Meena Steels Ltd. vs -
2016 Latest Caselaw 2422 Del

*     IN THE HIGH COURT OF DELHI AT NEW DELHI
                                       Judgement reserved on: 13.01.2016
%                                      Judgement delivered on: 29.03.2016

+                  CO.PET. 137/2015
IN THE MATTER OF
MEENA STEELS LTD.                                    ..... Petitioner

                                 Through: Mr. K. Datta and Ms. Nanay
                                 Agarwal, Advocates for the petitioner
                                 Ms AparnaMudiam, Asstt. ROC for the
                                 Regional Director

CORAM:
HON'BLE MR. JUSTICE RAJIV SHAKDHER

RAJIV SHAKDHER, J
1.

This is a petition filed under Section 100 to 105 of the Companies Act, 1956 (in short the 1956 Act) read with Rules 11(1)(a)(3) and 46 of the Companies (Court) Rules, 1959 (in short the Rules) alongwith Section 66 of the Companies Act, 2013 (in short the 2013 Act).

2. In brief, the petitioner company seeks approval of this court qua the special resolution passed at the Extraordinary General Meeting (EGM) of its shareholders, convened on 06.12.2014, wherein, it was resolved that its (fully) paid up share capital be reduced to the extent it reflected the interest of "public shareholders".

3. The petitioner company in this behalf avers that public shareholders constitute 5.47% of its total paid up share capital which, in real terms comprises of 2,43,470 equity shares of a face value of Rs.10 each. 3.1 Therefore the position which obtains as on 30.09.2014 and, which I

am told, continues to hold, is as follows :-

       S.No. Name of Shareholders              No. of Shares    %age
       1.      Promoters & Propounders         42,06,530        94.53
       2.      Public Shareholders             2,43,470         05.47
               Total                           44,50,000        100.00


3.2    Thus, as prayed by the petitioner company, the cancellation of shares

held by public shareholders if allowed, its paid-up share capital will get reduced to Rs.42,06,530/- consisting of shares of face value of Rs.10/- each.

4. In order to appreciate the rival contentions, which have been raised before me, the following broad facts need to be noticed :- 4.1 The petitioner company was first incorporated on 15.01.1971 as a public limited company under the provisions of the 1956Act under the name and style: Meena Steels Ltd., in the State of Uttar Pradesh. 4.2 The registered office of the petitioner company was, however, shifted to Delhi in 1972, whereupon, a certificate of incorporation dated 15.05.1972, was issued to it.

4.3 The petitioner company was thus, as per its Memorandum and Articles of Association, engaged in the business of manufacture and marketing of steel ingots and billets as also other related products. The first Initial Public Offer (IPO) was carried out by the petitioner company in 1973, which resulted in its shares being listed on the Bombay, Delhi and U.P. Stock Exchange. This position continued to obtain till 1987. 4.4 Pertinently, as on date, the shares of the petitioner company have been de-listed at the aforementioned stock exchanges on account of failure to pay listing fee.

4.5 Coming back to the narrative, between 1986-1987, the petitioner company suffered losses due to acute shortage of demand for steel ingots. The reason for the same, was that, the petitioner company, in the manufacture of its aforementioned product used the „electric arc furnace‟ technology, which did not yield dividend on account of apparent irregular supply of electricity in the State of U.P. This apart, the technology used, it appears, had also become obsolete.

4.6 As a result of the losses, which the petitioner company had suffered, it registered its reference with the Board of Industrial and Financial Reconstruction (BIFR) under the provision of the Sick Industrial Companies (Special Provisions) Act, 1985 (in short, the SICA). Evidently, a recommendation was made by the appellate authority constituted under the SICA i.e. Appellate Authority of Industrial and Financial Reconstruction (in short, AAIFR) vide its order dated 28.07.1989, to wind up the petitioner company. This recommendation was made to this Court, under Section 20(1) of the SICA.

