cp141.2007 Page 1 of 32 * IN THE HIGH COURT OF DELHI AT NEW DELHI COMPANY JURISDICTION Judgment reserved on : 22.01.2008 + Judgment delivered on: 30.09.2008 % C.P. No.141 of 2007 In the matter of: The Companies Act, 1956; In the matter of: Petition under Sections 391-394 of the Companies Act, 1956; And In the matter of: Scheme of Arrangement between Nestle India Limited and its shareholders and creditors; And Nestle India Limited having its Registered Office at M-54, Connaught Circus, New Delhi- 110001. …..Petitioner Company Through: Mr. Rajiv Nayyar, Senior Advocate with Mr. Anirudh Das and Mr. Sahil Sharma, Advocates for petitioner company Ms. Manisha Tyagi, Advocate for the O.L. Mr. R.D.Kashyap, Dy. ROC. Ms. Manisha Dhir with Ms. Preeti Dalal, Advocates for the Regional Director. CORAM: HON'BLE MR. JUSTICE VIPIN SANGHI 1. Whether the Reporters of local papers may be allowed to see the judgment? 2. To be referred to Reporter or not? Yes 3. Whether the judgment should be reported Yes in the Digest? cp141.2007 Page 2 of 32 VIPIN SANGHI, J. 1. This petition under section 391 -394 of the Companies Act, 1956 (hereinafter referred to as Act) has been filed by the petitioner Nestle India Ltd. to obtain the sanction and approval to the Scheme of Arrangement between the petitioner company and its equity shareholder. 2. Nestle India Ltd. the petitioner company is an existing Company within the meaning of the Act having its registered office at M-5A Connaught Circus, New Delhi 110001. 3. The object of the Scheme of Arrangement between the Petitioner Company and its shareholders and creditors is to pay off the balance in the Securities Premium Account of the petitioner company to the shareholders, and to disburse as special dividend to the shareholders, a part of the balance in General Reserve Account. It is submitted that the Scheme of Arrangement will give an opportunity to the shareholders to earn superior returns, as compared to those which the petitioner company can earn by investing in short term liquid instruments. Such reduction will further enhance the return on equity, provide an opportunity to leverage the balance sheet which in turn could further optimize the cost of capital and thus improve the economic value. To achieve the aforesaid objective, the Scheme proposes: a) An amount of Rs. 43,23,63,000/- as lying in the Share/Securities Premium Account of the petitioner company be reduced, consequent to which the shareholders of the petitioner company shall be paid off the said amount by the petitioner company in accordance with the cp141.2007 Page 3 of 32 provisions of the Act. b) An amount of Rs.43,08,57,000/- forming part of the amount voluntarily and excessively transferred by the petitioner company to its General Reserve (i.e the amount in excess of the prescribed 10% of the profits of the company) in accordance with the provisions of the Companies (Transfer of Profits to Reserve) Rules, 1975, during the Financial years 1981 to 1996, be credited to the balance in the “Profit and Loss Account” of the petitioner company, and upon the sanction of the Scheme of Arrangement, be distributed as special dividend to the shareholders of the petitioner company in accordance with the provisions of the Act. 4. It is averred that the Board of Directors of the petitioner company has duly approved the Scheme of Arrangement, and a certified extract of the Resolution passed by the Board of Directors of the petitioner company held on 15.01.2007 has been placed on record. 5. This Court vide order dated 23.03.07 in company Application (M) No. 55 of 2007 and CA Nos.314 & 340 of 2007, issued directions dispensing with the convening of meeting of the secured creditors of the petitioner company while directing the convening of the meeting of the equity shareholders of the petitioner company. So far as unsecured creditors of the petitioner company are concerned, the Court concluded that no useful purpose would be served in holding their meeting. The petitioner company, however, undertook that at the time of issuance of notice on the confirmation petition i.e. the present petition, the petitioner company would invite and consider the objections of the unsecured creditors. In view of the aforesaid, the cp141.2007 Page 4 of 32 Court dispensed with the holding of the meeting of the unsecured creditors as well, to consider the proposed scheme. 