National Company Law Appellate Tribunal
Precious Energy Services Limited vs Regional Director North-Western ... on 28 July, 2022
National Company Law Appellate Tribunal
Principal Bench, New Delhi
COMPANY APPEAL (AT) No. 17 of 2021
(Arising out of Order dated 11th December, 2020 passed by National Company Law
Tribunal, Ahmedabad Bench, Ahmedabad in C.P. No.- 4/66/NCLT/AHM/2020).
IN THE MATTER OF:
Precious Energy Services Ltd.
(CIN No: U40102GJ2008PLC107119)
A Public Company incorporated under the
Companies Act, 1956.
Having its Registered Office at 906-907,
Indraprastha Corporate, Opposite Venus Atlantis,
100 ft. Road, Prahladnagar,
Ahmedabad - 380015. ...Appellant
Versus
The Regional Director
North-Western Region,
Ministry of Corporate Affairs,
ROC Bhavan, Opp. Rupal Park Society,
Behind Ankur Bus Stop,
Naranpura, Ahmedabad, Gujarat - 380012. ...Respondent
For Appellant: Mr. Arun Kathpalia, Sr. Advocate along with
Mr. Hemant Sethi, Mr. Gaurav H Sethi,
Ms. Diksha Gupta, Mr. Jay Mehta and
Mr. Aditya Dhupper, Advocates.
For Respondent: Mr. Ankit Shah, Advocate.
JUDGEMENT
[Per; Shreesha Merla, Member (T)]
1. Aggrieved by the Order dated 11.12.2020 passed by the NCLT, (National Company Law Tribunal, Ahmedabad Bench, Ahmedabad) in C.P. No.- 4/66/NCLT/AHM/2020, 'M/s. Precious Energy Services Limited' preferred this Appeal under Section 421 of the Companies Act, 2013 (hereinafter referred to as 'The Act'). By the Impugned Order, the NCLT while -2- rejected the confirmation of scheme for reduction of share capital proposed by the Appellant Company on the following grounds:
"19. From the Balance Sheets submitted by the Company, it is noted that as on 24.08.2020 as per books, the Company is having negative net worth/ Shareholders Funds of Rs. 1609.66 lakhs (Share Capital of Rs. 698.50 lakhs + Other Equity of Rs.(-) 2308.16 lakhs) and Borrowings and Inter Corporate Loans are to the tune of Rs. 11354.43 lakhs. Other Equity consists of Share Premium Account and Accumulated Losses. The Book value per share as on 24.08.2020 is Rs. (-) 23.04. Further, for the Previous Financial year 2019-20, the Company's Total Income is Rs. 1962.45 lakhs and Interest Payments (Finance Cost) is Rs. 1019.37 lakhs.
20. Based on the accounting treatment, on capital reduction, the negative net worth/ Shareholders Funds of the Company as per Books may go to Rs.
7014.59 lakhs (Share Capital of Rs. 1 lakh + Other Equity of Rs. (-) 7015.59 lakhs), the Book value per share to Rs. (-) 70110.81 and the Companies Borrowings and Inter Corporate Loans to the tune of Rs. 11354.43 lakhs.
21. Section 66(1) of the Companies Act, 2013 with respect to capital reduction is reproduced below:
"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 Company Appeal (AT) No. 17 of 2021 -3- 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, or the interest payable thereon"
In the instant petition the Company proposed to return the capital to its shareholders at the rate of Rs. 77.49 per share totaling into Rs. 5404.93 lakhs whereas from the Balance Sheet submitted by the Company, it is noted that as per Books, the Company's net worth and Book value per share is negative. The Company is also having high borrowings.
22. In view of negative net worth as per Books, and negative Book value per share, this Adjudicating Authority is of the considered view that the proposed capital reduction by way of return of capital to its shareholders is not in the overall interest of the Company and its stake-holders. Hence the Company petition CP No. 04 of 2020 is not allowed."
2. Facts in brief are that 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 totalling to Rs.54,04,92,750/-. It is averred in the Petition that there are 2 Secured Creditors and 13 Unsecured Creditors and 7 Equity Shareholders. 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.
