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A REWARD TO THE INACTIONS OF INDIAN CORPORATES

R.V.RAO 
on 13 May 2008

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A REWARD TO THE INACTIONS OF INDIAN CORPORATES
 
BY R.V.RAO
 
Can a public limited company increase the authorized share capital and not pay fees on the increased share capital under Company’s Act 1956 and then reduce the same retrospectively while the violation continues.?
 
 
A VERY INTERESTING CASE OF VIOLATION UNDER SEC. 97 OF COMPANIES ACT 1956 HAS COME UP BEFORE THE HON’BLE HIGH COURT OF A.P.-HYDERABAD.
THE RELIEF GIVEN BY THE A.P. HIGH COURT TO THE COMPANY IN THIS CASE CAN POSSIBLY OPEN THE FLOOD GATES FOR CORPORATE INACTIONS IN FUTURE.UNDER SEC 94 AND SEC 97 OF THE COMPANY’S ACT 1956
FIRST LET US SEE THE LAW ON THE SUBJECT.
 
THE LAW ON INCREASE OF AUTHORISED SHARE CAPITAL UNDER THE COMPANY’S ACT 1956.
 
IT IS NOT UNCOMMON THAT PUBLIC OR PRIVATE LIMITED COMPANIES IN INDIA INCREASE THEIR AUTHORIZED SHARE CAPITAL UNDER SEC. 94 OF THE COMPANY’S ACT 1956 AND GIVE INTIMATION TO THE REGISTRAR OF COMPANIES UNDER SEC. 97 OF THE COMPANY’S ACT 1956 .
THE INTIMATION IN THE PRESCRIBED FORM IS ALSO TO BE ACCOMPANIED WITH NECESSARY FEES TO BE PAID ON THE INCREASED AUTHORISED SHARE CAPITAL AS STIPULATED UNDER SCHEDULE X OF THE COMPANY’S ACT.
BESIDES THE NORMAL FEES PAYABLE ON THE INCREASED AUTHORISED SHARE CAPITAL, FOR ANY DELAY BEYOND THE PERIOD ALLOWED BY THE ACT IN PAYMENT OF THE SAID FEES TO THE REGISTRAR OF COMPANIES, THE COMPANIES HAVE TO PAY INTEREST AT THE RATE OF 2% FOR EVERY MONTH OF DELAY TILL ONE YEAR AND THEN A HIGHER RATE OF INTEREST BEYOND ONE YEAR.ON THE AMOUNT OF THE FEES PAYABLE WHEN THE DELAY GOES BEYOND ONE YEAR..
 
 
 
 
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FACTS OF THE CASE
 
A PUBLIC LIMITED COMPANY IN THE STATE OF ANDHRA PRADESH HAS IN THE YEAR 2001 INCREASED THE AUTHORISED SHARE CAPITAL FROM RS. 10 CRORES TO RS. 155 CRORES .THE COMPANY HAS FILED FORM NO 23 FOR THE SPECIAL RESOLUTION PASSED BY THE GENERAL BODY OF SHARE HOLDERS IN THIS CONNECTION WITH IN THE STIPULATED PERIOD.
BUT THE MAIN ISSUE INVOLVED IS PAYMENT OF THE FEES FOR THE INCREASED AUTHORISED SHARE CAPITAL TO THE REGISTRAR OF COMPANIES TO BE PAID ALONG WITH FORM NO. 5 TO BE FILED WITHIN THE STIPULATED PERIOD. THE COMPANY DID NOT FILE FORM NO. 5 WHICH OFCOURSE WAS NOT DONE FOR WANT OF FINANCIAL RESOURCES.THE AMOUNT OF THE FEES RAN OVER HALF A CRORE OF RUPEES.
 
THE REGISTRAR OF COMPANIES STARTED ASKING THE COMPANY TO FILE FORM NO 5 (ALONG WITH PAYMENT OF THE FEES AS PRESCRIBED) TO COMPLY WITH SEC. 97 OF THE COMPANY’S ACT 1956.
 
BUT THE COMPANY COULD NOT FILE THE FORM 5 AND PAY THE FEES.
THE REGISTRAR OF COMPANIES SERVED A SHOW CAUSE NOTICE TO THE COMPANY FOR NON- FILING OF FORM NO. 5 .
WHEN THE COMPANY DID NOT ACT EVNE AFTER SHOW CAUSE NOTICE   THE REGISTRAR OF COMPANIES FILED A CRIMINAL CASE AGAINST THE COMPANY IN THE ECONOMIC OFFENCES COURT OF ANDHRA PRADESH.
 
