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Judgment
Ashutosh Chandra, Member (T)
This Company Petition has been filed on behalf of the Petitioner Company Under Section 66 of the Companies Act, 2013 read with Rule 2(1) of the National Company Law Tribunal (Procedure for Reduction of Share Capital of the Company) Rules, 2016, praying, inter alia, to approve the reduction of capital as resolved by a Special Resolution as set out in paragraph 8, and the same be confirmed; to direct the Registrar of Companies, Karnataka to allow the Company to file Form INC-28 and SH-7, etc.
Brief facts of the case, as mentioned in the Petition, are as follows:
(1) M/s. Mohtisham Estates Private Limited (herein after referred to as Petitioner) was incorporated on 19.04.2007, under the provisions of the Companies Act, 1956, bearing CIN: U45400KA2007PTC042536. The registered office of the Company is situated at 7th Floor, Empire Mall, M.G. Road, Mangalore - 560 034. The Authorised Share Capital of the Company is Rs. 13,33,34,000/- (Rupees Thirteen Crores Thirty Three Lakhs Thirty Four Thousand only) consisting of shares as below:
Type of Shares
Equity Shares
Additional Capital A Shares
Additional Capital B Shares
Total
Founder Shares
Investor Shares
Number of Shares
50,000
50,000
16,667
16,667
1,33,334
Nominal Value per shares (In Rs.)
1,000
1,000
1,000
1,000
1,000
Total Authorised Capital (In Rs.)
5,00,00,000
5,00,00,000
1,66,67,000
1,66,67,000
13,33,34,000
(2) As per the Article of Association of the Company, "Founder Shares" means the Equity Shares of the Company of par value Rs. 1,000 (Rupees One Thousand only) issued to Founders and Other Associates at such premium as is authorised by the Board of Directors and having voting rights equal to the proportion of the share capital which has been paid up through such shares, assuming the Company had issued only Equity Shares; provided that if the Company has issued investor shares, then notwithstanding the actual proportion of the paid-up share capital of the Company as represented by such Founder Shares, the voting rights of all the Founder Shares at any time shall be equivalent to 49.50% of the paid-up share capital of the Company and inter se between each Founder Share, the aforesaid 49.50% rights to voting shall be divided proportionately between each such Founder share which is outstanding from time to time and having economic rights as defined in the Articles and the Investment Agreement.
(3) As per the Articles of Association of the Company, "Investor Shares" means the Equity Shares of the Company issued to the Investor and/or their Affiliates and at par value of Rs. 1,000 and issued to the investors at such premium as is authorised by the Board of Directors and collectively with other investor Shares having voting rights and rights to dividend equal to 49.50% of the paid up share capital of the Company and inter se between each Investor Share, the aforesaid 49.50% rights shall be divided proportionately between each such Investor Share which is outstanding from time to time and having economic rights as defined in the Articles and the Investment Agreement.
(4) The Paid-up Capital of the Company is Rs. 11,86,32,000 (Rupees Eleven Crores Eighty Six Lakh Thirty Two Thousand Only) Consisting of Shares as below:
Type of Shares
Equity Shares
Additional Capital A Shares
Additional Capital B Shares
Total
Founder Shares
Investor Share
Number of Shares
49,182
40,462
14,494
14,494
1,18,632
Nominal Value per shares (In Rs.)
1,000
1,000
1,000
1,000
1,000
Total Capital (In Rs.)
4,91,82,000
4,04,62,000
1,44,94,000
1,44,94,000
11,86,32,000
(5) It is submitted that by article (s) "11 (iii)" of the articles of association of the Company, it is provided as follows:
11 (Hi) Cancel any share, which at the date of the passing of the resolution, have not taken or agreed to be taken by any person and Company may, by special resolution and subject to the approval of the appropriate authority to reduce the issued, subscribed and paid-up capital of the Company. (6) It is submitted that the Company is into development of townships, developers of land and other real estate business. The Company is still in the stage of acquiring the land required for developing the township. Hence, the Company is not generating any revenue. However, as per the audited Balance Sheet of the Petitioner Company made up to 31st March 2018, the assets and Liabilities of the Company are as follows:
Liabilities
Amount
Assets
Amount
Shareholder's Fund
1,06,61,99,482
Non-Current Liabilities
--
Non-Current Assets
7,85,40,027
Current Liabilities
40,15,059
Current Assets
99,16,80,367
(7) There were no Qualifications, reservation or adverse remark or disclosure made by the auditor in his report by the Statutory Auditors, and the Audit Report and Audited Balance Sheet as on 31st March, 2019, and there are no pending inspections, inquiry or investigations against the Company under the Companies Act, 2013.