Company Appeal (AT) No. 17 of 2021 -4- Pursuant to the receipt of Notices in Form RSC - 2, the Regional Director made a representation dated 29.05.2020 observing as follows:
"i. Compliance of Section 61 of the Companies Act, 2013;
ii. There are foreign shareholders in the Petitioner Company;
iii. The foreign shareholder of the Company has purchased shares of this company at Rs. 57.27 per share and reduction of capital is proposed on Rs. 77.49 per equity share in favour of shareholder, which clearly reflect that the foreign shareholder will have benefit of Rs. 20.22 per share.
iv. The Company does not have sufficient liquidity for making of payment towards reduction of share capital.
v. 3 Letters are received by office of Regional Director from certain persons claiming to be creditor of the Company.
vi. The notice of reduction of capital should have been sent to the Income Tax Authority;"
The NCLT has also recorded the response of the Appellant Company with respect to these observations.
3. Submissions of the Learned Sr. Counsel Mr. Arun Kathpalia appearing on behalf of the Appellant:
• It is submitted that the 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 earning per share.
The said approval was issued by the Shareholders in their Commercial Wisdom, keeping in view the financial health of the Appellant Company Appeal (AT) No. 17 of 2021 -5- Company and the expected Cash Flows from the sale of electricity to GUVNL under its long term Power Purchase Agreement ('PPA').
• It is submitted that the NCLT has failed to look into the complete records of the Financial and Valuation Report of the Appellant Company and arbitrarily passed the Impugned Order; 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; that the majority decision prevails and therefore the decision of the NCLT is contrary to Section 66 of the Companies Act, 2013 as well as to the settled principles of law. The Learned Counsel placed reliance on the following judgements in support of his case:
o 'British and American Trustee and Finance Corporation, Limited', 1984 A.C. 399 o 'Westburn Sugar Refineries - House of Lords', 05.04.1951 A.C 625 o 'Panruti Industrial Co., (Pvt.) Ltd.', 1959 SCC OnLine Mad 138 o 'Reckitt Benckiser (India) Ltd.', 2005 SCC OnLine Del 674 o 'Elpro International' 2007 SCC OnLine Bom 1278 o 'Economy Hotels India Services Private Limited' Vs. 'Registrar of Companies & Anr.' Company Appeal (AT) No. 97 of 2020 • It is submitted that the Appellant Company had satisfied all the requirements prescribed under Section 66 of the Act and the Rules framed thereunder and that despite the approval being given by all the Shareholders, NCLT had erroneously rejected the same though it was Company Appeal (AT) No. 17 of 2021 -6- not in violation of any provision of law or contrary to any Public Policy. As per the provisions of Section 66 of the Act, the list of creditors which is made as on date not earlier than 15 days prior to the date of filing of an Application before the Tribunal for reduction of Share Capital, is required to be accompanied with such Application showing the details of the Creditors of the Company, class-wise indicating their names, addresses and amounts owed to them. In support of his contention, the Learned Counsel also placed reliance on the following Judgements:
o 'Hyderabad Industries Limited' High Court of Andhra Pradesh - OSA 35/2004 o 'RHI India Pvt. Ltd. & Ors.' Vs. 'Union of India' Company Appeal (AT) No. 128 of 2020 o 'Lily Realty Private Limited', CP No. - 5415/MB-I/2019 o 'Times Global Broadcasting Company Ltd.', Company Scheme Petition No. 445 of 2016 • It is strenuously argued that the Appellant Company had sufficient funds and regular sources of Cash Flow arising out of the Power Purchase Agreement entered into with GUVNL. It is contended that the net worth of the Appellant Company appeared to be negative in its books of account only due to depreciation being charged on the assets of the capital-intensive industry i.e., the Solar Power Plant. The Appellant Company has investments of Rs.810.62 Lakhs/- and Rs.1181.29 Lakhs/- with Banks and liquid mutual funds, respectively. The Appellant Company also has cash and balances of Company Appeal (AT) No. 17 of 2021 -7- Rs.56.45 Lakhs/- and Rs.3569.90 Lakhs respectively. The Appellant Company operates a 15MV Power Generating Station at Gujarat and supplies electricity to GUVNL on a long term basis. In solar power plants, the practice in the industry is to have a single asset owning Company and therefore there is no requirement of any growth capital. Hence, the annual Cash Flows available remain unutilized. Accordingly, substituting equity by debt helps to take cash to the Shareholder as and when additional cash is available, which ultimately helps to reduce the cost of capital for the Appellant Company and its Shareholders. The statement for projected Cash Flows depicts sufficient liquidity which the Tribunal should have taken into consideration.
