NCLT Chandigarh Approves Share Capital Reduction Under Section 66, Affirms Domestic Concern Principle - 2025-03-10

Laws, Courts & Judgments.

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NCLT Chandigarh Greenlights Share Capital Reduction for YKM Holdings, Citing Domestic Concern

Chandigarh, India – February 19, 2025 – The National Company Law Tribunal (NCLT), Chandigarh Bench, has approved a petition by YKM Holdings Private Limited for the reduction of its share capital under Section 66 of the Companies Act, 2013. The tribunal, comprising Hon’ble Mr. Harnam Singh Thakur (Member Judicial) and Hon’ble Mr. Umesh Kumar Shukla (Member Technical), delivered the judgment on February 19, 2025, emphasizing that such reductions are primarily a matter of domestic concern for companies.

Background: Cancellation of Shares Held by Trust

YKM Holdings sought the NCLT’s sanction to reduce its paid-up equity share capital by cancelling 40,273 equity shares of ₹100 each, currently held by YKM Holdings Trust. These shares were initially issued to the trust as part of a Scheme of Amalgamation approved by the Punjab and Haryana High Court in 2008. However, the company argued that these shares, held in trust for the benefit of YKM Holdings itself, did not represent any realizable asset and that recovering the amount due from the trust was doubtful. The proposed reduction involved no payment to the trust or any other shareholder.

Justification and Approvals

The company detailed the rationale behind the reduction, citing unfavorable market conditions, the impact of the COVID-19 pandemic, and the decision not to introduce external shareholders. Crucially, YKM Holdings secured unanimous special resolutions from its shareholders in both 2020 and 2021, approving the capital reduction. Furthermore, the company demonstrated its solvency, its ability to meet creditor obligations, and obtained consent from its creditors, obviating the need for creditor notices.

Regulatory Scrutiny and Tribunal’s Observations

During the proceedings, the Regional Director (RD) and Registrar of Companies (RoC) raised certain observations, including the lack of consideration for the reduction and queries regarding compliance with Section 66. YKM Holdings addressed these concerns, clarifying that Section 66 permits capital reduction "in any manner" and reiterated that the reduction was in the company's best interest, without prejudicing creditors. The company also clarified that its Articles of Association allowed for share capital reduction.

The Tribunal noted the RD's revised report contained no objections after the company's clarifications. It also highlighted that all creditors had consented and no objections were received from the public following newspaper publications as mandated. The NCLT further took note of auditor certificates confirming the company's solvency, adherence to accounting standards, and absence of deposit repayment arrears.

Reliance on Precedent and "Domestic Concern" Principle

The NCLT Chandigarh bench heavily relied on established legal principles, particularly the concept that reduction of share capital is a matter of "domestic concern." The judgment extensively cited precedents, including:

• Precious Energy Services Ltd. Vs. The Regional Director: NCLAT judgment affirming that reduction of share capital is a domestic matter and courts should not be concerned with motive if creditor interests are safeguarded.
• Ulundurpet Expressways Pvt. Ltd. Vs. Regional Director: NCLAT reiterated Section 66 grants companies discretion to reduce capital "in any manner."
• Reckitt Benckiser (India) Ltd.: Delhi High Court judgment summarizing principles of share capital reduction, emphasizing majority decision and permissible selective reduction.

The Tribunal specifically referenced previous NCLT decisions in Escorts Kubota Limited and Nava Bharat Ventures Limited , where share capital reductions involving trust-held shares were approved, reinforcing the permissibility of such actions.

Decision and Way Forward

Based on the unanimous shareholder resolutions, creditor consents, regulatory reports, and established legal precedents, the NCLT Chandigarh Bench sanctioned the proposed reduction of share capital for YKM Holdings Private Limited. The order confirms the special resolution dated September 30, 2021, allowing the cancellation and extinguishment of 40,273 equity shares held by YKM Holdings Trust, reducing the company's issued, subscribed, and paid-up capital to ₹1,90,50,000.

The Tribunal directed YKM Holdings to publish the order in leading English and vernacular newspapers and file the approved minutes with the Registrar of Companies within 30 days, underscoring the procedural compliance necessary for such capital restructuring. This judgment reinforces the principle of shareholder autonomy in corporate restructuring and the NCLT's role in ensuring procedural and creditor safeguards are met in share capital reduction exercises. ```