Andhra HC (Pre-Telangana)
In Re: Global Trust Bank Ltd. vs Unknown on 3 September, 2004
Equivalent citations: 2004(5)ALD667, 2004(6)ALT390, I(2005)BC239, [2005]127COMPCAS604(AP), [2005]57SCL164(AP)
ORDER V.V.S. Rao, J.
1. This petition is filed under Section 100 read with Section 78 of the Companies Act, 1956 (for short, the Act). The petitioner herein, namely, Global Trust Bank Limited (hereafter referred to as 'GTBL'), seeks the following prayers.
(A) The utilization of share premium for making provisions for bad and doubtful debts/writing off irrecoverable bad debts as approved by the special resolution set out in Paragraph 13 with the consequential changes in the accounts of the company be confirmed effective 31st March, 2004.
(B) The requirement to add the words 'and reduced' after the name of the company be dispensed with.
(C) To this end all enquiries and directions necessary and proper be made and given.
(D) The proposed Minute be approved;
and (E) Such farther or other orders be passed in the premises as the Court shall deem fit.
2. In a nutshell it is the case of petitioner that during the financial year 2001- 2002 it was compelled to write off bad loans to the tune of Rs. 285.38 crores. During that year GTBL utilized general reserve to a tune of Rs. 181.95 crores and contingency reserves of Rs. 20 crores for the financial year ended 31.3.2002. Again during the subsequent financial year GTBL had to write off irrecoverable bad loans to the tune of Rs. 225 crores, which it met partially from accrued profits and partially from statutory reserves which according to them stood at Rs. 467.05 crores, including the share premium account of Rs. 130.19 crores. GTBL seeks imprimature of this Court for its strategy adopted to write off the loans.
3. GTBL is a Public Limited Company registered under the Companies Act on 29.10.1993, having its Registered Office at Secunderabad. It is a Banking Company governed by - in addition to the provisions of the Companies Act; the provisions of the Banking Companies Regulations Act, 1949 (BR Act) and Reserve Bank of India established under Reserve Bank of India Act, 1934 (RBI Act), has the power to regulate the affairs and banking operations of GTBL. It has authorized share capital of Rs. 650 crores divided into 65,00,00,000 of equity share of Rs. 10/- each out of which the paid up capital is Rs. 121,35,90,000/- divided into 12,13,59,000 of equity shares of Rs. 10/- each. The shares of the company are listed on various stock exchanges, namely, Ahmedabad, Coimbatore, Madras, Mumbai and National Stock Exchanges. As stated in the petition during the financial years 2001-2002 and 2002-2003 GTBL fully utilised the free reserves and statutory reserves amounting to Rs. 346.71 crores for making provisions towards Non-Performing Assets (NPAs) and for writing off allegedly irrecoverable bad debts. The company states that it has balance in the share premium account amounting to Rs. 1,29,44,25,000/- as on 31.3.2003. Having exhausted all the free and statutory reserves, GTBL proposed to utilise this balance in the share premium account for making provisions towards bad and doubtful debts/writing off irrecoverable debts as of 31.3.2004.
4. The company gives the following reasons for utilization of balance in share premium account, which are as under:
(a) The Reserves and Surplus amount includes the balances in the free and statutory reserve accounts and also share premium account, which is not created out of profits but is created when the shares of the Banking Company are issued at a premium.
(b) Right from the inception (i.e., incorporation) of the Bank, the Bank has been consistently appropriating profits by transferring to Reserves. The Bank had a Reserves Strength of Rs. 467.05 crores by the end of Financial Year 2000-01. This includes balance in Share Premium Account to the tune of Rs. 130.19 crores.
(c) In the year 2001-02, the Bank had a high Capital Market exposure. The down swing in the Capital Markets at that time badly affected the asset quality of the Bank, thereby compelling the Bank to write off bad loans to the tune of Rs. 285.38 crores. To support the write off, the Bank utilised General Reserve (Rs. 181.95 crores) and Contingency Reserve (Rs.20 crores) for the Financial Year ended 31st March, 2002.