(8) The Company is a Joint Venture between Oman Investment Fund (OIF) i.e. M/s. Funderburk Enterprise Private Limited, has entered into a Share Holders Agreement (SHA) with Mohtisham Complexes Private Limited (MCPL) on 24th January, 2008 and M/s. Funderburk 2 Mauritius Limited has entered into a revised SHA with MCPL on 18th July, 2013.
(9) As per the SHA both the Joint Venture parties have to hold equity Shareholding. However, due to the advance investment by MCPL to be followed by a matching investment by OIF, slight differences occurred and the investment by OIF became lesser than the amount invested by MCPL. At times, to meet the commitments, MCPL had to invest in advance, which was not evenly matched by OIF at all times. At this point of time, OIF expressed reservations to invest further to match the investment made by MCPL, resulting in excess shares being allotted to MCPL, though as per the agreement both the holdings should be equal. Therefore, it was deliberated at length and both parties agreed upon equalizing the respective holdings by resorting to reduction in capital of MCPL thereby making the holdings equal as per SHA.
(10) The Company is having Founder Equity Shares and Investor Equity Shares. As per Shareholders Agreement, proportion of both the Shares in Paid-up Capital should be same. In Paid-up Capital, the proportionate of Founder Shares is exceeded by 8,720 Shares. The Breakup of Paid-up Capital after proposed reduction is as below:
Type of Shares
Equity Shares
Additional Capital A Shares
Additional Capital B Shares
Total
Founder Shares
Investor Shares
Number of Shares
40,462
40,462
14,494
14,494
1,09,912
Nominal Value per shares (In Rs. )
1,000
1,000
1,000
1,000
1,000
Total Capital (In Rs. )
4,04,62,000
4,04,62,000
1,44,94,000
1,44,94,000
10,99,12,000
(11) By a special resolution of the Company, duly passed in accordance with Section 66 (1) of the Companies Act, 2013, at a General Meeting thereof held after due notice as provided in the Act on the 24th May, 2019, it was resolved:
"RESOLVED THAT pursuant to Section 66 and other applicable provisions of the Companies Act, 2013, (including any statutory modification(s) or re-enactment thereof for the time being in force) and the rules made thereunder, read with Articles of Association of the Company, and the confirmation by the Tribunal; and such other approvals as may be required, and subject to the terms and conditions and modifications, if any, as may be prescribed by the NCLT and subject to the approval of the Tribunal and as may be required or prescribed by such appropriate authority while granting approval, confirmation, and consent of members & directors of the Company be and is hereby accorded to reduce the issued, subscribed and paid-up capital of the Company from Rs. 11,86,32,000 consisting of 89,644 equity shares of Rs. 1000 each, 14,494 Capital A Equity Shares of Rs. 1,000 each and 14,494 Capital B Equity Shares of Rs. 1000 each to Rs. 10,99,12,000 consisting of 80,924 equity shares of Rs. 1000 each, 14,494 Capital A Equity Shares of Rs. 1000 each and 14,494 Capital B Equity Shares of Rs. 1000 each, by cancelling and existing 8720 equity shares of Rs. 1000 each, held by Mohtisham Complexes Private Limited and other Shareholder.
RESOLVED FURTHER THAT upon the Capital Reduction being confirmed by the Tribunal and becoming effective and operative, and/or the receipt of such other approvals as may be required, Mohtisham Complexes Private Limited and other Shareholders shall be paid, for the equity shares held by them and which are extinguished at the value of the equity shares of the Company for which shares have been subscribed.
RESOLVED FURTHER THAT upon the Capital Reduction being confirmed by the Tribunal and becoming effective and operative, without any further act or deed by the equity shareholders (including but not limited to surrendering of share certificates), 8720 equity shares of Rs. 1000 each held by Mohtisham Complexes Private Limited and other Shareholders shall stand cancelled and extinguished and rendered invalid.