4. Submissions of the Learned Counsel Mr. Ankit Shah appearing on behalf of the Respondent:
• The Regional Director, North Western Region, Ministry of Corporate Affairs filed their Affidavit of Reply stating as follows:
"In this regard, it is stated that the company has investment of Rs.810.62 Lakhs and RS.1181.29 lakhs with bank and liquid mutual funds respectively. Further it has cash and other bank balance of Rs.56.45 lakhs and Rs.3569.90 lakhs respectively. Hence, appellant company has aggregating to Rs.5618.26 lakhs.
However, it is observed from the same unaudited financial statement as of 24th August, 2020, the total current liabilities of the company is Rs.3992.64 Lakhs which is to be paid within the same financial year. Considering current liabilities which are required to be paid within the same financial year and the aggregate funds available with company, it is: observed that the company does not have required Company Appeal (AT) No. 17 of 2021 -8- funds Rs.5404.93 lakhs which is proposed for payment to the shareholders on reduction of capital. Further, it appears that the company has borrowed money of Rs.2029 lakhs approx. (reflected as current liabilities intercorporate loans) for making payment towards reduction of share capital. Even after taking inter-corporate loans, it observed that company does not have sufficient liquidity / excess money to pay to the shareholders in compliance to sec. 66 of the Companies Act, 2013."
• It is the case of the Appellant that as per Balance Sheet dated 24.08.2020, the Petitioner Company had sufficient and adequate funds to return back to the sole shareholders. It is also their case that the Regional Director never objected to the provisional Balance Sheet prepared as on August 24, 2020 and has also not objected to the clarificatory Affidavit filed by the Appellant Company before the NCLT. Assessment:
5. Section 66(1) of the Companies Act, 2013 reads as hereunder:
"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;
(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.
Company Appeal (AT) No. 17 of 2021 -9- 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, or the interest payable thereon."
6. It is the case of the Appellant that the Appellant Company is a 'going concern' having sufficient arrangement of Cash Flows to undertake the reduction of Share Capital and that the Company's negative net worth is not linked to its liquidity position and should not have any adverse impact on the Company's ability to honour its obligation towards the shareholders in case of Reduction of Share Capital. It is the further case of the Appellant Company that the net worth is appearing to be negative in its Books of Accounts due to depreciation being charged on the assets of the capital- intensive industry i.e., the Solar Power Plant. It is their case that the Appellant Company has Revenue from operations amounting to Rs.3233 Lakhs from April 2020 to March 2021 and Rs.1211 Lakhs from April 2021 to August 2021. The House of Lords of England in 'British and American Trustee and Finance Corporate' Vs. 'Couper', (1894) AC 399, observed as hereunder:
"It will be observed that neither of these statutes prescribes the manner in which the reduction of capital is to be effected. Nor is there any limitation of the power of the Court to confirm the reduction..."
"I do not see any danger in conclusion that the Court has power to confirm such a scheme as that now in question, or any reason to doubt that this was the intention of the Legislature. The interest of the creditors are not involved, and I think it was the policy of the Legislature to entrust the prescribed majority of the shareholders with the decision whether there should be reduction of capital, and if so, how it should be carried into effect ...."
Company Appeal (AT) No. 17 of 2021 -10- "...If the parties to the transaction come to the conclusion that the bargain is a fair one; why should the Court say that there is a preference on the one side or on the other. If there is nothing unfair or inequitable in the transaction, I cannot see that there is any objection to allowing a company limited by shares to extinguish some of its shares without dealing in the same manner with all other shares of the same class. There may be no real inequality in the treatment of a class of shareholders although they are not all paid in the same coin or in coin of the same denomination..."
7. The Madras High Court in 'Re. Panruti Industrial Company (Private) Ltd.', AIR 1960 Mad. 537, held as follows:
"...the question of reduction of capital has been treated as a matter of domestic concern, one for the decision of the majority of the shareholders of the company."
8. The principles distilled from the aforesaid precedents were summarized in 'Reckitt Benckiser (India) Ltd. (CP 206 of 2004) (Delhi High Court)' that has further been upheld by several courts:
"(i) The question of reduction of share capital is treated as matter of domestic concern, i.e. it is the decision of the majority which prevails. (ii)If majority by special reduction decides to reduce share capital of the Company, it has also the right to decide as to how this reduction should be carried into effect...."
