Court intervention in the reduction of share capital

Reduction of share capital under section 100 of the Companies Act, 1956, is used by companies to extinguish the shares of a group of shareholders. While the procedural requirements of undertaking a selective reduction of share capital are settled, the courts continue to differ on what constitutes a fair and equitable scheme of reduction. As such, the discretion available to courts while judging if the valuation of shares is fair and equitable is of particular interest.

What the courts look for

Indian courts have concluded that the pre-determinants for sanctioning such a scheme are: statutory provisions have been complied with; class of persons who attended the meeting was fairly represented; statutory majority acted in a bona fide manner; and a reasonable man may approve of the arrangements made.

It is well settled that no scheme of reduction “ought to be confirmed unless the court be satisfied that it will not work unjustly or inequitably” as held by the House of Lords in British and American Trustee and Finance Corporation v Couper. However, both the courts and the statutes are silent on what the just and equitable price should be.

Anuj Prasad is a partner at Amarchand & Mangaldas & Suresh A Shroff & Co, where Anu Susan Abraham and Priyanka Sant are associates. The views expressed in this article are those of the authors and do not reflect the official policy or position of Amarchand Mangaldas.