JUDGMENT
Indira Banerjee, J.
1. This is an application under Section 78 read with Sections 100 to 103 of the Companies Act, 1956, hereinafter referred to as the said Act, for confirmation of the proposed reduction of the securities premium account of the petitioner, hereinafter referred to as the company.
2. Pursuant to a notice dated 8th December, 2004, an extraordinary general metting of the company was held on 13th December, 2004. A special resolution was adopted at the said extraordinary general meeting, to reduce the securities premium account of the company from Rs. 4649/- lacs to Rs. 2292.95 lacs subject inter alia to confirmation by this Court.
3. The special resolution for reduction of the securities premium account of the company was necessitated by reason of loss of the value of intangible assets of the company such as goodwill, trade mark and copyright. The company proposes to adjust the aforesaid loss against its securities premium account.
4. Pursuant to an order dated 21th March, 2005 of this Court, notice of the petition was advertised in newspapers. No creditor or shareholder of the company has, however, opposed the petition.
5. The company is, under Article 25C of the Articles of Association of the company, authorised, to reduce by special resolution any securities premium account subject to the provisions of Sections 100 to 103 of the said Act.
6. Sections 78, 100, 101, 102 and 103 of the said Act are set out hereinbelow for convenience:
78. Application of premiums received on issue of [securities].–
(1) Where a company issues [securities] at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those [securities] shall be transferred to an account, to be called “the [securities] premium account”, and the provisions of this Act relating to the reduction of the [securities] capital of a company shall, except as provided in this Section, apply as if the [securities] premium account were paid-up [securities] capital of the company.
(2) The [securities] premium account may, notwithstanding anything in Sub-Section (1), be applied by the company–
(a) in paying up unissued [securities] of the company to be issued to members of the company as fully paid bonus [securities];
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of [securities] or debentures of the company; or
(d) in providing for the premium payable on the redemption of any redeemable preference [securities] or of any debentures of the company.
(3) Where a company has, before the commencement of this Act, issued any [securities] at a premium, this Section shall apply as if the [securities] had been issued after the commencement of this Act:
Provided that any part of the premiums which has been so applied that it does not at the commencement of this Act form an identifiable part of the company’s reserves within the meaning of Schedule VI, shall be disregarded in determining the sum to be included in the [securities] premium account.
100. Special resolution for reduction of share capital–(1) Subject to confirmation by the Court, a company limited by shares or a company limited by guarantee and having a share capital, may if so authorized by its articles by special resolution, reduce its share capital in any way; and in particular and without prejudice to the generality of the foregoing power, may–
(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 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 it necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly.
(2) A special resolution under this Section is in this Act referred to as “a resolution for reducing share capital.
101. Application to Court for confirming order, objections by creditors, and settlement of list of objecting creditors.–(1) Where a company has passed a resolution for reducing share capital, it may apply, by petition, to the Court for an order confirming the reduction.
(2) Where the proposed reduction of share capital involves either the diminution of liability in respect of unpaid share capital for the to any share holder of any paid up share capital, and in any other case if the Court so directs, the following provisions shall have effect, subject to the provisions of Sub-Section (3):
(a) Every creditor of the company who at the date fixed by the Court is entitled to any debt or claim which, if that date were the commencement of the winding up of the company, would be admissible in proof against the company, shall be entitled to object to the reduction;
(b) the Court shall settle a list of creditors so entitled to object, and for that purpose shall ascertain, as far as possible without requiring an application from any creditor, the names of those creditors and the nature and amount of their debts or claims, and may publish notices fixing a day or days within which creditors not entered on the list are to claim to be so entered or are to be excluded from the right of objecting to reduction;
(c) where a creditor entered on the list whose debt or claim is not discharged or has not determined does not consent to the reduction, the Court may, if its thinks fit, dispense with the consent of that creditor, on the company securing payment of his debt or claim by appropriating, as the Court may direct, the following amount:
(i) if the company admits the full amount of the debt or claim, or, thought not admitting it, is willing to provide for it, then, the full amount of the debt or claim;
(ii) if the company does not admit and is not willing to provide for the full amount of the debt or claim, or if the amount is contingent or not ascertained, then, an amount fixed by the Court after the like enquiry and adjudication as if the company were being would up by the Court.
