JUDGMENT
B. Sudershan Reddy, J
1.The petitioner in Company Petition No. 169 of 2003 is the appellant in this appeal preferred under Clause 15 of the Letters Patent and Section 483 of the Companies Act, 1956 (for short ‘the Act’) against the order dated 27.4.2004 of the learned Company Judge dismissing the application filed under Section 100 read with Section 78 of the Act.
2. The appellant herein filed the petition seeking the relief of confirmation of adjustment of share premium against the permanent loss in value of investment made by it in Nepal Metal Company Limited (‘NMCL’ for brevity) as approved by Special Resolution by the Annual General Meeting of the shareholders of the company.
3. The learned Company Judge after an elaborate consideration of the matter rejected the application and accordingly refused the approval/confirmation of the resolution passed by the Annual General Meeting.
4. In order to appreciate as to whether the order under appeal suffers from any infirmities requiring our interference, a few relevant facts and circumstances leading to filing of this appeal are required to be noticed.
5. The appellant company was incorporated under the provisions of the Act in the year 1956 as Hyderabad Asbestos Cement Products Limited. The name of the company was changed to Hyderabad Industries Limited with effect from 11.11.1985. The authorized capital of the company is Rs. 1,000 lakhs divided into Rs. 95,00,000/- equity shares of Rs. 10A each and 50,000 preference shares of Rs. 100/-each.71,47,631 equity shares are fully paid, but no preference shares have been issued. Any further details in this regard are not required to be noticed.
6. The case of the appellant is that it made investment of Rs. 115.30 lakhs out of its reserve capital in NMCL, a company promoted by the appellant company in Nepal jointly with the Government of Nepal and others. For whatever reasons, the value of the investment made by the appellant company in NMCL is reduced to ‘Nil’. The Board of Directors of the company, with a view to set off the loss incurred by the investment made in NMCL against the share premium account, proposed the following resolution as a Special Resolution.
“RESOLVED that pursuant to the provisions of Sections 78, 100 and other applicable provisions, if any, of the Companies Act, 1956 read with Article 15 of the Articles of Association of the Company and subject to the confirmation of the Honourable High Court of Judicature of Andhra Pradesh at Hyderabad, an amount not exceeding Rs. 115.30 lakhs out of the amount standing to the credit of Share Premium Account of the company be utilized for the adjustment against permanent loss in value of investment in shares of Nepal Metal Company Limited as at March 31, 2003.
RESOLVED FURTHER THAT for the purpose of giving effect to the aforesaid resolution, the Board of Directors of the Company or a Committee of Directors, be and is hereby authorized to do and perform all acts, deeds, matters and things and take all such actions as may be considered necessary and desirable to give effect to the same.”
The resolution was placed before the 56th Annual General Meeting (AGM) of the shareholders of the Company. Notices were issued to the shareholders of the AGM on 26.9.2003. The AGM of the shareholders unanimously passed a resolution to utilize the share premium to an amount not exceeding Rs. 115.30 lakhs for the adjustment against permanent loss in value of investment in shares of NMCL.
7. It is under those circumstances, the company moved this Court inter alia contending that reduction of capital does not involve either diminution of the liability in respect of unpaid capital or payment of any shareholder of paid up capital, and that the creditors of the company are in no way effected by the proposed adjustment. The application has been filed seeking confirmation of the resolution.
8. The Court having admitted the petition on 4.11.2003, directed the company to carry out publication of notices as contemplated under Rule 47 of the Companies (Court) Rules, 1959.
9. In response to the notices published, neither any shareholder nor any creditor approached this Court and expressed their objection.
Section 78 of the Act reads as follows:
(1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares 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 share capital of a company shall, except as provided in this section, apply as if the securities premium account were paid-up share 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 shares of the company to be issued to members of the company as fully paid bonus shares;
(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 shares or debentures of the company; or
(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.
(3) Where a company has, before the commencement of this Act, issued any shares at a premium, this section shall apply as if the shares 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.”
10. There is no dispute whatsoever that the aggregate sum not exceeding Rs. 115.30 lakhs now sought to be drawn out of the company’s Share Premium Account does not fall under any of the contingencies provided for under Sub-section (2) of Section 78 of the Act. Section 100 of the Act deals with ‘reduction of share capital by way of special resolution’ provided the Articles of Association so authorises the company to reduce its share capital. The special resolution under Section 100 is referred to as “a resolution for reducing share capital”. Section 101 of the Act deals with an application to Court for confirming the reduction. Section 102 of the Act provides that 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, it may make an order confirming the reduction on such terms as it thinks fit.
11. We are required to notice that in the instant case no objections have been received either from the shareholders or the creditors. It is nobody’s case that the petition contains any untrue statements.
