In Re: Kaashyap Radiant Systems Limited

Chitra Venkataraman, J.—This petition is for granting approval to a reduction of capital as resolved in the special resolution of the Board

dated 15.2.2006, which is extracted in paragraph 8 of the petition and marked as Annexure D to the petition.

It is seen from the averments in the petition that the petitioner company is a private limited company having its objects to carry on the business of

imparting computer education in general and hardware and software in particular by setting up own/franchise computer training institutes in India

and abroad by obtaining know-how and entering into foreign collaboration arrangement or similar arrangement in India; to carry on the business as

researchers, traders, dealers, importers in all kinds of software and to deal in all allied products of every kind and description. The objects also

includes to carry on business in web related services including internet based training and education etc. The copy of the Memorandum of Articles

of Association is enclosed as a Annexure A in the petition. The authorised capital of the company is Rs. 100,00,00,000/- consisting of

9,00,00,000 equity shares of Rs. 10/- each, 9,90,000, 11% redeemable preference shares of Rs. 100/- each and 10000, 15% cumulative

redeemable preference shares of Rs. 100/- each as on 31stMarch 2005. It is stated that by Article 6 of the Articles of Association, the company is

empowered to reduced its capital in any manner permitted by law by passing a special resolution.

It is stated that the petitioner company was earning substantial profits from export of software and education on advanced computing skills. It is

further stated that the violent incidents at US on 11th September 2001, had its serious impact on the industrial activity world over and this line of

activity was no exception. It is stated that consequent on this global trend, the petitioner''s interest suffered a serious set back. It is also stated that

in particular time on going software projects were not funded overseas. Students of advanced computing courses switched career and demanded

refund of fee. The alternative lines of business by acquiring substantial stakes in a software company called Soft Pride Inc. in US and the e-mail

based telegraphic services by acquiring another company called Satnet Services Private Limited also did not yield any better result. This resulted in

huge loss necessitating writing off of the investment in Soft Pride and Satnet Services. Due to difficult finance circumstances, several of the skilled

staff left the company and virtually abandoned the international branches and Indian branches. The entire fixed assets consequently became

depleted of its value. It is stated that the company had already adjusted the value of fixed assets against supply of bills and unsecured liabilities. It is

stated that it had reconstructed the data pertaining to statutory liabilities. In order to give realistic picture to the state of affairs of the company, the

petitioner felt it necessary to revalue the shares on the basis of the remaining assets and liabilities. Hence, by a special resolution, the company went

in for a proposal for reduction of share capital.

The true copy of the Board resolution is annexed as Annexure C. It states that the proposed reduction in capital and share premium account

does not involve any financial outlay on the part of the company and the reduction does not involve the diminution of any liability in respect of

unpaid capital or the payment to any shareholder of any paid up capital nor is any call being waived. It is further stated that there is no unpaid

capital, all shares issued having been fully paid up, hence, no creditor of the company is entitled to object to the proposed reduction of capital. It is

also stated that the proposed reduction does not affect the ordinary operations of the company or the ability of the company to honour its

commitments or to pay its debts in the ordinary course of business.

The resolution read as follows:

RESOLVED THAT in consequence of reduction of equity share capital contemplated by resolution set out as item (1) above, subsequent to the

same being passed and confirmed by the Company Court and pursuant to Article 3 of the Articles of Association of the Company and the

provisions of Sections 16, 31, 94 and other applicable provisions if any, of the Companies Act, 1956, the authorized share capital of the Company

be changed from Rs. 100,00,00,000/-divided into 9,00,00,000 equity shares of Rs. 10/-, 10,000 cumulative preference shares of Rs. 100/- each

and 9,90,000 Redeemable preference shares of Rs. 100/- each to Rs. 100,00,00,000/- divided into 90,00,00,000 equity shares of Rs. 1/- each,

10,000 cumulative preference shres of Rs. 100/- each and 9,90,000 Redeemable preference shares of Rs. 100/- each with power to issue new

shares upon such terms and conditions and such rights and privileges attached thereto as the Board shall determine subject to any directions of the

Company at General Meeting at the time of issue thereof.