9. In a recent Order of this Tribunal in 'Economy Hotels India Services Limited' Vs. Registrar of Companies', it is observed that:
"Be it noted, 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..."
10. The Hon'ble Andhra Pradesh High Court while allowing a Scheme of Reduction in the matter of 'IL&FS Engineer and Construction Company Company Appeal (AT) No. 17 of 2021 -11- Limited' Vs. 'Wardha Power Company Limited', (2013) 176 Comp. Cas 156, held as follows:
"Either in the case of a reduction of capital or a scheme of arrangement or both, the Court cannot interfere with the discretion and commercial wisdom of the stakeholders and the Board of Directors. (Re Ratners Group Plc; In Re Hindalco Industries Ltd). If the reduction is one which is properly passed by the shareholders who are treated equitably, have had the facts explained, and provided the creditors are safeguarded, the court will habitually sanction reductions and exercise its discretion in favour of them unless the act is a pointless and hollow act. Provided those requirements are satisfied, the company may reduce its capital in any way that it thinks fit. (Re Rafter Group plc; Re Ratners Group plc; In Re Hindalco Industries Ltd2). The court does not exercise any appellate power over the decision of the Company or its management. The Court is required to satisfy itself and see that the procedure, by which the resolution is carried through, is legally correct and the shareholders and creditors are not prejudiced. It is also the duty of the Court to see that the scheme is fair and equitable between the different classes of shareholders, (In Re Hindalco Industries Ltd; Hyderabad Industries Ltd., In re), the arrangement is such as a man of business would reasonably approve, (Hindustan Lever Employees' Union v. Hindustan Lever Ltd.; Custina Re Haare and Butfe Press LIC ), and the proposed reduction is within the powers of the company, and for the purposes allowed by the statute. The courts have a 'discretion' to confirm or not to confirm, which it is their duty to apply in 'every proper case,' and this discretion is to be exercised by reference to - whether the scheme would be 'fair and equitable,' 'just and equitable,' 'fair and reasonable' or 'not unjust or inequitable'. (Gower's Principles of Modern Company Law (Fourth Edition) Chapter 1 O; Scottish Insurance Corpn. v. Wilson & Clyde Coal Co.). Petitions, for approval of such schemes, are usually matters where the court can sanction the scheme without more than a careful check that all the correct steps have been taken. Although the court must be satisfied that "the proposal is such that an intelligent and honest man, a member of the class ... might reasonably approve" - yet the underlying commercial purposes need not be Company Appeal (AT) No. 17 of 2021 -12- investigated. The court will not be concerned with their commercial reasons for approval. (Re MB Group plc ; In re Dorman, Long and Company Limited v. In re South Durham Steel and Iron Company).
11. It is seen from the record that the 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. In 'Reckitt Benckiser (India) Ltd. (Supra), the Hon'ble Delhi High Court has upheld the view that "the question of reduction of Share Capital will be treated as a matter of domestic concern i.e., it is the decision of the majority which prevails. If majority by Special Reduction decides to reduce the Share Capital of the Company, which also has the right to decide as to how this reduction should be carried into effect...". In the instant case, admittedly, the reduction of this Share Capital was approved unanimously by the Shareholders by way of a Special Resolution.
12. This Tribunal in 'RHI India Pvt. Ltd.', 2021 SCC Online NCLAT 12, has held that it is not for the Courts to reject Schemes on grounds not required to be delved into for the determination of the Scheme:
"It is stated by the learned counsels for the Appellant that all the relevant documents/information were duly placed before all the stakeholders of 3rd Appellant. The NCLT has ignored the fact that basis the entire information placed before the general public and other stakeholders of 3rd Appellant, the scheme has been accorded an approval by an overwhelming majority of 99.95% of the relevant stakeholders (which includes 96.05% of the Public Shareholders). Thus the finding by the NCLT that the scheme being in the interest of certain shareholders and is against public policy is contrary to law.
