Is it fair to bar a Company from buying back its shares, for delay in filing of annual returns with the Registrar ?

As we all know the Companies Amendment Act, 1999 inserted S.
77A in the Companies Act 1956 (hereinafter referred to as the ‘Act’) giving
power to the company to buy back its own shares. At the same time it also
inserted S. 77B restricting or prohibiting the buyback of shares by the company
in certain circumstances. Here we are referring S. 77B(2).

S. 77B(2) reads as follows :

No company shall directly or indirectly purchase its own
shares or other specified securities in case such company has not complied
with provisions of S. 159, S. 207 and S. 211.

If we go through above, we can analyse as follows :

S. 77B(2) does not prescribe any time or period during which
the prohibition will prevail. Does this mean that if a default is committed,
say, for the year ended 31st March, 2001 and the company desires to buy back
shares in the year 2010 — it cannot buy back its shares. This leads to an absurd
situation.

Any default under the Act is penalised under the same Section
or S. 629A of the Act. The penalty depends on the gravity of the compliances
provided under respective sections.

We may agree to it that defaults u/s.207 or u/s.211 of the
Act should be penalised as it may cause monetary loss to shareholders or
misleading the shareholders by not giving true and fair view of the state of
affairs of the company.

But can we agree that a single day default in filing annual
return of the company with ROC is a major default ?

Is it fair to prohibit a company from buying back its shares
because it has not filed its annual return within 60 days from the date of
annual general meeting and when it has paid penalty for it ?

To make the law fair, the law should be amended to
clarify that prohibition shall apply for a period of twelve (12) months from the
date of default and the necessary penal consequences have been suffered by the
company.

Further, if the company makes default in complying with any
of the provisions of S. 159, S. 207 and S. 211, it cannot buy back its shares in
its lifetime.

Once a default is committed under the above Sections, the company is not eligible to buy back its shares in the entire
lifetime of it.

S. 77B does not give any immunity to the company or does not
provide any time period after which the company can buy back its shares, say
after expiry of 5 years from the date of default.

One should really look at the gravity of the defaults u/s.159, u/s.207 and u/s.211. Default u/s.207 i.e., non-payment of dividend within prescribed time limit and 211 i.e., non-disclosure of true and fair view in financial statements or not following accounting standards, etc. can be considered as material defaults. Defaults u/s.207 or u/s.211 may cause monetary loss to its shareholders/stakeholders.

But, if the company has failed to file its annual return within 60 days and causing delay of, say, one day is not so material default of S. 159 of the Act.

It is really not fair to put such restrictive clause u/s.77B of the Act prohibiting a company from buying back its shares for a single day delay in filing its annual return with ROC.

S. 77B of the Act needs alteration as it is really unfair to prohibit a company to buy back its shares for lifetime if it commits default u/s.159, 207 and 211 of the Act.

There are two options for alteration of S. 77B of the Act:

    a) Remove reference of S. 159 S. 77B (2) of the Act; or

    b) Specify, after expiry of certain period from the date of default u/s.159, u/s.207 and u/s.211 of the Act, the company can buy back its shares.