(d) The financial year 2002-2003 was a very stressful period for the Bank and it was trying to come out of the challenges. Due to the increase in the Non-Performing Assets, on account of the earlier year's Capital Market exposure, the Bank had to write off irrecoverable bad loans to the tune of Rs. 225 crores. The write off was met partially from Operating Profits and partially from Statutory Reserves.
(e) By the financial year-end of March, 2004, the Bank anticipates increase in Non-Performing Assets pertaining to earlier years which arc irrecoverable in nature thereby requiring either 100% provision or need to be written off from the books.
(f) The expected profits for the financial year 2003-2004 will not be sufficient to adhere to the provisioning norms of RBI. It is also evident from the above that the Bank had exhausted all the Reserves except the balance in the Share Premium Account. With an intention of cleaning up its Balance-Sheet and building a quality credit portfolio in the future, the Bank has obtained the approval of the Members for utilizing the balance in Share Premium Account for making provision towards Non-Performing Assets and writing off of irrecoverable bad debts.
5. The Board of Directors at the meeting held on 22.11.2003 made such proposal and the Tenth Annual General Meeting of the Company which was convened on 24.12.2003 passed the resolution and notices were sent to shareholders under Section 173(2) of the Act along with an explanatory note. On the appointed date, the shareholders passed resolutions as under:
RESOLVED THAT pursuant to Section 78, read with Section 100 and other applicable provisions, if any, of the Companies Act, 1956, and subject to the provisions of the Banking Regulation Act, 1949, the Articles of Association of the Company, the confirmation/order of the Hon'ble High Court of Andhra Pradesh and other appropriate authorities in this regard, and such other approvals, permissions and sanctions as may be necessary, and subject to such conditions and modifications as maybe prescribed in granting such approvals, permissions, which may be agreed to by the Board of Directors of the Company (hereinafter referred to as "the Board" which term shall include any committee(s) to which the Board may delegate the powers of the Board including powers conferred by these R resolutions) at its sole discretion, the consent of the Company be and is hereby accorded for utilizing amount of Rs. 1,29,44,25,000/- lying in the Share Premium Account as on 31st March 2003 for making provisions towards bad and doubtful debts/write off the irrecoverable debts and for the consequential reduction of Share Premium to that extent with effect from 31st March, 2004.
RESOLVED FURTHER THAT for the purpose of giving effect to the above, the Board be and is hereby authorized to give such directions as it may think fit and proper, including directions for settling any questions or difficulties that may arise and to do all acts, deeds, matters and things of whatsoever nature as the Board in its absolute discretion consider necessary, expedient and proper.
RESOLVED FURTHER THAT the Board be and is hereby authorized to delegate all or any of the powers herein conferred to any Committee of Board to give effect to the resolution,
6. In the circumstances as above, GTBL approached this Court purportedly under Section 100 read with Section 78 of the Act. The form of the Minute proposed to be registered under Section 103 is as under:
An aggregate sum not exceeding Rs. 1,29,44,25,000/- drawn out of the Company's share premium account as permissible to be utilized for the purpose and be applied/adjusted for making provisions for bad and doubtful debts/writing off irrecoverable bad debts as at 31st March, 2004.
7. This Court admitted the petition and directed the learned Counsel for GTBL to advertise the petition in Dcccan Chronicle English daily and Andhra Jyoti Telugu daily newspapers published from Hyderabad. Accordingly, the petition was advertised and proof of service was produced before this Court on 10.5.2004. The matter was listed for orders and it was heard at length on 14.6.2004, 16.6.2004 and 17.6.2004.
8. It is no doubt true that in law a company can always reduce its capital if the same is lost or unrepresented by available assets. In a case where banking company writes off its losses and/or bad debts as against statutory reserve, the same would result in losing the capital. Only in such an event, there can be, reduction of capital. But, action of the company in writing off the bad debts as against share premium account, if permissible, does not immediately result in reduction of capital, and hence the same is not permissible under law.