6. The meeting of the equity shareholder was held under the supervision of the chairperson appointed by this Court wherein the equity shareholders had approved the Scheme of Arrangement in accordance with the provisions of the Act. A copy of the said report has been placed on record. The original report stands filed on the record of CA(M) No.55 of 2007. As per the chairperson's report, the equity shareholders of the petitioner company were individually served with notices through UPC and by advertisement dated 5th April, 2007 in “Statesman” (English edition) and “Jansatta” (Hindi edition). The meeting was held on 03.05.2007 at 11:30 a.m. at the Air Force Auditorium, Subroto Park, New Delhi-110020. The meeting was attended either personally or by proxy by 182 members of the petitioner company. The shareholders who attended the meeting, by overwhelming majority supported the Scheme. While 164 shareholders, representing 60509611 shares voted in favour of the proposed scheme, 3 shareholders representing 3 shares voted against the Scheme. 15 ballot papers were rejected as invalid. Therefore, the resolution in support of the scheme was approved by 98.2% in number and 99.99% in value of the shareholders present and voting, who constituted 62.67% in value of the total paid up capital of the petitioner company. 7. It is further averred that no investigation/proceedings have been instituted and/ or pending in relation to the petitioner company under section 235 to 251 of the Act. cp141.2007 Page 5 of 32 8. Notice was directed to be issued to the Regional Director (NR) and the Official Liquidator attached to this Court. Citation was directed to be published in “The Statesman” (English) and “Jansatta” (Hindi) in accordance with the Companies (Court) Rules, 1959. It appears that the aforesaid requirement to invite objections from the unsecured creditors, and to consider the same, however, went unnoticed. I heard arguments in the matter and reserved orders on 22.01.2008. While preparing the order, I noticed the aforesaid omission and the matter was listed for directions on 04.04.2008. On 04.02.2008, I directed the petitioner company to comply with the aforesaid requirement and to invite objections from the unsecured creditors by publishing advertisements in “The Statesman” (English) and “Jansatta” (Hindi). In compliance with the said direction, the petitioner published the notices/advertisement in the two newspapers as aforesaid in editions published from various cities on 16.02.2008 and 29.02.2008. These publications have been filed on record alongwith an affidavit of Sh. Pramod Kumar Rai, the authorised representative of the petitioner company. I am satisfied that the petitioner company has given sufficient notice to the unsecured creditors of the proposed scheme. No objection or opposition to the proposed scheme has been received by the Court from any of the unsecured creditors of the petitioner company. 9. The Official Liquidator in his report has submitted that disbursement of Share Premium Amount to the shareholders of the petitioner company appears to be covered by Section 78 read with Sections 100-102 of the Act. However, as regards the amount voluntarily transferred by the Company to its General Reserve over cp141.2007 Page 6 of 32 and above the statutorily required rate in accordance with the provisions of the Companies (Transfer of Profits to Reserve) Rules, 1975 during the financial year 1981 to 1996, it is submitted that the proposed credit of the same in the “Profit and Loss Account” of the company, and its proposed declaration as special dividend does not specifically appear to fall under the provisions of the Act. 10. The Regional Director, Northern Region, Ministry of Company Affairs has, however, stoutly resisted the proposed Scheme of Arrangement of the petitioner company. To oppose the utilisation of the Share Premium Account as proposed, the Regional Director places reliance on Section 78 of the Act, which reads as follows: “78. Application of premiums received on issue of shares (1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account, to be called "the [securities] premium account"; and the provisions of this Act relating to the reduction of the [securities] capital of a company shall, except as provided in this section apply as if the [securities] premium account were paid-up [securities] capital of the company. (2) The [securities] premium account may, notwithstanding anything in sub-section (1), be applied by the company - (a) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares; (b) in writing off the preliminary expenses of the company; (c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; or (d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company. cp141.2007 Page 7 of 32 (3) Where a company has, before the commencement of this Act, issued any shares at a premium, this section shall apply as if the shares had been issued after the commencement of this Act: Provided that any part of the premiums which has been so applied that it does not at the commencement of this Act form an identifiable part of the company's reserves within the meaning of Schedule VI shall be disregarded in determining the sum to be included in the [securities] premium account.” 