Corporate Law Corner

6.   Vaibhav Goyal Ltd., In
re

(2016) 76 taxmann.com 249 (Rajasthan)                    Dated:
18.11.2016

Section 100 of the Companies Act, 1956 read with section 52
of the Companies Act, 2013 – Whether a company could utilise the balance held
in Securities Premium Account to adjust the accumulated losses – Held yes,
provided the same was permitted under its Articles and adjustment was approved
by requisite majority of equity shareholders

FACTS

Petitioner company (VCo) was engaged in the business of
dealing in gems and jewellery. The Incidental or ancillary objects clause of
the Memorandum of Association (MOA) of the company provided for activity of
investment. As per the Balance sheet as at 31.03.2015, VCo had a balance of Rs.
589.72 crore in its securities premium account and accumulated losses of Rs.
264.27 crore in its reserves and surplus. The accumulated losses were on
account on diminution in the value of investments made in the subsidiary
companies. The shareholders of VCo in a meeting held on 16.01.2016 passed a
special resolution approving the adjustment of such accumulated losses against
balance held in securities premium account. Articles of Association (Articles)
of VCo permitted reduction of share capital of the company.

The Registrar of Companies (ROC) challenged the reduction on
the grounds that company did not comply with provisions of section 149(2A) and
372A of the Companies Act, 1956 (1956 Act). ROC further argued that diminution
in the value of investments was not a permitted purpose for use of securities
premium in terms of section 52 of the Companies Act, 2013 and accordingly, the
special resolution passed was ultra vires. It also raised objections on
non-registration of VCo under RBI Act, 1934 in the context of investments made
in its subsidiaries. 

HELD

The High Court examined the provisions contained in section
52 of the Companies Act, 2013 as well as section 100 of the 1956 Act (which
were applicable for reduction of share capital). It was held section 52 equates
the securities premium account of a company to its paid up share capital.
Balance in share premium account could be used for purposes specified therein
without any approval of Court. For other purposes, the provisions of sections
100-104 of the 1956 Act applied and approval of the court was to be sought for
the reduction of paid up share capital of the company. 

It was observed that if the reduction of share capital of a
company u/s. 100(1) of the 1956 Act was authorised by its Articles of
Association and supported by a special resolution of equity shareholders, the
court of which approval is sought should merely evaluate whether it is
reasonable, just and fair and not prejudicial to the interest of the
shareholders, creditors or any other stakeholders of the company.

In the facts of the present case, Court observed that
contemplated adjustment would not entail any outflow of funds or assets and the
same was a commercial decision taken by the company with approval of
shareholders. Also, the said adjustment would not prejudice any creditor of VCo
or entail a reduction in the value of its shares. Court thus, upheld the
validity of resolution which permitted the utilisation of balance held in
securities premium account for adjustment of accumulated losses. It relied on
judgements rendered by various other High Courts in respect of utilisation of
securities premium account beyond the purposes specified u/s. 78 of the 1956
Act as long as the same was permitted by the Articles of the Company and
approved by requisite majority of equity shareholders.

Argument of ROC that VCo was not permitted to make
investments was not maintainable owing to the fact that the Incidental and
ancillary objects of VCo permitted the activity of making investments. Section
17 read with section 149(2) of the 1956 Act were also held to be inapplicable
for the same reason. Further, the Court observed that ROC did not have anything
on record to show that the investments in question beginning 2004-2005 were at
any point of time objected to by any statutory authority.

The Court also dispensed the procedure required u/s. 101(2)
of the 1956 Act as well as the formality of using the words “And reduced” while
describing its capital structure.

7.  SPC & Associates, Chartered Accountants
vs. DVAK & Co.

[2017] 80 taxmann.com 48
(NCLT – Hyd.)                  Dated:
17.03.2017

Sections 139 and 140 of the Companies Act, 2013 –CA firm was
appointed as auditor for 5 years – The appointment was not ratified at the
succeeding AGM – The only reason for the same was a nominal hike in audit fees
– CA firm was not given any opportunity before the decision of non-ratification
was taken – Whether such an act was bad in law – Held yes 

FACTS

Respondent company (NCo) appointed the Petitioner (SCo) as
its statutory auditor for a block of 5 years in its 17^th Annual
General Meeting (AGM) held on 28.08.2015 till the conclusion of AGM in the year
2020. However, NCo proceeded to appoint Respondent No. 2 (DCo) as its statutory
auditor for a period of five years from the 18^th AGM till the
conclusion of AGM in the year 2021. Two partners working in SCo had resigned
and established a new firm in the name and style of DCo. 

NCo alleged that it had an understanding with SCo that audit
fees would remain fixed for the tenure of 5 years. NCo admitted that the
ratification for appointment of SCo was not carried out because of a 10%
increase in the audit fees charged by SCo. NCo urged that SCo was not removed,
only its appointment was not ratified by the members of the company.

SCo thus approached the Tribunal with the prayer that removal
of SCo and appointment of DCo be declared as illegal and that Tribunal direct
NCo to appoint SCo as its auditor.

HELD

Although an auditor is appointed for a block of 5 years in
terms of section 139(1) of the Act, its appointment is required to be ratified
by the members in every AGM.  Section
140(5)(1) requires a company to pass a special resolution and obtain the
approval of Central Government before it removes the existing auditor. The
Tribunal observed that said approval was not obtained by NCo. The only ground
for non-ratification of appointment of SCo was the proposed fee hike. The
Tribunal noted that there was no documentary evidence furnished by NCo to
establish the alleged understanding that audit fees would remain fixed for 5
years. It was of the view that 10% rise in fees was reasonable.

