In re Fairfield Atlas Limited (NCLT Mumbai)
The National Company Law Tribunal (NCLT) considered a petition filed by Fairfield Atlas Limited seeking confirmation of a special resolution passed by its equity shareholders for reduction of its issued, subscribed and paid-up equity share capital under Section 66 of the Companies Act, 2013. The petition proposed reducing the company’s paid-up equity share capital from 2,73,20,540 fully paid equity shares of ₹10 each to 2,68,75,121 fully paid equity shares of ₹10 each by cancelling and extinguishing 4,45,419 equity shares held by public shareholders. The company proposed debiting the equity share capital account to the extent of the face value of the cancelled shares and charging the difference between the face value and consideration to retained earnings under reserves and surplus. The special resolution approving the reduction was passed at the Extraordinary General Meeting held on 10 May 2021.
The petitioner stated that its equity shares had been delisted, resulting in the absence of any trading platform for public shareholders. According to the petition, public shareholders were unable to liquidate their investments because the shares were no longer tradable through stock exchanges. The proposed selective reduction was intended to provide public shareholders with an opportunity to exit at a fair and equitable price while reducing the administrative costs associated with servicing a small percentage of shareholding held by a large number of public shareholders located across India and overseas.
The Tribunal recorded the company’s capital structure before and after the proposed reduction. Before reduction, the company had an authorised share capital of ₹28 crore divided into 2,80,00,000 equity shares of ₹10 each and an issued, subscribed and paid-up share capital of ₹27,32,05,400 divided into 2,73,20,540 equity shares. After the proposed reduction, the authorised share capital remained unchanged, while the issued, subscribed and paid-up share capital would stand reduced to ₹26,87,51,210 divided into 2,68,75,121 equity shares. The order also recorded that public shareholders would receive consideration of ₹273.20 per equity share following the reduction.
The Regional Director (Western Region), Ministry of Corporate Affairs, filed a report raising several observations. These included a reference to a pending complaint relating to non-transfer of shares, a requirement that the company affirm protection of creditors, stakeholders and government revenue, observations regarding tax implications arising from the reduction, the selective nature of the reduction affecting only public shareholders, and whether the proposed transaction amounted to a buy-back intended to circumvent Section 68 of the Companies Act, 2013.
In response, the petitioner stated that the complainant referred to by the Registrar of Companies was not reflected as a shareholder in the register of members and that the complaint had no impact on the petition. The company further affirmed that creditors, stakeholders and statutory dues were protected and undertook to comply with all applicable provisions of the Income-tax Act, 1961. It also stated that consideration payable to public shareholders would be treated as dividend within Section 2(22)(d) of the Income-tax Act and that taxes would be deducted or withheld in accordance with applicable law. The petitioner additionally pointed out that dividend distribution tax provisions had been abolished with effect from 1 April 2020.
Regarding the selective nature of the reduction, the company reiterated that following delisting in October 2013, public shareholders collectively held only 1.63% of the paid-up share capital, comprising 4,45,419 shares held by 2,516 shareholders, many of whom held 100 shares or fewer. The company submitted that the reduction would provide those shareholders with an exit opportunity while reducing administrative costs.
On the Regional Director’s observation concerning Section 68, the petitioner submitted that Sections 66 and 68 prescribe separate and independent statutory procedures. It relied upon earlier judicial decisions to contend that a company may proceed under Section 66 for reduction of share capital without circumventing the provisions governing buy-back under Section 68. Copies of those decisions were placed before the Tribunal.
The Tribunal noted that the petitioner had filed an affidavit in rejoinder providing clarifications to the observations made by the Regional Director. After considering those clarifications and the judgments cited by the petitioner, the Tribunal allowed the company petition. It directed the company to publish notices regarding registration of the order and minutes in The Free Press Journal (English) and Navshakti (Marathi) within 30 days of registration and to file the certified copy of the order and certified minutes with the Registrar of Companies within 30 days of receiving the certified order.
By its final order, the Tribunal confirmed the reduction of the issued, subscribed and paid-up share capital of Fairfield Atlas Limited to ₹26,87,51,210 divided into 2,68,75,121 equity shares of ₹10 each, reduced from ₹27,32,05,400 divided into 2,73,20,540 equity shares. It further recorded that, upon registration of the minute, 2,68,75,121 shares would be deemed fully paid and the remaining 11,24,879 shares would remain unissued.
