Case Note & Summary
The petitioner, Indian Seamless Enterprises Limited, filed a petition under Sections 391 to 394 of the Companies Act, 1956 seeking sanction of a scheme of arrangement between the company and its shareholders. The scheme proposed to gift the shares held by the petitioner in Taneja Aerospace and Aviation Limited (TAAL) to its shareholders in a specific ratio: one fully paid-up equity share of TAAL for each fully paid-up equity share of the petitioner, and one fully paid-up equity share of TAAL for every two partly paid-up equity shares of the petitioner. Consequent to the gift, the petitioner sought to reduce the balance in its Securities Premium Account (SPA) by the book value of the investment in TAAL shares as appearing in its books on the record date. The reduction was sought under Sections 100 to 104 of the 1956 Act read with Section 52 of the Companies Act, 2013. The Board of Directors approved the scheme on 26 June 2014. By an order dated 8 August 2014, the court convened meetings of equity shareholders and unsecured creditors, which unanimously approved the scheme on 15 September 2014. The Regional Director filed an affidavit objecting to the scheme on two grounds: first, that the scheme was not a compromise or arrangement under Section 391(1) of the 1956 Act, and second, that the reduction of the securities premium account was not permissible under Section 52 of the 2013 Act as it did not comply with the procedure for reduction of share capital. The court overruled both objections. It held that the term 'arrangement' under Section 391(1) includes a reorganisation of share capital, and the gift of shares to shareholders coupled with the reduction of the securities premium account constituted an arrangement. The court further held that the securities premium account is a reserve and not share capital, and its reduction did not require the procedure for reduction of share capital under Sections 100-104 of the 1956 Act. The reduction was merely an accounting adjustment to reflect the distribution of assets. The court sanctioned the scheme, noting that it was fair, reasonable, and not contrary to public policy.
Headnote
A) Company Law - Scheme of Arrangement - Gift of Shares to Shareholders - Sections 391-394 Companies Act, 1956 read with Section 52 Companies Act, 2013 - The court considered a scheme whereby the petitioner company proposed to gift shares held by it in another company to its shareholders and reduce its securities premium account by the book value of the investment. The Regional Director objected on grounds that the scheme was not a compromise or arrangement and that the reduction of the securities premium account was not permissible under Section 52 of the 2013 Act. The court held that the scheme was an arrangement under Section 391(1) as it involved a reorganisation of share capital and distribution of assets, and that the reduction of the securities premium account was permissible as it did not involve a reduction of share capital but a reduction of a reserve. The court sanctioned the scheme, overruling the objections. (Paras 1-10) B) Company Law - Reduction of Securities Premium Account - Section 52 Companies Act, 2013 read with Sections 100-104 Companies Act, 1956 - The court examined whether the reduction of the securities premium account by the book value of the investment in shares to be gifted required compliance with the procedure for reduction of share capital. The court held that the securities premium account is a reserve and not share capital, and its reduction does not require the procedure under Sections 100-104 of the 1956 Act. The court noted that the scheme did not involve any reduction of share capital, extinguishment of liability, or return of capital to shareholders. The reduction was merely an accounting adjustment to reflect the distribution of assets. (Paras 5-8) C) Company Law - Arrangement - Meaning of 'Arrangement' under Section 391(1) Companies Act, 1956 - The court interpreted the term 'arrangement' to include a reorganisation of share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both those methods. The court held that the gift of shares to shareholders and the consequent reduction of the securities premium account fell within the ambit of 'arrangement' as it involved a reorganisation of the company's share capital and distribution of its assets. (Paras 4-6)
Issue of Consideration
Whether a scheme of arrangement involving a gift of shares held by the company in another company to its shareholders, coupled with a reduction of the securities premium account by the book value of the investment, can be sanctioned under Sections 391 to 394 of the Companies Act, 1956 read with Section 52 of the Companies Act, 2013 and Sections 100 to 104 of the Companies Act, 1956, despite objections from the Regional Director.
Final Decision
The court overruled the objections of the Regional Director and sanctioned the scheme of arrangement as proposed by the petitioner.
Law Points
- Scheme of arrangement
- Gift of shares to shareholders
- Reduction of securities premium account
- Sections 391-394 Companies Act 1956
- Section 52 Companies Act 2013
- Sections 100-104 Companies Act 1956
- No reduction of share capital
- No extinguishment of liability
- No compromise with creditors
- Shareholders' approval
- Regional Director's objection overruled