4.7 The petitioner company‟s woes were further compounded by the fact that, a company petition, being: CP 114/1989 was filed against it, on the ground that it was unable to repay its debts.

4.8 In the said petition, this court vide order dated 06.08.1991, directed, that the petitioner company be wound up. Consequent thereto, the Official Liquidator (OL) attached to this court was ordered to take over the assets of the petitioner company.

4.9 After a long gap, that is, in 2005, one Mr. N.K. Somani, the ex- Director and shareholder, approached this court, with a proposal, to revive the fortunes of the petitioner company.

5. Mr. N.K. Somani, apparently, proposed infusion of funds and also repayment of debts owed to the secured and unsecured creditors which included arrears qua dues owed to legal and statutory authorities. 5.1 Evidently, based on his request, Mr. N.K. Somani was given an opportunity to implement his proposal vide order dated 05.08.2005. 5.2 Apparently, in this effort, Mr. N.K. Somani had sought the help of a strategic investor, namely one Mr. B.K. Agarwal.

5.3 Pertinently, Mr. B.K. Agarwal stands appointed as a Director on the board of the petitioner company.

5.4 As a result of the aforesaid, CA 1351/2012 was filed, whereby, recall of winding up order passed by this court was sought. This application was followed by another application, being: CA 43/2013, wherein, the petitioner company once again sought revocation of order dated 06.08.1991. The said application was filed after the OL had filed his report with regard to the affairs of the petitioner company.

6. Evidently, this court ordered convening of meeting of the shareholders, whereupon, after being satisfied as regards the affairs of the petitioner company, by an order dated 19.07.2013, recalled the winding up order.

7. On their part, the Board of Directors (BOD) of the petitioner company decided to convene an EGM of its shareholders on 06.12.2014 to seek approval for reduction of its (fully) paid-up share capital by a sum of Rs.24,34,700/- consisting of 2,43,470 (fully) paid-up shares of a face value of Rs.10/- each, which in percentage terms comes to a figure of 5.47% of the total paid-up share capital, held by equity shareholders, other than those who fall in the category of promoters, promoters group and persons acting in

concert (in short, described as : "persons in control"). 7.1 Notice in this behalf was sent to the shareholders on 05.11.2014. The said notice was accompanied by an explanatory statement. As decided, by the BOD of the petitioner company, the EGM was convened on 06.12.2014, at which, a decision was taken to cancel the paid-up share capital to the extent of 5.47% of the total paid up share capital, represented by shareholders other than persons in control.

7.2 In other words, the equity shareholders resolved and agreed to cancel the equity stake of the public shareholders. The total number of shareholders which hold 2,43,470 shares (equivalent to 5.47%), are 6000. 7.3 At the EGM held on 06.12.2014, 36 shareholders representing 35,665 equity shares and 5 proxies representing 41,70,430 equity shareholders were present. In all, the said persons, both in person and via proxies, constituted, in aggregate, 94.52% of the issued and paid up share capital of the petitioner company.

8. It needs to be noticed that the position as on 31.03.2014 was different, to that, which obtained on 30.09.2014, to which, I have made a reference right at the beginning of my discussion. As on 31.03.2014, the public shareholding i.e. equity stake held by persons other than persons in control was 56.32% which in real terms was equivalent to 2,43,470 equity shares. The remaining shares i.e. 43.68% were held by persons in control which, in real terms translated to 1,88,855 shares.

8.1 The change in the equity pattern as between public shareholders and persons in control occurred when, the shareholders of the petitioner company passed a special resolution at the EGM held on 25.03.2014. This occurred on account of a resolution being passed at the said meeting which enabled

issuance of equity shares not exceeding 40 Lakh equity shares of Rs.10 each at par to persons dehors their attribute of holding shares in the petitioner company, in consonance with the provisions of Section 81(1A) of the 1956 Act.

8.2 The object of the preferential issue appeared to be to pay off the unsecured creditors. In consonance with the aforementioned decision taken at the EGM held on 25.03.2014, 40 Lakh equity shares were allotted on 26.05.2014, on preferential basis. As a result thereof, the equity stake of the persons in control in the petitioner company increased from 43.68% to 94.53%. Consequently, the equity stake of public shareholders, in the petitioner company, declined from 56.32% to 5.47%.

9. As indicated above, the sum of Rs.4 Crores was raised by the petitioner company to pay off unsecured creditors as obtaining on 31.03.2014. The petitioner company, it appears, had raised an unsecured loan from B.K. Agarwal to the extent of Rs.3.88 Crores. The petitioner company, it appears, has allotted 4,55,000 shares to Mr. B.K. Agarwal on preferential basis.

10. The aforementioned are the broad facts in the background of which the present peition came to be filed.

11. Notice in this petition was issued on 07.04.2015. On that date, notice was accepted on behalf of the Regional Director (RD). Since then a reply has been filed by the RD, based on inputs received from the Registrar of Companies (ROC).

12. The main objection of the RD is that the petition for reduction of capital is directed to benefit one class of shareholders i.e. persons in control. It is stated that the petitioner company is attempting to edge-out public

shareholders by seeking reduction in its share capital. In this context the RD has highlighted the fact that the equity stake of the public shareholders was reduced from 56.32% to 5.47% when, 40 Lakh shares were issued on preferential basis to persons in control.

12.1 It is, perhaps in this background, that the RD has suggested that comments of Security Exchange Board of India (SEBI) should be called for.

13. The petitioner company, on the other hand, has, in its rejoinder to the reply filed by the RD broadly, reiterated the facts set out in the petition to which, I have made a reference hereinabove. The petitioner company, in its defence, has stated that the company was put-in liquidation, in 1991, and while, the process of liquidation was on, in 2005, its ex-director and shareholder, Mr. N.K. Somani, approached the court with a proposition to infuse funds and settle dues of secured and unsecured creditors. 14 As indicated above, vide order dated 05.08.2005, this court, permitted Mr. N.K. Somani to take appropriate steps for revival of the petitioner company and, to liquidate the debts owed by it. It is, in this background, that Mr. N.K. Somani brought in Mr. B.K. Agarwal (i.e. its present director) as its strategic investor. This move was, evidently, successful, in as much as, secured and unsecured debts had been paid off, and permission was granted by this court, for institution of a scheme of arrangement. Accordingly, CA 1351/2012 was filed in consonance with the provisions of Section 391(1) and 393 of the 1956 Act. In the application, a prayer was made to recall the winding up order passed by this court. This court, though, directed convening of meeting of shareholders. The Chairperson appointed qua the meeting submitted a report, which revealed, that the shareholders of the petitioner company had consented to the revocation of the winding up order

as also, its revival.

14.1 It is thus, averred, that this court vide order dated 19.07.2013 recalled the winding up in the background of the aforesaid short facts. 14.2 It is further submitted that in CP 114/1989, which was filed by a petitioning creditor, an application was moved, wherein, it was clearly mentioned that Mr. B.K. Agarwal would invest upto Rs.5 Crores in the petitioner company, a sum, which would be converted into shares. For this purpose, the petitioner company sought to rely upon paragraph 4 and 6 of the application. For the sake of convenience, the averments made therein, are extracted hereinbelow :-

"..4. Mr. Bijendra Kumar Agarwal son of Late Shri Raghunath Parshad Agarwal, Proprietor of Tirubala Exports of Kanpur who is exporting Leather Footwear and whose group has turnover of Rs.30 Crores per year has agreed to invest upto Rs.5 Crores from his group for said purpose, subject to approval of scheme and terms by this Hon‟ble Court. Mr. B.K Agarwal and Mr. N.K. Somani want to bring a joint venture between Mr. N.K. Somani, ex-Director and Mr. Brijendra Kumar Agarwal.

The copy of the letter written by him confirming to this effect with his Chartered Accountant Certificate is filed as Annexure 'A'.

6. It is further respectfully submitted that to show his bonafide the applicant will deposit Rs.10 Lakhs as security in favour of the Registrar General, High Court of Delhi, New Delhi by Demand Draft No.102935, Dated 27.07.2005. This amount has been raised from Shri. B.K. Agarwal, who is ready to finance, subject to approval by this Hon‟ble Court.

(i). The applicant will settle or pay to all creditors, secured creditors and labourers as specified in Statement of Affairs by applicant within 6 months from making of such order by Hon‟ble

Court;

(ii). The Sale of Plant and Machinery, land, etc. of company will be deferred for 6 months after order is made relating to compliance of the serial no.(i).

(iii). The applicant will collect from debtors as specified in Statement of Affairs thereafter.

(iv). On such settling or payment to all creditors the Hon‟ble Court will hand over all the properties, management of company, machinery and demand draft of Rs.10 Lacs to applicant, Shri B.K. Agarwal Group and Shri N.K. Somani, who will be free to select its own Board of Directors.

(v). After all properties and management of company are handed over to the applicant, the rehabilitation of the company will be done and the business of the company will be started through resources of Shri B.K. Agarwal and Shri N.K. Somani.

(vi). After payment of all dues / settlement official Liquidator would be withdrawn from the management of the company.

(vii). The amount to be brought in by Shri B.K. Agarwal and his group and Shri N.K. Somani shall be converted in the form of share capital which shall be increased suitably and the Board of Directors shall be suitably modified, so that Shri B.K. Agarwal and Shri N.K. Somani may have effective control over the affairs and management of the company, to safeguard his investments in the company..."

14.3 Reference in this behalf is also made to paragraph 8.3 of the scheme sanctioned by this court on 19.07.2013; when, at which point in time, as noticed above, the winding up order was also recalled.

15. It is, thus, contended, that the allotment of shares on preferential basis was carried out in accordance with the law, and also, in consonance with the

provisions of the scheme sanctioned by this court. It is stated that since, funds had to be infused to pay off the creditors, allotment of shares on preferential basis in consonance with the provisions of Section 81(1A) of the 1956 Act read with the Unlisted Public Companies (Preferential Allotment) Rules, 2003 as amended in 2011, was made.

15.1 It is averred that prior to the allotment of shares on preferential basis, which was made on 26.05.2014, unsecured loan to the extent of Rs.3,96,98,630.09 was infused by Mr. B.K. Agarwal, who was recognized as a strategic investor by this court. The petitioner company further avers, that shares on preferential basis were allotted not only to Mr. B.K. Aggarwal but to other persons and a company, which was part of his group. The details, with respect to those, who were allotted 40 Lakh shares on preferential basis as set out in the rejoinder are as follows :-

       NAME & ADDRESS                 NO. OF SHARES         AMOUNT
  Mr. Brijendra Kumar Agarwal              4,55,000          45,50,000
  Mr.Harsh Kumar Agarwal                   5,15,000          51,50,000
  Mr.Adarsh Kumar Agarwal                  5,15,000          51,50,000
  Mr.Anuj Kumar Agarwal                    5,15,000          51,50,000
  Real Light Estate Private                20,00,000        2,00,00,000
  Limited
  Total                                    40,00,000        4,00,00,000

16. It is further avered that the petitioner company does not have any fixed assets except land which is also a leasehold property. It is submitted that the petitioner company is a going concern, and that, it is entitled in law, being a

de-listed company, to seek reduction of capital, and thereby, provide exit opportunities to public shareholders. The petitioner company further avers that reduction in capital sought by it, is bonafide, since public shareholders, at present, do not play a significant role in the petitioner company and if, approval is given to reduction of capital, they would be paid a loyalty bonus at the rate of Rs.10/- per share even though the value of each share after allotment on preferential basis is only Rs.1.4252 per share which, prior to allotment of shares on preferential basis was pegged at (-) Rs.76.2236 per share.

17. In the background of the aforesaid facts, arguments on behalf of the petitioner company were put forth by Mr. K. Datta, while on behalf of the Regional Director, submissions were advanced by Ms. Aparna Mudiam.

18. Mr. Datta argued for approval of reduction of share capital in line with the averments made in the pleadings filed. It is his submission that the reduction of share capital would accord an exit route to the public shareholders, who today have an equity stake of only 5.47% in the total paid- up share capital of the petitioner company. The learned counsel reiterated the fact that allotment of shares on preferential basis was made pursuant to a decision taken at the EGM held on 25.03.2014. Mr. Datta also reiterated the fact that Mr. B.K. Agarwal was recognized as a strategic investor and because he had infused funds in the form of an unsecured loan, that it became possible for the petitioner company to pay off its secured and unsecured creditors. Mr. Datta conceded that the allotment of shares on preferential basis brought about a change in the equity pattern. It was the learned counsel‟s submission that the allotment of shares on preferential basis was carried out in accordance with the relevant provisions of the law as

obtaining at the relevant point in time. In support of his submissions, Mr. Datta relied upon the following judgments :-

(i). Judgment dated 07.06.2010, passed in Company Scheme Petition No.101/2010, titled : Organon India Ltd.

(ii). Sandvik Asia Limited Vs. Bharat Kumar Padamsi & Ors., 2009 SC Online Bom 541.

19. On the other hand, Ms. Mudiam, who appears on behalf of the RD/ROC, relied largely upon the averments made in the reply so filed. Ms.Mudiam in consonance with the averments made in the reply filed by the RD stated that the reduction of share capital was evidently directed to benefit persons in control.

19.1 Ms. Mudiam, however, confirmed for me that comments were asked of SEBI, vide RD‟s letter dated 17.08.2015, to which no response was received from SEBI.

19.2 Ms. Mudiam, however, did not refute the fact that Article 48 of the Articles of Association did permit the petitioner company to seek reduction of its share capital.

20. Having heard the submissions advanced on behalf of the parties before me and perused the record, in my view, what clearly emerges is as follows :-

(i). The petitioner company went through significant business crisis between 1986-1987. Its problems were compounded by the fact that a winding up petition was filed against it, being: CP 114/1989, which finally culminated in this court directing the winding up of the petitioner company vide order dated 06.08.1991.

(ii). As noticed above, in the interregnum, the petitioner company had filed a reference with the BIFR in consonance with the provisions of SICA. The

AAIFR vide order dated 28.07.1989, recommended its winding up.

(iii). Mr. N.K. Somani, ex-Director / shareholder of the petitioner company took steps for revival and for paying off the secured and unsecured creditors of the petitioner company. Permission in that behalf was given by this court vide order dated 05.08.2005.

(iv). Consequent thereto, this court granted permission for filing a scheme of arrangement. This scheme of arrangement was subject matter of CA 1351/2012 and in subsequent application, being: CA 43/2013, a request was made for recall of winding up order dated 06.08.1991, passed by this court qua the petitioner company. It appears that this court did direct convening of the shareholders‟ meeting to ascertain their views in the matter. The shareholders did convey at the meeting, a fact evident from the report submitted by the Chairperson, that they were desirous of the winding up order being recalled.

(v). It is, in this background, that on 19.07.2013, this court, sanctioned the scheme of arrangement and recalled the winding up order.

21. Consequent thereto, an EGM was held on 25.03.2014, whereat, a decision was taken to allot shares on preferential basis. 21.1 Mr. B.K. Aggarwal, who was introduced as a strategic investor had in the intervening years supported the petitioner company by infusing unsecured loans to the extent of Rs.3,96,98,630.09; a figure set forth by the petitioner company, though, the RD avers that the figure should read as: Rs.3.88 Crores.

22. Be that as it may, the fact of the matter is that, because funds by way of unsecured loans were infused in the petitioner company by Mr. B.K. Agarwal during its difficult days, allotment of shares on preferential basis

was made to him and to other persons, as also, a company which came under his sway.

22.1 It is not the RD‟s stand before me that the allotment of shares on preferential basis was flawed or illegal. If that position remains undisturbed, then quite naturally the equity pattern of the petitioner company had to change. Consequently, with the allotment of 40 Lakh shares, albeit, on preferential basis, the public shareholding in the petitioner company went down from 56.32% to 5.47%. In real terms, however, the public shareholders continued to hold 2,43,470 shares.

22.2 These shares as alluded to above are held by 6,000 shareholders.

23. The petitioner company proposes to cancel the said shares and repay a sum of Rs.24,34,700/- to these 6,000 shareholders. The RD does not refute the fact that after shares were allotted on preferential basis, the value of each share was pegged at Rs.1.4252 per share. The RD, also does not refute that prior to allotment of shares on preferential basis, the value of each share was in the negative, that is, equivalent to (-) Rs.76.2236. 23.1 Therefore, quite clearly, in so far as the public shareholders are concerned, they stand to gain by return of capital.

24. This brings me to the aspect as to whether there is any impediment in law in seeking reduction of the equity stake held by Public Shareholders. 24.1 A similar question came up for consideration before the Division Bench of the Bombay High Court in Sandvik Asia. In the said case, the promoter group held 95.54% of the share capital, while the balance, 4.46% was held by the non-promoters. A special resolution was passed by a majority of 99.95% of those who were present and had voted in favour of the resolution moved for reduction in share capital. The court, like in this case,

was confronted with the issue as to whether the majority shareholders could seek cancellation, and thereby, return share capital of the minority, which represented the non-promoter group.

24.2 The Division Bench of the Bombay High Court, inter alia, observed that as long as the non-promoter shareholders, were being paid a fair value for their shares, and such, a decision had been taken by an overwhelming majority of shareholders, the court would not be justified in withholding its sanction qua approval sought vis-à-vis such a resolution. 24.3 A special leave petition preferred against the said decision (which was converted into a Civil Appeal i.e. CA No.2418/2009), was dismissed vide order dated 13.07.2009.

25. The very same issue has been noticed by a single Judge of the Bombay High Court in Organon (India) Ltd., which followed the view of its Division Bench in Sandvik Asia.

26. Having regard to the aforesaid position in law, in my view, there appears to be no impediment to grant sanction to the resolution, passed by the shareholders, at their EGM held on 06.12.2014, for reduction of its share capital by a sum of Rs.24,34,700, comprising of 243470 shares of Rs.10 each, held by public shareholders.

26.1 As indicated above, necessary power for reduction in share capital is contained in Article 48 of the Articles of Association of the petitioner company.

27. For the foregoing reasons, as prayed, the resolution passed, at the EGM, held on 06.12.2014, by the shareholders of the petitioner company is approved.

28. Furthermore, minutes appended as Annexure P-9 to the petition,

which are extracted hereinbelow for the sake of convenience, will be registered in accordance with the extant provisions of law with the ROC.

"..The capital of Meena Steels Limited is henceforth Rs.4,20,65,300/- divided into 42,06,530 equity shares of Rs.10/- each reduced from Rs.4,45,00,000/- divided into 44,50,000 equity shares of Rs.10/- each. At the date of registration of this minute, 42,06,530 equity shares have been issued and deemed to be fully paid-up (and the remaining 2,43,470 equity shares are unissued).."

29. In view of the fact that the petitioner company has no secured and unsecured creditors, it is exempted from using the expression "AND REDUCED" as a suffix against its name.

30. Before, I part with the matter, in so far as the aspect concerning issuance of notice to SEBI is concerned, as evident from the reply filed by the RD, despite a communication dated 17.08.2015 being served upon SEBI, no response was received from the said authority. Apart from this, the fact that the petitioner company is not listed on any stock exchange, an averment which is not refuted by the RD, the SEBI, so to say, may not have any role to play in the present petition.

31. The petition is disposed of, in the aforesaid terms.

RAJIV SHAKDHER, J

MARCH 29, 2016 yg