The Tribunal noted that SCo should have been provided with a
sufficient opportunity before its non-ratification. It was directed that DCo
would be removed as auditor of NCo and that its appointment was improper. The
Tribunal also held that SCo would continue to be the auditor till the next AGM
and that NCo may take necessary course of action in accordance with law.

8.  Bimla Kothari vs.
Unitech Ltd.

(2016) 75 taxmann.com 151 (NCLT – New Delhi)      Dated: 06.10.2016

Section 73 of the Companies Act, 2013 – Law does not
distinguish between deposits accepted prior to commencement of 2013 Act and
ones accepted after it – Remedy to approach NCLT upon failure of company to
repay them was available to both the set of depositors. 

FACTS

A company (UCo) accepted deposits from public prior to
01.04.2014. It was not able to repay the same upon their maturity. UCo filed an
application with the erstwhile Company Law Board seeking an extension of time
to repay the deposits which was rejected. Various investors approached NCLT
u/s. 73(4) of the Companies Act, 2013 for redressal of their grievances. It was
also alleged that UCo had siphoned off the money raised from public deposits.

UCo urged that since the deposits in question were accepted
under Companies Act, 1956 it would not be covered by the term “deposits” as
referred u/s. 73 of the Companies Act, 2013. UCo argued that investors could
not approach NCLT as they were not “depositors” within the meaning of the
Companies Act, 2013 and that the only available recourse to them was filing a
suit with the Civil Courts.

HELD

The Tribunal observed that it had trappings of a Court with
adjudicatory rights for exercising all equitable jurisdiction. It was further
held that Legislature did not intend to differentiate between depositors prior
to 01.04.2014 or thereafter. The remedies available cannot be any different.
Rule 19 of the Companies (Acceptance of Deposits) Rules, 2014 clarifies the
applicability of sections 73 and 74 of Companies Act, 2013 to deposits accepted
from public by eligible companies, prior to or after coming into force of the
2013 Act.

It was held that the term every deposit would mean and
include all previous deposits accepted by a company. Petition u/s. 73(4) was
accepted by the Tribunal for recovery of the deposits. UCo assured the Tribunal
to sell six parcels of land owned by it and use the proceeds for repayment of
deposits. Separately, ROC had started proceedings for prosecution and was
directed by the Tribunal to investigate into the allegations of siphoning off
of funds.

9.  Rupak Gupta vs. U.P.
Hotels Ltd., In re

(2016) 71 taxmann.com 158 (NCLT – New Delhi)      Dated:
22.06.2016

Section 173 of the Companies Act, 2013 read with Rule 3 of
Companies (Meetings of Board and its Powers) Rules, 2014 – Directors are
entitled to use video conference facility to participate in Board Meetings even
if the intimation for such use has not been furnished at the beginning of the
calendar year.

FACTS

Applicant and his mother (A) were directors on the Board of a
company (UCo) along with R2 and one other independent director (G). R2 and A
were joint Managing Directors. A received a notice on 28.05.2016 for attending
a board meeting scheduled to be held on 04.06.2016. Since A and his mother were
travelling overseas on that date, it was agreed to re-schedule the same on
01.06.2016. A received another notice on 30.05.2016 which further re-scheduled
the meeting to its original date being 04.06.2016. R2 assured that A and his
mother could participate in the Board Meeting through a video conference. On
03.06.2016, A and his mother were denied the permission to attend the meeting
through the video conference and meeting was conducted as per the schedule
without A and his mother being present there.

R2 submitted to the Tribunal that the video conferencing
facility was denied with a view to comply with provisions of Rule 3(3e) of
Companies (Meeting of Board and its Powers) Rules, 2014 (Rule) which requires a
director to intimate his intention of participating in a Board meeting through
video conference facility at the beginning of the calendar year.

In addition to the items specified in the agenda, R2 proposed
to appoint B as an additional director of UCo. G had objected the denial of
video conference to A and his mother as well as appointment of B. Another Board
meeting was scheduled on 22.06.2016 to confirm the minutes of meeting held
previously, as well as to appoint B as a non-executive independent Chairman of
UCo.

A approached the Tribunal to order a stay on the meeting to
be held as well as on operation of resolution passed in the meeting of
04.06.2016.

HELD

The Tribunal noted that R2 had assured to provide the video
conference facility to A and his mother on 30.05.2016 and on the basis of this
assurance, they left for overseas. The said Rule which was cited as a reason
for denial was also in force on the date of providing the assurance. The
Tribunal held that if at all any person backed out from the assurance given,
and if the assured proceeded on that assurance, then such statement was hit by
doctrine of estoppel.

The Tribunal further held that Rule 3 was meant for providing
video conferencing. It was the obligation of the directors convening the
meeting to provide every facility to the directors asking video conference and
enable them to participate in the Board meeting. Sub-rule 3(e) merely provided
that intimations given at the beginning of the calendar year would continue to
remain valid for the entire calendar year. It did not in any way intend that in
absence of such intimation at beginning of the calendar year, directors would
not be entitled to use video conference facility during the year. Owing to the
unfairness in the manner of holding the Board meeting on 04.06.2016, the
Tribunal stayed the operation of resolutions passed therein.