Loss-Making Companies Can Pay Shareholders During Capital Reduction: NCLT Chennai

The Chennai Bench of the National Company Law Tribunal (NCLT) has reiterated that even loss-making companies are legally permitted to pay shareholders during a capital reduction exercise under Section 66 of the Companies Act, 2013, observing that such decisions fall within the commercial wisdom of shareholders.

The coram of Judicial Member Sanjiv Jain and Technical Member Venkataraman Subramaniam said there is no bar in law on a company with accumulated losses returning capital to its shareholders, provided statutory requirements are complied with.

The tribunal observed, “There are no serious allegations as regards the bona fides of the proposed scheme. It has been settled that there is no bar in law, for a loss making company to pay off shareholders, while undergoing a reduction in the share capital of the company"

The company had approached the tribunal seeking confirmation of the reduction of its issued, subscribed and paid-up share capital from Rs 3.04 crore to Rs 26.82 lakh. Under the scheme, a portion of the share capital was cancelled and extinguished, with shareholders being paid Rs 4.97 per share from the company's cash and cash equivalents. A part of the reduction amount was also proposed to be utilised for writing off accumulated losses.

The tribunal, after considering the precedents placed on record, noted that the decision to reduce share capital is a matter resting on the commercial wisdom of shareholders and is treated as a domestic concern of the company. It further noted that the jurisdiction of the Tribunal in such matters is supervisory in nature.

The Tribunal recorded that the proposed scheme had been approved by way of a special resolution and that there were no serious allegations regarding the bona fides of the scheme.

It also recorded the company's submissions regarding its financial position, including its cash balance, and its undertaking to comply with applicable regulatory requirements, including FEMA provisions, in view of the involvement of foreign shareholders.

Finding that the proposed reduction was not barred by law and was compliant with the procedural requirements under Section 66, the Tribunal approved the reduction of share capital and the minutes to be registered under Section 66(5) of the Act.

It clarified, “this order should not be construed as an order in any way granting exemption from payment of stamp duty, taxes or any other charges, if any payment is due or required in accordance with law or in respect to any permission/ compliance with any other requirement which may be specifically required under any law”

The petition was accordingly allowed.