Scheme Of Arrangement Cannot Be Used To Bypass Mandatory Capital Reduction Procedure: NCLT Mumbai

The Mumbai Bench of the National Company Law Tribunal (NCLT) held that a scheme of compromise or arrangement under Section 230 of the Companies Act, 2013 cannot be used to bypass the specific statutory mechanism prescribed for reduction of share capital under Section 66.

On 10 April, a Bench comprising Judicial Member Ashish Kalia and Technical Member Sanjiv Dutt dismissed a company petition filed by Bangalore Elevated Tollway Pvt Ltd seeking approval for reduction of share capital of about Rs. 195.59 crore, reiterating that capital reduction must ordinarily follow the procedure laid down under the Act.

The Tribunal noted:

“We are of the considered view that Section 66 is a specific provision for reduction of share capital which represents the appropriate route for capital reduction, unless such reduction is a part of a broader scheme (e.g., amalgamation merger or demerger). Section 230 dealing with compromises or arrangements cannot be used to bypass the procedural requirements of Section 66 for simple capital reduction.”

The company filed the petition on 2 June 2025 seeking approval of a scheme of arrangement with its shareholders. Incorporated as a special purpose vehicle for a highway project awarded by the National Highways Authority of India in January 2006, the company had approved the scheme through a board resolution dated 26 July 2024.

Under the proposed scheme, the company sought restructuring of reserves and reduction of share capital to write off accumulated losses of approximately Rs. 195.59 crore as on 31 March 2024. The adjustment was proposed against securities premium, general reserves, and by reducing the paid-up value of equity and preference shares.

The Tribunal observed that a scheme of arrangement cannot be invoked where the sole object is reduction of share capital, as such reduction is permitted only as an incidental consequence of a broader restructuring and not as the primary purpose.

The Bench clarified that permitting such a course would effectively defeat the statutory framework under Section 66. It held:

“However, such a requirement cannot be read to mean that a scheme of arrangement or compromise solely in relation to reduction of share capital can be filed for approval of this Tribunal in terms of provisions of Section 230 of the Act, thereby giving a complete go-by to the provisions of Section 66 of the Act. Though the reduction of share capital can be incidental or ancillary outcome of such arrangement or compromise, it cannot be the sole purpose or principal object of the same.”

Accordingly, finding that the proposal was, in substance, a capital reduction exercise dressed up as a scheme of arrangement, the Tribunal dismissed the petition.

For Petitioner: Advocate Hemant Sethi