A scheme of arrangement often includes a reduction of share capital as one of its components. The reduction may be incidental to a merger or demerger, or it may be the principal object of the scheme. The NCLT's treatment of the reduction depends on which it is. Where the reduction is incidental to a broader restructuring, the Tribunal may sanction it as part of the scheme under Section 230. Where the reduction is the sole or principal object, the Tribunal will require the company to follow the separate procedure under Section 66.
The Incidental Reduction
A reduction of capital that is incidental to an amalgamation or demerger is treated as part of the scheme. The cancellation of the shares of the transferor company, the extinguishment of cross-holdings, and the adjustment of reserves are all incidental to the restructuring, and the Tribunal has the power to sanction them under Section 230 read with Section 232.
The rationale is that the scheme is a composite transaction, and the reduction is not a standalone corporate action. The shareholders and creditors who approve the scheme are taken to have approved the reduction as part of the scheme, and the separate Section 66 procedure is not required.
The Principal Reduction
Where the reduction is the sole or principal object of the scheme, the Tribunal will not sanction it under Section 230. The NCLT Mumbai, in Bangalore Elevated Tollway, dismissed a scheme that sought to reduce share capital by approximately ₹195.59 crore to write off accumulated losses, holding that Section 66 is the specific provision for reduction of share capital and that Section 230 cannot be used to bypass its procedural requirements.
The Tribunal's reasoning is that Section 66 contains safeguards—including the requirement of a special resolution, the notice to creditors, and the confirmation by the Tribunal—that are designed to protect the creditors and the shareholders. A scheme that is used to circumvent those safeguards is a scheme that defeats the statutory purpose.
The Practical Test
The practical test is whether the reduction is a means to an end or the end itself. If the scheme's primary purpose is to merge two businesses, and the reduction is a consequential adjustment, the Section 230 route is available. If the scheme's primary purpose is to reduce capital, and the merger or arrangement is incidental, the Section 66 route is required.
A scheme that is structured without regard to this distinction is a scheme that may be dismissed at the threshold, with costs.
Call to Action
Anuj Desai & Associates advises companies on the treatment of capital reduction in a scheme—from the distinction between incidental and principal reduction to the choice between the Section 230 route and the Section 66 route. If your scheme includes a reduction of capital, we can help you structure it to withstand the Tribunal's scrutiny.
📧 office@anujdesaiassociates.com
📞 9619456656
🌐 https://anujdesaiassociates.com
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