11. It is submitted by Ms. Manisha Dhir, learned counsel for the Regional Director (NR) that the purport of Section 78 of the Act is that the amount lying in the Securities Premium Account can be applied by the company, only for the purposes which are specifically provided for in sub-Section (2) of Section 78 of the Act, and for no other purpose. In the present case, under the proposed Scheme, the petitioner company proposes to utilise the amount lying in the Securities Premium Account for a purpose other than the ones specified in sub section (2) of 78 of the Act and, as such, the said Arrangement is not in conformity with the provision of the Act. 12. On the second aspect of the Scheme of Arrangement i.e the proposed payment of special dividend, from the General Reserves Account after transferring the aforesaid amount to the Profit and Loss Account of the petitioner company, it is contended that there is no provision in the Act permitting the transfer of the amount credited to the General Reserve Account to the “Profit and Loss Account” of the Company as proposed by the petitioner company under the Scheme. The utilization of General Reserve for the purposes of declaration of dividends is governed by Section 205-A read with Companies (Declaration of Dividends out of Reserves) Rules, 1975. The said cp141.2007 Page 8 of 32 Section, in so far as it is relevant, reads as under: “S. 205A. Unpaid dividend to the transferred to special dividend account- (1)......... (2)......... (3) Where, owing to inadequacy or absence of profit in any year, any company proposed to declare dividend out of the accumulated profits earned by the company in previous years and transferred by it to the reserves, such declaration of dividend shall not be made except in accordance with such rules as may be made by the Central Government in this behalf, and, where any such declaration is not in accordance with such rules, such declaration shall not be made except with the previous approval of Central Government.” 13. Thus, it is argued by Ms. Manisha Dhir that the dividend can be declared out of the General Reserves either in accordance with Companies (Declaration of Dividend out of Reserves) Rules 1975 and, if the same is not in accordance with the said Rules, with prior approval of Central Government. Rule 2 of Companies (Declaration of Dividends out of Reserves) Rules, 1975 in so far as it is relevant reads as under: “2. Declaration of Dividend out of Reserves.- In the event of inadequacy or absence of profits in any year, dividend may be declared by a company for that year out of the accumulated profits earned by it in previous years and transferred by it to the reserves, subject to the conditions that- (i) The rate of the dividend declared shall not exceed the average of the rates at which dividend was declared by it in the five years immediately preceding that year or ten per cent of its paid up capital, whichever is less..............” 14. It is submitted that in the present case the petitioner has not stated in the resolution the rate at which it is going to declare the dividend. Further, the paid up capital of the company is cp141.2007 Page 9 of 32 Rs.96,41,75,000/- and the petitioner company intends to transfer a sum of Rs. 43,08,57,000/- from the General Reserves Account to the dividend account which is more than 10% of the paid up capital of the company. Thus the second precondition is not satisfied. 15. The respondent has also relied upon the stated object behind the insertion of Section 205-A in the Companies Act by way of Companies(Amendment) Act, 1974, which reads as under: “It has been observed that large established Companies have been in practice of Declaring dividends in a year in which profits are not adequate for payment of large dividends, out of reserves accumulated in previous years. Such accumulated reserves , which should have been normally available as plougbacks for the furtherance of the company's business, are thus used in a manner prejudicial to the public interest. It is ,therefore, proposed to incorporate in the statue provision to the effect that declaration of dividends out of reserve could be made only in accordance with the the rules to be prescribed by the Central Government or in special cases with the previous approval of the government.” “The declaration and payment of dividend in any year , out of the reserves of the past years, cannot be made as a matter of course at the discretion of the board of Directors, but can only be made in accordance with the rules made by the Central Government in this behalf, or in exceptional cases with the previous approval of the central Government.” 