(3) Where a proposed reduction of share capital involves either the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid up share capital, the Court may, if, having regard to any special circumstances of the case, it thinks proper so to do, direct that the provisions of Sub-section (2) shall not apply as regards any class or any classes of creditors.
102. Order confirming reduction and powers of Court on making such order.–(1) The Court, if satisfied with respect to every creditor of the company who under Section 101 is entitled to object to the reduction that either his consent to the reduction has been obtained or his debt or claim has been discharged, or has determined, or has been secured, may make an order confirming the reduction on such terms and conditions as it thinks fit.
(1) Where the Court makes any such order, it may–
(a) if or any special reason it thinks proper so to do, make an order directing that the company shall, during such period commencing on, or at any time after, the date of the order, as is specified in the order, add to its name as the last words thereof the words “and reduced”; and
(b) make an order requiring the company to publish as the Court directs the reasons for reduction or such other information in regard thereto as the Court may think expedient with a view to give him proper information to the public, and, if the Court thinks fit, the causes which led to the reduction.
(3) Where a company is ordered to add to its name the words “and reduced”, those words shall, until the expiration of the period specified in the order, be deemed to be part of the name of the company.
103. Rgistration of the order and minute of reduction.–(1) The Registrar–
(a) on production to him of an order of the Court confirming the reduction of the share capital of a company; and
(b) on the delivery to him of a certified copy of the order and of a minute approved by the Court showing, with respect to the share capital of the company as altered by the order, (i) the amount of the share capital, (ii) the number of shares into which it is to be divided, (iii) the amount of each share, and (iv) the amount, if any, at the date of registration deemed to be paid up on each share;
shall register the order and minute.
(2) On the registration of the order and minute, and not before, the resolution for reducing share capital as confirmed by the order shall take effect.
(3) Notice of the registration shall be published in such manner as the Court may direct.
(4) The Registrar shall certify under his hand the registration of the order and minute, and his certificate shall be conclusive evidence that all the requirements of this Act with respect to reduction of share capital have been complied with, and that the share capital of the company is such as is stated in the minute.
(5) The minute when registered shall be deemed to be substituted for the correseponding part of the memorandum of the company, and shall be valid and alterable as if it had been orginally contained therein.
(6) Substitution of any such minute as aforesaid for part of the memorandum of the company shall be deemed to be an alteration for the memorandum within the meaning and for the purposes of Section 40.
7. Mr. Ratnanko Banerjee appearing on behalf of the petitioner submitted that reduction of securities premium was authorized by the articles of association of the company and that there was no legal bar to the reduction of the securities premium account with a view to set off losses, which has been done in the instant case.
8. Notice of this petition was issued to the Central Government through Regional Director, Department of Company Affairs, Eastern Region, pursuant to an order of this Court. It is, however, not in dispute that there was no requirement in law for notice of this petition either to the Regional Director or to the Registrar of Companies.
9. Section 78 provides for a separate account known as securities premium account for premium collected on issue of securities. The securities premium account is not share capital of the| company. Share capital as defined in Section 86 of the said Act provides for only two kinds of share capital, namely, equity share capital and preference share capital. By reason, however, of Section 78(1) of the said Act, the provisions of the said Act with regard to reduction of share capital are applicable to the securities premium account.
10. Notwithstanding anything in Section 78(1) of the said Act the securities premium account may be applied by the company in paying up unissued securities of the company, to be issued to members of the company as fully paid bonus shares, in writing off the preliminary expenses of the company, in writing off the expenses of or the commission paid or discount allowed on any issue of securities or debentures of the company or in providing for the premium payable on the redemption of any redeemable preference securities or any debentures of the company.
11. Under Section 100 of the said Act the company, if so authorized by its Articles, might, by special resolution, reduce its share capital, if so permitted by its Articles and thereby (i) extinguish or reduce the liability on any of its share in respect of share capital not paid up, (ii) cancel any paid up share capital which is lost or is unrepresented by available assets, either with or without extinguishing or reducing liability on any of its shares or (iii) pay off any paid up share capital which is in excess of the wants of the company, with or without extinguishing or reducing liability on any of its shares and may also, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares. The purposes listed above are only illustrative and not exhaustive.
