This Article focuses on the modes of reduction of capital under the head “In Any Manner” as prescribed under section 66 of the Companies Act, 2013 other than those specified under the section.
The reduction of share capital means reduction of issued, subscribed and paid up share capital of the company. Previously, reduction of share capital was governed by section 100 to 104 of the Companies Act, 1956, whereas upon enactment of the Companies Act, 2013, the reduction of capital is governed by section 66 read with other applicable sections and rules thereunder.
Section 66 of the Companies Act, 2013 reads as follows:
“Reduction of share capital.—(1) Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in particular, may—
(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid up; or
(b) either with or without extinguishing or reducing liability on any of its shares,—
(i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or
(ii) pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly:
Provided that no such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act….”
A reduction of capital often involves the reduction of the same proportion of the shares of the company on similar terms and conditions offered to each shareholder whose shares are being reduced.
What is the meaning of “any other manner”?
- Section 66 of the Companies Act, 2013 authorizes the company to reduce its capital in ‘any manner’ the company deems fit, which implies that the company can carry out a selective reduction of capital.
- A ‘selective’ reduction of capital differentiates between shareholders of the same class by resulting in compulsory extinguishment of capital of some shareholders, while leaving the other shareholders untouched.
- Section 66 of the Companies Act, 2013 allows a company to undertake a capital reduction in any manner subject to, amongst other things, (i) the approval of the shareholders by way of special resolution; (ii) the approval of the National Company Law Tribunal (NCLT); and (iii) the accounting treatment for such reduction being in conformity with the accounting standards specified under the Companies Act, 2013.
- If a company decides to selectively reduce its capital, the articles of association of the company ought to allow the company to reduce its capital from time to time, and in any manner for the time being authorised by law.
Jurisprudence on Selective Capital Reduction under the CA, 2013
The NCLT is only authorised to sanction a reduction of uncalled liability or a repayment of capital if it is satisfied that creditors have agreed, or have been paid, or have their debts secured. Here, it would be useful to examine the extent to which selective reduction of capital has been permitted by the courts in India.
a) In CSC India Private Limited, National Company Law Tribunal, Mumbai Bench in its order dated 04.01.2019 stated : “…the company is of the view that the funds are in excess of its wants and has undertaken the proposed capital reduction. The explanation provided by the petitioner company, it appears that the petitioner company has adequate sources of fund to pay the consideration proposed to be discharged in cash.”
“8) The Learned practising company secretary appearing on behalf of the petitioner company further submits that the petitioner company has complied with all the statutory requirements as per the directions of the Tribunal and they have filed necessary affidavit of service. None of the parties have come forward to oppose the proposed reduction.”
To which the Hon’ble NCLT had allowed the petition stating “Petition for reduction of share capital allowed subject to the direction given herein above. All concerned regulatory authorities to act on certified copy of the Order and the form of Minutes forming part of the petition, duly certified by the Deputy Director, National Company Law Tribunal.”
b) In Reckitt Benckiser (India) Ltd. vs Unknown, the Delhi High Court held that the majority had the 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 (subject to this being without with mala fide and unfair motive).
The court held 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).
c) In Cadbury India Limited, Bombay High Court had approved the selective reduction of share capital scheme provided it is fair, just and reasonable.
d) In Digi Smart Digital Media Private Limited (05.07.2019 – NCLT – Chandigarh) it was observed that “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. The company limited by shares is permitted to reduce the share capital in any manner, thereby a selective reduction is permissible within the framework of law. On the question of valuation as well, an observation was that valuation of shares is a technical matter, which requires considerable skill and experience. If the stakeholders are satisfied with the value, can approve the transaction of reduction of share capital which should not deemed to be inequitable or unfair transaction.”
It is imperative to note that a scheme of reduction shall carry the following three components: (i) the majority of the minority shareholders approve the scheme, (ii) the reduction of share capital is fair and equitable and (iii) fair and just methodology adopted for valuation of the shares (While reducing capital, the price offered by the company to the shareholders, in other words the valuation of the shares, is of paramount importance) for a smooth and successful reduction of capital.
It is difficult for the courts to decipher the intent behind selectively reducing the share capital (whether the reduction in the capital is induced to drive out the minority shareholders or for a rearrangement of the balance sheet of the company). However, the onus lies on the company undertaking the reduction to demonstrate that the reduction is fair to minority share.
This Article has been Compiled by Richa Singh (Associate)
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