9. Reserve is created generally out of the profits earned by the company, where as the share premium account or securities premium account created under Section 78 of the Act is not a capital and has no characteristics of statutory reserve or reserve. Therefore, there may be justification for any company to write off the losses or bad debts as against statutory reserve or capital reserve created out of profits earned in yester years, but a company cannot be permitted to write off its bad debts as against share premium account. It would be illogical and unsound business prudence to touch securities premium account to write off the bad debts. A company can always carry the bad debts or losses to the Balance Sheet to the next year and may decline to distribute dividend in future years till the bad debts/losses are adjusted against future profits.
10. As per the provisions of the Companies Act, including Sections 78 and 100 thereof, or Section 203 read with Schedule VI, a company cannot set off its loss or cumulative loss as against share premium account, because share premium account or security premium account though treated as paid up capital of the company for a limited purpose, namely, getting approval of the Company Court, cannot be treated as the reserve fund, nor there is a concept like share premium account in future. These principles are fundamental for considering this petition for approval of the Minute as noticed hereinabove.
11. In view of legal fiction introduced by Section 78(1) of the Act, share premium account is deemed to be paid up share capital for the purpose of Sections 100 to 105. These are mandatory provisions which have to be complied with by the company seeking to reduce its share capital while considering the application for reduction of share capital including applications under Sections (1) and (2) of Section 78 of the Act, the Company Court has to apply the principles entrenched in Section 100. Merely because the company proposes to utilize the share premium account for the purpose of writing off losses, it does not mean that the company can ignore the provisions of law in Section 100(1). Be it noted Section 100(1) enumerates the situations where the share capital can be reduced by the company. While doing so, not only Memorandum of Articles of Association of the company and provisions of the Companies Act, but also other provisions of relevant law govern the exercise of right of the company to reduce its share capital. Therefore, a company cannot be permitted to resort to the provisions of Section 78 read with Section 100 and write off its losses against share premium account unless it is permitted by law.
12. In case of banking company, as defined under provisions of BR Act, and RBI Act, the affairs of the company are not mere contractual relations among the company and its members. All the affairs of such company have public character, and any action of the banking company which is derogatory to public interest gives rise to a situation of distrust by public. The Company Court cannot mechanically approve the Minute of the banking company to adjust its cumulative loss from the share premium account, especially when such company has already appropriated all the reserves for writing off its losses and bad debts. If such course is permitted by the Company Court, the same might, in a given situation, result in manipulation of accounts of the company and artificially bolstering the book value or market value of the stock of the company.
13. In Re Hyderabad Industries Limited, , the question for consideration was whether a company can draw funds out of share premium account for the purpose of utilising the amount for applying/adjusting against permanent loss in value of the investment. In that context, this Court analysed the provisions of Sections 78 and 100 of the Act in Paragraphs 10 to 13 of the judgment. Instead of again redoing the same thing, it would be appropriate to incorporate those passages in this judgment as the next four paragraphs of this judgment.
14. There cannot be any dispute that the provisions as to reduction of share capital would apply when the share premium account is to be utilized. Section 78(1) introduces a fiction and the share premium account is deemed to be "paid-up share capital of the company". Sections 100, 101, 102, 103, 104 and 105 deal with reduction of share capital and the procedure to be adopted, when an application is made to the Company Court, for confirming the resolution/Minute of the Members of the company for reduction of share capital. Reading Section 78(1) and (2) together with Sections 100, 101 and 102, it becomes clear that even when the share premium account is to be applied either for the purpose of writing off the loss (in case such a course is permissible) or otherwise, the procedure under Sections 100(2) and 105 has to be followed. Indeed, any misrepresentation before the Court for the purpose of obtaining imprimatur of the Court is made a penal offence (under Section 105) with imprisonment for a term, which may extend to one year, or with fine, or with both. Keeping this in mind, Section 100 be read which is as under:
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 of any paid-up share capital which is in excess of the wants of the company;
and may, if and so far as is 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."