12. Where a company has adopted a special resolution for reducing the securities capital, it may by petition to the Court apply for confirming the reduction. Where, however, the proposed reduction involves diminution of liability in respect of unpaid share capital or involves the payment to any shareholder of any paid up share capital or, in any other case, if the Court so directs, every creditor of the company would be entitled to object to the reduction and the Court would settle the list of creditors so entitled to object and for that purpose ascertain the names of creditors and the nature and amount of their debts or claims.
13. Where a creditor, entered in the settled list of creditors, does not consent to the reduction, the Court may, if it thinks fit, dispense with the consent of that creditor, on the company securing payment of its debt or claim. Where a proposed reduction of capital either involves diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid up share capital, the Court may if, having regard to the special circumstances of the case, it thinks proper so to do direct that the provisions of Section 100(2) shall not apply as regards any class or any classes of creditors. In the instant case, the proposed reduction does not involve any diminution of liability or payment to any shareholder.
14. In any case, a learned Single Judge of this Court has by an order dated 21st March, 2005 dispensed with compliance of Section 102(2) of the said Act. Directions were, however, issued for advertisement of notice of the petition as also for service of a copy of the petition to the Central Government through the Regional Director. Pursuant to the order dated 21st March, 2005, referred to above, the petition had duly been advertised No creditor or shareholder has opposed this petition.
15. The petition has, however, strongly been opposed on behalf of the Regional Director on the purported ground that the proposed reduction does not conform to accounting standard 5 read with accounting standard 26.
16. The relevant provisions of the accounting standards relied upon by the Regional Director are extracted hereinbelow:
AS 26(72). The amortization method used should reflect the pattern in which the asset’s economic benefits are consumed by the enterprise. If that pattern cannot be determined reliably, the straight-line method should be used. The amortization charge for each period should be recognized as an expense unless another accounting standard permits or requires it to be included in the carrying amount of another asset.
AS 5 (5) All items of income and expense which are recognized in a period should be included in the determination of net profit or loss for the period unless an accounting standard requires or permits otherwise.
17. Learned Counsel appearing on behalf of the Regional Director submitted that Accounting Standard 26 (72) read with Accounting Standard 5(5) provided that amortization charge would be recognized as an expense to be routed through Profit & Loss Account. Amortization of assets as per Accounting Standard 26 (72) whether tangible or intangible would be deducted to profit & loss account unless any other accounting standard permitted or required it to be included in the carrying amount of any other asset.
18. Counsel further submitted that the application of securities premium account was restricted to the specific purpose mentioned in Clauses (a), (b) & (c) of Section 100(1) of the said Act. It is difficult to accept the aforesaid submission. The purposes listed in such Clauses (a) to (c) of Section 100(1) are not exhaustive. This is amply clear from the said Section.
19. It was further argued that the company wanted to adjust the securities premium account against tangible/intangible assets for example goodwill, copyright and trade mark which had no future benefits for the company. In reducing its securities premium against impairment value of intangible assets such as goodwill, trade mark, copyright, patent and the like the company was applying a short cut method not permissible in law and procedurally incorrect.
20. On behalf of the Regional Director, it is contended that as per Accounting Standard 26, impairment of assets should first be routed through profit and loss account. If upon such routing through the profit and loss account, there is loss to the company, only then the company can move an application for reduction of capital under Section 100. According to Counsel this application is premature.
21. Counsel lastly, submitted that the short cut method of amortization of intangible assets against reduction of securities premium account would contradict Schedule VI of the Companies Act, 1956, for if securities premium account were to be treated as capital, the company would exceed the limit of its authorized share capital as on 31″ March, 2004. As on 31st March, 2004, the authorized capital was Rs. 38 crores and the paid up capital was Rs. 37 crores, there being a balance of Rs. 1 crore. The premium account is proposed to be reduced against the impairment of assets amounting to Rs. 23.53 crore.
22. The company would, according to the Regional Director, have to pay fees to the Central Government for increase of authorized capital by Rs. 25 crores. The fees would be approximately Rs. 8 to 9 lakhs. The company had not filed Form V with the Registrar of Companies, West Bengal in accordance with the Section 97 of the said Act before treating the share premium as share capital.