Company Appeal (AT) No. 17 of 2021 -13- ........ 4 .....15.The learned counsel for the Appellants contended that a bare perusal of the impugned order, would make it evident that it is a case of judicial overreach, as the NCLT, while examining the said scheme for the purposes of according its approval has delved into issues, which it need not have. The scope of judicial intervention, while approving a scheme is very limited and has been well defined by this Appellate Tribunal as well as the Hon'ble Supreme Court of India in a catena of judgments. The Learned Counsel for the Appellants have put their reliance in the matter of UFO Moviez India Ltd. & Anr. V. UOI, Company Appeal (AT) No. 48 of 2019, wherein, a scheme of merger was rejected by the NCLT inter alia on the basis that the scheme is effecting the share price and is devaluing the investment of the public 110 8 Company Appeal (AT)No.128/2020 shareholders, therefore, the same is against public policy. The order of rejection passed by the NCLT therein was overruled and the Appeal was allowed by this Appellate Tribunal vide Judgment dated 24.10.2019 inter-alia holding the rejection of the scheme of merger by NCLT has been on the grounds, which were not required to be delved into for the determination of a merger in terms of scheme of Section 230-232 of the Companies Act......
....32.The NCLT while passing the impugned order have overreached its scope of Judicial Intervention in determination of the Scheme of Amalgamation u/s 230-232. NCLT have failed to point out any material illegality under the scheme and also accepted the clarifications submitted by the Appellant against the objections raised by the Regional Director, Western region. Since no minority shareholders have raised any objections against the scheme thus, the commercial wisdom of the shareholders shall not be overlooked by the NCLT. We are of the view that the scheme cannot be said to be violative of public policy just on the ground that NCLT considered that the scheme appears to benefit only a few shareholders of Transferor Company without giving any reasonable findings for the same...."
13. The High Court of Andhra Pradesh in 'Hyderabad Industries Ltd.', (2005) 123 Comp. Cas 458, has observed as hereunder:
Company Appeal (AT) No. 17 of 2021 -14- "...6. 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...".
14. It is seen from the record that the Company has complied with all the statutory requirements as per the directions of the Tribunal and has also filed necessary Affidavits to that effect. It is also pertinent to mention that none of the Creditors objected to the reduction of the Capital. Section 66(1)(b) of the Act enables a Company to reduce its Share Capital 'in any manner' provided it is approved by the majority of Shareholders through a Special Resolution relevant extracts of Section 66(1) is reproduced hereunder for ready reference:
"66(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 Company Appeal (AT) No. 17 of 2021 -15- memorandum by reducing the amount of its share capital and of its shares accordingly;"
15. We are also conscious of the fact that the Appellant Company had filed a 'Clarificatory Affidavit' before the NCLT deposing that the Appellant Company had investment of Rs.810.62 Lakhs and Rs.1181.9 Lakhs with Banks and Liquid Mutual Funds respectively. Further, the Appellant Company also had cash and bank balances of Rs.56.45 Lakhs and Rs.3569.90 Lakhs respectively and that the Appellant had ready access of funds aggregating to Rs.5618.26/- which is an excess of the amount of Rs.5404.93 lakhs proposed to be paid to the Shareholders on reduction of capital. We are also conscious of the fact that the Appellant Company operates a 15MW power generating station and supplies electricity to GUVNL under a long-term PPA and is a 'going concern'. Having regard to the fact that the Appellant had deposed in a Clarificatory Affidavit regarding its financial position which is not in the negative and also that the reduction of the Share Capital was approved by the Shareholders of the Appellant Company unanimously by way of a Special Resolution and that the Creditors of the Company have also not objected to the same and further that this reduction does not cause any prejudice to any class of Creditors, we are of the considered view that the ratio laid down by the Hon'ble Madras High Court in 'Panruti Industrial Company (Private) Ltd.' (Supra), and the Hon'ble Andhra Pradesh High Court in 'IL&FS Engineer and Construction Company Limited' (Supra), Hon'ble Bombay High Court in 'Times Global Broadcasting Company Limited', Company Scheme Petition No. 445/2016 dated 22.07.2016, is applicable to the facts of the Company Appeal (AT) No. 17 of 2021 -16- attendant case and hence, this Tribunal is of the considered view that the reduction of the Share Capital, as approved by the majority of Shareholders by way of a Special Resolution, be confirmed and the proposed Minutes be approved.
16. For all the aforenoted reasons, this Appeal is allowed and the Order of the NCLT is set aside. NCLT shall proceed in accordance with law. No order as to costs.
[Justice Anant Bijay Singh] Member (Judicial) [Ms. Shreesha Merla] Member (Technical) NEW DELHI 28th July, 2022 Himanshu Company Appeal (AT) No. 17 of 2021