This Article has been authored by Suman Kumar Jha (Founder & Managing Partner), Afnaan Siddiqui (Co-Founder & Partner), Visakha Raghuram (Associate) and Akshita Varshney
Sections 66 & 68 of the Companies Act, 2013 are independent and separate mechanisms of capital restructuring. Conditions prescribed u/s 68 for buy-back of shares shall not be applicable in case of Reduction of Capital u/s 66.
1. Facts:
The Petitioner Company filed the petition under Section 66 of the Companies Act, 2013 seeking confirmation of the Honโble National Company Law Tribunal for reduction of its share capital. The said petition was preferred as the Petitioner Company had accumulated losses to the tune of โน416,57,80,966 (Rupees Four Hundred and Sixteen Crores Fifty-Seven Lakhs Eighty Thousand Nine Hundred and Sixty-Six). The Petitioner Company contended that due to the accumulated losses, the financial position of the Company is not being appropriately depicted. This reduction of share capital was being undertaken to accurately depict the position of the share capital of the company and to partially compensate the commercial and economic loss suffered on account of the erosion of investment by the shareholder. To address this, the Company decided to reduce its equity share capital by proposing the cancellation and extinguishment of โน592,57,80,970 (Rupees Five Hundred and Ninety-Two Crores Fifty-Seven Lakh Eighty Thousand Nine Hundred Seventy), thereby adjusting the equity share capital to โน857,05,07,750 (Rupees Eight Hundred and Fifty-Seven Crores Five Lakh Seven Thousand Seventy Hundred Fifty). In lieu thereof, a consideration shall be payable by the Petitioner company of Rs. 1,76,00,00,000 (Rupees One Hundred and Seventy-Six Crores Only) and balance amount of Rs. 4,16,57,80,970 (Rupees Four Hundred Sixteen Crores Fifty-Seven Lakhs Eighty Thousand Nine Hundred and Seventy Only) was to be adjusted against negative retained earnings.
The petition was filed under Section 66 of the Companies Act, 2013 following the unanimous approval obtained from equity shareholders of the Petitioner Company. It is pertinent to note that the Petitioner Company completed the buy-back of its equity shares amounting to โน42,75,36,760 (Rupees Forty-Two Crores Seventy-Five Lakh Thirty-Six Thousand Seven Hundred Sixty) under Section 68 of the Companies Act, 2013, prior to filing the present petition.
2.Regional Director Observations and the Petitioner Companyโs Response thereon:
The Regional Director (RD) submitted a report on the present petition noting that the Petitioner Company intends to reduce its share capital from Rs. 1449,62,88,720 (Fourteen Hundred and Forty-Nine Crores Sixty-Two Lakh Eighty-Eight Thousand Seven Hundred Twenty) to Rs. 857,05,07,750 (Rupees Eight Hundred and Fifty-Seven Crores Five Lakh Seven Thousand Seventy Hundred Fifty), fully paid up, by cancelling Rs. 5,92,57,80,970 (Rupees Five Hundred and Ninety-Two Crores Fifty-Seven Lakh Eighty Thousand Nine Hundred Seventy) in accordance with its proposed scheme. However, the RD contended that this capital restructuring is in the nature of a buyback and falls under Section 68 of the Companies Act, 2013 as it proposes to pay off to the shareholders. As such, the Petitioner Company should proceed in accordance with the provisions outlined in Section 68 for the buyback of shares. In response, the Petitioner Company submitted an Affidavit-in-Rejoinder dated October 5, 2023, asserting that the Regional Director has misconstrued the applicability of Section 68 of the Companies Act, 2013, contending that this situation does not constitute a buyback of shares and instead pertains to Section 66 of the Act.
The Honโble Tribunal on April 2, 2024, directed the Regional Director to examine the following issue:
Whether the present capital reduction under Section 66 is in violation of Section 68 and is permissible under the law or not?
The Regional Director filed a supplementary report on June 12, 2024, which stated that it is the intention of the legislation that should the Company fail to meet the criteria for a buyback as stipulated under Section 68, it ought not to pursue Section 66 for capital reduction via the buyback of its own shares. In turn, the Petitioner Company responded by placing reliance on SEBI v. Sterlite Industries (2003 45 SCL 475) which was followed in Capgemini India Private Limited (2015 SCC Online Bom 1754) whereby it was affirmed that the provisions of buy-back of shares and reduction operate independency. The RD further contended that it must be ensured that the interest of creditors are not compromised in a case of reduction of share capital. In response, the Petitioner Company contended that in SEBI v. Sterlite Industries, it is the intention of the legislature that buy-back under Section 68 is an alternative route when criteria under Section 66 is not met. Further, the choice to opt for capital reduction under either Section 68 or Section 66 of the Act is a matter of discretion and commercial judgment for the shareholders. The Petitioner Company also referenced the order issued by this Tribunal in the case of โWalton Street India Finance Private Limited v. RoC Mumbai (CP 60/2022)โ, which addressed similar objections raised by the Regional Director; in that instance, the Honโble Tribunal approved the proposed capital reduction.
3. Judgment:
The Honโble Tribunal acknowledged that the Company had accumulated losses of Rs. 373.82 crore and no free reserves or Security Premium was available which is a pre-requisite for carrying out buy-back under Section 68. The proposed capital reduction aims to wipe out the accumulated losses. Furthermore, the company is planning to offer Rs. 2.97 per fully paid share, which will not come from free reserves or security premium as stipulated under Section 68. Therefore, this capital reduction cannot be categorized as a buyback under Section 68 of the Act. Additionally, the proviso of Section 68(2) states that no buyback shall occur within one year of a preceding buyback offer. However, the present petition being a case of reduction of share capital is not a violation of the cooling off period stipulated in Section 68.
In pursuance of the above, the Honโble Tribunal, being satisfied with the contentions raised by Petitioners, took a different view than what was suggested by the Regional Director and approved the petition filed by the Petitioner Company while emphasizing that a Company must adhere to all statutory requirements under Section 66 when reducing its share capital. This includes safeguarding the interests of creditors, complying with procedural mandates, and fulfilling all other statutory obligations to ensure the reduction is lawful and equitable.