In Re: Economy Hotels India Private Limited Vs

Kapal Kumar Vohra, Member (T)

Under consideration is an Application filed on 03.10.2019 under Section 66(1) of the Companies Act, 2013 for confirming the reduction of share capital.

The Applicant Company has made prayers as follow:

i. Confirm the reduction of issued, subscribed and paid up equity share capital of the Petitioner Company as resolved by the members in their annual general meeting held on 19th August, 2019 by passing the resolution;

ii. Approve form of minutes under sub-section (5) of section 66 of the Act, proposed to be filed with the Registrar of Companies, NCT of Delhi and Haryana; and/or;

iii. Pass such further order or orders as may be deemed fit and proper by this Hon'ble Tribunal.

It has been stated in the Application that the Applicant is a closely held private company limited by shares incorporated and registered on 08.08.2012 under name and style "Economy Hotels India Private Limited" as per the provisions of the Companies Act, 1956. The Registered Office of the Company is situated at 4th Floor, Kaveri Tower-1, 211, D-6, Vasant Kunj, New Delhi - 110070. The Company's Corporate Identity Number (CIN) is U55101DL2012FTC2 40008.

The main object of the Company is to carry on in India and abroad, the business of franchising, operating, managing and promoting hotels, serviced and convention centre and other hospitality related facilities and activities incidental thereto.

The Authorised Share Capital of the Company as on 31st March, 2018 was Rs. 90,00,000 consisting of 9,00,000 equity shares of Rs. 10 each and the Issued, Subscribed and Paid-up capital was Rs. 30,00,000 consisting of 3,00,000 equity shares of Rs. 10 each.

The position as on 31st March, 2019 was as under:

Authorized Share Capital: Rs. 67,48,00,000 divided into 6,74,80,000 equity shares of Rs. 10 each.

Issued, Subscribed and Paid-up Share Capital: Rs. 30,00,000 consisting of 3,00,000 equity shares of Rs. 10 each.

Position as on 30th June, 2019:

Issued, Subscribed and Paid-up Share Capital of the Company: Rs. 67,47,90,000 divided into 6,74,79,000 equity shares of Rs. 10 each (vide board approval on 1st April, 2019, the Applicant Company converted its 67,17,900 unsecured fully compulsory convertible debentures of Rs. 100 each into 6,71,79,000 equity shares of Rs. 10 each w.e.f. 1st April, 2019).

Article 9 of the Articles of Association of the Applicant Company provides that the Company may, from time to time, by a Special Resolution, reduce its Share Capital in any manner permitted by law.

It is averred that the Company has been incurring high operating costs over a period of time, resulting in significant amount of losses from year to year. The total amount of accumulated losses as appearing in the provisional financial statements of the Company as on 30.06.2019 is Rs. 48,90,74,571 which has eventually resulted in erosion of net worth of the Company. It is further stated that the present issued, subscribed and paid up equity share capital of the Applicant company does not fairly represent its available assets and in order to give fair representation of assets and liabilities, realign the size of equity share capital structure to the optimum and rational level and considering its current operations, the Company has proposed to reduce its equity share capital from its present level of Rs. 67,47,90,000 divided into 6,74,79,000 shares of Rs. 10 each to Rs. 4,90,00,000 divided into 49,00,000 equity shares of Rs. 10 each by reducing and cancelling 6,25,79,000 equity shares of Rs. 10 each. The mode and manner in which the reduction will be done is given hereunder:

a) The Petitioner Company shall debit its equity share capital account by the face value of equity shares of Rs. 10 per reduced equity share;

b) A sum of Rs. 7.25 per reduced equity share (Total Rs. 45,36,97,750 i.e. 7.25 multiplied by 6,25,79,000) be adjusted against the accumulated losses appearing under the head Reserves and Surplus as on 30th June, 2019;

c) A sum of Rs. 2.75 per reduced equity share, i.e., current fair value of the equity share of the Company as per the valuation report (page 148 of Paper book), shall be paid to the equity shareholders where reduction is involved;

d) Consequently, the debit balance of profit and loss account of the Applicant Company shall be reduced by an amount of Rs. 45,36,97,750;

e) The aforesaid reduction and cancellation of issued, subscribed and paid-up equity share capital against the accumulated losses shall help the Petitioner Company to improve its solvency ratios and reflect a true and fair view of the state of affairs of the Applicant Company.

The Applicant Company has two Equity Shareholders (page 113 of the Application). Also, a declaration certified by two directors of the Applicant Company stating that there are no Creditors as on 27th September, 2019 has been filled at page 141-142 of the Application and Certificate issued by the Statutory Auditor to that effect has been placed at page no 144.