RESOLVED FURTHER THAT the payment of consideration to the above mentioned Shareholder shall be made within such number of days of the Record Date and subject to such approvals, if any, as may be required under the applicable laws/or as may be directed by the NCLT, on the reduction becoming effective. All such payments will be made by the electronic transfer of funds, cheque pay order/warrant or demand draft, NEFT/RTGS/IMPS or set aside against any amount to be paid by the Mohtisham subject to if applicable payment of appropriate taxes by the Company.
(12) The reduction of Share Capital involves the payment to 8,720 Equity Shares of Rs. 1000 each, held by Mohtisham Complexes Private Limited, at an average of Rs. 3,900/- per Share.
(13) The form of the minutes proposed to be registered under Section 66(5), is as follows:
"The paid-up capital of Mohtisham Estates Private Limited, is henceforth 10,99,12,000 (Rupees Ten Crore Ninety Nine Lakhs Twelve Thousand only) divided into 80,924 (Eighty Thousand Nine Hundred and Twenty Four) equity shares of Rs. 1000 (Rupees Thousand) each, 14,494 (Fourteen Thousand Four Hundred and Ninety Four) Capital A Equity Shares of Rs. 1000 (Rupees Thousand) each and 14,494 (Fourteen Thousand Four Hundred and Ninety Four) Capital B Equity Shares of Rs. 1,000 (Rupees Thousand) each reduced from Rs. 11,86,32,000 (Rupees Eleven Crores Eighty Six Lakh Thirty Two Thousand only) divided into 89,644 (Eighty Nine Thousand Six Hundred and Forty Four) Equity shares of Rs. 1000 (Rupees Thousand) each, 14,494 (Fourteen Thousand Four Hundred and Ninety Four) Capital A Equity Shares of Rs. 1000 (Rupees Thousand) each and 14,494 (Fourteen Thousand Four Hundred and Ninety Four) Capital B Equity Shares of Rs. 1000 (Rupees Thousand) each."
(14) There are no secured Creditors in the Company, and 6 unsecured creditors in the Company. There are no arrears for repayment of any deposits or interest payable thereon on the date if presenting the Petition. The declaration made by the Directors that there are no arrears in repayment of the Deposits or interest payable has been filed.
(15) It is further submitted that the above reduction of Equity Share Capital is in compliance with the Accounting Standards and in conformity with Companies Act, 2013. The Auditors Certificate certifying that the Accounting treatment for the reduction is in conformity with the Accounting Standard under Section 133 of the Companies Act, 2013 has been filed.
During the course of hearing, the Tribunal ordered notices to the Registrar of Companies, Karnataka and all Creditors of the Company. Accordingly, notices were served upon the Authorities.
The Registrar of Companies, Karnataka and Regional Director, Ministry of Corporate Affairs, SER, have filed an Affidavit dated 28.05.2020. Apart from the facts of the case as mentioned in the Petition, it has been observed as under:
(1) It is stated that the 8720 equity shares are to be extinguished/reduced to maintain the parity among the group as per the agreement. The Company has not complied with the provisions of Section 166, 210 and 220, Section 96 and 129 of the Companies Act, 1956/2013 for the financial years 2014 to 2018 and no provision has been made in the Accounts for making penalty as per Auditor's qualified remarks. Hence, the Company may be directed to compounding/adjudicating application as the case may be with ROC for necessary action before the approval of the Scheme.
(2) The Petitioner Company has foreign shareholders and hence need to comply with FEMA/RBI Regulations.
(3) The Company's Paid up capital was above Rs. 5 Crores from the financial year 2011-12 onwards and the Company has not appointed of Company Secretary for the period from 13.07.2011 to 10.02.2013 and from 28.06.2015 to till date. The Petitioner may be advised to file adjudication application for the said violation before the approval of the Scheme.
(4) As per Financial Statement as at 31.03.2019, Share Application Money of Rs. 5,853 is pending from Funderburk 2 Mauritius Ltd. The Petitioner may be directed to explain the same.
(5) As per the records attached to the application for reduction of capital, the Board has passed resolution on 24.05.2019. On the same day the EOGM was held on for reduction of capital. In this connection, the Company may be asked to compliance of Section 101 of the Companies Act, 2013.
