:1: :1: :1: IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTON ORDINARY ORIGINAL CIVIL JURISDICTON ORDINARY ORIGINAL CIVIL JURISDICTON COMPANY APPLICATION NO. 3 OF 2005 COMPANY APPLICATION NO. 3 OF 2005 COMPANY APPLICATION NO. 3 OF 2005 . In the matter of the Companies Act, 1956; AND . In the matter of Sections 79, 80 an 100 to 103 of the Companies Act, 1956; Rallis India Limited ...... Applicant Mr. Janak Dwarkadas with Jal Andhyarujina i/b. A.Z.B. and Partners for applicant. CORAM: S.U. KAMDAR, J. CORAM: S.U. KAMDAR, J. CORAM: S.U. KAMDAR, J. DATE : 10TH FEBRUARY, 2005. DATE : 10TH FEBRUARY, 2005. DATE : 10TH FEBRUARY, 2005. JUDGEMENT : JUDGEMENT : JUDGEMENT : 1. The present application is placed before me for directions inter-alia seeking direction that the provisions of section 101 (2) and procedure set out therein should not apply to the reduction of the capital due to adjustement of share premium account :2: :2: :2: and Capital Redemption Reserve Account of the applicant with the accumalated losses of the company. The applicant company has passed a special resolution in terms aforestated on 20.12.2004 and in terms of section 100 and section 101 of the Act seeks confirmation thereof from this Court. 2. This application raises a very interesting question of law as to the interpretation of the provisions of sub-section (2) of section 101 of the Companies Act-I of 1956. 3. Some of the few facts which are necessary for determination of the aforesaid question of law. I ave briefly enumerated as under : 4. Rallis India Limited was incorporated on 13.8.1998 under the provisions of the Indian Companies Act, 1930 as a public limited company limited by shares. The authorised share capital of the company is Rs.200,00,00,000/- (Rupees Two Hundred crores) divided into 5,00,00,0000 Equity shares of Rs.10/- each and 15,00,00,000 Preference shares of :3: :3: :3: Rs.10/- each. The paid up share capital of the company is Rs.99,98 45,930/- representing 1,19,84,593 Equity shares of Rs.10/- each and 8,80,00,000 Preference shares of Rs.10/- each. Sometime in or about 2003-2004 four wholly owned subsidiaries of the applicant company were merged with the applicant, thus, due to the said merger losses of all these four companies were included in the Books of Account of the applicant compaby and therefore substantial loss was indicated in the financial year 2002-03 in the accounts of the company. It was then decided by the company that the share premium account and the Capital Redemption Reserve of the Company should be reduced to adjust the debit balance in the Profit and Loss Account. Thus in the aforesaid manner it was decided that a debit balance of Rs.75.58 crores in t he Profit and Loss Account of the Company as on 31.3.2004 should be wiped off. The said adjustment of outstanding in the Capital Redemption Reserve account and Share Premium Account reduces the share capital which has already been lost, or is unrepresented by available assets. The Company is thus proposing to utilize and apply the balance in :4: :4: :4: respect of the said accounts for the adjustment and writing off of the debit balances under the Profit and Loss Account of the Company. 5. On 28.10.2004, the board of directors of the applicant company held a meeting and approved the said proposal of the reduction of share capital by the aforesaid adjustment and an extraordinary general meeting was convened on 20.12.2004 for passing a necessary resolution as required under the provisions of the Companies Act. According to the company under the provisions of the sections 78 and 80 read with section 100 of the Said Act of 1956 it is permissible to adjust the share premium account and the Capital Redemption Reserve Account for the purpose of writing off of the debit balances in the Profit and Loss Account of the Company. In view of the sub-section 2 of Section 78 of the Act the reduction in the Share Premium Account would amount to reduction in the share capital of the company and thus the procedure prescribed for the purpose of reduction in the share capital from Section 100 to Section 105 of the Act is :5: :5: :5: required to be complied with. According to the Company the company is empowered under the provisions of Articles of Association to carry out such an exercise. In the meeting of the shareholders held on 20.12.2004 being an extraordinary general meeting of the company the shareholders of the company accorded their consent to the reduction of the Share Premium Account and the Capital Redemption Reserve Account and the necessary resolution as contemplated under the provisions of the Act was passed. 6. It is thus in the aforesaid facts of the case that the learned advocate for the applicant submitted that the reduction of the Share Premium Account and the Capital Redemption Reserve Account does not involve a diminution of liability in respect of unpaid share capital or the payment to any shareholder of any paid up share capital of the Company and thus the company has pleaded that the procedure prescribed under sub-section (2) of Section 101 of the a Act should be dispensed with. 7. In the light of the aforesaid facts a question :6: :6: :6: of law has been raised whether the Court has power to dispense with procedural requirements as contemplated under the provisions of sub-section (2) of section 101, the procedural requirements as contemplated therein and if there is any such power then what should be the guidelines of criteria which the court should take into consideration for dispensing with such a requirement. Before I go into large number of authorities which have been cited before me it is necessary that the provisions of section 100 