It is stated that the petitioner company originally had authorised capital of 100,00,00,000/- consisting of 9,00,00,000/- equity shares of Rs. 10/-

each, 9,90,000 11% redeemable preference shares of Rs. 100/- each and 10,000 15% cumulative redeemable preference shares of Rs. 100/-

each as on 31stMarch 2005. It has issued, subscribed and paid-up capital of Rs. 60,37,63,350/- consisting of 1,18,91,000 shares of Rs. 10/-

each fully paid up, 5570 shares 15% preference shares of Rs. 100/- each, 4,00,000 11% preference shares of Rs. 100/- each, 1,60,91,610

shares of Rs. 10-/- each issued and fully paid bonus shares by capitalization of share premium account, RS.28,33,80,250/- consisting of

2,83,38,025 shares of Rs. 10/- each.

Consequent on the above said resolution, the authorised capital of the company is reduced and divided as follows:

(a) 90,00,00,000 (Ninety crores) equity shares of Rs. 1/-each;

(b) 10,000 cumulative redeemable preference shares of Rs. 100/- each

(c) 9,90,000 redeemable preference shares of Rs. 100/- each.

A perusal of the minutes of the meeting shows that the authorised capital reduction would be beneficial to the petitioner and to the shareholders.

In the background of the said reduction, the petitioner has moved this petition praying for reduction of capital as resolved on 15.2.2006 by the

special resolution be granted.

The learned Counsel for the applicant referred to Section 101 of the Companies Act and submitted that notice u/s 101 of the Act to the

creditors is not mandatory since the reduction in share capital does not in any way offend the creditors. He further submitted that it is only for the

purpose of projecting the true picture that such a step has been under taken. He also pointed out that there are no unpaid share capital, hence,

reduction does not involve any payment to the shareholder.

When the matter was taken up for hearing, objections were raised by some of the creditors to object the proposed reduction capital.

Mr. Aravind P. Datar, learned senior counsel appearing for the objectors submitted that the affairs of the petitioner company had been carried

out with no accountability either to the shareholders or to the creditors and there are no proper explanation or justification for the loss of the assets

to. the extent of over Rs. 100 crores. By reduction of share capital the petitioner company attempted to write off this loss. The learned senior

counsel further pointed out that there was no activity for two years; that there was no inflow for the company, however, the company had issued

bonus shares on 21.8.2002 and invested Rs. 20 crores as fresh investment, the source of which are not properly explained. The learned senior

counsel also submitted that fresh shares were also issued. The learned senior counsel pointed out to the balance sheet and submitted that there are

no explanation on the companies to which shares were allotted. The objectors also pointed out that the petitioner company had invested nearly -

Rs.7 crores in cash in Kaashyap inter serve Technologies Limited. The source of this funds and the reason as to why these investments were made

are not explained at all. Pointing out to the balance sheet details, the learned senior counsel submitted that the petitioner had acquired 40% of

equity in the case of Shri Ram EPC Limited by passing a special resolution. However, there are no details as to the source of making such

application or the details of the assets taken over from Shriram EPC Limited. The learned senior counsel submitted that the details of these

acquisitions were not reflected in the balance sheet of the company. He questioned the investment that as a matter of admitted fact, the petitioner

had stated that the branches were abandoned by the companies'' employees and the salaries to the employees could not be paid, that the assets

have been totally lost, if so, the aftermath of September 11, 2001, in U.S had leading to crash in his business activities. There was no explanation

as to how the petitioner company could issue bonus shares in 2002. The learned senior counsel pointed out to the income disclosed in the balance

sheet at Rs. 15,000/- and submitted that the application lacked bona fide and hence, the prayer should not be granted.

Mr. Aravind P. Datar, learned senior counsel appearing for the Objectors took me through the paper book including the balance sheet and

raised doubts as regards bona fides of these transactins. Taking me through the balance sheet and the 7th Annual Report for the financial year

2004-2005, he made a particular reference at page 43 of the paper book which showed that no dividend was declared due to the huge loss

incurred which went up to 863.66 as against 738.07 in the previous year. The net loss of the company stood at Rs. 125.59 lakhs.