(6) As per valuation Certificates, the value of each share is at Rs. 3,900/-and further in the copy of the Petition also, at Page No. 20, the value of shares is mentioned as Rs. 3,900/-. However, in the Resolution as well Minutes to be recorded U/s.66(5) of the Companies Act, 2013, it is mentioned for reduction of 8720 shares at Rs. 1000/- in respect of promoter shares, duly by cancelling or extinguishing the shares to match with the conditions laid in Shareholder Agreement entered into by the Petitioner Company.
(7) Further, in the reply furnished by the Company also, the method of reduction is given post reduction, however exactly how much amount is being transferred is not furnished. Hence, full facts with regard to the transfer of amount to the promoter shareholders to whom reduction is offered should be placed before the Tribunal approval of the Scheme.
(8) The Petitioner Company may be advised to open a separate account for transfer of the amount in case the Application is advised by the Tribunal and in case, any unpaid amount is lying in such account, it should be invariably transferred to the IEPF Account.
(9) The Petitioner Company has approached the Tribunal for approval of the reduction of capital only to a selective group i.e. Promoter Group and not across all the Shareholders stating that they intend to reduce the capital only to equalize the shares among promoter and investor groups. This could otherwise undertaken by bringing additional capital from investor group instead of approaching the Tribunal through the present scheme.
Pursuant to the above observations of ROC and RD, Mr. Naman G Joshi, PCS has filed reply affidavit dated 19.06.2020, by inter alia clarifying as follows:
(1) Regarding para (d) the reason of non-compliance under section 166, 210 and 220, Section 96 and 129 of the Companies Act, 1956/2013 for the financial years 2014 to 2018 is due to the difference in shareholding pattern due to which every compliance event is delayed; and Management was of the opinion that on the resolution of the issue equalisation of shareholding, every non-compliance will be made good through the means available such as condonation of delay, compounding or adjudication.
(2) Regarding para (e) i.e., compliance to FEMA/RBI Regulations it is submitted that as per the scheme proposed by the company there is no outflow of funds to the Foreign Joint venture partner hence FEMA compliance is not required.
(3) Regarding the ROC/RD observations that the Company's Paid up capital was above Rs. 5 Crores from the financial year 2011-12 onwards and the Company has not appointed of Company Secretary for the period from 13/7/2011 to 10/2/2013 and form 28/6/2015 to till date, it is submitted by the Petitioner that as per the details shared by Central Government it has appointed company secretaries in compliance post 2015 none of the company secretary joined company due to the management compliance issue referred in the point (d) above and giving the reason that company is in the city of Mangalore in spite of several efforts offering good pay more than industry standard; and Management was of the opinion that on the resolution of the issue of equalisation of shareholding even fresh appointment is possible and every noncompliance will be complied through the means available such as compounding or adjudication as applicable.
(4) As regards the observations that as at 31/3/2019, Share Application Money of Rs. 5,853 is pending from Funderburk 2 Mauritius Ltd. the Petitioner has submitted that as per the details shared by Central Government it is correct and this is due to currency fluctuation while remitting the money to the company account by the Foreign JV partner. The deference amount can't be utilised against the allotment of shares as value per share allotted was Rs. 15,000 per share whereas balance amount is Rs. 5,853. Further Company has obtained NOC from the Foreign JV partner to retain the amount till next remittance or payment and same has been communicated to RBI while filing Fc-GPR and RBI did not raised any objection for the same.
(5) As regards the ROC/RD observation regarding compliance of Section 101 of Companies Act, 2013, the Petitioner submits that as per the details shared by Central Government it is not correct. No board meeting was held on 24th May 2019. The Notice for the EOGM along with the explanatory statement was circulated on 2nd May 2019 as per Section 101 of Companies Act, 2013 and EOGM was held on 24th May 2019. Meeting has been held with 21 days clear notice as well as by circulating all the necessary documents as referred under section 101 read with the secretarial standard hence there is no further compliance required and same details has been filed with the Registrar of Companies through E form -MGT 14.