Cases Discussed
- Earnest Towers Private Limited (NCLT Mumbai), CP No. 1188 of 2020, dated 24.08.2021.
- Lily Realty Private Limited (NCLT Mumbai), CP No. 4514 of 2019, dated 10.03.2021.
- Company Scheme Petition No. 434 of 2014 connected with Company Summons for Direction No. 396 of 2014 (High Court of Bombay), dated 28.04.2015.
- Kalyani Thermal Systems Limited (High Court of Bombay), Company Petition No. 801 of 2005 in Company Application No. 620 of 2005, dated 23.12.2005.
FULL TEXT OF THE NCLT JUDGMENT/ORDER
1. The Court convened by video-conference.
2. Heard Learned Counsel for the Petitioner Company and the representative from the Regional Director (WR). No objector has come before the Tribunal to oppose the Petition and nor any party has controverted any averments made in the Petition.
3. The learned Counsel for the Petitioner Company submits that this petition is for confirmation of a special resolution passed by the equity shareholders of the Petitioner Company to reduce the issued, subscribed and paid-up equity share capital of the petitioner Company from 2,73,20,540 (Two Crores Seventy Three Lakhs Twenty Thousand Five Hundred and Forty) equity shares of INR 10/- (Indian Rupees Ten) each, fully paid-up, to 2,68,75,121 (Two Crores Sixty-Eight Lakhs Seventy Five Thousand One Hundred and Twenty One) equity shares of INR 10/-(Indian Rupees Ten) each, fully paid-up and that the Petitioner Company shall debit the Equity share capital account to the extent of the face value of shares cancelled and the difference between face value per share and the amount of consideration per share shall be debited to the ‘Retained Earning ’under the head ‘Reserves and surplus’. The said special resolution was approved with requisite majority by the equity shareholders of the Petitioner Company in its Extraordinary General Meeting held on May 10, 2021.
4. The Learned Counsel for the Petitioner Company states that the rationale for reduction is that, due to delisting of the equity shares, of the Petitioner Company which resulted in non-tradability of its equity shares through stock exchange(s), the investment made by the Public Shareholders in the Petitioner Company is locked. As there is no market to buy and sell the equity shares and the Public Shareholders do not have the opportunity to exit the Petitioner Company, liquidate their shareholding or realize their investment from the Petitioner Company. The reduction of share capital will provide the Public Shareholders an opportunity to liquidate their entire shareholding in the Petitioner Company at a fair and equitable price. Further, the capital reduction will also enable the petitioner Company to save the administrator and other costs associated with serving a very small percentage of shareholding held by a large number of public shareholders distributed all across the Country and overseas.
5. CAPITAL STRUCTURE OF PETITIONER COMPANY
The present Authorised, issued, subscribed and paid up Share Capital of the Petitioner Company as on 31st March 2020 is as under:
| Particulars | Amount in INR |
| AUTHORISED
28,000,000 Equity Shares of Rs. 10/- each |
280,000,000 |
| TOTAL | 280,000,000 |
| ISSUED & SUBSCRIBED & PAID-UP
27,320,540 Equity Shares of Rs. 10/- each fully paid up. |
273,205,400 |
| TOTAL | 273,205,400 |
Subsequent to this date, there has been no change in capital structure of the Petitioner Company. A certified true copy of the audited financial statement of the Petitioner Company as on 31st March 2020 and the unaudited financial statement of the Petitioner Company as on 28th February 2021 is marked and annexed to this Application.
6. The following special resolution was approved by the requisite majority of equity shareholders of the Petitioner Company at the Extra Ordinary General Meeting held on 10th May. 2021 pursuant to and in accordance with Section 66(1) of the Act:
“RESOLVED THAT pursuant to the provisions of Article 13 and any other applicable provisions of the Articles of Association, Section 66 and other applicable provisions of the Companies Act, 2013 read with the National Company Law Tribunal (Procedure for Reduction of Share Capital) Rules, 2016 and other relevant rules made there under, including any statutory modification(s) thereto or any amendment(s) or substitution or re-enactment thereof for the time being in force and subject to the confirmation of the National Company Law Tribunal (‘NCLT’) and such other approvals, consents, permissions or sanctions of any other authority, body or institution (hereinafter collectively referred to as ‘the concerned authorities’) as may be required, the consent of the equity shareholders be and is hereby accorded to reduce the issued, subscribed and paid-up share capital of the Company from INR 27,32,05,400 divided into 2,73,20,540 (Two Crore Seventy-Three Lakhs Twenty Thousand Five Hundred and Forty) shares of INR 10 each, fully paid-up, to INR 26,87,51,210 divided into 2,68,75,121 shares of INR 10/- each i.e. being the shares held by promoters including their nominee(s) (viz. TH LICENSING, INC.) [hereinafter referred as ‘Promoter(s)’), by cancelling and extinguishing 4,45,419 equity shares of Rs. 10/- each (1.63 % of the total issued, subscribed and paid-up equity share capital of the Company), held by the holders of the equity shares of the Company other than Promoter(s), hereinafter referred to as the “Identified Shareholders” (the “Capital Reduction”) on such terms and conditions of reduction of share capital as provided in explanatory statement annexed to this notice.
