CAN A LOSS-MAKING COMPANY RETURN CAPITAL TO ITS SHAREHOLDERS UNDER SECTION 66 OF THE COMPANIES ACT, 2013? YES, SAYS NCLT CHENNAI
NCLT,CHENNAI Vs ABTRAN INDIA PRIVATE LIMITED
REDUCTION OF CAPITAL
Abtran India filed petition to NCLT Chennai for reducing its capital from Rs 3.04 crore to Rs 26.82 lakh. This involved cancelling a substantial portion of equity shares and paying Rs 4.97 per share to its shareholder from available cash reserves.
FINANCIAL RESTRUCTURING
The scheme also earmarked a portion of the reduction amount to write off accumulated losses. The company placed on record that its financial restructuring aimed to present a more accurate balance sheet and improve its ability to raise funds in the future.
STATUTORY POSITION – SECTION 66
Section 66 expressly allows a company to reduce its share capital “in any manner”, including:
Cancelling capital lost or not represented by assets
Paying off excess paid-up capital to shareholders
This provision is not restricted only to profit-making companies.
NCLT FINDING
The Tribunal noted that the scheme was duly approved by shareholders through a special resolution. It also recorded that the company had no creditors and no pending investigations. Financial disclosures showed sufficient liquidity to undertake the payout without affecting operations.
NO BAR IN LAW
The Tribunal held that accumulated losses do not bar a company from paying shareholders during capital reduction. It 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”
A LOSS-MAKING COMPANY CAN RETURN CAPITAL IF:
✔ It has surplus capital despite losses (e.g., over-capitalization)
✔ The reduction is bona fide and not a regulatory bypass
✔ Creditors are fully protected
✔ NCLT is satisfied on fairness and solvency
CREDITORS’ INTERESTS ARE PROTECTED
· No compromise or prejudice to creditors
· Tribunal ensures solvency post-reduction
NCLT FINAL VERDICT
After reviewing financial statements, including recent profitability trends and cash balances, the Bench held that the scheme was viable. It found no procedural irregularities or legal prohibitions.
Accordingly, the Tribunal approved the reduction and confirmed the revised capital structure.
# YOUR COMPLIANCE PARTNER R V SECKAR, FCS, LLB 79047 19295,
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