Referring to finances of the year under consideration, the learned Counsel pointed out to page 49 of the paper book filed by the petitioner,

wherein fresh shares were stated to have been issued to the tune of Rs. 283,380,250/-. Referring at page 51, the learned senior counsel pointed

out that there was practically no actual flow of funds.

Referring to page 4 5 of the paper book filed by the Objector, referring to receivables particularly with reference to the receivables for the year

2004-05 at 279.60 lakhs, the learned senior counsel for respondents referred to the comparative statement found at page 48 of the paper book of

the petitioner, the profit and loss account for the year 31.3.2005 and stressed on the fact that for the year ended 31.3.2004 a sum of Rs. 138.50

lakhs is indicated as receivables. No details are available as regards the estimated receivables at 279.60 lakhs. The learned Counsel also pointed

out that as regards 31.3.2004, the receivables for the same year is NIL, that a perusal of the paper book shows the payment of Rs. 15 crores to

Shriram group companies. The sum and substance of argument is that the details filed lead one no where as regards the source of investment or the

fate of receivables. The details of the income earned and fresh deposits in the form of shares received discloses no evidence as regards the

whereabouts of the money. He also pointed out to the explanatory statement accompanying the meeting as regards the future course of conduct

referring to a closure of business in US and to write off bad debts.

The learned senior counsel submitted that there are absolutely no details as regards investment and current assets for one to really understand

the state of affairs of the company. There are no details as regards scheme for the payment to the creditors.

The submission of the learned senior counsel in fine is that the reduction as prayed for cannot be permitted considering the huge loss suffered

by the company and such reduction of the company should not be permitted to go in or further worsening of the situation to the detriment of the

creditors herein as well as to the general public at large.

A perusal of the objection show that there are creditors of the company institutional as well as private. It is admitted in the petition that the

reduction of share capital does not involve the diminution of any liability of the shareholders as regards unpaid share capital. However, it is the case

of the objectors that the course of action adopted is against the interest of creditors, depositors as as prospective lenders and investments. The

objector also stated that in September 2000, the Managing Director of the company met him and his brother to invest in the subsidiary of the

petitioner company, Softpride Systems (Europe) Limited, incorporated in the United Kingdom. The objector and his brother invested 20% each in

the equity shares of the Softpride Systems (Europe) Limited and petitioner company owned 60% of the share. The agreement was executed on

31.10.2000. The subsidiary company namely Softpride Systems (Europe) Limited agreed to repay the amount with interest at 15% within a period

of six months. It also provided for an increased interest of 17% for any mutual agreed period. The corporate guarantee was also executed by the

petitioner company guaranteeing the repayment of the loan. In view of the defoult committed by the subsidiary company, the objector invoked

corporate guarantee and called upon the petitioner to repay the loan. This necessitated the filing of C.P. No. 191 of 2003.

It is stated that the said Managing Director, his brother and one Devarajan fraudulently removed a sum of 292,000 pounds. It is also stated

that they repiad a portion of it after a criminal case was initiated. It is also stated that Venkataramani, the Managing Director transferred 250,0,00

shares held by, the petitioner company on payment of Rs. 4 crores and that the company had obtained permission for the transfer of the shares.

Trusting the words, it is stated that he had parted with few more crores. However, the transfer of shares never took place.

As regards the objections of his brother Shailesh Gokal, it is stated that he had also filed C.P. No. 178 of 2002. It is stated that his brother lent

a sum of UK pound 276,000 to the subsidiary company, Softpride Systems (Europe) Limited. He also executed corporate guarantee there.

Invoking the same, C.P. No. 206 of 2003 is filed for winding up of the company. It is alleged that the same has not been disclosed in the petition.

The objectors stated that the company is commercially insolvent and the reduction of the capital resolved by the company is only for the purpose

of writing off its accumulated losses so as to mislead prospective investors and lenders. Hence, it will be prejudicial to the creditors (both current

and prospective) to enable the company to borrow further, when it is clearly incapable of repaying its debts. The accumulated loss was to the tune

of Rs. 124 crores.