23. Mr. Banerjee appearing on behalf of the petitioner submitted that there being no requirement for any notice to the Central Government the Regional Director had no locus standi to oppose the reduction. It is true that notice on the Regional Director is admittedly not necessary for confirmation of a resolution for reduction of the securities premium account. This Court, however, by its aforesaid order dated 21st March, 2005 directed service of notice on the Central Government through the Regional Director. Even though the Regional Director may not have locus standi to question the reduction of the securities premium account, the Regional Director is obliged to draw the attention of this Court to any legal infirmity in the proposed reduction. This Court, therefore, needs to examine the grounds on which the proposed reduction has been opposed.
24. There are no restrictions in the said Act on the purposes for which the securities premium account or the share capital of a company might be reduced. The said Act only prescribes the procedure for reduction. The confirmation of Court for the proposed reduction of securities premium account is necessary for safeguarding the interests of creditors and the minority shareholders. In an application for confirmation of the proposed reduction all that the Court is required to see is that the proposed reduction is fair, equitable and reasonable, the procedure by which the resolution is carried is legally correct and that no creditor or shareholder is prejudiced.
25. The Court has a discretion whether or not to confirm the reduction of securities premium account. The Court would not, however, refuse to exercise its discretion to confirm the proposed reduction, where the proposals for reduction are properly explained, the reduction is for a discernible purpose, the shareholders are treated equally and the creditors are safeguarded.
26. All the aforesaid tests appear to have been satisfied in this case. It is nobody’s case that the reduction proposals are not properly explained. The reduction is for the express purpose of balancing the loss of the value of intangible assets, that is, goodwill, trade mark and copyright. Reduction of securities premium account to balance the loss of value of intangible assets would neither prejudice any creditor nor any shareholder.
27. No shareholder or creditor has opposed the reduction. The Regional Director has alleged contravention of the accounting standards. It is not the case of the Central Government that the reduction will prejudice any creditor or shareholer or that any shareholder has been treated unequally. Nor is it the case of the Central Government that the proposed reduction would be against public interest. There is no allegation of any procedural irregularity in adoption of the resolution for the proposed reduction.
28. On the other hand, the proposed reduction will only give a true reflection of the value of the assets of the company. There is no allegation against the company of any undue gain by adoption of the procedure of balancing the loss in the value of intangible assets with the securities premium account.
29. The rule of accounting as per the Accounting Standards 26(72) and 5(5) is not inflexible. The relevant accounting standards permit deviation if allowed by any other accounting standards Reduction with a view to adjust and/or balance fall in value of intangible assets is impliedly, if not expressly permitted by Section 100(1)(b) of the said Act. The said Section, in my view, allows adjustment by reduction of securities premium so that paid up capital or any part thereof is not unrepresented by available assets. There is also some substance in the contention of learned Counsel of the company that the deviation in the instant case has necessitated this application. If the loss in value of intangible assets were to be shown as revenue expenditure, this application would not have been necessary.
30. The approval of this Court has been sought for deviation from the accounting procedure of showing loss in value of assets as expenditure, a deviation which could, in many cases bring in higher revenue to the Government exchequer by way of income-tax.
31. It is nobody’s case that the proposed reduction is prejudicial to the interest of any shareholder or any creditor or prejudicial to public interest. As held by a Division Bench of the Andhra Pradesh High Court hi the case of Hyderabad Industries Ltd. reported in 2003 Company Cases 458, relied upon on behalf of the company this Court does not sit in appeal over the decision of the shareholders of the company taken in an extraordinary general meeting.
32. The securities premium account not being a share capital of the company, there can be no question of exceeding the authorized share capital as rightly submitted on behalf of the petitioner. The fact that by reason of a legal fiction created by Section 78 of the said Act, the provisions of Section 100 to 103, are made applicable to reduction of securities premium account, the securities premium account does not become share capital of the company.
33. In passing an order confirming reduction of securities premium account all that the Court is required to do is to satisfy itself that the dues of every creditor entitled to object are discharged or determined or secured. No other obligation is cast on the Court in view of the express provisions of Section 102(1). This Court can at best impose terms and conditions for reduction which the Court does not deem necessary in the instant case. The reasons for the reduction and other material information with regard thereto have duly been disclosed. There is nothing on record to show that any prejudice has been caused to anybody by reason of the proposed reduction.
34. The application is, therefore, allowed. There will be an order in terms of Prayers (a) to (e) of the petition.