NCLAT approves the Scheme of Capital Reduction of Negative Net-worth Company
M & A Critique|August 2022
Precious Energy Services Limited ("PESL" or "Petitioner Company") is a wholly owned subsidiary of MAIF Investment India Pte. Limited, Singapore operates 15 MV Power Generating Station in Gujarat.
Surendra Rahalkar
NCLAT approves the Scheme of Capital Reduction of Negative Net-worth Company

Petitioner Company filed Scheme of Capital Reduction (Scheme) at Hon'ble National Company Law Tribunal (NCLT) Ahmedabad Bench, where it was proposed to cancel 99.85 % of Paid-up equity Share Capital by and paying Rs.77.49 Per share aggregating to Rs.5404.93 Lakhs by passing special resolution. Interestingly, the Net-worth of the Company is negative.

On direction of Hon'ble NCLT, Petitioner Company served individual notices to each of the secured & unsecured creditors. None of the creditors has raised objections to the Scheme. In view of Negative net worth and negative book value per share, proposed capital reduction was disallowed by the Hon'ble National Company Law Tribunal (NCLT) Ahmedabad Bench stating that the Capital Reduction is not in overall interest of the company and its stakeholders.

Petitioner Company filed an appeal with Hon'ble National Company Law Tribunal (NCLAT) and argued on following grounds:

a) Petitioner Company states that Company has sufficient arrangement of Cash Flows to undertake reduction of share capital and should not have any adverse impact on company ability to honour its obligation toward shareholders in case of reduction of share capital.

b) Negative Net-worth of the company appearing in the books is due to depreciation being charged on the assets of the capital-intensive industry - Solar Power Plant

c) Petitioner Company has referred to catena of judgement where it states that Reduction of Share Capital is Domestic Affair of Particular Company in which ordinarily a Tribunal will not interfere because of the reason that it is majority decision that prevails. Following are some of the Judgement referred by Petitioner company to NCLAT.

Hon'ble Delhi High Court in case of Reckitt Benckiser (India) Ltd. (CP 206 of 2004)-held that:

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