 
THE RETROSPECTIVE REVERSAL OF THE ORIGINAL INCREASE
 
THE ECONOMIC OFFENCES COURT HAD SEVERAL HEARINGS OF THE CASE.
MEANWHILE THE COMPANY GOT A BRILLIANT PIECE OF ADVICE ON THE ISSUE   TO REVERSE THE INCREASE OF AUTHORISED SHARE CAPITAL TO   REDUCE IT TO THE LEVEL OF THE ORIGINAL AMOUNT AND THE REVERSAL TO BE MADE RETROSPECTTIVELY FROM THE DAY WHEN IT WAS ORIGINALLY INCREASED.
THIS IDEA WAS IMPLEMENTED BY THE COMPANY IN THE YEAR 2002 WHEN THE AUTHORISED SHARE CAPITAL INCREASE WAS REVERSED WITH RETROSPECTIVE EFFECT.
THE NECESSARY FORMS WERE ALSO FILED WITH THE REGISTRAR OF COMPANIES ABOUT THE RETROSPECTIVE REDUCTION IN THE AUTHORISED SHARE CAPITAL OF THE COMPANY BY THE GENERAL BODY
                      
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 OF SHAREHOLDERS OF THE COMPANY BY BRINGING THE AUTHORISED SHARE CAPITAL DOWN FROM RS. 155 CR. TO THE ORIGINAL AMOUNT OF RS. 10 CR.
 
THE FACT OF RETOSPECTIVE REDUCTION IN THE AUTHOSRISED SHARE CAPITAL BY THE COMPANY WAS ALSO BROUGHT TO THE NOTICE OF THE SPECIAL JUDGE OF THE ECONOMIC OFFENCE COURT DURING THE COURSE OF THE SEVERAL HEARINGS THAT WERE GOING ON IN THE CASE.THE FORMS FILED IN THIS CONNECTION WITH THE REGISTRAR OF COMPANIES ABOUT REVERSAL OF THE SHARE CAPITAL WERE ALSO PRODUCED BEFORE THE ECONOMIC OFFENCES COURT.
 
IS A RETROSPECTVE REVERSAL OF THE INCREASE IN AUTHORISED SHARE CAPITAL ALLOWED BY LAW?
 
THE ECONOMIC OFFENCES COURT DID NOT FIND ANYTHING WRONG IN RETROSPECTIVE REDUCTION IN THE AUTHORISED SHARE CAPITAL OF THE COMPANY PRESUMABLY DUE TO THE ABSENCE OF ANY SUCH PROVISIONS IN THE ACT RESTRICTING THE RIGHT OF A COMPANY TO REVERSE THE ORIGINAL ACTION.
 
PENALTY FOR VIOLATION UNDER SEC. 97 OF THE COMPANIES ACT 1956
 
 DUE TO THE OFFENCE OF NON- FILING OF FORM NO 5 BY THE COMPANY, THE ECONOMIC OFFENCES COURT LEVIED A PENALTY OF RS. 100 FOR EVERY DAY OF DEFAULT (IN NOT FILING FORM NO 5) ON THE COMPANY AS ALSO ON OTHERS WHO WERE MADE PARTY BY THE THE REGISTRAR OF COMPANIES IN THIS CASE.
 
THE COMPANY PAID THE PENALTY (FOR NON FILING OF FORM NO. 5) LEVIED BY THE ECONOMIC OFFENCES COURT. IT IS IMPORTANT TO NOTE HERE THAT THIS PENALTY WAS LEVIED BY THE ECONOMIC OFFENCES COURT ONLY FOR NON-COMPLIANCE OF SEC 97 OF THE COMPANY’ACT 1956 BY THE COMPANY ie NON FILING OF FORM NO. 5
 
 
MATTERS NOT DECIDED
 
THE CRITICAL ISSUES HERE NOT DECIDED BY THE ECONOMIC OFFENCES COURT WERE:
 
1.         WHAT ABOUT PAYMENT OF NORMAL FEES PAYABLE ON THE INCREASED AUTHORISED SHARE CAPITAL. IS THE NON-PAYMENT OF FEES NOT AN OFFENCE? IF SO FOR HOWLONG CAN SUCH AN OFFENCE CONTINUE AND CAN IT CONTINUE FOREVER?
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2..       CAN A COMPANY REMAIN SILENT ON THE ISSUE OF PAYMENT OF
FEES ON THE INCREASED AUTHORISED SHARE CAPITAL FOREVER       LEAVING A PRESUMPTION ON EVERYBODY’S MIND THAT AS AND WHEN THE FEES IS PAID BY THE COMPANY THE PENAL INTEREST ALSO WILL BE PAID FOR THE PERIOD OF DELAY. IS THAT RIGHT?
 
NO ANSWERS WERE AVAILABLE TO THE ISSUES RAISED ABOVE, THOUGH THE REGISTRAR OF COMPANIES’ CASE AGAINST THE COMPANY WAS TO MAKE THE COMPANY PAY THE STATUTORY DUES.
 
