In Re: Parrys Confectionery Ltd.

S. Ashok Kumar, J.—In this Petition, the Petitioner Company seeks an order of this Court for confirming the reduction of share premium

account under Sections 78 and 101(1) of the Companies Act, 1956 read with Rules 46 & 47 of the Companies (Court) Rules.

The case of the Petitioner is that the Petitioner has as on 31-3-2002, a sum of Rs. 3319.51 lakhs standing to the credit of its Securities Premium

Account. The Petitioner had made large investments in setting up their factory at Manappakkam. However, as the factory operations proved

unviable due to several reasons, the Petitioner took a business decision to close the said factory in August, 2002, after following the requisite

procedures. The Petitioner has also identified the surplus assets relatable to such Manappakkam Unit and has taken a decision to sell such assets

for which purpose they have obtained the valuation of an independent valuer. On this basis, the Petitioner estimates, that as on 31-3-2003, they

would suffer a loss not exceeding Rs. 700 lakhs in the process.

The further case of the Petitioner is that the Petitioner has as on 31-3-2003, an accumulated loss of Rs. 1642.20 lakhs which includes a one

time expenditure of Rs. 1456 lakhs incurred towards product withdrawal and the expenditure relating to the business method restructuring costs

for the year ended 31-3-2000. Further, the Petitioner also has a balance of deferred Voluntary Retirement/Separation Expenditure, incurred at

Manappakkam to the extent of Rs. 73 lakhs as on 31-3-2003. For the reasons set out in para 8 of the Petition, namely to undertake a financial

restructuring the Petitioner proposed to apply its Securities Premium Account and to utilize an amount not exceeding Rs. 2500 lakhs out of such

account to set-off the above three heads of losses/expenditures. The Petitioner has also explained in para 10 of the Petition, how this would

enhance shareholder value while not affecting the Petitioner''s operations. The Petitioner therefore convened an Extraordinary General Meeting of

its Shareholders on 23-6-2003 for transacting two items of business, the first being, for modification of Article 45 of the Articles of Association of

the Company, providing for Reduction in its Share Capital, its Capital Redemption Reserve Fund/Account and Securities Premium Account. The

Second Resolution was for passing another Special Resolution for giving effect to the reduction in the Securities Premium Account as aforesaid.

The Notice for the meeting was accompanied by an Explanatory Statement as contemplated by Section 173(2) giving full details of the

proposed reasons thereof. The meeting was attended by 60 shareholders in person and by 166 Shareholders by Proxy and both Resolutions

namely for the amendment of the Articles and for the reduction of the Securities Premium Account, were put to vote and approved unanimously by

the Shareholders. The following is the text of the resolution so carried and relating to the Petitioner''s Securities Premium Account:

Resolved that pursuant to the provisions Sections 78, 100 and other applicable provisions if any, of the Companies Act, 1956 and Article 45 of

the Articles of Association of the Company and subject to the confirmation of the Hon''ble High Court of judicature at Madras and/or other

Tribunal or Authority empowered for this purpose under the Companies Act, an amount not exceeding Rs. 2500 lakh standing to the credit of the

Securities Premium Account of the Company be utilized for adjustment against an estimated loss not exceeding Rs. 700 lakh as on 31-3-2003 by

reason of the diminution in value of the Plant and machinery held for disposal at the Company''s Manappakkam location (being an extraordinary

item on Capital Account), as also a sum of Rs. 73 lakh being the balance of the deferred voluntary retirement/separation expenditure as on 31-03-

2003 incurred at Manappakkam, and the Accumulated loss of the Company of Rs. 1642.20 lakh as on 31-3-2003.

Further Resolved that for the purpose of giving effect to the above Resolution and for removal of any difficulties or doubts, the Board of Directors

of the Company, (hereinafter referred to as ""the Board"" which term shall be deemed to include any person or committee which the Board would

have authorized/may authorize or nominated/may nominate to exercise its powers, including the powers conferred under this Resolution) be and is

hereby authorised to do all such acts, deeds, matters and things as it may, in its absolute discretion, deem necessary, expedient, usual or proper

and to settle any question or difficulty that may arise with regard to utilization/adjustment of the Securities Premium Account including passing of

such accounting entries and/or making such other adjustments in the books of account as considered necessary to give effect to the above

Resolution, finalizing the amounts involved or to carry out such modifications/directions as may be ordered by the Hon''ble High Court of

Judicature at Madras to implement the aforesaid Resolution.

