Corporate Updates 21 June 2014

A Profitable Company proposes to reduce its share capital by cancelling a specified number of shares held by certain shareholders. Whether such reduction of share capital was really to pay off the capital which is in excess of the requirements of the company or it was distribution of profits under the guise of reduction of capital.????

The Hon’ble High Court of Delhi in the petition filed by RS Livemedia Private Limited, the petitioner company under Sections 100-104 of the Companies Act, 1956 (hereinafter referred to as the ‘Act’) seeking approval/sanction to the proposed reduction of the Subscribed and Paid-up Equity and Preference Share Capital of the petitioner Company

Observation made by the Regional Director expresses the apprehension that the proposed reduction of capital is in substance a ruse to distribute profits hence the approval of reduction of share capital should be withheld.

Facts of the case: 

• The present petition has been filed by the petitioner company under Sections 100-104 of the Companies Act, 1956
• The petitioner proposes to reduce its share capital by cancelling a specified number of shares held by certain shareholders. The petitioner has also determined the amounts payable to the shareholders with respect to the shares proposed to be cancelled reduced.
• A resolution approving the reduction of share capital had been passed by the members of the petitioner company at the Extra Ordinary General Meeting of the company held on 08.07.2013.
• As per the Explanatory Statement issued, the object of reduction of share capital was to pay off the capital which is in excess of the requirements of the company, to the investor shareholders, thereby providing partial exit to the investor shareholders.
• In EGM members of the company approved the reduction of the existing issued, subscribed and paid up share capital from `5,08,28,456 to `1,25,00,000/- by cancelling 2,97,29,048 equity shares and 85,99,408 Non-Cumulative Convertible Preference shares.
• The Petition stated that the company company did not have any secured creditor and out of the 20 unsecured creditors, 15 unsecured creditors representing more than 90% of the unsecured debt had given their no objection or consent to the said reduction of capital, the requirement of complying with the provisions of Section 101(2) of the Act was dispensed with by an order dated 06.11.2013
• The petitioner has also filed an affidavit dated 10.02.2014 stating that no objections have been received from the general public in pursuance of the publication of the notices.

Observations of the Regional Director

• Observed that the petitioner company is an profit making company and the petitioner company had reported income from operations of `13.84 crores and net profit of `9.83 crores during the year.
• Observed that cancelling/reducing the said preference shares without conversion would amount to treating the said shares as redeemable preference shares. It is submitted that as per the RBI guidelines the preference shares would have to be considered as debt capital and the petitioner company would be required to comply with the norms as applicable to External Commercial Borrowing.

Judgement by the Hon’ble High Court

The Court held that the question of reduction of share capital is treated as a matter of domestic concern, i.e. it is the decision of the majority which prevails. If a majority by special resolution decides to reduce share capital of the company, it has also the right to decide as to how this reduction should be carried. While reducing the share capital the company can decide to extinguish some of its shares without dealing in the same manner as with all other shares of the same class. 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.

In view of the above, the present petition is allowed and the approval of reduction in the share capital cannot be withheld on the basis of the above mentioned observation made by the Regional Director

Conclusion

The observation made by the Regional Director is solely premised on the fact that the petitioner company is a profitable one. There is no principle of law which prohibits a profitable company from reducing its share capital and thus the fact that the petitioner company is a profitable one cannot possibly, in absence of any other material fact, lead to the conclusion that the reduction of capital is for a collateral purpose.