Securities Premium Account Cannot Offset Accumulated Losses: NCLT Bengaluru

The National Company Law Tribunal at Bengaluru has recently clarified that while a company may reduce its paid-up share capital to write off accumulated losses under Section 66 of the Companies Act, the securities premium account cannot be used for such write-off, as this is expressly prohibited under Section 52 of the Act.

A coram of Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada partly allowed the petition filed by Firepro Systems Pvt Ltd, approving the proposed reduction of its paid-up share capital but rejecting its attempt to bring the securities premium balance to zero for the purpose of wiping out losses.

Relying on the company law provisions, it observed, “it is clear that the Share premium account cannot be utilised for the purpose of writing off of the Accumulated losses. This is because Section 52(2) does not list Setting off of Accumulated losses is one of the means of Application of Securities Premium Account.”

Firepro had moved the tribunal under Sections 66 and 52 of the Companies Act seeking approval to reduce its paid-up capital from Rs 543.61 crore to Rs 54.36 crore by extinguishing shares and writing off accumulated losses of Rs 489.25 crore. The company also sought to reduce its securities premium account of Rs 460.99 crore to nil, so that the entire losses of Rs 950.24 crore could be written off.

The board approved the proposal in December 2023 and the shareholders unanimously passed a special resolution on February 9, 2024. The Tribunal issued notices to the Registrar of Companies, the Regional Director and the company's creditors on 20 May 2024, following which Firepro published the mandatory notices in Indian Express and Kannada Prabha on July 11, 2024.

After examining the statutory framework and the company's compliance, the tribunal held that Firepro had satisfied the requirements of Section 66 for reduction of paid-up capital, and therefore approved the reduction of equity capital to the revised level of Rs 54.36 crore. However, the tribunal rejected the company's bid to reduce its securities premium account to zero, ruling that Section 52 of the Companies Act imposes a strict, limited set of permissible uses and does not allow accumulated losses to be written off using this reserve.

It also held that even if a company's Articles authorise such a reduction, Section 6 of the Act gives overriding effect to the statute, noting that “the Provisions of Companies Act will have overriding effect not withstanding any thing to the Contrary contained in Memorandum of Association or Articles of Association.”

Partly allowing the plea, the tribunal confirmed the reduction of paid-up share capital and directed Firepro to file the approved minutes of the meeting with the Registrar of Companies and publish the confirmation order in Indian Express and Kannada Prabha. 

Click Here To Read/Download Order