It is stated by the objectors that softwear developed by this company had been transferred to other entity, leaving the companies virtually

indebted on account of high costs. It is stated that the business of the company was not in any way offended by the September 2000 events and

that they were consciously being wound up by the promoters. It is submitted that the petitioner had suppressed the vital details and proceedings

pending against the company. They also questioned the need for acquiring the engineering, construction and energy division of Shriram EPC

Limited for Rs. 15 crores when they are in default as regards repayment by the depositors. The balance sheets makes no reference to the assets in

its schedule. It also pointed out that the receivables for the year 2004-2005 was projected as Rs. 2.79 crores whereas it has received a paltry sum

of Rs. 15,532/-. It has also stated that the company had stated to have entered into an agreement with Shriram group which would collect

receivables on its behalf. Pointing out to the issuance of shares by the company worth Rs. 28,33,80,250, for consideration other than cash, the

objectors submitted that the identity of these persons and the nature of the consideration received ought to have been disclosed. Similarly, status of

the company by name Soft pride Inc., the investment made in company called Setnet Service Limited, the status of the company is not known and

the Directors are bound to account for their investment. Questioning the bona fide of the proposed reduction in the share capital, the objectors

stated that the motive in obtaining the investments, despite commercial insolvency would be prejudicial to the creditors and investors. In the

background of these, the petition is thus objected to by the objectors.

The learned Counsel for the petitioner has filed his reply to the objections filed by the Objectors. He submitted that the objections from the

objectors are purely on matters relating to the accounting method of the company and that such questions can be raised only in the shareholders

meeting. He submitted that the balance sheet had been duly audited and approved by the general body in statutory meetings. As such, the creditor

has no locus standi to question on matters pertaining to the internal management of the company.

Dealing with the specific question raised by the objector, as regards the income shown at Rs. 15,532/- in the year ended 31.3.2005, in

contrast to the NIL income for the immediate preceding year, the petitioner submitted that the same represented income arising on settlement of

certain outstanding dues. He further submitted that the bonus shares were issued on 21.8.2002 in respect of all paid-up shares as on 17.8.2002.

As regards the issuance of shares of 2,83,38,025 to the shareholders in four different companies, the learned Counsel for the petitioner submitted

that the same were issued in consideration of the petitioner company acquiring shares from these companies in accordance with swap ratio. The

Board resolution evidencing the transactions were also marked as Annexures C1 to C4. With reference to investments made in Kashyap

Interserve Tech Limited, Shriram EPC Limited and Satnet Services Limited, the learned Counsel submitted that the investments made were not

cash investments. He submitted that the investments were made by allotment of shares. He also listed'' the dates of investments by way of

allotments of shares in his written submissions and that the purpose of these investments were for earning profits. The petitioner further submitted

that the investments did not yield results since the business in all these companies failed. The petitioner further submitted that a sum of Rs. 29.98

crores investments in Kashyap Interserve Tech Limited and Satnet Services Limited are to be written off in view of the huge financial difficulty

expressed on account of general slump in softwear industry. The learned Counsel submitted that fixed assets, current assets, loans and advances in

the Indian and International branches of the company were not good enough even to meet the salaries of the personnel in various branches. The

learned Counsel for the petitioner pointed out to the difficult situation created by the legal proceedings, that the branches were abandoned by the

personnel, ultimately leading to all fixed assets, current assets, loans and advances totally lost in its value. The learned Counsel filed a detailed reply

to the specific points raised by the Objector in the course of the proceedings before this Court.

A reply affidavit has also been filed on behalf of the petitioner by one Dakshinamurthy, Director of the Company. The- deponent stated therein

that the objectors were not creditors of the petitioner company. However, in view of the pendency of the winding up petition filed by the objectors,

the deponent stated that in September 2000, the company by name Softpride Systems (Europe) Limited was not in existence and that it was

incorporated by the objectors only on 11.10.2000. The deponent further submitted that the said company was under the control and management

of the objectors. He denied the genuiness of the alleged loan agreement and the corporate guarantee given and that they were hit by Sections 23

and 24 of the Contract Act. Admitting the payment of certain sums to Softpride Systems (Europe) Limited by the objectors pursuant to the

coerced agreement dated 1.8.2003, the deponent representing the petitioner submitted that the agreement was not valid since the same was

coerced with the aid of police. As regards the payment of a sum of Rs. 4 crores for the purchase of 2,50,000 shares for the petitioner company

held by its Managing Director, it is submitted that the Managing Director on 16.9.2000 despatched the shares to the depository concerned for

being transferred in demat form to that the deponent. However, for want of instructions from the transferee, the said depository returned the

chalan. Hence, this deponent denied the allegations of the objectors.