The petition further averred that the requisite form 23 reflecting the above special resolution has been filed with the Registrar of Companies,

Chennai.

The Petitioner further states that the form of minute proposed to be registered u/s 103(1)(b) of the Companies Act is as follows :

Pursuant to the provisions of Sections 78, 100 and other applicable provisions, if any of the Companies Act, of 1956 and Article 45 of the Article

of Association of the Company, the expected loss as on 31-3-2003 arising out of the Plant and Machinery held for disposal at Manappakkam

location not exceeding Rs. 700 lakh, the accumulated loss as on 31-3-2003 (which includes the one time expenditure of Rs. 1456 lakh incurred

towards product withdrawal and expenditures relating to business method restructuring cost in the year ending 31-3-2000) and totalling to Rs.

1642.20 lakh and the balance of deferred voluntary retirement/ separation expenditure incurred at Manappakkam location as on 31-3-2003

amounting to Rs. 73 lakhs, which figures are as per the petition''s books of account subject to audit, are adjusted against the balance standing to

the credit of the Securities Premium Account for an amount not exceeding Rs. 2,500 lakh in the books of the Petitioner as at March 31, 2003 as

per the terms of the Special Resolution passed at the Extraordinary General Meeting held on 23-6-2003.

The balance standing to the credit of Securities Premium Account as on 31 -3-2003 after the aforesaid adjustments shall not be less than Rs.

819.51 lakh.

The Petitioner also seeks the liberty of this Hon''ble Court for dispensing with the words ""and reduced"" as contemplated in Section 102(3) of the

Act. The Petitioner therefore has filed the above Petition u/s 101 of the Act for confirming the Reduction.

The Assistant Registrar of Companies has now filed an affidavit in this C.P. on 11-9-2003 and in turn the Petitioner has also filed rejoinder for

the same on 16-9-2003.

In para 5 of the affidavit filed by the Assistant Registrar of Companies, he has extracted Section 78(2) of the Act, and has sought to contend

that the Share Premium Account can be used only for a specific purpose. He further states, on the basis of the above provision that there is no

reduction in actual share capital in real terms but the entire adjustment is made against the Securities Premium Account, and that while there may

not be any objection to utilize reserves created out of profit generated over a period of time, for writing off losses, deferred revenue expenditure

etc., the Securities Premium Account cannot be used for the purpose and that this is available only to meet the expenses or losses or providing

premium on share or debenture related activities.

For which, the learned Counsel for Petitioner contends that Section 78(1) of the Act, specifies that the provisions of the Act relating to

Reduction of share Capital of the Company shall, except as provided in that Section, apply as if the Securities Premium Account were the paid up

share Capital of the Company. Section 78(1), the Securities Premium Account may be applied by the Company for the purposes set out therein,

which are the purposes extracted in the affidavit of the Asstt. Registrar of Companies. Therefore, while reading the two Sub-sections together, the

conclusion that would follows would be that where a Company proposes to apply its Securities Premium Account in the manner provided for in

Sub-section (2), the provisions relating to reduction of Capital would not be attracted and the Company can do so without either being required to

pass a special resolution or seek the confirmation of Court. Section 78(2) is however not exhaustive of the methods in which the Securities

Premium Account can be applied by the Company and is only exhaustive of the methods in which such application can take place without

following the reduction procedure. Where however, a Company proposes to apply its Securities Premium Account in a manner other than that

contemplated in Sub-section (2), then the provisions relating to Reduction of Share Capital would have to be followed in respect of such

application.

The Learned Counsel for Petitioner further contends that the further contention of the R.O.C. that the adjustment proposed by the Petitioner

can only be effected out of the Reserves created out of profits and not out of the Securities Premium Account would again not represent the

correct position. Apart from the fact that Section 78 permits such adjustments, it can also be seen that the losses and expenses against which such

adjustments are to be made, are primarily one-time losses and expenses and are not of a recurring nature. These losses and expenses represent the

value lost to the Petitioner and the exercise is being undertaken in the interest of and for the benefit of the shareholders. It may be pointed out that

the credits in the Securities Premium Account represents amounts received by the Petitioner, from its shareholders. The shareholders of the

Petitioner have unanimously approved the Application of the Securities Premium Account in the manner proposed by the Petitioner.