and 101 of the said Act are reproduced which are as under : "100. Special resolution for reduction of share capital. (1) Subject to confirmation by the [Tribunal] a company limited by shares or a company limited by guarantee and having a share capital, may if so authorised by its articles, by special resolution, reduce its share capital in any way; and in particular and without prejudice to the generality of the foregoing power, may- (a) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up; (b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available assets; or (c) either with or without extinguishing or reducing liability on :7: :7: :7: any of its shares, pay of any paid-up share capital which is in excess of the wants of the company.; . any may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly. (2) A special resolution under this section is in this Act referred to as " a resolution for reducing the share capital". .101 Application to the Tribunal for confirming order, objections by creditors and settlement of list of objecting creditors . (1). Where a company has [passed as resolution for reducing share capital it may apply, by petition, to the [Tribunal] for an order confirming the reduction.. . (2). Where the proposed reduction of share capital involves either the diminution of liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital, and in any other case if the [Tribunal] so directs, the following provisions shall have effect, subject to the provisions of sub-section (3):- (a) every creditor of the company who at the date fixed by the [Tribunal] is entitled to any debt or claim which, if that date were the commencement of the winding up of the company, would be admissible in proof against the company, shall be entitled to object to the reduction; (b) the [Tribunal] shall settle a lilt of creditors so entitled to object, and for that purpose shall ascertain , as far as possible without requiring an application from any :8: :8: :8: creditor, the names of those creditors and the nature and amount of their debts or claims, and may publish notices fixing a day or days within which creditors not entered on the list are to claim to be so entered or are to be excluded from the right of objecting to the reduction. (c) where a creditor entered on the list whose debt or claim is not discharges or has not determined does not consent to the reduction, the [Tribunal] may, if it thinks fit, dispense with the consent of that creditor, on the company securing payment of his debt or claim by appropriating, as the [Tribunal] may direct, the following amount:- (i) if the company admits the full amount of the debt or claim or though not admitting it, is willing to provide for it, then the full amount of the debt or claim; (ii) if the company does not admit and is not willing to provide for the full amount of the debt or claim, or if the amount is contingent or not ascertained, then, an amount fixed by the [Tribunal] after the like inquiry and adjudication as if the company were being wound-up by the [Tribunal]. (3) Where a proposed reduction of share capital involves either the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital, the [Tribunal] may, if, having regard to any special circumstances of the case, it thinks proper so to do, direct :9: :9: :9: that the provisions of sub-section (2) shall not apply as regards any class or classes of creditors. 8. The first question which arises for my determination is that whether on the true scope and interpretation of the section 100 and 101 of the Act whether the procedure contemplated therein is required to be complied with in cases where the proposal put forward for reduction of share capital does not involve, 1) the diminution of liability in respect of unpaid share capital or 2) the payment to any shareholder of any paid-up share capital or by virtue of the words "any other cases" appearing under sub-section (2) of Section 101 the procedural requirements set out therein should be complied with in all cases where share capital is proposed to be reduced. 9. Mr. Dwarkadas learned counsel appearing for the applicant company has contended before me that by virtue of the provisions of section 100 after the resolution is passed by the company for reducing the share capital it is required to be put forward to the :10: :10: :10: court for confirmation thereof and while confirming the said resolution under section 101 the court has to take into account the interest of the creditors by virtue of the provisions of sub-section (2) of thereof. Thus according to him the provisions shall apply only in cases where the interest of the creditors is affected. He has contended that in the first two categories namely where the reduction of share capital involves the diminution of the liability in respect of the unpaid share-capital or 2) the payment to any shareholder of any paid up share capital, and thirdly if the court so directs where the interest of the creditors is likely to be affected by virtue of such reduction of share capital. He has thus contended that in the third category there is no need to comply with the provisions of sub-section 2 of section 101 because according to him, in the third category the provisions of the section would apply only if the court so directs. The learned counsel has thus made a distinction between the first two categories where the requirement of compliance with the provisions of sub-section 2 of section 101 is mandatory and the :11: :11: :11: third category where there is no need to comply with such procedure unless there is specific direction from the court in that behalf. The learned counsel has thereafter further submitted