“Reduction of Share Capital is a matter of domestic concern”; NCLAT confirms reduction of the share capital approved by the shareholders of Precious Energy Services Ltd.

NCLAT

   

National Company Law Appellate Tribunal (NCLAT): While deciding the instant appeal filed by Precious Energy Services Ltd., against the order of NCLT holding the reduction of share capital to be against the interests of the company; the Bench of Justice Anant Bijay Singh (Judicial Member) and Shreesha Merla (Technical Member) allowed theappeal by referring to the decision of Panruti Industrial Co., (Private) Ltd., 1959 SCC OnLine Mad 138 which stated that “reduction of share capital is a matter of domestic concern; one for the decision of the majority of the shareholders of the company”.

Background of the case: The Appellant Company, having an authorised capital as on 31-03-2019 of Rs 7.51,00,000/-; and Rs 6,98,50,050/- as the Issued, Subscribed and Paid-up Share Capital, passed a Board Resolution dated 30-09-2019 resolving to confirm the reduction of the Share Capital by cancelling Rs 69,75,000 Equity Shares of Rs 10 each, paying to the holders of such Equity Shares an agreed amount of Rs.74.49 per Equity Share totaling to Rs 54,04,92,750.

An Annual General Board Meeting of the Members was convened on 24-09-2019 for confirming the reduction of Share capital by cancelling Rs 69,75,000/- Equity Shares of Rs.10 each and paying to the holder of such Equity, the agreed amount of Rs 77.49 per Equity Share.

In view of the negative net worth as per Books, and negative Book value per share, The NCLT was of the view that the proposed capital reduction by way of return of capital to its shareholders was not in the overall interest of the Company and its stake-holders.

The appellant Company then preferred the instant appeal under Section 421 of Companies Act, 2013 against the afore-stated order passed by the National Company Law Tribunal, Ahmedabad Bench.

Contentions: The appellant’s Counsel submitted that the reduction of the Capital Share was approved by the shareholders of the company with the help of Special Resolution to decrease the capital and improve the earning. It was submitted that when the decision of reducing the capital share was passed unanimously then the decision of majority prevails and the decision of NCLT is conflicting to Section 66 of the Companies Act, 2013.

The appellant further submitted that the reduction of the Share Capital is the ‘domestic affair’ of the Appellant Company which ought to be permitted when there are no objections from the Shareholders and the Creditors.

Observations: Perusing the facts of the instant appeal, the Bench examined the relevant provisions of the Companies Act, 2013– namely Section 66 and a plethora of judicial pronouncements on the issue. The Bench quoted the decision of Madras High Court in Panruti Industrial Co., (Private) Ltd., 1959 SCC OnLine Mad 138 and a recent NCLAT decision in Economy Hotels India Services Private Limited v. Registrar of Companies, 2020 SCC OnLine NCLAT 653, wherein the Tribunal had clearly stated that “Reduction of Capital is a domestic affair of a particular Company in which, ordinarily, a Tribunal will not interfere because of the reason that it is a majority decision which prevails…

Furthermore the Bench observed that Reduction of the Share Capital was approved by the Shareholders of the appellant company unanimously by way of a Special Resolution with the objective of reducing the overall weighted average cost of Capital and improving the earnings per share.

It was further observed that appellant Company had complied with all the statutory requirements entailed in Section 66 of 2013 Act and had also filed necessary Affidavits to that effect. It was also pointed out that none of the Creditors objected to the reduction of the Capital.

The Bench also noted that the appellant Company had deposed in a Clarificatory Affidavit regarding its financial position which is not in the negative

Decision: With the afore-stated observations, the Tribunal held that the reduction of the Share Capital was approved by the Shareholders of the appellant Company unanimously and that the Creditors of the Company have also not objected to the same. Thus, this reduction does not cause any prejudice to any class of Creditors. The Tribunal therefore confirmed the reduction of share capital.

[Precious Energy Services Limited v. The Regional Director, COMPANY APPEAL (AT) No. 17 of 2021, decided on 28-07-2022]


Advocates who appeared in this case :

Arun Kathpalia, Sr. Advocate along with Hemant Sethi, Gaurav H Sethi, Diksha Gupta, Jay Mehta and Aditya Dhupper, Advocates, for the Appellant;

Ankit Shah, Advocate, for the Respondent.

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