12. The learned Company Judge on a true interpretation of Section 78 of the Act read with Sections 100, 101 and 102 correctly came to the conclusion that if the Share Premium Account is to be applied to any of the purposes mentioned in Sub-section (2) of Section 78, the company need not seek the approval/confirmation of the Company Court. It is only in case the company desires to apply Share Premium Account for any other purpose, it has to approach the Company Court for confirmation. The learned Company Judge had also rightly observed that there could be myriad situation where the Company may have to use Share Premium Account or reserve or reserve fund provided such use is authorized by the Articles of Association and must be within the four corners of law.
13. The question that falls for consideration is whether the Articles of Association of the appellant company permit utilization of Share Premium Account for purposes other than as provided for under Section 78(2) of the Act.
14. Article 15(2) of the Articles of Association of the appellant Company reads as follows:
“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. Article 15 of the Articles of Association of the appellant company is couched in wide language which enables the company by Special Resolution reduce in any manner any Capital Redemption Reserve Fund or any Share Premium Account. Hence, we are unable to subscribe to the view taken by the learned Company Judge in this regard. The redemption in the Capital Redemption Reserve Fund or Share Premium Account by way of a Special Resolution could be only for the purposes authorized under Sections 78(2) and 100 of the Act. That as has been observed by the learned Company Judge there could be variety of situations where the company may be required to use Share Premium Account, Reserve or Reserve Fund for such lawful purposes as it may consider necessary. It is needless to observe that for utilization of the Share Premium Account for purposes mentioned in Section 78(2) of the Act, no approval or sanction of this Court is required.
16. It is very well settled and needs no restatement that this Court does not exercise any appellate power over the decision of the Company or its management. The Company Court in its equity jurisdiction is required itself to satisfy and see that the procedure by which resolution is carried through is legally correct and the shareholders and creditors are not prejudiced. It is also the duty of the Court that it had to see that the scheme is fair and equitable between the different classes of shareholders. It is no doubt true that it is the duty of the Court to protect the interests of the creditors and it must be safeguarded. Public interest is also a paramount consideration.
17. In the instant case, the Special Resolution has been passed in accordance with the Articles of Association. Neither the creditors nor the shareholders are before the Court objecting to passing of the resolution. Nothing is brought to the notice of the Court that the Special Resolution affects the interests of the shareholders. There is no material available on record that the Special Resolution had caused any prejudice to any of the shareholders. In the company petition, it is specifically stated that “the company has made an investment of Rs. 115.30 lakhs in NMCL and owing to various concerns about the economic viability of the project being put up by NMCL, the pace of the work in the said project has slowed down. The company proposes to disinvest its shareholding favouring the present promoters and/or their associates at a mutually acceptable price. However, the company considers it prudent to align the investment to reflect their true and fair value…….. the company proposes to set off the above amount against Share Premium Account. With the said adjustment, the Company’s accounting method in respect of investments would fall in line with Accounting Standards of Institute of Chartered Accountants of India and represent true shareholder value. The set off will not cause any prejudice to the creditors of the Company. The reduction of capital does not involve either result in the diminution of any liability in respect of unpaid capital or the payment to any shareholder of any paid-up capital. No compromise or arrangement is contemplated. There is no reduction in the value of the security, which the creditors have in the Company.
18. The purposes for which the Special Resolution was introduced and approved by the General body thus are stated in clear and specific terms. The course adopted, in our considered opinion, in no way causes any prejudice to the creditors of the Company nor the interest of the shareholders is effected in any manner whatsoever. It may be a prudent business decision about which we do not propose to express any opinion.
19. In OCL India Limited, In re, 95 Company Cases (1999) 429, the Orissa High Court speaking through Sri A. Pasayat, J., as his Lordship then was, while interpreting Section 100 of the Act observed:
Section 100 of the Act deals with special resolution for reduction of share capital. In exercising its power the Court will have due regard to the interests of the creditors, who may consent or object to the reduction. For a company to reduce its share capital in any manner set out in Section 100, it must have power given to it under its articles to do so. Subject to confirmation by the Court as required under Section 101 of the Act, a company may, if authorized by its articles, effect a reduction of its share capital in any way which it may think fit by special resolution, including in particular any of the following ways:
(1) it may reduce or altogether extinguish the liability on any paid or partly paid-up shares;
(2) it may, by reducing the face value of any shares or otherwise, cancel any paid-up share capital which is lost or cancel it to the extent to which there is found deficiency in available assets;
(3) it may pay off any paid up share capital which is found to be in excess of the capital requirements of the company.