As regards the allegations of dishonesty and froud, the petitioner submitted that they lacked in substance and not true. He also referred to

acquisition of a division of Shriram EPC Limited and submitted that the some was not ultra vires the powers of the comppany. He reffered to a

special resolution dated 8.3.2002 under which acquisition was undertaken. On the question of allotment of shares, it was defended that the same

was made after complying with all the formalities. He referred to the proceedings taken by the objectors before this Court in Application No. 1001

of 2002 in C.P. No. 178 of 2002 to stay the allotment and that this Court did not grant any stay. The petitioner defended the investments as a

matter of policy decision taken after due diligence. It is further submitted that the allegations that no payment had been made to the depositors is

false. He submitted that the petitioner had no intention to borrow any money from any creditor afresh. The attempt of restructuring the company is

only based on certain foreign investors evincing interest in certain projects developed by this Company. The petitioner also recorded the

undertaking that in the event of this Court sanctioning the reduction of capital, the petitioner company shall not borrow any further sum from any

creditor or accept any deposit afresh without the prior permission of this Court. In the circumstances, the petitioner prayed for sanctioning of the

scheme.

Before going into the merits of the claims of the parties herein, one may have to advert to the statutory scheme for. sanctioning the reduction of

share capital as given in Sections 101 to 104.

Section 100 provides reduction of the share capital of a company by a special resolution by a statutory majority. The special resolution u/s is

referred to as a resolution for reducing a share capital. The reduction has to be subject to the confirmation by the Court. The resolution must be

one authorised by the articles. Hence, for a company to reduce its share capital in any manner set out in Section 100, it must have the necessary

powers reserved under its article to do so.

The need for reduction of the share capital may arise where the capital is lost due to the trading losses, heavy capital expenses, that the assets

of the company reduced to a doubtful value and that the capital is unrepresented by the available assets or even case where the capital is in excess

of wants of the company.

Thus in process of reduction, the company may reduce or altogether extinguish the liability or any unpaid or partly paid-up shares; it may, by

reducing the face falue of any shares or otherwise, cancel any paid-up share capital which is lost or cancel it to the extent to which there is found

deficiency in available assets; and it may pay off any paid up share capital which is found to be in excess of the capital requirements of the

company.

It may be noted that the statute has not prescribed cases in which the reduction is to be carried out nor has it prohibited any method of

effecting that object. It is purely a matter of domestic affair.

A Reading of the provisions of Section 101 shows that the jurisdiction of the Court to confirm a resolution for reduction of capital is not limited

to those cases specified above. The power conferred on the court is general.

Touching on the scope of jurisdiction of the Court to grant or to confirm the resolution for reduction on share capital, in the case reported in

Vol. XXI11 TLR 567 in Poole and Ors v. The National Bank of China (Limited), Lord Macnaghten held that,

The condition that gives jurisdiction is not proof of loss of capital or proof of that capital is unrepresented by available assets or that the capital is in

excess of the wants of the company. The jurisdiction arises whenever the company seeking reduction has duly passed a special resolution to that

effect.

In the oft quoted decision of the British and American Trustee and Finance Corporation v. Couper 10 T.L.R. 415, Lord Herschell held that

there is no limitation of the power of the Court to confirm the reduction, except that it must first be satisfied that all creditors entitled to object to

the reduction have either consented or been paid or secured.

Referring to various authorities on the subject topic, Judicial Commissioner''s Court of Peshawar held that (vide VIII Company Cases 314 in

the matter of Khattar Electrical Engineering and General Supply Company Limited) the Court has to see that interest of the minority have been

protected and no unfairness has been shown to it and that in doing so the Court should keep in view the consideration that the decision has been

arrived at by businessmen who are fully cognisant of their necessities and are the best custodians of their interests and should therefore be slow to

interfere.