that even in cases where there is diminution of liability in respect of unpaid share capital and the payment to any shareholder of paid up share capital where the procedure is required to be complied with under sub-section (2) of section 101 still in those cases by virtue of the provisions of sub-section (3) of section 101 the court has been given power to dispense with the procedural requirements of sub-section (2) in special circumstances. Thus according to the learned counsel for the applicant the power of the court to dispense with the requirements of sub-section 2 of section 101 only applies in cases of first two categories whereas in the third category there has to be specific direction from the court to comply with the provisions of sub-section 2 of section 101 and in absence of of such direction the company is not bound to comply with the provisions of sub-section 2 of section 101 and entitled to confirmation of reduction in the :12: :12: :12: share capital without complying with the procedure therein. 10. Thus according to the learned counsel for the the applicant in the present case since the reduction in the share capital is neither for the diminution of liability nor payment to any shareholder of the paid up share capital the provisions of sub-section 2 are not required to be complied with. In so far as third category is concerned empowering the court to given specific direction in the cases falling under the words " any other case" the learned counsel has submitted that such a power of the court must be exercised and can only be exercised in cases where reduction of share-capital is not in either of the two modes provided in the first part of sub-section (2) but still likely to affect the interest of the creditors then in that event alone the court has discreation to specifically direct a particular company to comply with the procedure of sub-section (2). It has been further submitted by the learned counsel for the applicant that the whole purpose and intent of enactment of sub-section (2) of section 101 :13: :13: :13: is to protect the interest of the creditors. Thus while construing the third part of sub-section (2) of section 101 it is necessary that the court must keep in mind the intention of the legislature in enacting the said section and therefore reduction in share capital must be correlated with the likely effect on the interest of the creditors and not otherwise. 11. Before I consider various authorities in my opinion in so far as the provisions of sub-section (2) of section 101 is concerned the same requires an interpretation for more than one reasons. On the plain reading of sub-section (2) of section 101 the legislature has carved out three eventualities. i) diminution of liability in respect of unpaid share capital, or ii) payment to shareholder of any paid-up share capital and iii) and in any other case if the court so directs. :14: :14: :14: 12. In so far as the first two categories are concerned, I do no find any difficulty because they are specific in nature and if reduction of share capital has an effect of either of the first two eventualities prescribed therein then obviously the provisions of sub-section 2 is totally mandatory and is required to be complied with. Undoubtedly there is power in the company court to dispense with even such mandatory requirement by virtue of sub-section (3) of section 101 but in my opinion such power can be rarely exercised and the language of sub-section (3) makes the said fact clear. Sub-section (3) provides with the dispensing of the requirements falling in the first two categories only in special circumstances and that court can exercise such power under sub-section (3) only after recording special reasons for exercising such a power. Thus the power dispensing with the provisions of sub-section (2) of section 101 in so far as it relates to the first two categories the court must apply its mind and ascertain what are the special circumstances which calls for exercise of power of dispensing under :15: :15: :15: sub-section (3) of section 101 of the Act. 13. In so far as sub-section (2) of section 101 is concerned, i.e. "any other cases" where the court so directs the procedure of sub-section 2 of section 101 should be complied with in my opinion in such cases there is no provision of dispensing with the procedure prescribed under sub-section 2 of section 101. It is because the language of the section is clear that such requirement is required to be complied with only if there is such a direction from the court to do so. This leads me to next facet of interpretation of sub-section (2) of section 101. It is more complex i.e. what are the cases where a direction can be given to the company to comply the provisions of sub-section (2) of section 101 even though the same does not result in diminution of the liability and or repayment of the share capital. For the aforesaid purpose it is necessary to interpret the word "any other case" as appearing in sub-section (2) of section 101. The learned counsel for the applicant Mr. Dwarkadas has relied upon the various authorities which I shall now revert to breiftly for :16: :16: :16: the purpose of interpreatation of sub-section (2) of section 101. Firstly the learned counsel for the applicant has relied upon the judgment of this court in the case of In re The Tata Iron and Steel Co. Ltd In re The Tata Iron and Steel Co. Ltd In re The Tata Iron and Steel Co. Ltd Bombay Law Reported page (1926) 30 Bom.L.R. 197 Bombay Law Reported page (1926) 30 Bom.L.R. 197 Bombay Law Reported page (1926) 30 Bom.L.R. 197 particularly the following paragraph appearing on page 207 on the judgment. ". I now come