RESOLVED FURTHER THAT subject to the confirmation of the Capital Reduction by the NCLT and such Capital Reduction becoming effective and operative, and / or the receipt of such other approvals or confirmations as may be required, the Identified Shareholders of the Company, as on the ‘Record Date’ to be determined by the Board, for the purposes of determining the names of the registered holders of the equity shares of the Company, shall be paid, for the equity shares held by them and which are cancelled and extinguished, a sum of INR 44,54,190 (Rupees Forty four Lakhs Fifty four Thousand One Hundred Ninety only) per equity share of Rs. 10/- each, so cancelled and extinguished.
7. The Extra Ordinary General Meeting of the equity shareholders of the Petitioner Company was attended by a total of 23 members (representing 2,68,77,580 shares and 98.38 % of the paid-up equity share capital of the Petitioner Company) either in person or through authorised representatives, including an authorised representative of the promoter of the Petitioner Company (i.e. T-H Licensing Inc.) holding 2,68,75,121 equity shares of INR 10/- each representing 98.37% of the share capital of the Petitioner Company.
8. Pursuant to the provision of Article 112 of Articles of Association of the Petition Company, the Chairman of the Board acted as the Chairman of the said Meeting. With the permission of the Chairman, the Company Secretary invited the members to speak. During the meeting the members were informed that e-voting facility was kept open for e-voting by members from 7th May 2021 at 9.00 am to 9th May 2021 at 5.00 pm. The chairman further informed that, members who were present in the meeting through VC/OAVM facility and have not caste their vote on the Resolutions through remote e-Voting and were otherwise not barred from doing so were eligible to vote through e-Voting system available during the meeting and time allotted after the meeting.
9. The share capital of the Petitioner Company prior to and post the reduction of its share capital shall be as follows –
(a) Prior to capital reduction:
| Particulars | Amount (in INR) |
| Authorized Share Capital | |
| 2,80,00,000 equity shares of INR10/- each | 28,00,00,000 |
| Total | 28,00,00,000 |
| Issued, subscribed and paid-up Share Capital | |
| 2,73,20,540 equity shares of INR10/- each | 27,32,05,400 |
| Total | 27,32,05,400 |
b) Post capital reduction:
| Particulars | Amount (in INR) |
| Authorized Share Capital | |
| 2,80,00,000 equity shares of INR10/- each | 28,00,00,000 |
| Total | 28,00,00,000 |
| Issued, subscribed and paid-up Share Capital | |
| 2,68,75,121 equity shares of INR10/- each | 26,87,51,210 |
| Total | 26,87,51,210 |
10. Subsequent to the aforesaid reduction, a price of INR 273.20 (Indian Rupees Two hundred and seventy-three and twenty paisa only) per equity share (the “Offer Price”) will be paid to the Public Shareholders as consideration for the proposed selective capital reduction.