Courts have also taken the view that where the reduction does not involve diminution of any liability in respect of unpaid capital or payment to

any shareholders of any paid up capital which would be detrimental to the interest of the creditors as a class or where the creditors are not

concerned at all, the only question to be considered are

(i) Ought the Court to refuse its sanction to the reduction out of regard to the interests of those members of the public who may be induced to take

shares in the company? and

(ii) Is the reduction fair and equitable as between the different clause of shareholders? (vide XXIII TLR 567 by Lord Macgnaten).

Hence, the questions to be considered by the Court in the matter of granting approval are (1) whether the reduction is fair and equitble as

between different classes of shareholders? and (2) should the Court refuse the sanctioning to the reduction out of regard to the interests of those

members of the public who may be induced to take shares in the company? Hence the concern of the Court exercising its jurisdiction is to see that

the reduction undertaken is fair and equitable one, that the interests of those concerned with the affairs of the company are taken care of, that those

who are likely to be affected by the reduction are properly put on notice. As already stated, in cases where reduction sought for does not have any

adverse effect on the interests of the creditors of the company, normally the question of considering the creditor does not arise, yet, where a

creditor comes forward objecting to the scheme, the allegations deserve and need to be considered to hold that the scheme is not illusory. In short,

the Court Is to keep in consideration that the decision for reduction is based on commercial consideration undertaken by the businessmen who are

the best person to know of the necessities and the interest of the company concerned. Hence, in the absence of serious allegations as regards an

exercise does not bona fide, courts have hesitant in interfering in this majority view of the company.

It may be seen that Clause 6 of the Articles of Association refers to the power reserved to reduce the capital in any manner permitted by law

by passing special resolution. The resolution passed refers to the reason for reduction which stated to be a huge loss suffered, which is far in excess

of paid up capital. Keeping in mind the interest of the company, the said exercise has been undertaken by the petitioner herein seeking approval to

the resolution passed to reduce the share capital. The share capital on reduction in effect has equity shares of 9 crores reduced in value of one

rupee each as against the original of ten rupees. The cumulative redeemable preference shares of 10,000 and redeemable preference shares of

9,90/00;000 however remained without any variation. The petitioner has stated that the shares were fully paid up, as such, the reduction proposed

does not involve any diminution of liability or does it have an impact on the creditors interest. In short, the exercise undertaken is purely a business

and commercial decision to have a proper projection of the state of affairs in the balance sheet so that the interest of the company can be taken

further in a positive way.

38.The learned Counsel for the petitioner has submitted that the objectors have objected purely on matters relating to the accounts that in any

event, the creditors could not object to the reduction when no money is paid to the shareholders consequently on the reduction to the detriment of

the objectors.

I do not think the stand of the petitioner is correct. It is no doubt true that the reduction does not result in any payment to the share holders or

lead to a situation prejudicial to the creditors interest as on this day. Yet a reading of the objection raised by the creditors show that they point out

more particularly, to the balance sheet details, which call for explanation from the petitioner company. Considering the huge amount of

indebtedness to the creditors, that a fresh investment had been shown in the balance sheet and hence to be properly explained to this Court, it is fit

and proper that the creditors have a say in the matter of considering the prayer in this petition. The allegations are quite serious that may be need to

be looked into with reference to the balance sheet figures. The petitioner has filed specific reply to the allegations on the balance sheet figures.

In course of hearing, the learned Counsel appearing for the objectors placed reliance on the following decisions:

(1) Cosmosteels Private Ltd. and Others Vs. Jairam Das Gupta and Others, .

(2) Re Lucania Temperance Billiard Halls (London) Ltd. (1966) I C.L.J.350.

(3) Re Ratners Group P & C (1988) BCLC 685

(4) Re Guangnan (Holdings) Ltd. 2005 HKCU LEXIS 1687

As regards the first decision reported in Cosmosteels Private Ltd. and Others Vs. Jairam Das Gupta and Others, , it will be seen that the case

relates to a scheme u/s 397 of the Companies Act relating to the purchase of shares by the company and its own members leading to consequent

reduction. The Court held that before granting such a direction in a scheme it. is not necessary to give fresh notice of reduction of the share capital

to the creditors of the company. I do not find any relevance to the case on hand, except to the fact that the Supreme Court held that where a

company passed a resolution for reduction of share capital and submitted it to the Court for confirmation, the procedure described under Sections

100 to 104 will have to be followed.