(6) With regard to the difference in the value of shares pointed out by the ROC, the Petitioner submits that the Company will pay Rs. 39007- per share for promoters against 8720 shares. As per the proposed price Company will end up in paying Rs. 3,40,08,000/-. Further, the promoter who are offloading their 8720 equity shares to equalise their share are getting 3900 as per share as per the Average allotment price Value identified, whereas in the year 2015-16 share value has been identified as 15000/- per share as per the share allotted to both the parties to the JV agreement so considering the same value ideally promoters forgo Rs. 11,100/-per share.
(7) Regarding the ROC/RD's observation that the Petitioner Company may be advised to open a separate account for transfer of the amount, it is submitted by the Petitioner the Company will abide by the compliance requirements and directions of the Tribunal. 4th para of the resolution passed at the EOGM will also confirm the same and the same is reproduced under;
"RESOLVED FURTHER THAT the payment of consideration to the above mentioned Shareholder shall be made within such number of days of the Record Date and subject to such approvals, if any, as may be required under the applicable law/s or as may be directed by the NCLT, on the reduction becoming effective. All such payments will be made by electronic transfer of funds, cheque, pay order/warrant or demand draft, NEFT/RTGS/IMPS or set aside against any amount to be paid by the Mohtisham subject to if applicable payment of appropriate taxes by the Company."
(8) Regarding the observations that the Petitioner Company has approached this Tribunal for approval of the reduction of capital only to a selective group and equalisation can be undertaken by bringing additional capital from investor group, it is submitted that due to the OIF (foreign JV partner) dis-interest in further investment has led to this Application to equalise the shareholding pattern otherwise promoters are not interested in reduction of capital. It is further verified through the various means that only reduction of capital is the solution to resolve the deadlock.
(9) In view of the observations made in the above paras, it is opined that this Tribunal may not consider the present Scheme of Reduction of Capital.
(10) The Petitioner prays that the Hon'ble Tribunal may be pleased to pass such order as deems fit, and proper in the interest of justice and equity on the following grounds:
The opinion of the Central Government is not based on the any Valid grounds. It is only concerned with Compliance. Hence, whatever Compliances is directed will ensured post order of the Honourable Bench.
We clarified above this reduction is proposed in the larger benefit of the organisation to grow it further than selective profit making so context of the application coined by the Central Government was wrong. None of the Promoters are benefited though the money is paid through reduction of capital, because they are getting only Rs. 39007- per share whereby the previous allotment was at Rs. 15000/- per share. They are ready to forgo Rs. 11,100/- per share in the interest of the company, company future and its employees.
If Hon'ble Bench does not grant the approval or directions for Reduction of Capital, then it will be a grave impact on the Company position, which may lead to Deadlock in Company's operation. The Deadlock may lead to lockdown of business. Further considering the COVID-19 situation and industry in which company is operating if deadlock arises then the survival of the Company become doubtful.
This will negatively impact promoters and employees of the Industry and the company.
(11) In addition to the Memo of para wise replies filed by the Petitioner, as discussed above, vide Memo dated 29.06.2020 it has further explained that the Company is a debt free entity which was developed and managed by own equity fund. It had an initial plan of acquiring 235 acres for the township project but it has acquired only 195 acres up to FY 2017-18. It has decided to stop the acquisition of land and started the development of the project by filling of mud to sell the land. As its business model has changed from capital intensive to realisation of revenue hence the Company does not require any additional capital fund to run and manage the business. Hence, it does not need the unutilised excess fund as there is no further plan of acquisition of land, and keeping the shares equal between the parties is obligatory between the Company and the parties, as per the Articles of Association and shareholders agreement.
Heard Shri Naman G Joshi, learned PCS for the Petitioner, through Video Conference. We have carefully perused the pleadings of the party and extant provisions of the Companies Act, 2013 and the rules made there under.
As per Section 66 of the Companies Act, 2013, deals with reduction of share capital of a Company limited by shares or guarantee, after applying to the Tribunal, and based on a Special Resolution passed by the Board of Directors in this regard, as has been done. This Section provides for reduction of share capital either through extinguishment or reduction of the liability on any of the shares of a Company in respect of the share capital which is not paid-up, or on cancellation of any paid-up share capital which is lost or is unrepresented by available assets, or on payment of any paid-up share capital which is in excess of the wants of the Company, subject to the conditions enumerated therein.