Reduction of the capital in the following ways is within the Act:
(1) diminishing the nominal amount of the shares so as to leave a less sum unpaid;
(2) diminishing the nominal amount of any
shares by writing off or repaying paid up
capital;
(3) diminishing the nominal amount by combining both (1) and (2);
(4) diminishing the number of shares by extinguishing the existing liability on certain shares, writing off or repaying the whole amount paid up thereon, and cancelling them. The statute has not prescribed the manner in which the reduction is to be carried out nor has it prohibited any method of effecting that object-per Lord Herschell L.C in British American Trustee and Finance Corporation v. Couper (1894) AC 397, at page 405, quoted with approval by Lord Reid in Westburn Sugar Refineries Ltd., In re (1951) 1 All ER 881, at page 885, who added that “paying off capital can be done otherwise than by payment of money”. Important though its task is to see that the procedure, by which a resolution is carried through, is formally correct and that creditors are not prejudiced, it has the further duty of satisfying itself that the scheme is fair and equitable between the different classes of shareholders. What then is the duty of the Court in considering a matter of this kind? In the first place, the interests of creditors must be safeguarded, but here that has been done. Secondly, the interests of shareholders may have to be considered but in the case there has been no opposition by any shareholder at any time and it is difficult to see how there could be any prejudice to any single shareholder. Thirdly, there is the public interest to consider.
The Court has first to be satisfied that in the case of the creditors who had objected to the reduction either their consent to the reduction has been obtained or their debts or claims have been discharged or settled or secured. The Court has the power to dispense with this procedure if there is strong cause. Thus, in Meux’s Brewery Co. Ltd., In re (1918-19) 1 All ER 1192; (1919) 1 Ch 28, debenture holders unsuccessfully objected that the proposed reduction would be prejudicial to their security by enabling the company to pay dividends out of profits instead of such profits being applied in making good the lost capital. No evidence was adduced, however, to show what part of the lost capital was attributable to circulating capital. The Court can also correct immaterial errors in the resolution; Willaire Systems Plc., In re (1987) BCLC 67.
Special circumstances which would justify a direction for dispensing with creditors’ objections must be such as would satisfy the Court that so far as could be reasonably foreseen the relevant creditors would not be adversely affected by the proposed reduction. But if the creditors did actually appear and object, the Court would dispense with a creditor’s assent only if the company secured payment of his claim by appropriating a sufficient sum. Lucania Temperance Billiad Halls (London) Ltd., In re (1965) 3 All ER 879; (1966) 36 Comp Cas 356; (1966) 1 Comp LJ 334 (Ch.D). “The power under Section 102 is conferred on the Court in order to enable it to protect the interests of dissenting shareholders and even those who do not appear. Before confirming a reduction the Court must see that the interests of the minority shareholders and of the creditors are adequately protected and that there is no unfairness even though this is an internal matter of the company”. Indian National Press (Indore) Ltd., In re (1989) 66 Comp Cas 387 (MP).”
20. It is unnecessary to refer in detail to various orders passed by the Courts in India approving/confirming such resolutions relating to reduction of share capital. Nor is it necessary to refer to the orders in detail passed by the Supreme Court of New South Wales Equity Division in the matter of Coca-Cola Amatil Ltd., 1998 NSW LEXIS 1786, and the decision of the High Court of Hong Kong Special Administrative Region In Re Yoshiya International Corporation Limited’s case, (2002) 1207 HKCU 1. The Hong Kong High Court observed that the Principles that the Court will require to be satisfied for sanctioning a reduction of capital are well established. Firstly, the shareholders should be treated equitably in the proposed reduction; secondly, the shareholders in general meeting should have had the proposals properly explained to them so that they could exercise an informed judgment on the proposed reduction and thirdly, the creditors of the company should be safeguarded.
21. This Court in Company Petition No. 21 of 1998 dated 10.4.1998 allowed the application for reducing the share capital on the ground that no diminution of liability in respect of any paid up share capital was involved.
22. The Delhi High Court in e Medlife Com Limited, CP No. 165 of 2003 dated 31-3-2003, by its order dated 31.6.2003 confirmed the resolution resolving the reduction of share capital of the company on the ground that it does not involve either the diminution of any liability in respect of unpaid capital or the payment to any shareholder of any paid up capital.
23. It is unnecessary to burden this order with various such pronouncements of various Courts in the country.
24. For all the aforesaid reasons, we find that the resolution of the General Body dated 26.9.2003 resolving to utilize an amount not exceeding Rs. 115.30 lakhs out of the amount standing to the credit of Share Premium Account of the Company for the adjustment against permanent loss in value of investment in shares of NMCL as at 31.3.2003, does not suffer from any legal infirmity. The rights of the shareholders and the creditors are not prejudicially affected. The resolution in no manner prejudicially affects the public interest. We find no legal impediment for granting the approval/confirmation by this Court.
25. For the aforesaid reasons, the order under appeal is set aside. Company Petition No. 169 of 2003 is allowed as prayed for. No costs.
26 Thee appeal is accordingly allowed.