Ulundurpet Expressways Pvt Ltd vs Regional Director

a)

The appellant company operates a four-lane highway on BOT (toll) model. The said highway has been operational since July, 2009. In the initial years of operations, the traffic on the project was lower than the target traffic leading to the Appellant Company earning lower revenue and consequently incurring losses. As a result, the Appellant Company has accumulated losses thereby impacting its ability to distribute surplus cash to its shareholders by way of dividend. Currently, the appellant Company is witnessing increase in revenue because of the toll rates revision and traffic growth. Appellant company expects the overall revenue growth to further increase in the years to come. Consequently, the Appellant Company with the sustained growth anticipates sufficient cash flows to pay off its liabilities and expenses and projects there to be surplus cash flows which can be repatriated to the shareholders.

b)

Based on the steady and regular cash flow streams of the Appellant Company and with due regards to the future projections of the business, the proposed capital reduction shall enable optimal utilization of the surplus cash balance available with the Appellant Company for the benefit of all stakeholders.

c)

It is worthwhile to note that it is a general practice in the industry to which the Appellant Company belongs to, to set up each highway projects under separate special purpose vehicles based on the requirement posted under the concession agreement. Essentially, the growth prospects of such kind of business model from the perspective of each special purpose vehicle are limited to the extent of toll collection of a previously constructed highway project and post the completion of requisite project, the Special Purpose Vehicle is wound up. Accordingly, the major expenses viz. construction of the highway was carried out during the initial period by the Appellant Company and during the subsequent years it is to expend only for maintenance and financing expenses to keep its business floating. Consequently, while the Appellant is generating surplus cash, the Appellant Company is not left with any avenues to utilize its surplus cash, over and above the maintenance and financing expenses. This is resulting in a situation of a cash trap in the Appellant Company whereby it is unable to repatriate surplus funds to shareholders even though distributable cash is available with the Appellant Company. A capital reduction of the existing equity share capital of the Appellant company shall offer an avenue to the appellant Company to repatriate surplus cash to the shareholders in a timely and efficient manner.

d)

The Appellant Company shall be able to meet all its existing liabilities as and when due. Further, stakeholders of the Appellant Company, including creditors and employees, shall not be adversely impacted by the proposed capital reduction. It is pertinent to note that pursuant to the order of Hon’ble NCLT dated 9^th February 2023, notices were sent to the secured and unsecured creditors of the Appellant Company and no objections were received by the Appellant Company.

The Appellant Company decided to cancel 16,76,96,382 equity shares of INR 10 each, fully paid up held by the shareholders, out of total existing paid - up equity share capital of the Appellant Company of INR 2,64,55,23,650 divided into 26,45,52,365 equity shares of INR 10 each, fully paid up and that such reduction shall be effected by returning to the shareholders INR 11.33 per equity share (being the fair market valuation of the equity shares of the Appellant Company as determined by the registered valuer CA Harsh Chandrakant Ruparelia in his report dated 29th November 2022) aggregating to an amount of INR 190,00,00,008/-, which shall be kept outstanding as a loan to the Appellant Company on the following terms:

Particulars	Terms
Coupon rate	14% p.a. or such other rate as may be mutually agreed between the Company and its shareholders from time to time
Payment of coupon	Annually or at such other interval as may be mutually agreed between the Company and its shareholders
Tenure	At any time within a period of 5 years from the date of order of the NCLT approving the said Petition; or at an extended period as may be mutually agreed between the Company and its shareholders
Security	Unsecured

The capital reduction further required that the difference between the face value of the shares so cancelled and the amount to be paid to the members shall be adjusted against the balance in Retained Earnings.

11.

From the material on record, the Petitioner Company has sought reduction of its share capital by conversion of such reduced share capital into the interest bearing unsecured loans, to be repaid out of future cash accruals. It is admitted fact that the Petitioner company does not have sufficient cash accruals as on date of passing of special resolution, accordingly the proposed scheme has been devised for gradual repayment of such reduced share capital by converting the same into interest bearing unsecured loans.

12.

We find that Section 66(1)(b)(ii) of the Companies Act, 2013 empowers a company to pay off any paid-up share capital which is in excess of the wants of the company. It is case of the Petitioner Company that the Petitioner Company with the sustained growth anticipates sufficient cash flows to pay off its liabilities and expenses and thereby wishes to reward its shareholders by returning the surplus cash from its operations. The proposed scheme of reduction by way of conversion of existing share capital into unsecured loans is based on the premise that The Petitioner Company currently generates surplus cash from its operations and also anticipates a higher cash surplus in the future year basis the business projections. This clearly indicates that the proposed buy back shall take place out of future cash flows, which are anticipated based on the projections. Accordingly, it can not be said that the proposed share capital sought to be reduced is in excess of the wants of the company in present and is based on future cash flows. Since, the converted portion of reduced share capital into unsecured loans shall be interest bearing, it has propensity to impact the operating as well as financial ratios of the petitioner company.