The Applicant Company has placed on record the declaration that the Company has not obtained any deposits from public, hence, the question of arrears of repayments of deposits does not arise, copy of which is placed at page 150 of the typed set filed with the Application. The Applicant Company has placed on record the Audited Financial Statements for the year ending 31.03.2019 and unaudited provisional Financial Statements for the period ending 30.06.2019 at pages 44 to '69 and 70 to 77 respectively of the Application.

It is further averred that the proposed reduction of the paid up share capital of the Company is by way of writing off the accumulated losses and by repaying to the shareholders of the company and the interests of the shareholders are not affected.

On 22.10.2019, the Counsel for the RoC was present and therefore, a direction was given to the Registry to issue notice to the Regional Director (RD), Ministry of Corporate Affairs in Form No. RSC-2. The Applicant Company was also directed to issue paper publication in the newspaper one in English and another in vernacular language having wider circulation in the area where the registered office of the Applicant Company is situated besides individual notices to the creditors in Form No. RSC-3.

The Applicant Company has filed the proof of paper publication both in English and vernacular containing the proposed reduction of share capital. The Applicant Company has also sent the private notice to the RD.

This Tribunal received report of RD on 29.01.2020 wherein it has been stated that the Scheme of reduction of capital has been examined and the Company has 2 Equity Shareholders as certified by the Auditors of the Company and the Company is regular in filing the statutory returns and there is no complaint/prosecution/investigation/inspection pending against the Company and therefore, he has no objection to the Scheme.

Heard the representative for the petitioner and the counsel for RoC, perused the application along with the documents placed in the case filed.

Section 66(3) of Companies Act, 2013 states that no application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such reduction is in conformity with the accounting standards specified in Section 133 or any other provision of this Act and a certificate to that effect by the company's auditor has been filed with the Tribunal.

The applicant has submitted a certificate dated 27.09.2019 (Page 146 of paper book) from S.R. Batliboi & Co. LLP (the auditor of the company), para 2 of which states that "at the request of the management of the company, we have examined the proposed accounting treatment specified in paragraph 10 of the draft petition on reduction of capital between the company and its shareholders (hereinafter referred to as 'Annexure 1') to confirm whether it is in compliance with the Indian Accounting Standards prescribed under Section 133 of the Companies Act, 2013 as amended from time to time and other Generally Accepted Accounting Principles in India ('GAAP')".

In the same certificate (para 9, page 147), while giving opinion, the auditor has certified that "based on the procedures performed by us as described in paragraph 8 above and according to the information, explanations and representations provided to us by the management, we are of the opinion that the proposed accounting treatment specified in paragraph 10 of the draft petition, as such, is in accordance with the Generally Acceptable Accounting Principles in India. Based on our examination, we note that there are no specific Accounting Standards prescribed under the Act with respect to proposed accounting treatment of petition".

Thus, the auditor certificate refers (para 2) to examination of Sec 133 of Companies Act 2013 though, while giving final opinion (Para 9), specific reference to Section 133 of the Companies Act 2013 is not given.

Section 66 of Companies Act, 2013 states that "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...".

Article 9 of Articles of Association of the company (page 81 of Paper book) allows it to reduce share capital by passing a special resolution. Board resolution dated 29.7.19 recommended reduction in capital as per Article 9 of Articles of Association and subject to consent of members by a special resolution (Page 111).

We have perused the minutes of the Annual General Meeting of the company held on 19.08.2019 (page 123 to 126 of the paper book). Page 123 of the Paper book records that "With the consent of the Members present, Mr. Balvinder Sahrawat was elected to chair the meeting." On Page 124 of the paper book, it is recorded that the meeting has passed the resolution for reduction of capital "as an ordinary resolution". The minutes of the meeting have been signed by the Chairman of the meeting on pg 126 of the paper book.

Thus, we observe that the company has not met the specific requirement of Section 66 of the Companies Act by passing 'Special Resolution' for reduction of share capital. The Company has also not complied with the requirements of its own Articles of Association.

We are left with no choice but to reject the present application in view of the fact that there is no special resolution for reduction of share capital as prescribed under Section 66 of the Companies Act 2013 and as required in Article 9 of Articles of Association of the company. Section 66 of Companies Act also requires this Tribunal to approve the minutes of resolution passed by the Company which has been passed as ordinary resolution as against the requirement of special resolution [mentioned in Para 2(ii) above also as part of prayer]; the Tribunal is not in a position to approve such minutes in this case. Accordingly, we hereby reject the Petition. However, liberty is being given to petitioner to file fresh application after complying all the requirements of Section 66 of Companies Act.