15. The heading of Section 100 reads "Special resolution for reduction of share capital." Nonetheless, it is not only reduction of share capital as such, but any decision taken for extinguishing or reducing the liability in respect of (i) unpaid share capital;
(ii) paid-up share capital which is lost and unrepresented by assets or (iii) payment of paid up share capital in excess of requirement. As per Sub-section (2), when a company resorts to a special resolution under Section 100(1) of the Act, any of the purposes (i), (ii) or (iii) as mentioned in Sub-section (1) of Section 100, such resolution is referred to as "a resolution for reducing share capital". The intention of Legislature in enacting such provision is obvious. Take a situation referable to 100(1)(a), i.e., extinguishing liability in respect of unpaid share capital. When the company issues shares to its members, it may require the payment of face value of the shares or face value with premium as determined by the company. The company may require the member to pay face value or face value with premium at one time or on different calls depending on exigencies or requirements for the capital. Nonetheless, when once the authorized capital or part thereof is issued and subscribed, whether or not fully paid, the issued share capital forms part of subscribed capital and for all purposes it is the capital of the company. When the company decides to extinguish unpaid shares, assuming that such unpaid shares were initially issued for premium, in the event of the resolution of the company to cancel unpaid shares to the extent of those shares cancelled, the share premium account also gets reduced. Similar is the case in the event of cancellation of paid up share capital when proportionate premium amount gets reduced or in the event of payment by the company for the fully paid up share capital, again to that extent there is reduction in the share premium account.
16. It must be noticed that when Sections 78 and 100 of the Act speak of share capital whether unpaid, fully paid or excessively issued share capital, the provisions refer to share capital of the company and not the investment made by the company by subscribing to the share capital of another company. Obviously, therefore, if the subscribed shares capital in another company is lost or not properly represented by assets, the same cannot and should not fall under Section 78 read with Section 100 of the Act. When the company writes off its loss, or resorts to adjusting loss from the reserve fund, there is no reduction of share capital as contemplated under Sub-section (2) of Section 100 of the Act. The share premium account can only be utilised for any of the purposes mentioned under Section 78(2) of the Act or at the time of winding up of or for the purpose of issuing bonus shares or dividend, whereas the reserve of the company or the reserve fund, represented by assets, cannot be used for the purpose of issuing dividend or bonus shares. However, I must hasten to add that in the event of capitalization of reserve, it can always be used for issue of bonus shares. Be that as it is, unless and until there is diminution of the share capital and corresponding reduction of the share premium account, no company can be allowed to write off or adjust the loss against share premium account.
17. When can a company by a special resolution resort to any of the purposes under Sub-section (1) of Section 100? Section 100 or any of the provisions in the Companies Act does not confer any right on the company to reduce its share capital. Such a right has to be conferred by the Articles of Association. Sub-section (1) of Section 100 makes it very clear that a company if so authorized by its Articles, may by special resolution, reduce its share capital in any of the three ways and then approach the Company Court for confirmation of the resolution for reducing share capital under Section 102(1) of the Act. Whether the reduction of share capital- (a) by way of extinguishing or reducing the liability in respect of unpaid share capital; or (b) by way of either with or without extinguishing or reducing liability, in respect of paid-up share capital which is lost and unrepresented by assets; or c) by way of payment of any paid-up share capital which is in excess, either with or without extinguishing or reducing liability, such course should have to be specifically authorized by Articles of the company.
18. I have perused the Articles of Association of the company. They do not authorise or permit the petitioner company, which is a banking company to write off its losses or bad debts against share premium account. No provision of law is brought to the notice of this Court, which would authorise such course of action. The Companies (Transfer of Profits to Reserves) Rules, 1975, the Companies (Declaration of Dividends out of Reserves) Rules, 1975, do not permit a banking company to do so. Section 209 read with Schedule VI of the Act which deal with books of accounts to be kept with by the company do not permit the company to treat the share premium account as reserve fund. In Re Hyderabad Industries Limited (supra), this Court after referring to 'Treatise on Company Law' by Palmer (eighth edition), 'Principles of Company Law' by H.A.J.Ford (1974), 'Charlesworth and Cain's Company Law" (twelfth edition) and relevant provisions of the Act, laid down as under:
The share premium account can be applied (i) for paying of bonus shares issued to members as fully paid shares; or (ii) writing off preliminary expenses or expenses of or the commission paid or discount allowed on, any issue of shares or debentures of the Company; or (iii) providing for premium payable by the Company on reduction of redeemable preference shares or of debentures. According to Palmer, the object of the provisions relating to share premium account is to prevent dividends being paid out of premiums received on an issue of shares and it is quasi-capital of company (See Palmer's Company Law 24th edn. pp. 425 and 489). Therefore, when a share premium account is distributed among the shareholders, it is to be regarded as if the Company is reducing its share capital by paying off paid-up share capital. (See Page 176 of Charlesworth and Cain's Company Law (Twelfth edition)). Therefore, though share premium account is considered as one of the types of capital or quasi-capital of the Company, the share premium account cannot be equated as a reserve fund. Be it noted that reserve fund or reserve surplus is generally utilized for writing off the loss incurred by the Company. In that view of the matter, the decisions cited by the learned Counsel for the petitioner referred to supra have no relevance.