to the second of the general objections. it is urged tht the company must take proceedings to alter the memorandum and the articles before the Court can sanction a scheme involving such alteration. The Act is capable of a construction which may seem to favour this argument, but there is authority so clear upon the point that it is unnecessary to discuss at length. It is enough to point out that s.153 does not contain any express requirement of this nature, and it would be most inconvenient were its terms cut down by s.10. But to come to the authorities. The case of Inre Palace Hotel, Limited is one where a scheme was put forward which involved an alteration of the memorandum of association (vide p.443). the question considered was whether the scheme fell within s.45 the conditions of which has not been complied with. (The references are to the English statue) That section is identical with s.54 of the Indian Act. It was held that as s.45 was inapplicable the scheme could be sanctioned under s.120. the question whether this could have been done had s.45 been applicable was left open. The next case upon the point is Inre Schweppes Limited Though the scheme did not in fact involve an alteration of the memorandum the Court held :17: :17: :17: that even if an alteration of had been involved the scheme could have been sanctioned under s.120 so long as it was outside s.45. the last case is In re J.A. Nordbery Limited Neville J. followed the previous decisions. He says (p.441):- . "As I understand the authoritis you can under s.120 alter the rights conferred by the memorandum upon preference shareholders, provided that in so doing you avoid consolidating shares of different classes or dividing shares into shares of different classes." . He regarded s.45 (p.441) "not an enabling section as its form would suggest, but a section limiting the generality of the power under s.120 to make arrangements with regard to capital which alter the terms of the memorandum of association." . The general results appears to be this that where the Act lays down an express procedure for altering the memorandum it is doubtful whether it is not necessary to follow that procedure, before applying for sanction under s.120, but where that is not so the court can under s.120, but where that is not to the Court can under s.120 sanction a scheme which alters the memorandum. I have considered the other cases cited, but those discussed are the most recent authorities upon the point. I follow these cases. This objection, therefore fails." 14. Thereafter the learned counsel has relied upon the judgment of this court in the case of In re The In re The In re The Katni Cement and Industrial Co. Ltd reported in Katni Cement and Industrial Co. Ltd reported in Katni Cement and Industrial Co. Ltd reported in (1936) 39 Bom.L.R. page 677, (1936) 39 Bom.L.R. page 677, (1936) 39 Bom.L.R. page 677, particularly the following paragraph : :18: :18: :18: ". On a careful consideration of the cases referred by Buckley as authorities for the statement of the law an practice in the above passage, and others cited at the bar, it seems to be well established in England that (see Palace Hotel, Limited) In re Scheweppes Limited, In re and J.A. Nordberg Limited, In re) the court can under this section sanction a scheme, even though it involves acts which, apart from such provisions, would be ultra vires the company; but this rule is subject to the limitation that if the /Companies Act contains express provisions enabling the doing of any act in a particular way, the provisions of the enabling section, and not those of s.153, must be followed. The decision in the three cases to which I have referred ahove would seem to show that s. 153 as altered by the Act of 1929 would, read with s.154, give a very wide power to a company in this respect and a scheme involving a re-organization of capital which altered rights conferred by the memorandum of association can be sanctioned under s.120. A non-cumulative dividend conferred by the memorandum was altered into a cumulative dividend as part of a scheme under s.120 (United States and South American Investment Trust Co. (00145 of 1913), Neville J. July 8, 1913)." 15. In my opinion both the aforesaid judgments has no direct relevance to the issue which I am considering in the present case. Firstly both the aforesaid judgments were in respect of alteration of Memorandum of Association and the issue before the :19: :19: :19: court was whether a special procedure prescribed under the Act is required to be seperately complied with or not, while considering the amalgamation of the two companies. The issue was that at the time of amalgamation of the two companies if the resolutions are passed merging the two companies then whether a seperate special resolution is required for the purpose of alteration of Memorandum of Association. In both the cases court has held that if a particular actions requires a special procedure to be fulfilled then in that even the same should be so done. 16. The learned counsel has thereafter relied upon the judgement of the Gujarat High Court in the case In re Maneckchowk and Ahmedabad Manufacturing Co. In re Maneckchowk and Ahmedabad Manufacturing Co. In re Maneckchowk and Ahmedabad Manufacturing Co. Ltd reported in (1970) Vo.40 C.C. page 819 Ltd reported in (1970) Vo.40 C.C. page 819 Ltd reported in (1970) Vo.40 C.C. page 819 This judgement pertains to reduction in the share capital and subsequently the application of section 100 and 101 of the said Act. While considering the aspect of reduction in the share capital he learned single Judge D.A. Desai, J. (as he then was) has held that reduction in