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1959 Supreme(Mad) 156
MADRAS HIGH COURT
RAMASWAMI
In re Panruti Industrial Co.(Private) Ltd.
Versus
.
O. P. No. 158 of 1959
Decided On : 1 September, 1959
A. Devanathan, for Petitioner.
The court has the jurisdiction to confirm a reduction of share capital, but it must exercise its discretion carefully to ensure that the reduction is fair and equitable and does not prejudice the rights of creditors or minority shareholders.
Headnote:
COMPANY LAW - REDUCTION OF SHARE CAPITAL - JURISDICTION OF COURT - PRINCIPLES GOVERNING EXERCISE OF DISCRETION - PROTECTION OF INTERESTS OF CREDITORS AND MINORITY SHAREHOLDERS - CONFIRMATION OF REDUCTION - ADDITION OF WORDS "AND REDUCED" TO COMPANY'S NAME.
Fact of the Case:
The petitioner company, Panruti Industrial Co. (Private) Ltd., filed a petition under Section 100 of the Indian Companies Act, 1956, seeking a declaration that its creditors were not entitled to object to a proposed reduction in the company's share capital. The company had sustained a net unabsorbed loss and sought to reduce its share capital by Rs. 300 per share, appropriating the realized amount to wipe off the loss and build up reserves.
Finding of the Court:
The court held that it had the jurisdiction to confirm the reduction of share capital and that the principles governing the exercise of its discretion included protecting the interests of creditors and minority shareholders. The court found that the proposed reduction was fair and equitable and did not prejudice the rights of any creditor or shareholder.
Issues: 1. Whether the court had the jurisdiction to confirm the reduction of share capital? 2. Whether the proposed reduction was fair and equitable and did not prejudice the rights of any creditor or shareholder?
Ratio Decidendi: The court relied on various case laws and legal principles to arrive at its decision. It noted that the reduction of share capital was a matter of domestic concern for the company and that the court's role was to ensure that the reduction was fair and equitable and did not harm the interests of creditors or minority shareholders. The court also considered the fact that the company had obtained the approval of its shareholders through a special resolution.
Final Decision: The court allowed the petition and confirmed the reduction of the company's share capital. It directed that the words "and reduced" be added to the company's name for a period of six months from the date of the order.
JUDGMENT : This is a petition filed under S. 100 of the Indian Companies Act, 1956, on which our case law is thoroughly sparse.
2. The petitioner is Panruti Industrial Co. (Private) Ltd. It deals in oil and oilseeds etc. The nominal capital of the company is Rs. 3,00,000, divided into 600 shares of Rs. 500 each, of which 323 shares have been issued and are fully paid up. The company has sustained as on 31st March 1958 a net unabsorbed loss of Rs. 81,640. Consequently, the Board of Directors at the meeting held on 6th October 1958 resolved to reduce the share capital paid up by Rs. 300 per share and to appropriate a sum of Rs. 96,900 realised thereby to wipe off the loss in the profit and loss account, the preliminary expenses account and build up a reserve for bad and doubtful debts, and to lay by a reserve fund.
Therefore, under the provisions of S. 100 of the Indian Companies Act, 1956, and in pursuance of the powers in that behalf contained in the Articles of Association, the company by a special resolution of its shareholders duly passed at a meeting convened for that purpose on 15th November 1958 (sic) that the share capital be reduced as set out above. The reduction of the capital, according to the petitioner, will not involve either a dimunition of liability in respect of unpaid share capital or the payment to any shareholder of any paid up share capital and in consequence creditors of the company are not entitled to object to the reduction under the provisions of S. 101(2) of the Act. The petitioner therefore prays that it may be declared that the creditors are not entitled to object to the above reduction of the capital and the reduction of the capital effected by the special resolution be confirmed and that the period for which the words "and reduced" shall be added to the companys name be limited to one month from the date of the order of this court.
3. Notice has been taken out under orders of court to two creditors of the company and the Registrar of Companies, Madras and no objection is forthcoming.
4. The provisions under the Indian Companies Act, 1956 relating to reduction of the share capital are found in Ss. 100 to 105. Ss. 100 to 105 are based on Ss. 55 to 66 of the old Act and Ss. 66 to 71 of the English Act of 1948. The present Ss. 100 to 105 are rearranged on the lines of the English Act. Sec. 100 corresponds to old S. 55, and English Act, 1948, Sec. 66.
5. The word capital" involved in "reduction of capital" includes nominal share capital, whether issued or unissued and if issued, whether fully paid or not, and share" includes "stock", so that a company may reduce its stock: See Re Allsopp and Sons Ltd., (1903) 51 WR 644. Every reduction of capital must reduce the nominal capital, and a reduction of unissued capital may be combined with a reduction of issued capital, while issued capital may be reduced, whether fully paid or not : Re Anglo French Exploration Co. 1902-2 Ch. 845 at 852.
6. The need for reducing capital may arise in various ways, for example, trading losses, heavy capital expenses (e.g., preliminary expenses), and assets of reduced or doubtful value. As a result, the original capital may either have become lost, or a company may find that it has more resources than it can profitably employ. In either case, the need may arise to adjust the relation between capital and assets. Unlike an individual, a company has no power to write off losses of this nature or to return capital except in the manner provided by the Act. (See Robert Alan Hill v. Permanent Trustee Co. of New South Wales Ltd. 1930 AC 720 : (AIR 1930 PC 302), and this can be done as indicated in sub-sec. (1) of Sec. 100.
7. The principles upon which the discretion of the court has to be exercised can be gathered from (a) Magnus and Estrins Companies (Law and Practice), 3rd End. pages 79-80; (b) Buckley on the Companies Act, 13th Edn., pages 156, 164-165; (c) Sri N.N. Sircar and Susil C. Sens Indian Companies Act, 1913, 1937 Edn. p
