16 January 2025
NCLAT allows capital reduction u/s 66 to be repaid as loan; upholds shareholder discretion
 
The National Company Law Appellate Tribunal (NCLAT), in a recent ruling, overturned the National Company Law Tribunal's (NCLT) decision and approved a capital reduction proposal by Ulundurpet Expressways Pvt. Ltd. (UEPL) under Section 66 of the Companies Act, 2013 (the Act). This ruling allowed UEPL to structure the repayment proceeds as interest-bearing unsecured loans between the company and its shareholders, to be repaid over a period of time.

Background and Context
  • UEPL operates a toll-based highway under the Build-Operate-Transfer (BOT) model. It was generating surplus cash but could not distribute it as dividends due to accumulated losses.
  • To address this issue, UEPL proposed a reduction of its equity share capital by cancelling 16.76 crore fully paid-up equity shares of INR 10 each. The cancellation was coupled with a plan to repay shareholders INR 11.33 per share-totalling INR 1,900 crores-structured as unsecured loans bearing a 14% annual coupon rate.
  • The proposal was approved unanimously by shareholders through a special resolution passed in an Extraordinary General Meeting (EOGM). Additionally, notices were sent to creditors, and neither creditors nor regulatory authorities, including the Regional Director (Western Region) and the Registrar of Companies (ROC), raised objections.
  • However, the NCLT declined to confirm the capital reduction plan, inter alia, citing that it does not satisfy the requirements under Section 66(1)(b)(ii) of the Act.
  • UEPL preferred an appeal against NCLT's decision before NCLAT arguing that the proposed reduction was compliant with the provisions of Section 66 of the Act.
The NCLAT Ruling

The NCLAT overturned the order of NCLT on following grounds/ submissions:
  • NCLAT noted that reduction of capital was in compliance with Section 66 of the Act and consistent with precedents where similar reduction schemes had been approved by other NCLT benches, including in case of Dewas-Bhopal Corridor Pvt. Ltd. (CP No.252/2022) and Godhra Expressways Pvt. Ltd. (CP No.254 of 2022).
  • The NCLAT emphasized that Section 66 of the Act, permits a company to reduce its share capital 'in any manner'. Thus, considering the law above, the company has a power to reduce its shareholding capital in any manner, this being a domestic issue.
  • The tribunal noted that the proposed reduction, supported by business projections, was a legitimate mechanism to address the company's inability to distribute surplus cash efficiently.
  • Importantly, it reiterated that the role of the tribunal is not to second-guess the business rationale or projections but to ensure compliance with statutory provisions and protection of stakeholder interests.
  • The NCLAT also considered well-settled precedents which stated that company can reduce its share capital in any manner.1
  • Considering the fact that none of the creditors ever raised any objection, even the Regional Director (Western Region) and the Registrar of Companies did not object to such reduction and also a special resolution dated 29 November 2022, having been passed by 100% majority of shareholders, NCLAT find there is no impediment to grant permission to the appellant for reduction of its shares.
Our Comments
The NCLAT order is significant and welcome. It reinforces the autonomy of the company to reduce its share capital in any manner. NCLAT has also discussed at length the settled precedents on capital reduction which will further strengthen the law around it.

Interestingly, the Kolkata Bench of NCLT dismissed the petition of Philips India Limited seeking reduction of capital. This order is likely to be great support as stare decisis2 on similar cases.

1. Indian National Press (Indore) Ltd (1989) 66 Comp Cas 387 (MP); Reckitt Berickiser (India) Ltd (2005) 122 DLT 612; Panruti Industrial Company (P) Ltd AIR 1960 Mad.537; Tamil Nadu Newsprint & Papers Ltd (CP No.17 of 1995)
2. the legal principle of determining points in litigation according to precedent
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