11. The Regional Director (Western Region), Ministry of Corporate Affairs, Mumbai, has filed a Report dated 25th February 2022 inter-alia making the following observations which are produced hereunder:
| Para | Observation by the Regional Director | Response by the Petitioner |
| 6 | ROC, Mumbai in his Report No. ROC/STA(SP)/03/Sec. 66/288 dated 12.01.2022 inter-alia mentioned that there is a complaint against the Company/ scheme. The details is given below:
SRN Nature of Complaints Status Complaint’s name 100037991 Non-transfer of 100 shares received vide Ministry Letter No. 3/44/2018-CL-III(WR) dated 29.01.2019 Pending for action Dhani Ram Sharma |
RD Report referred to the report of RoC Mumbai wherein a complaint made by Mr. Dhani Ram Sharma in relation to non-transfer of 100 shares is mentioned and also RD has stated that it may be decided on the merits. In this regard, we submit that Mr. Dhani Ram Sharma is not a shareholder as per the register of Members maintained by Registrar and Share Transfer Agent of the Petitioner Company and this Complaint is an independent matter and has no impact on this Petition. |
| 7 (A) | Applicant to submit an Affidavit to the effect that the interest of the creditors and all stakeholders and Government Revenue are protected as well as Statutory dues are paid off. |
The said reduction of capital is fair and in the interest of the creditors and all the stakeholders and government revenue are protected as well as statutory dues are paid off of the Petitioner Company. It is respectfully submitted further that the said reduction of capital will not, once be confirmed by this Hon’ble Tribunal, work unjustly or inequitably against the interests of the Public Shareholders. |
| 7 (B) | The tax implications if any arising out of the proposal for reduction is subject to final decision of the Income Tax Authorities. The approval of the Company Petition by this Hon’ble Court may not deter the Income Tax Authority to scrutinize the tax return filed by the Company after giving effect to the proposed reduction. The decision of the Income Tax Authority is binding on the petitioner Company.
Further the payment made to the shareholders shall be subject to payment of Income Tax or Capital Gain Tax, as the case may be in the hands of recipients Shareholders. Further the repayment of amount by way of reduction of capital to the shareholders shall be in the nature of deemed dividend i.e. the amount paid in excess of the nominal value (i.e Rs. 10/-) and hence the Company shall be liable to pay dividend distribution tax, if so applicable. |
The Petitioner Company undertakes to comply with all the applicable provisions including proceedings of the Income Tax Act, 1961(the “Income Tax Act”) and all tax issues arising out of the Petition of Capital Reduction will be met and answered in accordance with the law.
Further, as mentioned in paragraph 18 of our Petition, the consideration payable to the Public shareholders would be considered as dividend within the provisions of Section 2(22)(d) of the Income-tax Act, which will be taxable in the hands of these Public shareholders. Accordingly, the Petitioner Company will, in accordance with the applicable provisions of the Income-tax Act, withhold/deduct taxes at the prescribed rates, on such consideration. Further, we wish to highlight that dividend distribution tax provision have been abolished from Income Tax Act with effect from 1st April, 2020. |
| 7 (C) | The petitioner Company is proposing to reduce issued, subscribed and paid-up share capital of the Company from Rs. 27,32,05,400 divided into 2,73,20,540 equity shares of Rs. 10/- each to Rs. 26,87,51,210 divided into 2,68,75,121 equity shares of Rs. 10/- each i.e. being the shares held by promoters including their nominee(s) (viz. TH LICENSING, INC., by cancelling and extinguishing 4,45,419 equity shares of Rs. 10/-each held by holders of the equity shares of the Company, other than promoters. In this regard it is submitted that:(i) The proposed reduction of the share Capital is selective reduction as the petitioner has proposed the reduction of shares of the public shareholders only other than promoter;(ii) The Petitioner Company to place on record the reasons for such selective reduction with full facts. |
The detailed background, reasons/rationale, commercial justification of the reduction of share capital by the Petitioner Company was provided in the paragraph 11 to 15 of our Petition, which is reproduced below:
“11. In October 2013, the equity shares of the Petitioner Company were delisted from the Bombay Stock Exchange (‘BSE’) Limited pursuant to a delisting offer made by the promoter of the Petitioner Post the Delisting, there is no trading platform available to the Public Shareholders of the Petitioner Company, who in aggregate hold 1.63% of the total paid-up equity share capital of the Petitioner Company. Public Shareholders means all shareholders other than the Promoter and its nominee. The shareholding pattern of the Company as on 28th February, 2021 is: Sr. No. Category of shareholder No. of shares held % of shares held 1 Promoter including nominees) 2,68,75,121 98.37% 12. As can be seen from the shareholding pattern above, the Public Shareholders hold an aggregate of 1.63% of the total paid-up equity share capital of the Petitioner Company. Also, the total number of these Public Shareholders is 2516 and out these 2516 shareholder, 1965 Public Shareholders currently hold less than or equal to 100 issued, subscribed and fully paid up equity shares of the Petitioner Company. 