The NCLT said that the company has a negative net worth and so capital reduction shouldn’t be allowed. The NCLAT, however, reasoned that if all the shareholders and creditors are on board, capital reduction should be allowed. A capital reduction is done when companies want to decrease their shareholding. This could be done through either a share cancellation or a share buyback.
In the ruling, NCLAT said that the capital reduction was approved by all the shareholders with the objective of reducing the overall weighted average cost of capital and improving the earnings per share, and there were no objections from any of the creditors of the appellant.
Also, the capital reduction is a matter of “domestic concern”, that is, the rule of the majority prevails, and once all the conditions of Section 66 of the Act are satisfied, NCLT cannot interfere with the decisions of the shareholders and other stakeholders.
Experts say that this ruling should help companies undergoing restructuring exercises or proposing to repatriate cash to shareholders.
“This is an important ruling laying down the parameters within which the NCLT has to function in the case of capital reduction as well as any scheme of arrangement amongst the shareholders. This ruling provides clarity on aspects of capital reduction even for companies with negative net worth with adequate cash and approval of the shareholders and creditors,” said Yashesh Ashar, partner, Buta Shah & Co.
The case pertained to Ahmedabad-based Precious Energy Services, which is engaged in operating a solar power plant. The company had proposed a capital reduction and applied for approval of NCLT. The NCLT said that the company has a negative net worth and disallowed the capital reduction exercise.
NCLAT, while overturning the NCLT order, also said that the company has provided affidavits clarifying the financial position of the company.
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