16. In reply to the first of the above objections raised by the official liquidator and the Regional Director Northern Region, Mr. Rajiv Nayyar, learned Senior Counsel appearing for the petitioner submits that Section 78 (1) of the Act provides that the amounts lying in the Securities Premium Account can be applied for any purpose. However, for its utilization, the provisions of the Act relating to reduction of share cp141.2007 Page 10 of 32 capital of a company shall apply, as if the Securities Premium Account were paid up share capital of the company. But if the amounts lying in the Securities Premium Account is to be utilized for any of the four specific purposes mentioned in Section 78(2), the same could be done without attracting the provisions of the Act relating to reduction of share capital of the company. Section 78(2) of the Act cannot be read to mean that the amount lying in the Securities Premium Account cannot be applied for any other purpose, other than those specified in Section 78(2) of the Act. The petitioner submits that since the utilisation of the Securities Premium Account in the manner proposed under the Scheme is not covered by Section 78(2) of the Act, the company has complied with the requirements of Section 100 of the Act relating to reduction of share capital. It is further submitted that there is no impediment in reduction of the Securities Premium Account, it being a part of a Scheme under Section 391 of the Act, as long as there is substantial compliance of Rule 85 of the Companies (Court) Rules, 1959. Since the shareholders and creditors have approved and not objected to the Scheme, there is adequate compliance of the requirement of Section 102 of the Act. 17. With regard to the objection regarding the disbursement of amounts as special dividend, which were voluntarily transferred by the petitioner company to its General Reserves in excess of the prescribed 10% of the profits of the Company over the years in the past, by first transferring the same to the Profit and Loss Account of the petitioner company, the petitioner submits that there is no prohibition prescribed either in the Act or under The Companies (Transfer of Profits to Reserves) Rules, 1975 for transferring back from the General Reserve cp141.2007 Page 11 of 32 Account to “Profit and Loss Account”, amounts transferred in excess of the prescribed 10% of the profits of the petitioner company. It is submitted that the amounts transferred to the General Reserves Account, in excess of the requirement prescribed under the Act and the Rules are earnings of the petitioner company which the company was capable of distributing to the shareholders in the respective years in which they were earned. It is further submitted that the General Reserves of the company by its very nature are free Reserves which are not specifically earmarked for any purpose, and are available to the company for utilisation for any purpose, including distribution thereof to the shareholders as special dividend. Petitioner submits that as Section 205(3) permits issuance of bonus shares from the reserves, so in the present case, instead of issuing bonus shares the company is proposing a special dividend payout. 18. The petitioner has relied on In Re: Parrys Confectionery Ltd.; 2004(122) CC 99.; In Re: Karam Chand Appliances (P) Ltd. CP No.73/2006 decided on 9.10.2006 by this Court; In Re: Hyderabad Industries Ltd. [2005] 123 Comp. Cases 458 (AP); In Re: Raasi Cement Ltd. 2000(1) ALD 65; Novapan India Ltd. (1996) 5 Comp L J 96 (AP) and In re: Cargill India Pvt. Ltd. in CP No.175 & 233/2004 decided on 15.10.2004 by this Court, in support of his aforesaid submissions on the interpretation of Section 78(2) and Sections 100 & 101 of the Act. On the hand, the Regional Director (NR) has relied on M/s Bharat Fire and General Insurance Ltd. v. The Commissioner of Income Tax, New Delhi AIR 1964 SC 1800 and Commissioner of Income Tax Vs. Allahabad Bank 1969 (2) SCC 143 in support of her submission on the interpretation of Section 78(2) cp141.2007 Page 12 of 32 of the Act. 19. I now proceed to consider the two objections raised by the Regional Director (Northern Region). I shall take up the objection to the application of the “Securities Premium Account” first, and thereafter consider the objection to the disbursement of special dividend, by transferring from the General Reserves, the amount in excess of the prescribed 10% of the profits of the company into the “Profit and Loss Account” of the company. 