13. The equity shares of the Petitioner Company are no longer listed on the stock exchange. Due to delisting of the equity shares of the Petitioner Company which resulted in non-tradability of its equity shares through stock exchange(s), the investment made by the Public Shareholders in the Petitioner Company is locked. As there is no market to buy and sell the equity shares and the Public Shareholders do not have an opportunity to exit the Petitioner Company, liquidate their shareholding or realize their investment from the Petitioner Company. 14. Implementing the restructuring of the Petitioner Company’s existing paid-up equity share capital structure by way of selective reduction of the paid-up equity share capital held by the Public Shareholders will provide the Public Shareholders an opportunity to liquidate their entire shareholding in the Petitioner Company at a fair and equitable price. Further, this capital reduction will also enable the Petitioner Company to save the administrative and other costs associated with servicing a very small percentage of shareholding held by a large number of Public Shareholders distributed all across the Country and overseas. 15. As a result of the proposed selective capital reduction, the issued, subscribed and paid-up equity share capital of the Petitioner Company will be reduced from INR 27,32,05,400 dividend into 2,73,20,540 equity shares of INR 10 each to INR 26,87,51,210 divided into 2,68,75,121 equity shares of INR 10 each, and the Reserves and Surplus of the Petitioner Company will be reduced by an amount of INR 11,72,34,280.80.” |
| 7 (D) | In the proposed scheme the applicant proposes to pay off Rs. 273.20/- per equity share to the public shareholders, which is a nature of buy back. Therefore, Petitioner Company be directed to place on record as to how the present scheme is not to circumvent the provisions of the Section 68. | A company having a share capital by passing a special resolution and subject to confirmation by the Tribunal is entitled to reduce it’s share capital in any manner as it so desires. The provisions of the Companies Act, 2013 (“the Act”) have prescribed separate procedures and regulations for Buy-Back, which being independent provisions are not inter-dependent to each other.
The provision under Section 66(6) of the Act explicitly provides for exclusion of section 66 of the Act for the purposes of buy-back of it’s own securities by any Company. It is open for the Petitioner company to follow the procedure under Section 66 of the Act for share capital reduction or procedure under Section 68 of the Act of the Act for Buy-Back of its own securities and both the provisions/procedures stand independent. Further section 66 of the Act provides for a detailed procedure to reduce the share capital of the Company in any manner inter alia paying off any paid-up capital which is in excess wants of the Company. Therefore, the contentions of the Regional Director are contrary to the prevailing legal position. In this regard reliance is placed on the following rulings where similar observations were raised by the Regional Director and the Hon’ble High Court/NCLT were pleased to allow reduction of share capital as a procedure under Section 66of the Act: a. Decision of NCLT Mumbai Bench in CP No. 1188 of 2020 in the matter of Earnest Towers Private Limited dated 24.08.2021. b. Decision of High Court of Bombay in Company Petition No. 801 of 2005 in Company Application No. 620 of 2005 in the matter of Kalyani Thermal Systems Limited dated 23.12.2005. c. Decisions of NCLT Mumbai Bench in CP No. 4514 of 2019 in the matter of Lily Realty Private limited dated 10.03.2021. d. Decision of High Court of Bombay in Company Scheme Petition No. 434 of 2014 connected with Company Summons for direction no. 396 of 2014 dated 28.04.2015. In view of the above the Petitioner Company confirms that the present Scheme does not circumvent the provisions of the Section 68 of the Act in any manner. Copies of the Judgements were annexed herewith vide “Annexures -1 to 4 respectively”. |
7. In response to the Report of the Regional Director the Petitioner Company has filed affidavit in rejoinder and have given necessary clarifications to the observations made by the Regional Director.
8. In view of the clarifications given by the Petitioner Company and the judgement cited on the issue the Company Petition is allowed.
9. The Petitioner Company to publish notices about registration of order and minutes by the concerned Registrar of Companies, Mumbai, Maharashtra in two newspapers namely ‘The Free Press Journal ’in English language and translation thereof in ‘Navshakti ’in Marathi language both having circulation in the State of Maharashtra within 30 days of registration.
10. The Petitioner Company undertakes to file the certified copy of the order and form of minutes duly certified by the Designated Registrar of this Tribunal with the Registrar of Companies within 30 days from the date of receipt of the certified Order from the Registry of this Tribunal.
ORDER
“The issued, subscribed and paid up share capital of Fairfield Atlas Limited, is henceforth Rs. 26,87,51,210 divided into 2,68,75,121 shares of INR 10 each, reduced from 27,32,05,400 divided into 2,73,20,540 shares of INR 10 each. At the date of the registration of this minute 2,68,75,121 shares have been issued and are deemed to be fully paid (and the remaining 11,24,879 shares are unissued)”