13.

We are of considered view that the scheme of section 66(1)(b)(ii) of the Companies Act, 2013 only enables a company to pay off excess capital to its shareholders, which is considered in excess of wants of the company. The facts of the case clearly shows that such reduced share capital can not be said to be in excess of wants of the company on the date of passing of special resolution. Accordingly, such reduction is not permissible under the terms of Section 66(1)(b)(ii) of the Companies Act, 2013. Further, the effect of such conversion shall be indirect lending by the overseas shareholders, which is allowed in terms of External Commercial Borrowings guidelines in accordance with provisions of Foreign Exchange Management Act and such guidelines permit borrowings by a resident subject to terms and conditions provided in such guidelines in case such borrowings is under automatic route.

14.

In view of the aforesaid discussion, we are of considered view that the proposed scheme of reduction of share capital in terms of section 66(1)(b)(ii) of the Companies Act, 2013 is not in accordance with mandate of the provisions. Accordingly we decline to confirm the Special Resolution dated 29th November 2022 and dismiss CP 271/2022.

66.

Reduction of share capital.—(1) Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in particular, may—

(a)

extinguish or reduce the liability on any of its shares in respect of the share capital not paidup; or

(b)

either with or without extinguishing or reducing liability on any of its shares,—

(i)

cancel any paid-up share capital which is lost or is unrepresented by available assets; or

(ii)

pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly:

Provided that no such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon.

20 & 21. The need for reducing capital may arise in various ways, for example, trading losses, heavy capital expenses, and assets of reduced or doubtful value. As a result, the original capital may either have become lost or a company may find that it has more resources than it can profitably employ. In either case, the need may arise to adjust the relation between capital and assets. The company has the right to determine the extent, the mode and incidence of the reduction of its capital. But the court, before it proceeds to confirm the reduction of capital, must see that the interests of the minority and that of the creditors are adequately protected and there is no unfairness to it, even though it is a domestic matter of the company. The power of confirming or refusing to confirm the special resolution of a company to reduce its capital is conferred on the court in order to enable it to protect the interest of person who dissented or even of persons who did not appear, except on the argument and hearing of the petitioner.

20.

The principles, which can be distilled from the aforesaid judicial dicta, are summarised as under:

(i)

The question of reduction of share capital is treated as matter of domestic concern, i.e. it is the decision of the majority which prevails.

(ii)

If majority by special resolution decides to reduce share capital of the company, it has also right to decide as to how this reduction should be carried into effect.

(iii)

While reducing the share capital company can decide to extinguish some of its shares without dealing in the same manner as with all other shares of the same class. Consequently, it is purely a domestic matter and is to be decided as to whether each member shall have his share proportionately reduced, or whether some members shall retain their shares unreduced, the shares of others being extinguished totally, receiving a just equivalent.

(iv)

The company limited by shares is permitted to reduce its share capital in any manner, meaning thereby a selective reduction is permissible within the framework of law (see Re. Denver Hotel Co., 1893 (1) Chancery Division 495).

(v)

When the matter comes to the Court, before confirming the proposed reduction the Court has to be satisfied that (i) there is no unfair or inequitable transaction and (ii) all the creditors entitled to object to the reduction have either consented or been paid or secured.

Most of the arguments of the objectors stand answered in view of the principles of law laid down in the aforesaid judgments. It is clear that majority shareholders have decided to reduce the share capital. Normally, decision of the majority is to prevail. It is also their right to decide the manner in which the shareholding is to be reduced and in the process they can decide to target a particular group (of course it is to be seen that this is not with mala fide and unfair motive which aspect is discussed hereinafter).

SCHEDULE-B The paid-up capital of Tamil Nadu Newsprint & Papers Ltd. from the formerly capital of Rs. 98,18,00,000 divided into 9,81,80,000 equity shares of Rs. 10 each be reduced to Rs. 50 crores divided into 5 crore equity shares of Rs. 10 each. At the date of registration of this minute, the paid-up capital is equivalent to 5 crore equity shares of Rs. 10 each have been issued and are deemed to have been fully paid-up on each of the said shares. The remaining shares are unissued. The special resolution of the company has been passed to take effect upon the said reduction of capital by repaying a sum of Rs. 48.18 crores representing 4,81,80,000 equity shares of Rs. 10 each to the shareholders proportionately: