Introduction
The Kolkata Bench of the National Company Law Tribunal (“NCLT”), on September 19, 2024, dismissed an application filed under Section 66 of the Companies Act, 2013 (“Companies Act”), in Philips India Limited[1] (the “Order”), on the grounds that Section 66 of the Companies Act cannot be invoked for capital reduction when the circumstances mentioned in Section 66(a) or 66(b) of the Companies Act are not met. The NCLT held that Section 66, which provides for reduction of share capital, cannot be used merely to provide liquidity or exit to minority shareholders, or to save on administrative costs. The Order attempts to justify the same on the grounds that the proposed share capital reduction was only incidental to the main objective of buy-back of shares.[2] However, this observation is in stark contrast to a catena of NCLT and National Company Law Appellate Tribunal (“NCLAT”) orders, as well as decisions of various High Courts that have time and again noted that a company may reduce its share capital in any manner as it deems fit, and courts have limited role in such schemes of capital reduction.
Brief Background on the Order
Philips India Limited (“Petitioner”) approached the NCLT under Section 66 of the Companies Act, seeking a sanction for reduction of its equity share capital. The shareholding structure of the Petitioner, prior to the intended reduction, was as follows:
| S. No. | Shareholder(s) | % of shareholding |
| 1. | Koninklijke Philips N.V. and Philips Radio B.V. | 96.13% |
| 2. | Public Shareholders | 3.16% |
| 3. | Investor Education Protection Fund (“IEPF”) | 0.71% |
The said capital reduction was to be carried forward by cancelling and extinguishing, in aggregate, 3.87% of the total equity share capital of the Petitioner, belonging to the public shareholders and IEPF. Post delisting of the Petitioner in 2004, the public shareholders of the Petitioner had no liquidity or avenues to monetise their shareholding. On multiple and regular requests from the public shareholders to buy out their shareholding, the Petitioner decided to reduce its share capital and provide them an exit, in pursuance of which the present application was filed. Contentions were raised by the minority shareholders surrounding the valuation report, fairness of the scheme and the requirement to seek approval of the public shareholders. Before proceeding to adjudicate on the aforesaid contentions, the NCLT decided to examine whether Section 66 of the Companies Act could be used to buy out the shareholding of minority shareholders of a company.
NCLT observations in the Order
The NCLT noted that share capital reduction for the Petitioner under Section 66 of the Companies Act could be done: (a) to extinguish or reduce the liability of any of its shares in respect of the share capital not paid-up; or (b) either with or without extinguishing or reducing liability on any of its shares, to cancel any paid-up capital that is lost or is unrepresented by available assets, or pay off any paid-up share capital that is in excess of the wants of the Petitioner. In the instant case, however, the only grounds claimed for capital reduction by the Petitioners were to: (a) provide liquidity/ exit to the minority shareholders; and (b) save on administrative costs of servicing large public shareholders with negligible percentage of shareholding. Since the circumstances mentioned in Sections 66(a) or 66(b) of the Companies Act were not found in the present case and the proposed share capital reduction of the Petitioner was only incidental to the main objective of the buy-back of shares, the NCLT dismissed the petition on the ground that Section 66 of the Companies Act could not be invoked under the given facts and circumstances.
Analysis
Sections 66 and 68 of the Companies Act are mutually exclusive
In a recent Mumbai Bench order of the NCLT, In the matter of reduction of equity share capital of Vanaz Engineers Limited,[3] capital reduction was allowed by the NCLT to pay off and provide an exit to minority worker shareholders. Similar to the facts in Philips India Limited, share capital reduction was sought to provide liquidity to minority shareholders and save on administrative costs. Herein, it was noted that Section 66 of the Companies Act enables a company to reduce its share capital in ‘any manner’ as it so desires, by passing a Board resolution, special resolution and subject to confirmation by the NCLT. Furthermore, the Andhra Pradesh High Court in IL&FS Engineer and Construction Company Limited v. Wardha Power Company Limited (“IL&FS Case”),[4] while discussing the erstwhile provision for reduction of share capital in a company, observed that share capital reduction can be carried out ‘in any way’.[5] It further observed that:“Those words are extremely wide and general. The statute has not prescribed the manner in which the reduction is to be carried out nor has it prohibited any method of effecting that object.”[6] This was restated in In Re: Lily Realty Private Limited,[7] wherein the NCLT permitted the reduction of share capital as Section 66 of the Companies Act allowed a company to pay-off the share capital to the shareholders, pursuant to reduction of share capital, which cannot be re-characterised as buy-back.
On the other hand, Section 68 of the Companies Act empowers a company to purchase its own securities up to certain limits, with the approval of the Board and shareholders of the company without any approval of NCLT.[8] In In Re: L&T Investment Management Limited,[9] the NCLT noted that in buyback of shares under Section 68, first, the company receives the shares from the shareholders who wish to tender the shares in the buyback, and then cancels the shares. However, in case of capital reduction under Section 66, the shares are automatically cancelled upon sanction by the NCLT.[10] Companies are permitted to undertake corporate action either under Section 66 or 68 of the Companies Act and are accordingly required to comply with the provisions of the applicable provision. Thus, the process, approvals and mechanisms prescribed under Sections 66 and 68 are mutually exclusive.[11]
Capital reduction under Section 66 does not circumvent Section 68
In Max India Limited,[12] Supreme Petrochemical Limited,[13] Fairfield Atlas Limited,[14] Sai Service Private Limited,[15] etc., the NCLT had sanctioned reduction of share capital as a procedure under Section 66 of the Companies Act, holding that capital reduction under Section 66 did not circumvent the provisions of Section 68 of the Companies Act. Further, paying fair value to the existing shareholders to provide them an exit was not in the nature of buying back shares, as per the observations in SM Dyechem Limited.[16] Hence, when the procedure laid down under the provisions of Section 66 of the Companies Act had been duly followed, including procurement of shareholders’ approval and approval of the NCLT, the question of circumventing provisions of Section 68 did not arise.
Capital reduction: A domestic concern?
In Jadcherla Expressways Pvt Ltd,[17] the NCLT had observed that no section of the Companies Act mandates to opt the buy-back route in preference to the capital reduction route. A company can thus follow either the procedure under Section 66 or 68 of the Companies Act, and the said provisions are independent of one another.[18] The Madras High Court judgement in Re. Panruti Industrial Company (Private) Ltd.,[19] has clearly laid down the precedence in this regard by stating that share capital reduction is a matter of domestic concern, left to the decision of the majority of the shareholders of the company. Referring to this, the Delhi High Court in Reckitt Benckiser (India) Ltd. v. Unknown,[20] additionally noted that once share capital reduction is approved by majority of shareholders, the court will confirm it, except in situations where the transaction is unfair or inequitable or there is objection by creditors. On the same lines, a recent NCLAT decision in Economy Hotels India Services Private Limited v. Registrar of Companies & Anr.[21]observed: “Reduction of Capital is a ‘Domestic Affair’ of a particular Company in which, ordinarily, a Tribunal will not interfere because of the reason that it is a ‘majority decision’ which prevails.”[22] This was further reiterated by the Principal Bench of the NCLAT in Precious Energy Services Limited v. Regional Director North-Western Region,[23]wherein the NCLT confirmed the reduction of the share capital, approved by the majority of shareholders.
Furthermore, with regard to the threshold of interference over a scheme of reduction by a company, the Andhra Pradesh High Court in the IL&FS Case[24]hadobserved that courts do not exercise appellate power over the decisions of companies or their managements. Courts are only required to see that the procedure, by which the resolution is carried through, is legally correct and the shareholders and creditors are not prejudiced. Thus, courts are not to be concerned with the commercial reasons for approval. As evidenced, reduction of share capital is a company’s domestic concern, where interference by the court is permitted only with regard to fairness of the scheme.
Conclusion
As observed in the series of decisions mentioned above, the manner of reduction of share capital is an internal and domestic affair of the company, in which courts and tribunals have limited roles. Therefore, the interference by NCLT in the Order is beyond the powers vested with it, in case of a scheme of reduction. Moreover, the observation that Section 66 could not be invoked for capital reduction when the circumstances mentioned in Section 66(a) or 66(b) of the Companies Act are not met, seems to brush aside the bare wordings of the provision, which reads, “…reduce the share capital in any manner and in, particular, may….” By focussing solely on the specific grounds mentioned in Section 66(a) and 66(b), the NCLT seems to have overlooked that capital reduction can be done ‘in any manner’. Accordingly, the NCLT Order is per incuriam,[25] as it is in stark contrast to the observations made by multiple judicial bodies above, which have stated time and again that the words ‘in any manner’ are extremely wide and general and are to be interpreted in the intended manner. The NCLT in the present case, headed with an approach too literal without due consideration to established precedents.
[1] CP/312(KB)2023.
[2] Philips India Limited, para 9.13.
[3] CP No. 302 of 2023, NCLT Mumbai Bench.
[4] (2013) 176 Comp. Cas 156.
[5] IL&FS Case, para 22.
[6] IL&FS Case, para 22.
[7] C.P. No. 4514/MB-I/2019.
[8] CP No. 302 of 2023, NCLT Mumbai Bench.
[9] CP No. 11 of 2022, NCLT Mumbai Bench.
[10] In Re: L&T Investment Management Limited, para 6.
[11] CP No. 302 of 2023, NCLT Mumbai Bench.
[12] CP No. 344 of 2021, NCLT Mumbai Bench.
[13] CP No. 330 of 2021, NCLT Mumbai Bench.
[14] CP No. 207 of 2021, NCLT Mumbai Bench.
[15] CP No. 195 of 2022, NCLT Mumbai Bench.
[16] CP No. 224 of 2021, NCLT Mumbai Bench.
[17] CP No. 49/66/HDB/2022.
[18] Max India Limited; Supreme Petrochemical Limited.
[19] AIR 1960 Mad. 537.
[21] 2020 SCC OnLine NCLAT 653.
[22] Economy Hotels India Services Private Limited, para 21.
[23] Company Appeal (AT) No. 17 of 2021.
[24] (2013) 176 Comp. Cas 156.
[25] The term ‘per incuriam,’ meaning ‘through lack of care,’ refers to judgments passed without considering relevant legal authorities or statutes.