms then reduction of share capital under Section 66 of the Act. Reliance was placed on the Judgment of Hon’ble High Court of Gujarat in the case of Maneckchowk and Ahmadabad Manufacturing Company Ltd. 1969 SCC Online Guj. 22 and the Judgment of NCLAT in the case of R. Systems International Ltd. Company Appeal(AT) No. 416 of 2017.

NCLAT’s view: Reliance was placed on the judgement of Hon’ble Gujarat High Court in Maneckchowk and Ahmadabad Manufacturing Company Ltd. where it was held that “As a necessary corollary, if the scheme of compromise and arrangement includes reorganization of share capital except reduction of share capital, it can be sanctioned as a part of the scheme of compromise and arrangement”

With the aforesaid citation, 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.

5. Buyback as an alternative instead of reduction

Appellant argued that the Option of buyback of shares is less beneficial for the shareholders who requested the exist opportunity for the following reasons: 

1. Offer for buyback lapses after 30 days, if the offer goes unnoticed by any shareholders the opportunity for such exit is lost.
2. Once the buyback is accomplished, no issue of similar kind of securities can be undertaken for 6 months as it may affect business and investments. 
3. The entire process of reduction is more transparent and fair because the approval of ROC, RD and Tribunal is mandatory

NCLAT’s view: 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. 

Power of Court is supervisory not appellate in nature 

Appellant also submitted that Hon’ble Supreme Court in the case of Mihir H. Mafat Lal Vs. Mafat Lal Industries (1997) 1 SCC 579 held that the power of Court is supervisory not appellate in nature and that scrutiny of the scheme of reduction is best left to the parties in the realm of commercial democracy. Thus, the impugned order is liable to be set-aside. 

NCLAT Judgement

NCLAT held that NCLT has erroneously rejected the Application for reduction of share stating that it is not maintainable under Section 66 of the Act. Therefore, NCLAT set aside the impugned order passed by NCLT.