Article No. 37 of the Articles of Association of the Petitioner Company permits reduction of share capital of the Company. Accordingly, to effect the reduction of capital, a special resolution of the Company was duly passed in accordance with Section 66 (1) of the Companies Act, 2013, at a General Meeting held on the 24th May, 2019. The Petitioner is a debt free entity, developed and managed by its own equity fund. The reduction sought to be made by the Applicant Company, appears to have been necessitated by the share-holding becoming unequal due to advance investments by one party, though as per the agreement both the holdings should be equal. Further as the excess funds were not required due to change in the business model and the decision not to acquire more land, the reduction was contemplated, by paying back to the party which had made the excessive investment. As the Company has no secured Creditors in the Company, and there are no arrears for repayment of any deposits or interest payable, it appears that no prejudice would be caused to any stakeholder by the reduction of capital, as contemplated by the Petitioner. The Report of the ROC/RD have been considered along with the para wise replies filed by the Petitioner. Issues requiring our intervention are duly considered in the order passed below.
In the light of the above observations, and by exercising the powers conferred on this Tribunal, U/s.66 of the Companies Act, 2013, the proposed reduction made on the basis of the Resolutions passed is approved as under:
FORM OF THE MINUTE
"The paid-up capital of Mohtisham Estates Private Limited, is henceforth Rs. 10,99,12,000 (Rupees Ten Crore Ninety Nine Lakhs Twelve Thousand only) divided into 80,924 (Eighty Thousand Nine Hundred and Twenty Four) equity shares of Rs. 1000 (Rupees Thousand) each, 14,494 (Fourteen Thousand Four Hundred and Ninety Four) Capital A Equity Shares of Rs. 1000 (Rupees Thousand) each and 14,494 (Fourteen Thousand Four Hundred and Ninety Four) Capital B Equity Shares of Rs. 1,000 (Rupees Thousand) each reduced from Rs. 11,86,32,000 (Rupees Eleven Crores Eighty Six Lakh Thirty Two Thousand only) divided into 89,644 (Eighty Nine Thousand Six Hundred and Forty Four) Equity shares of Rs. 1000 (Rupees Thousand) each, 14,494 (Fourteen Thousand Four Hundred and Ninety Four) Capital A Equity Shares of Rs. 1000 (Rupees Thousand) each and 14,494 (Fourteen Thousand Four Hundred and Ninety Four) Capital B Equity Shares of Rs. 1000 (Rupees Thousand) each."
THIS TRIBUNAL DO FURTHER ORDER:
(1) That the certified copy of this Order including the Minute, as approved, be delivered to the Registrar of Companies within thirty days of receipt of the Order.
(2) The Notice of Reduction of Paid-up Equity Share Capital shall be published by the Registrar of Companies, Karnataka, in two newspapers namely i.e. "The Hindu" (Bangalore Edition) in English Language and Kannada Daily "Kannada Prabha" (Bangalore Edition) Newspapers both having circulation in Bangalore within 30 days of registration.
(3) Since there are foreign shareholders, the Company shall comply with the provision of RBI/FEMA, as may be applicable, at the time the excess capital is remitted back to any foreign entity;
(4) The Petitioner Company shall comply with the provisions of the Income Tax Act, 1961, and pay any such demand as may arise, consequent to its reduction of capital, as approved vide this order;
(5) The Petitioner Company shall, as undertaken by it, comply with all the provisions of the Companies Act, 2013 in respect of any non-compliance of sections 66, 210, 220, 96, 129 etc. as pointed out in the report of the ROC/RD, and present itself before the ROC/RD within 30 days of this order, for adjudication/compounding of the defaults committed, if any, under the above said provisions;
(6) If at any point of time, any creditors oppose the scheme, they are free to approach the Tribunal for settling their dues, if the Company fails to settle their dues as per terms and conditions of the contract/agreement with the Company.
(7) This Order is limited to the reduction of share capital alone, and it will not come in the way of the Registrar of Companies or any other authority to take appropriate action(s) in accordance with law, for any other violations/offences or omissions, if any, committed by the Company or any of its personnel prior or during the reduction of share capital.
(8) The Petitioner Company shall hereafter suffix the words "as reduced" after the words "issued, subscribed and paid up capital".
(9) Any person shall be at liberty to apply to the Tribunal in the above matter for any directions that may be necessary.
(10) Accordingly, C.P. No. 209/BB/2019 is disposed of as above.