The National Company Law Tribunal (NCLT), Bengaluru Bench has held that while a company is permitted to reduce its paid-up share capital to write off accumulated losses under Section 66 of the Companies Act, 2013, the securities premium account cannot be utilised for the same purpose, as such utilisation is expressly barred under Section 52 of the Act. The ruling came in response to a petition filed by Firepro Systems Private Limited, which sought to wipe out losses by simultaneously reducing its paid-up share capital and its securities premium account.

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A Bench comprising Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada partly allowed Firepro Systems' petition by approving the proposed reduction of paid-up share capital while rejecting the reduction of the securities premium account. The Tribunal emphasised that although the provisions governing reduction of share capital under Section 66 apply to securities premium by virtue of Section 52(1), the permissible uses of securities premium are strictly limited to those listed under Section 52(2) and do not include setting off accumulated losses.

Firepro Systems had proposed to reduce its paid-up share capital from ₹543.61 crore to ₹54.36 crore, extinguishing shares and using ₹489.25 crore of the adjustment to write off accumulated losses. Simultaneously, the company sought to reduce its securities premium of ₹460.99 crore to nil, so that losses of over ₹950 crore could be fully erased from its financial statements. The special resolution approving this reduction was passed unanimously at the extraordinary general meeting held on 9 February 2024 and was duly supported by audited accounts and compliance certificates.

During the proceedings, the Tribunal issued notices to the Registrar of Companies, Regional Director (SER), and the company’s creditors, in accordance with the rules governing capital reduction. After examining the objections submitted by statutory authorities and the company’s responses, as well as proof of notices sent to all creditors and publication of notices in Indian Express and Kannada Prabha, the Tribunal found that Firepro had satisfied all procedural requirements under Section 66 in relation to the reduction of paid-up capital.

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However, the Tribunal categorically held that the securities premium account cannot be utilised to write off accumulated losses. It noted that Section 52(2) exhaustively lists the purposes for which the securities premium account may be used — such as issuing bonus shares, writing off preliminary expenses, discount on securities issues, premium on redemption of securities, and buy-back — and that writing off losses does not fall within this list. The Tribunal referred to the Supreme Court judgment in CIT v. N.C. Budharaja & Co. to reiterate that a fiscal statute must be interpreted strictly and courts cannot expand the meaning of clear statutory language based on perceived equity or convenience.

The Tribunal also rejected Firepro’s reliance on Article 15 of its Articles of Association, which authorised the company to reduce its securities premium account. It clarified that Section 6 of the Companies Act gives overriding effect to the statute, and therefore any clause in the memorandum or articles that conflicts with the Act becomes void to the extent of such conflict. Consequently, the Tribunal held that contractual authorisation in a company’s Articles cannot override the explicit statutory prohibition contained in Section 52.

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In conclusion, the Tribunal confirmed the reduction of paid-up share capital and approved the minutes resolving the reduced capital structure. Firepro has been directed to file the approved minutes with the Registrar of Companies and to publish the confirmation order in Indian Express (Bengaluru edition) and Kannada Prabha within 30 days. The petition was disposed of with the direction that the reduction of share capital shall also comply with applicable FEMA, RBI and Income-Tax regulations as required.

Appearance

For Petitioner: Advocate Bibas Kittur

Cause Title: M/s. Firepro System Pvt. Ltd

Case No: CP. No. 52/BB/2024

Coram: Judicial Member Sunil Kumar Aggarwal, Technical Member Radhakrishna Sreepada