THE FINAL VERDICT
 
LATER THE COMPANY IN THE YEAR 2002 FILED A PETITION BEFORE THE HON’BLE HIGH COURT OF ANDHRA PRADESH CLAIMING THAT THE PENALTY OF RS. 100 (FOR EVERY DAY OF DEFAULT OF NON- FILING OF FORM NO. 5) LEVIED BY THE ECONOMIC OFFENCES COURT WAS ON THE HIGHER SIDE.
 
THOUGH THIS PETITION WAS FILED BY THE COMPANY IN THE YEAR 2002 IN THE HON’BLE HIGHCOURT OF ANDHRA PRADESH, THE FINAL HEARING TOOK PLACE IN THE YEAR 2006, WHEN THE HON’ -BLE HIGH COURTOF A.P CONFIRMED THE LEVY OF PENALTY OF RS. 100 FOR EVERY DAY OF DEFAULT IMPOSED BY THE ECONOMIC OFFENCE COURT.
 
BONUS TO THE COMPANY FOR NON-PAYMENT OF STATUTORY FEES
 
BUT A SURPRISING BONUS WAS GIVEN TO THE COMPANY BY THE HON’ BLE HIGH COURT OF ANDHRA PRADESH IN THIS FINAL VERDICT IN THE FORM OF A DECISION THAT SINCE THE COMPANY HAS REVERSED THE ORIGINAL INCREASE OF AUTHORISED SHARE CAPITAL, THE COMPANY NEED NOT FILE FORM NO. 5.
 
IS A BAD PRECEDENT SET ?
 
NOW IS NOT THIS PART OF THE FINAL VERDICT MORE INTERESTING THAN THE VIOLATION ITSELF ?
 
SADLY OFCOURSE A BAD PRECEDENT WAS SET IN THAT ANY COMPANY MAY NOW INCREASE THE AUTHORISED SHARE CAPITAL BEYOND THE EXISTING LEVEL AND NOT PAY THE   FEES   PRESCRIBED FOR THE SAME AND THEN REVERSE THE RESOLUTION WITH RETROSPECTVE EFFECT WHILE THE OFFENCE CONTINUES.
 
 
 
 
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THE QUESTION THAT ARISES ALSO IS THE INTEREST OF THE FINANCIAL INSTITUTIONS ( WHO LEND MONEY TO COMPANIES BASED ON SUCH INCREASE IN THE CAPITAL BASE ) WHO WERE INFORMED THAT THE SHARE CAPITAL WAS   INCREASED     AS
STIPULATED BY FIs. BUT THE LATER DEVELOPMENTS OF NON PAYMENT OF THE PRESCRIBED FEES, REVERSAL OF THE ORIGINAL
INCREASE OF SHARE CAPITAL, THE RESULTANT COURT CASES ETC.. NOT BROUGHT TO THE NOTICE OF THE FIs..
 
THE DISTURBING QUESTIONS THAT BEG FOR AN ANSWER NOW
 
CAN CORPORATES FEEL FREE ABOUT BLATANT VIOLATION OF A LAW OF THE LAND THAT WAS LAID DOWN IN THE STATUTE BOOK?
 
CAN IT HAPPEN SO EASILY THERE BEING NO AUTHORITY ABLE TO PLUG SUCH LOOPHOLES?
 
 CAN A COMMON MAN IN OUR COUNTRY ALSO BE ABLE TO TAMPER THE LAWS OF THE LAND, AS DO CORPORATES?
 
DO THE ECONOMIC OFFENCES COURTS/HIGH COURTS HAVE NO SAY
 ON CORPORATES’ CAUSING REVENUE LOSSES? IF SO, THEN WHO IS TO DECIDE THE LEGALITY, THE LOGIC OF CORPORATE ACTIONS OR INACTIONS AND ENSURE THAT CORPORATES COMPLY WITH THE   APPLICABLE LAWS IN LETTER AND IN SPIRIT?
 
IS THERE NO REMEDY?
OR CAN THERE BE A REMEDY THROUGH    AMENDING SECTION 94 AND SECTION 97 OF THE COMPANIES ACT 1956 BY PROVIDING THAT ONCE INCREASED, THE AUTHORISED SHARE CAPITAL OF A CORPORATE CANNOT BE REDUCED UNTIL AND UNLESS THE FEES PRESCRIBED ON THE INCREASED SHARE CAPITAL HAS BEEN PAID ?
 
 
CASE UNDER REFERENCE:
CRIMINAL REVISION CASE NO 1356 OF 2002 FINAL VERDICT DT. 31 ST OCTOBER 2006 IN THE HON’ HIGH COURT OF ANDHRA PRADESH-HYDERABAD
CONTRIBUTED BY R.V RAO Mobile no. 9849436267Email: r.venkatarao@sify.com



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