20. At the outset, I consider it appropriate to analyze the relevant provisions of the Act on my own. The aspect of issue of shares at a premium or at a discount is dealt with in the Act in Sections 78, 79 & 79A. I am only concerned with Section 78 for the present. Section 78(1) states that the premium collected by the company while issuing shares shall be transferred to a separate account called the “Securities Premium Account”. The manner in which the amount lying in the “Securities Premium Account” can be utilized and the purposes for which it can be utilized is also provided for by Section 78. Section 78(1) states that the “Securities Premium Account” would be regulated by the provisions of the Act, which deal with the aspect of reduction in the securities capital of a company. However, the provisions of the Act relating to reduction of securities capital would not apply to the “Securities Premium Account”, when the same is utilized as provided in the Section itself. Section 78(2) enumerates four specific purposes for which the amount lying in the “Securities Premium Account” may be applied “notwithstanding anything in sub-Section (1)”. This means, that the provisions of the Act relating to the reduction of the securities cp141.2007 Page 13 of 32 capital are not applicable where the application of the “Securities Premium Account” is for one or more of the four specific purposes enumerated in Section 78(2). A co-joint reading of Section 78(1) and 78(2) of the Act, therefore, leads to the inference that the amounts lying in the “Securities Premium Account”, for their application, must comply with the provisions in the Act relating to reduction of securities capital of a company, except when the application of the “Securities Premium Account” is for one or more or the four specific instances enumerated in sub-Section (2) of Section 78. When the application of the “Securities Premium Account” is for one or more of the four specific purposes enumerated in Section 78(2), no further compliance with any of the provisions of the Act relating to reduction of securities capital of a company is necessary and the amount lying in the “Securities Premium Account” can be straightaway be applied for all or any of the said four specific purposes. 21. The argument of the Regional Director (NR) is that the “Securities Premium Account” can be applied only for the specific four purposes mentioned in Section 78(2) of the Act and for no other purpose. To support this interpretation, the learned counsel for the Regional Director, Ms. Manisha Dhir, heavily relies on the use of the expression “notwithstanding anything in sub-Section(1)” to submit that sub-Section (2) of Section 78 overrides everything stated in sub- section(1), in relation to the application of the “Securities Premium Account”. 22. In my view, the interpretation advanced by learned counsel for the Regional Director (NR) is not correct. If the interpretation as cp141.2007 Page 14 of 32 advanced by the Regional Director (NR) is accepted, it would render otiose the provisions contained in sub-Section (1) of Section 78. The entire Section 78 has to be read as a whole and all the sub-Sections of this Section have to be read and interpreted so as to give a meaningful interpretation. Sub-Section (1) & (2) of Section 78 when read together clearly show that they form part of the same scheme. As aforesaid, the scheme is that the amounts collected as premium while issuing shares, which are required to be transferred to a separate account called the “Securities Premium Account” are governed by provisions of the Act relating to reduction of securities capital of a company. That is the general rule. However, an exception is carved out. The exception is that the provisions of the Act relating to reduction in securities capital would not apply “as provided in this section”. Therefore, in respect of the specific applications of the “Securities Premium Account” provided in sub-section (2) of Section 78, the general procedure prescribed in sub-section(1) of Section 78 would not apply. If the submission of Ms. Manisha Dhir, Advocate, is accepted that the Securities Premium Account can be utilized only for the four specific purposes, which are enumerated in Section 78(2) and for no other purpose, it could lead to absurd situations. Take for instance, the case of a company which has issued shares at a premium and which does not have any unissued shares, which it proposes to issue as bonus share or any outstanding preliminary expenses which could be written off or any expenses towards commission or discount paid or allowed on issue of shares or debentures of the company, which could be written off and any obligation for payment of premium on redemption of any redeemable preference shares or debentures of the company. If cp141.2007 Page 15 of 32 the submission of the learned