The second decision reported in (1966) I CLJ. 350 is an English Court decision relating to the dispensing with the creditors objection. This

decision lays down that where a proposed reduction of share capital involves diminution of liability in respect of unpaid share capital, or the

payment to any shareholder of any paid up share capital, the creditors should be heard.

The third decision reported in (1988) BCLC 685, speaks about the equitable treatment of the shareholders. The said decision is relied on for

the proposition that the creditors of the company are to be safeguarded, so that the money could not be applied in any way which would be

detriment to the creditors.

The fourth decision reported in 2005 HKCU LEXIS 1687, relate to one decided by High Court of Hong Kong. The purpose of the reduction

was to bring the company capital in loss with the available assets. Considering the fact that the company had huge accumulated loss of capital

which are permanent, the Court noted the stated purpose that the existence of the accumulated losses is prejudicial to the general body of

shareholders. Taking note of the same, the Court at this stage rejected the claim of the creditors holding that the creditors would not be prejudiced

by the proposed reduction of capital.

The learned Counsel for the petitioner placed reliance on the decision of the Bombay High Court reported in 125 C C 268 in the case of Rallis

India Limited., In Re, interpreting Section 101 to the phrase ""in any other case"", the Court held that the phrase which are general in character must

take its colour from the earlier part of Sub-section (2); that where the reduction of capital is set off of accumulated losses, there is no diminution of

liability or payment to any shareholder. Consequently, the interest of the creditors are not affected to necessiate complaiance of the procedure

prescribed u/s 101(2) of the Act.

A perusal of the balance sheet shows that the company had its income of Rs. 15,532 only for the year ended 31.3.2005. It also reveals that

the fact is the company is totally depleted of its liquidity and there are no materials to show the actual receipt of consideration. Annexures C1 to

C4 are the copies of minutes of the meeting of the Board of Directors as regards certain investment in three companies. A sum of Rs. 7 crores in

the form of equity shares was invested in Kashyap Interserve Technologies Limited by way of cash investments as per the resolution dated

15thMay 2001. Further investment by way of allotment of shares on 21 May 2001 was not for any cash consideration. As regards the investment

in Shriram EPC Limited and Satnet Services Limited, was an issuance of shares for consideration other than cash. This is evidenced by Annexures

C2 and C3. It is stated that considering the fact that explanatory statement itself refers to the notes of AGM that there is no suppression of facts in

any of these dealings, it is no doubt true that the exercise undertaken for the purpose of earning profits ended miserably and the loss had written

off. The reply filed by the petitioner make detailed reference as regards the above said facts. In the light of the specific answers given to the

questions raised, I do not find that the objections raised stands in the way of this Court considering the petition and it is now for this Court to

consider the fairness or otherwise of the prayer.

The objection as regards the various aspects of accounts, particularly with reference to the manner of investments or allotment of shares have

nothing to do with reduction sought for since whatever reduction that has been done, has its effect on the shares held by the shareholders only.

Consequently, the objections are overruled.

It is also stated in the reply affidavit that reduction would facilitate certain investors evincing interest in the project relating to software E-

learning developed by the petitioner company, so that there can be revival of the activities in a gainful way. It is further stated that such revival

would enable the company to meet its commitments which are huge as on today.

As pointed out by the learned Counsel the share which were quoted at 1.71 in February 2006 had diped into 1.17. The Madras Stock

Exchange had expressed their no objection as regards the reduction proposed. In the context of such dipping of value in the shares traded in the

stock exchange, the fact remains that the company could not march to a recovery road without any financial assistance. The huge losses has stood

in the way of any institution to consider its plea for a financial assistance. It is stated that unless there is a true reflection of the state of affairs,

particularly with reference to the asset position, the foreign investors too are not willing to consider any participation.