19. Learned Counsel for the petitioner placed strong reliance on Sections 17 and 29 of the BR Act in support of the contention that it is always permissible for the banking company to write off its losses or bad debts to treat the share premium account as reserve fund of the company and therefore it is permissible for such company to write off its losses as against reserve fund. This submission is wholly misconceived. Sections 17 and 29 of the BR Act read as under:
17. Reserve Fund:--(1) Every banking company incorporated in India shall create a reserve fund and shall, out of the balance of profit of each year, as disclosed in the profit and loss account prepared under Section 29 and before any dividend is declared, transfer to the reserve fund a sum equivalent to not less than twenty per cent of such profit.
(1A) Notwithstanding anything contained in Sub-section (1), the Central Government may, on the recommendation of the Reserve Bank and having regard to the adequacy of the paid-up, capital and reserves of a banking company in relation to its deposit liabilities, declare by order in writing that the provisions of Sub-section (1) shall not apply to the banking company for such period as may be specified in the order:
PROVIDED that no such order shall be made unless, at the time it is made, the amount in the reserve fund under Sub-section (1), together with the amount in the share premium, account is not less than the paid up capital of the banking company.
(2) Where a banking company appropriates any sum from the reserve fund or the share premium account, it shall, within twenty-one days from the date of such appropriation, report the fact to the Reserve Bank, explaining the circumstances relating to such appropriation:
PROVIDED that the Reserve Bank may, in any particular case, extend the said period of twenty-one days by such period as it thinks fit or condone any delay in the making of such report.
29. Accounts and balance-sheet :--(1) At the expiration of each calendar years or at the expiration of a period of twelve months ending with such date as the Central Government may, by notification in the Official Gazette, specify in this behalf, every banking company incorporated in India in respect of all business transacted by it, and every banking company incorporated outside India in respect of all business transacted through its branches in India shall prepare with reference to that year or period, as the case may be, a balance-sheet and profit and loss account as on the last working day of the year or the period, as the case may be, in the Forms set out in the Third Schedule or as near thereto as circumstances admit:
PROVIDED that with a view to facilitating the transition from one period of accounting to another period of accounting under this sub-section, the Central Government may by order published in the Official Gazette, make such provisions as it considers necessary or expedient for the preparation of, or for other matters relating to the balance-sheet or profit and loss account in respect of the concerned year or period, as the case may be.
(2) The balance-sheet and profit and loss account shall be signed--
(a) in the case of a banking company incorporated in India by the manager or the principal officer of the company and where there are more than three Directors of the company, by at least three of those Directors, or where there are not more than three Directors, by all the Directors, and
(b) in the case of a banking company incorporated outside India by the Manager or Agent of the principal office of the company in India.
(3) Notwithstanding that the balance-sheet of a banking company is under subsection (1) required to be prepared in a form other than the form set out in Part I of Schedule VI to the Companies Act, 1956 (1 of 1956), the requirements of that Act relating to the balance-sheet and profit and loss account of a company shall, insofar as they are not inconsistent with this Act, apply to the balance-sheet or profit and loss account, as the case may be, of a banking company.
(3A) Notwithstanding anything to the contrary contained in Sub-section (3) of Section 210 of the Companies Act, 1956 (1 of 1956), the period to which the profit and loss account relates shall, in the case of a banking company, be the period ending with the last working day of the year immediately preceding the year in which the annual general meeting is held.
