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Facts of the case:

R Systems International Limited is a company listed on recognized stock exchange in India having its registered office in New Delhi. The Company is engaged in sale, purchase, maintenance, of computer related products and also provide consultancy services in India and abroad. R System filled an application to NCLT for reduction in Share Capital u/s 230. However, tribunal was of the view that application for reduction is share capital and sanction relating to the same has been prescribed separately elsewhere in section 66 and cannot be brought within the confines of section 230, which is more for restructuring business.

The Applicant Company argued that Explanation to Section 230 of the Act which reads as “For the removal of doubts, it is hereby declared that the provisions of section 66 shall not apply to the reduction of share capital effected in pursuance of the order of the Tribunal under this section.” Therefore, the application for reduction of share capital can also be considered u/s 230 of Act.

The Hon’ble Member (Judicial) of the Tribunal, however, dismissed our argument vide Order dated December 08, 2017 and quoted as under:

“It is pertinent to note that Reduction of Capital and sanction relating to the same has been prescribed separately elsewhere in Companies Act, 2013 and for the said purpose separate rules have also been framed by the Central Government. Thus reduction of capital requires separate set of procedure to be complied for which specific rules have been framed and hence cannot be  brought within the confines of Section 230 of the Companies Act, which is more for restructuring business. At the cost of repetition where a separate section deals in relation to the scheme contemplated by the Applicant Company and which also contains specific rules to be complied with it will be appropriate for the applicants to file the application under the relevant provision and not under the one presently under which, the application has been preferred. Hence, the Tribunal is constrained to dismiss the application as provisions for exclusive reduction of share capital is provided elsewhere in Companies Act, 2013 and the applicant, if so advised may prefer under the said provision of the Act of 2013. This application is accordingly dismissed.”

Appeal against NCLAT order

Applicant Company filed an appeal against the NCLT order to NCLAT on the grounds of relevant explanation of Section 230 of the Act (as reproduced above) and various judicial precedents, wherein the High Courts have entertained application(s) u/s 391 of the erstwhile Company Law, for reduction of share capital despite having specific provisions for reduction of share capital, as follows:

  1. the Hon’ble Bombay High Court in “Investment Corporation of India Ltd.─ (1987) 61 Com Cases 92 Bom”;
  2. the Hon’ble High Court of Gujrat in “Gujarat Ambuja Exports Ltd.─2003-(CC1)-GJX-0113-GUJ”;
  3. the Hon’ble High Court of Madras in “Panasonic Appliances India Co. Limited” in Company Petition No. 331 of 2013; and
  4. the Hon’ble High Court of Andhra Pradesh decision in “M/s. Jyoti Infraventures Limited" Company Petition No. 263 of 2013”

On July 16, 2018 NCLAT has passed the Judgment which is quoted as under:

“We hold that the Tribunal failed to notice the ‘Explanation’ below Section 230, which makes it clear that even for reduction of share capital effected in pursuance of the order of the Tribunal under Section 230, the provision of Section 66 shall not apply. As noticed above, earlier the Hon’ble High Courts used to entertain application(s) under Section 391 for reduction of share capital. This will be evident from the decision of the Hon’ble Bombay High Court in “Investment Corporation of India Ltd.─ (1987) 61 Com Cases 92 Bom”; Hon’ble High Court of Gujrat in “Gujarat Ambuja Exports Ltd.─2003-(CC1)-GJX-0113-GUJ”; Hon’ble High Court of Madras in “Panasonic Appliances India Co. Limited” in Company Petition No. 331 of 2013 and the Hon’ble High Court of Andhra Pradesh decision in “M/s. Jyoti Infraventures Limited─ Company Petition No. 263 of 2013” decided on 21st April, 2014. Now it is not necessary to refer the earlier decisions in view of the ‘explanation’ below Section 230. Having held that the Tribunal failed to notice the aforesaid observations, we have no other option but to set aside the order dated 8th December, 2017 passed in CA (CAA)-105(ND)/2017 which is accordingly set aside. The case is remitted to the Tribunal to decide the application under Section 230 in accordance with law after notice and hearing the parties.”

NCLAT judgment is in the favour of R Systems and referred back the matter to the Tribunal.

My comments

NCLAT order has bring clarification that though there are specific provisions in the Act (section 66) for reduction in share capital but the same are also covered under explanation to section 230. However in my view, application for reduction of share capital should be filed u/s 66 (unless there are any other restructuring proposals attached with it) as section 66 is easy to comply and takes less time compared to section 230.

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Category Corporate Law, Other Articles by - CA Nirmit Sharma 



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