I do not find any reason to reject the reasons at this stage which compelled the company to go for reduction. Compelled by the circumstances

of huge losses and the necessity of projecting the true state of affairs, the only available method to the company is to go for a reduction in share

capital, so that, a realistic picture is presented of the capital reflective of the value of the shares of the company. The company is empowered under

its articles of association to reduce the share capital by passing a special resolution in accordance with law. This had been done by the company. In

the context of such exercise undertaken and particularly in the context of the majority of the shareholders approving such course of action, and the

same not having any adverse effect worse than what these financial institutions are already in, I do not find any reason to reject the petition at this

stage, there being no payment going to the shareholders on a fresh borrowing consequent on the reduction. The reduction undertaken on the stated

reasons cannot be controverted or the exercise called unjust and unfair. The claim of the petitioner merit acceptance. The company bona fide

entertains the belief that such reduction would pave way for inducing investors in the conduct of business in which investors themselves are also

interested.

There are no materials alleged as regards the correctness of the balance sheet entries. There is no denial of the fact that the capital of the

company is totally unrepresented by the available assets. That capital was unrepresented by available assets is proved by the balance sheet figures.

The accounts are audited and approved by the General Body.

In the context of the consistent view taken by the Courts on the scope of the jurisdiction of the Court in the matter of this nature, I have no

hesitation in ordering notice to the petition for approval to the resolution passed. Consequently, I order notice on the petition seeking approval to

the reduction subject to confirmation. The objectors namely, creditors although have their interest to be protected in the matter of settlement of

their dues, cannot complain of any serious prejudice since a reduction does not contemplate any outflow of funds. The assets as on today are not.

good enough to satisfy their claim.

The other question which remains for consideration is as regards the interest of the members of the public who may be induced to take share in

the company.

A perusal of the petition shows that the decision for reduction is a unanimous decision passed by a special resolution. It is a commercial

decision, which, unless shown to be one against public policy, cannot be interfered with.

It is no doubt true that some of the creditors have objected to the prayer of the petitioner. The question of such reduction certainly have its

reflection on the state of affairs of the company. It may be noted that when the exercise itself is for a realistic projection of the capital, I do not find

at this stage to consider that such reduction can have a serious impact on the public adversely when the prima facie evidence as regards their need

for reduction of share capital is disclosed and a special resolution support the same. It. is not stated how any member of the public who may be

induced to take share in the company would be adversely affected by such reduction. In the absence of any allegation of misrepresentation as to

the true state of affairs or a mistaken impression or influence, some mistake, it would be unfair not to order notice for such reduction. The

creditors, public and other shareholders individually and collectively are to be put on notice by necessary publicity of the proceedings and when the

reduction is confirmed, the memorandum has to be altered in the prescribed manner. With these safeguards, I do not find that one need to visualise

any negative serious impact on the interest of the investing public.

The petitioner has stated in the affidavit that the attempt to restructure the company is only based on certain investors evincing interest in certain

projects related to software and E-learning that have been developed by the petitioner company. The petitioner company undertakes that in the

event of this Court sanctioning the reduction of capital, the petitioner company shall not borrow any sum from any creditor or accept any deposit

afresh without the prior permission of this Court. This undertaking is suffice to clear all the misapprehensions of the objectors. Taking note of this

undertaking, the special resolution passed by the company on 15.2.2006 for reduction of its share capital is hereby put on notice as directed

below. This Court directs that the petitioner shall publish the case number in The Hindu having All India edition as well as in Financial Express and

Daily Thanthi the ordering of notice to Registrar of Companies and Public Prosecutor by this Court by fixing the date of hearing as 26.7.2006 and

of the minutes as having been approved. The company shall also publish the reason for reduction, in the aforesaid newspapers. The copy of this

order including the resolution passed shall be delivered to the Registrar of Companies within 21 days from today and the same shall be caused

publication in the Gazette by the publication (sic). Apart from this, the company shall produce before this Court any scheme formulated on the

understanding entered into with the foreign investors and serve copies of the same to all the secured creditors. The company shall file a report as

regards the progress of its negotiation before this Court so that the future course of action consequent on the reduction which was necessitated by

its anxiety to have an investment from the foreign investor is placed for scrutiny of this Court.

In the light of the prima facie view that I have taken, the prayer sought for in the Company Petition needs to be put on notice as ordered

above. The petition shall be posted for hearing objections, if any, on 26th July 2006.