Explanation.--In Sub-section (3A) "year" means the year or, as the case may be, the period referred to in Sub-section (1).
(4) The Central Government after giving not less than three months' notice of its intention so to do by a notification in the Official Gazette, may from time to time by a like notification amend the Forms set out in the Third Schedule.
20. Section 29 of the BR Act deals with accounts and balance-sheet of a banking company. Sub-section (3) of Section 29 lays down that notwithstanding that the balance-sheet of a banking company is required to be prepared in a form other than the form set out in Part-I of Schedule VI to the Companies Act, the requirements of the Companies Act relating to balance-sheet and profit and loss account of a company, insofar as the said balance-sheet in form Schedule VI is not in consistent with the provisions of the Act. It only means that the banking company incorporated under the Companies Act has to modify its balance-sheet and profit and loss account in such a manner so as to comply with the provisions of the BR Act. Section 17(1) of the BR Act requires a banking company incorporated to create a reserve fund and to transfer 20% of balance of profit each year as disclosed in profit and loss account to such reserve fund. Section 17 only authorise a banking company to transfer 20% of the profit to reserve fund and it does not authorise a banking company to transfer its share premium account to reserve fund. The reserve fund created under Section 17(1) of the BR Act, and the share premium account created as per Section 78(1) of the Companies Act are different. Though Section 78 introduces legal fiction and hypothetically deems the share premium as a paid up share capital of the company, the legal fiction created by Statute must not be enlarged so as to enable the banking company to transfer its share premium account to reserve fund as required under Section 17(1) of the BR Act. Indeed, it is not the case of the petitioner company that it has transferred the share premium account to reserve fund as required under Section 17(1) of the BR Act, and therefore reliance placed on Sections 17 and 29 of the BR Act is devoid of any merit and cannot be countenanced.
21. It is well settled that in interpreting a provision creating legal fiction, the Court has to ascertain the purpose for which such fiction is created. The Court should give full effect to such legal fiction. But, in so construing the fiction, the Court cannot extend the legal fiction beyond the purpose for which it is created (See State of Maharashtra v. Narayana Rao Sham Rao Deshmukh, , Union of India v. Sampath Raj Dugar, and M. Venugopal v. Divisional Manager, LIC of India, ). Therefore, the share premium account which is created by transferring the sum equal to aggregate amount on the premiums on the shares has . to be deemed as paid up share capital of the company only for the purpose of Section 100 of the Act, i.e., requiring the approval of the Minute by the Company Court, and cannot be extended any further, especially having regard to Sub-section (2) of Section 78 of the Act. In my considered opinion, the Legislature introduced the fiction treating the share premium account as paid up share capital of the company only for the purpose of Section 100 of the Act and no further. The share premium account has been treated always separate from the reserve fund under the Act as well as the accounting procedures stipulated under the Act.
22. Learned Counsel for the petitioner placed reliance on two un-reported orders and judgments of the High Court of Judicature at Madras in Company Petition No. 21 of 2003, dated 28.2.2003 and in Company Petition No. 202 of 2003, dated 19.6.2003 in support of the contention that it is permissible to set off losses against share premium account. These judgments cannot be precedents for such proposition for the copies produced before this Court only contain the approval of the Minute and the question did not crop up before the High Court of Madras. Similar is the situation regarding the un-reported order and judgment of the High Court of Delhi in Company Petition No. 165 of 2003, dated 6.8.2003 on which petitioner's Counsel placed reliance. Attention of this Court has also been invited to the un-reported judgment of this Court in Company Petition No. 6 of 2004, dated 26.3.2004 in M/s. Synergies-Dooray Automotive Limited. That was a case where the company resolved to reduce issued, subscribed and paid up capital and there was no element of using share premium account for writing off the loss. In that context, this Court observed:
As seen from the resolution of the Board of Directors, it was not specifically resolved to write off the share premium account amount to Rs. 2,18,40,000 and (Rupees Two Crore Eighteen Lakhs Forty Thousand only) which capital is lost and unpresented by assets, though in the resolution it is mentioned that the reduction of paid up capital to Rs. 1,717.60 lakhs containing 1,71,76,000 shareholders involves cancellation of paid up share capital which is lost. However, the resolution passed by the EGM also contains a clause to the effect that the share premium account which is lost and unrepresented by assets be written off to that extent the formalities required under the provisions have been complied with.
