In a relatively recent order, the Chandigarh Bench of National Company Law Tribunal has occasion to consider the issues pertaining to selective reduction of share capital effected in pursuance of order of the National Company Law Tribunal (“NCLT”) under Section 230 of the Companies Act, 2013 (“CA 2013”). 

Relevant Facts: 

The case pertained to a scheme of amalgamation between Salter India Limited with Avery India Limited (“Transferee Company”) and (collectively referred to as the “Petitioner Companies”).

The instant petition relates to a composite scheme of arrangement wherein the scheme inter alia proposes reduction of capital resulting in cancellation of the shares of the non-promoter shareholders. Therefore, various representations and objections from the shareholders of the Transferee Company were received claiming that the provision of reduction of capital in the scheme was highly prejudicial to the interest of the non-promoter shareholders. 

Queries: 

The questions before the bench were as follows:

1. Whether the Transferee Company was by passing Sections 66 and 236 of the CA 2013;
2. Whether cancelling the shares held by the non-promoter shareholders would lead to variation of class rights in violation of Section 48 of the CA 2013;
3. Whether Sections 230-232 of the CA 2013 is applicable only for sick company or potentially sick companies;
4. Whether reduction of share capital in a disproportionate manner is permitted; and
5. Whether the shares were valued at a throw away price. 

Findings of the Tribunal: 

The Tribunal held that the objection raised were adequately responded by the Petitioner Companies, which responded as follows:

Whether the Transferee Company was by passing Sections 66 and 236 of the CA 2013? 

Reliance was placed on the Explanation to Section 230(12) of the CA 2013 and the decisions of NCLAT in R Systems International Limited [Company Appeal (AT) No. 416 of 2017] and Ratnagiri Gas and Power Limited & Anr [CA (AT) No. 294 of 2017] to observe that capital reduction is permissible by way of a separate clause in the scheme approved by the order of the Tribunal, without following the compliances under Section 66 of the CA 2013.

Further, considering that there is no acquisition of shares, and merely reduction of capital of the non-promoter shareholders by discharging consideration by the company itself, Section 236 would not be applicable.

1. Whether cancelling the shares held by the non-promoter shareholders would lead to variation of class rights in violation of Section 48 of the CA 2013?

As per the Articles of Association of the Transferee Company, the company has only one class of shares, i.e., equity shares and the voting and other rights of the entire class of equity shareholders is the same, therefore, there would be no occasion of variation of any rights of shareholders as per Section 48 of the CA 2013 even where selective reduction of share capital is proposed, as also held in Bharti Telecom Limited [C.P. No. 167/Chd/Hry/2018]. 

2. Whether Sections 230-232 of the CA 2013 is applicable only for sick company or potentially sick companies?

Sections 230-232 of the CA 2013 has been interpreted in a wide manner as being a compete code in itself and there is no such condition therein that only a sick or a potentially sick company can exercise their right under the aforementioned provisions. 

3. Whether reduction of share capital in a disproportionate manner is permitted?

Reliance was placed on Reckitt Benckiser (India) Limited [122(2005)DLT 612] and R.S. Live Media Private Limited [209(2014)DLT229], wherein it had been categorically held that the question of reduction of share capital is treated as matter of domestic concern, and while reducing the share capital, the company can decide to extinguish some of its shares without dealing in the same manner with the other shares of the same class. However, before confirming the reduction of share capital, the court is required to be satisfied that (a) there is no unfair or inequitable transaction keeping in mind that the shareholders are in the best position to ascertain the necessities and interests of the company; and (b) all the creditors entitled to object to the reduction have either consented or have been paid or secured. 

4. Whether the shares were valued at a throw away price? 

The relevant observation of the Tribunal is as follows: 

“39. As regard the valuation of the shares, we refer to the decision of Hon’ble Bombay High Court in Cadbury India Ltd. Manu/MH/2681/2014 and Hon’ble Supreme Court in Hindustan Lever Employees Union Vs. Hindustan Lever Ltd. & Ors.1995Supp(1)Supreme Court Cases 499.  We find that in Cadbury India Ltd. supra (Section 7) : General Principles the Bombay High Court has held that before a court can decline sanction to a scheme on account of valuation, an objector to the scheme must first show that the valuation is ex-facie unreasonable i.e. so unreasonable that it cannot be accepted.  It was also held that plausible rationale provided by a valuer is not be readily discarded merely because an objector has a different view. It was held that valuation is not an exact science and all valuations proceed on assumptions and to dislodge a valuation, it must be shown that those assumptions as such as could never have been made, and that they are so patently erroneous that the end result itself could not but be wrong unfair and unreasonable.  In Hindustan Lever Employees Union Vs. Hindustan Lever Ltd. supra (para No.3) the Hon’ble Supreme Court held that the jurisdiction of the court in sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical test and the court is not required to interfere only because the figure arrived at by the valuer was not as better as it would have been if another method would have been adopted.  It was held that what is imperative is that such determination should not have been contrary to law and that it was not unfair to the shareholders of the company which was being merged.”                                                                                                                (emphasis in original) 

Observations: 

The Hon’ble Tribunal has relied on the precedents of various courts and concluded that share capital can be reduced as part of a scheme, without following the compliances under Section 66 of the CA 2013, as  provided in the Explanation to Section 230(12) of the CA 2013; (ii) selective reduction does not amount to variation in rights of shareholders, where there is only one class of shares; (iii) Sections 230-232 is not restricted to sick company or potentially sick companies; (iv) there is no prohibition on disproportionate reduction of share capital by a company; and (v) with regards to the valuation of shares, the objector to the scheme must show that the valuation of the shares is ex-facie unreasonably. 

This update has been contributed by Arka Majumdar (Partner) and Juhi Wadhwani (Associate).