By order dated 24-7-2003, this Court directed the publication of the Petition in one issue of English Daily and in one issue of Tamil Daily

giving 10 clear days from the date of publication to the date of hearing. This Court has also directed notice to be issued to the Registrar of

Companies, Chennai, and to the Public Prosecutor, High Court, Madras and the notices were also served on them and Mr. M.T. Arunan is

appearing for the Registrar of Companies.

The short question that arises for consideration is whether this Court should grant approval for the reduction of the Petitioner''s Securities

premium Account as resolved by the Shareholders of the Petitioner in the Special Resolution at the meeting held on.23-6-2003 as set out in para

13 of the Petition.

The Special Resolution passed by the Company clearly shows that the restructuring will not be prejudicial to the interest of the Petitioner''s

creditors as the reduction does not involve either the diminution of any liability in respect of unpaid capital or the payment to any shareholder of any

paid-up capital. Further, there is no reduction in the amount payable to any of the creditors and neither is any compromises or arrangement

contemplated with such creditors. The asset cover ratio as covenanted by the Petitioner in their agreement with various secured creditors will

continue to be maintained even after such restructuring. In recognition of this position all such secured creditors have signified their consent to the

restructuring. I find that it is purely a business decision arrived at by the shareholders on the basis of the commercial principles as the restructuring

does not involve any cash outflow, the same will not affect the normal operations of the Petitioner or its ability to honour its commitments and to

pay its debts, in the ordinary course of business and the restructuring is in accordance with sound commercial and accounting practice and would

enable the Petitioner to project a more realistic picture of the Petitioner''s operations, which would be to the benefit of the Petitioner''s shareholders

and investors. In recognition of this position, the shareholders of the Petitioner have unanimously approved such restructuring.

Section 100 of the Companies Act empowers a Company Limited by shares, if so authorised by its articles to reduce its share capital by

special resolution. The circumstances mentioned in Section 100(1)(a), (b) and (c) of the Act are only illustrative and not exhaustive and it is open

to a company covered u/s 100 of the Companies Act to reduce its Securities Premium Account. As far as the facts of the case are concerned,

Clause 45 of the Articles of Association empowers the Company to reduce its Securities Premium Accounts by passing a Special Resolution

subject to the provisions of Sections 100 to 104 of the Act. I have held that the resolution for the proposed reduction has been passed by more

than the required majority to pass special resolution and the resolution has been passed unanimously.

The next question that arises for consideration is whether the procedure prescribed u/s 102 of the Act should be complied with by the

Petitioner in its entirety. Section 101(2)(b) of the Act provides that the Court shall settle a list of creditors who are entitled to object to the

reduction now proposed by the Petitioner. Since all such secured creditors have signified their consent to the proposed reduction, this Court has

dispensed with the drawing up of list of creditors in C.A. No. 1216/2003 and notice to such secured creditors. I am of the view that it is not

necessary to follow the procedures prescribed in Rules 49 to 60 of the Companies (Court) Rules, 1959.

The next question that arises is whether the words ""and reduced"" shall be added to the name of the Petitioner company from the date of the

Order. Since there is no cash flow from the Petitioner Company to the shareholders and the Secured Creditors of the Petitioner have given their

consent to the proposed reduction, I am of the view that the words ""and reduced"" need not be added to the name of the Petitioner company from

the date of this Order. Therefore, I dispense with the requirements to comply with the provisions of Rule 62(b) and (c) of the Rules. I hold the said

adjustment will not have any impact on the book value of the shares to the extent of losses written off as the net worth calculations required

adjustment of losses towards the capital and reserves of the Petitioner Company. The proposed adjustment is not prejudicial to the interest of the

creditors, as there is no reduction in the amount payable to them. The proposed adjustment will not adversely affect the ordinary operations of the

Petitioner Company or the liability to honour its commitments or pay its debts in the ordinary course of the business.

For the foregoing reasons, the Special Resolution dated 23-6-2003 passed by the shareholders of the Petitioner Company is approved and as

such the proposed reduction of the Petitioner''s Securities Premium Account is confirmed. The form of Minute set out in para 18 of the Petitioner is

also approved as per Rule 63 of the Rules. The Words ''and reduced'' need not be added to the name of the Petitioner Company from the date of

this Order and the same is dispensed with. The Petitioner is directed to advertise the notice of Registration Order and the minutes as approved by

this Court in the same newspapers in which notice of the Petition was advertised within four weeks from the date of receipt of a copy of the Order.

The Additional Central Government Standing Counsel is entitled to fees of Rs. 5,000. The Company Petition stands allowed.