23. Therefore, it was a clear case where the company's decision to treat large quantity of paid up shares as un-issued shares would result in reduction of share capital as well as share premium account. The same has no application to the facts in this case.
24. The decision of the Supreme Court of New South Wales (Equity Division) In the matter of Coca-Cola Amatil Ltd., 1998 NSW LEXIS 1786, BC 9802902 (decision dated 23.6.1998) and the decision of High Court of the Hong Kong (Special Administrative Region) In Re Yoshiya International Corporation Ltd., 2002 HKCU LEXIS 1601 = [2002] 207 HKCU 1, (decision dated 15.10.2002), have also been relied on by the learned Counsel petitioner in support of the contention that share premium account is a capital of the company and therefore it is always permissible to adjust the loss suffered by the company in the future as against the share premium account. In these two judgments it was held that share premium account is in the nature of capital of company. In Re Yoshiya International Corporation Ltd. (supra), the Extraordinary General Meeting of Yoshiya International Corporation Limited passed a special resolution subject to capital reduction to reduce and cancel stipulated amount standing to the credit of the share premium account. It was not the case of writing off losses against share premium account. In the matter of Coca-Cola Amatil Ltd. (supra) the issue before the Court was confirmation of reduction of capital by way of distribution from the share premium account and it is not the case of reduction of share premium account for writing off losses or bad debts. The Supreme Court of New South Wales In the matter of Coca-cola Amatil Limited., (supra) referred to the decision in Drown v. Gaumont-British Picture Corporation Limited, (1937) Ch 402. It is apposite to quote the following passage from the said judgment, delivered by Clauson, J.
Subject always to anything in the articles of association to the contrary, there is nothing legally wrong, so far as I am aware, in a company dividing among its shareholders a premium obtained on the issue of shares. The premium from its very nature is not part of the capital paid up on the shares; it is the surplus of the sum received in respect of the share over the amount required to pay up the share to the extent to which it is treated by the company as paid up. The capital paid up on the share must not be divided in the dividend; but the premium is not capital paid up on the share but a sum received by the company in excess of the capital paid up on the share; and the principle that capital paid up on the share must not be divided is in no way infringed by distributing the premium in dividend.
25. As already held supra, share premium account in Indian Company Law is deemed to be paid up share capital only for the purpose of Sections 100 to 104 of the Act and the company cannot enlarge the scope of deeming provision by appropriating share premium amount for adjusting the loss suffered by it. As held by me In Re Hyderabad Industries Limited (supra), unless and until the action of the company to apply share premium account for any purpose, actually results in reduction of share capital, the company cannot be permitted to apply share premium account for any other purpose as per its ipse dixit. It is not the case of the petitioner company that by giving effect to the Minute as passed by the company would result in reduction of share capital and that the authorised share capital as well as paid up share capital remain the same and therefore the share premium account would be utilised for the said purpose.
26. In Indian Company Law, the affairs of the company by and large are governed by Memorandum of Association and Articles of Association insofar as they are not ultra vires the provisions of the Companies Act and other laws, As per Section 5A of the Banking Regulation Act, the provisions of the said Act shall override Memorandum or Articles of Banking Company. Generally, the administration and management of the company is entrusted by the General Body of the shareholders of the company to the duly constituted Board of Directors. The Board of Directors is empowered with powers to deal with all matters and only in respect of certain items like appointment of Directors, giving of guarantees to the others, issue of un-subscribed share capital and enhancing authorised capital, reduction of share capital, scheme of arrangement or compromise with other persons or company, amendment of Memorandum of Association or Articles of Association etc., are to be placed before the General Body. The decision taken by the General Body in respect of these subjects is considered as final and has to be respected. However, at least from 1913 onwards, company law enforced in this country has provided safeguard for the shareholders and other members of the company as well as public at large who deal with the company. In matters of scheme of arrangement, compromise, reduction of share capital etc., law provides that a company has to apply and get approval or sanction of the Company Court. While considering scheme of arrangement for amalgamation or compromise or any other arrangement or considering a Minute for reduction of share capital, does a law envisage an automatic routine sanction by the Court? The answer must be definitely in the negative.
27. In Hindustan Lever Employees' Union v. Hindustan Lever Limited, 1995 Supp (1) SCC 499, a three-Judge Bench of the Supreme Court (majority judgment by Justice Suhas C. Sen) considered the scope of jurisdiction of the Court while considering scheme of amalgamation. The following ratio decidendi emerges (See Paras 73 to 77 of SCC).
This is against public policy. In my judgment, what has been expressly authorised by the statute cannot be struck down as being against the public policy. A foreign company under the new economic policy of the Government has been allowed to acquire controlling share of an Indian company......
Nor do we think that "public interest" which is to be taken into account as an element against approval of amalgamation would include a mere future possibility of merger resulting in a situation where the interests of the consumer might be adversely affected. If, however, in future the working of the Company turns out to be against the interest of the consumers or the employees, suitable corrective steps may be taken by appropriate authorities in accordance with law.
28. In Miheer H. Mafatlal v. Mafatlal Industries Ltd., , the Supreme Court considered the scope of jurisdiction of the Company Court, while sanctioning the scheme of amalgamation as per the provisions of Sections 391 and 393 of the Act. The law laid down by the Supreme Court therein is applicable even to jurisdiction of this Court while sanctioning/ approving the Minute of the company for reduction of share capital. It is apposite to quote the following:
...On a conjoint reading of the relevant provisions of Sections 391 and 393 it becomes at once clear that the Company Court which is called upon to sanction such a scheme has not merely to go by the ipse dixit of the majority of the shareholders or creditors or their respective classes who might have voted in favour of the scheme by requisite majority but the Court has to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and it does not violate any public policy. This is implicit in the very concept of compromise or arrangement which is required to receive the imprimatur of a Court of law. No Court of law would ever countenance any scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is an unconscionable or an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. .....It can be postulated that even in case of such a scheme of compromise and arrangement put up for sanction of a Company Court it will have to be seen whether the proposed scheme is lawful and just and fair to the whole class of creditors or members including the dissenting minority to whom it is offered for approval and which has been approved by such class of persons with requisite majority vote.
29. It would be a myth to assume that the shareholders resolution must be given effect to by the Company Court whatever be consequences that might follow on implementation of such Minute. The power of this Court to approve Minute of reduction of share capital includes the power to reject approval if such resolution is found to be unconscionable, illegal or unjust to the class of the shareholders or the creditors who may be voiceless minority shareholders or indifferently apathetic low visibility shareholders or ill-informed consumers. It must not be forgotten that a company is incorporated not just for making profits for distribution among its shareholders. A company incorporated is a juristic person with perpetual succession and it should also mould and take its decisions and actions keeping in view the future of its shareholders, who are at the relevant time find place in the register of members, and the persons who might subsequently purchase shares from the company or from shareholders of the company. This becomes more relevant in the case of a listed company. A person, it must be presumed; prefers to buy stock of a particular company having regard to its fundamentals (assets, liabilities, performance and potential). While doing so, a person necessarily looks to reserve fund, share premium accumulation and all other liquid assets of the company apart from capital assets of the company. If a company is allowed to eat into its share premium account, which is deemed to be paid up share capital for a limited purpose, in the considered opinion of this Court, the same would weaken the fundamentals of the company and would be unfair to those persons, who deal with company either as customers or depositors or creditors. This is more relevant in the case of a banking company which is entirely governed by the Banking Regulation Act and the Reserve Bank of India Act and various Regulations promulgated under various physical statutes.
30. In the result, for the above reasons, this Company Petition is misconceived and the Minute of the /Meeting of the shareholders dated 24.12.2003 cannot be approved, as it would be illegal and unfair and not authorised by law. Company Petition is accordingly dismissed.