1990 (10) TMI 288 - HC - Companies Law

Summary

Issues Involved:
1. Sanctioning of the scheme of amalgamation and merger between the transferor-company and the transferee-company.
2. Compliance with statutory provisions and representation of classes.
3. Fairness and reasonableness of the scheme.
4. Tax implications and potential tax avoidance.

Detailed Analysis:

1. Sanctioning of the Scheme of Amalgamation and Merger:
Petition No. 10 of 1990 by the transferor-company and Petition No. 9 of 1990 by the transferee-company sought the court's sanction for a scheme of amalgamation and merger. The transferor-company, Shankaranarayana Steel and Polymer Concrete Ltd., and the transferee-company, Shankaranarayana Hotels Pvt. Ltd., sought to merge, with the latter absorbing the former. The court considered both petitions together due to common questions of law and fact and disposed of them by a common order.

2. Compliance with Statutory Provisions and Representation of Classes:
The court examined whether statutory provisions were complied with, whether the class or classes were fairly represented, and whether the arrangement was reasonable. The court found no dispute regarding compliance with statutory provisions. The equity shareholders and unsecured creditors of both companies approved the scheme unanimously. The court noted that there was adequate representation and no suggestion of coercion or unfair advantage by the majority over the minority.

3. Fairness and Reasonableness of the Scheme:
The court scrutinized the scheme's fairness and reasonableness, considering the financial conditions and potential benefits for both companies. The transferor-company, struggling financially, had substantial manufacturing capacity and potential market demand for its products. The transferee-company, financially sound and with sufficient liquid resources, could effectively execute the transferor-company's stalled project. The court found the scheme beneficial for both companies, their shareholders, and creditors, ensuring the transfer of all assets, properties, and liabilities from the transferor-company to the transferee-company effective from April 1, 1989.

4. Tax Implications and Potential Tax Avoidance:
The official liquidator's report, assisted by a chartered accountant, indicated that the scheme might result in a future reduction in the income-tax liability of the transferee-company, potentially amounting to tax avoidance. The court examined the report and relevant case law, including McDowell and Co. Ltd. v. CTO, which emphasized that tax planning must be within the framework of the law and not involve colorable devices. The court concluded that the official liquidator's concerns were beyond the scope of his authority, as the statutory requirement was to investigate the transferor-company's affairs, not the transferee-company's potential tax liability. The court found no evidence of tax avoidance by the transferor-company and deemed the scheme fair, reasonable, and in the public interest.

Conclusion:
The court sanctioned the scheme of amalgamation, finding it beneficial for both companies, their shareholders, and creditors, and in the public interest. The scheme was approved by a statutory majority, and the court directed the transferor-company to stand dissolved upon sanction of the order of amalgamation. The scheme took effect from April 1, 1989, and the Registrar of Companies was instructed to consolidate the files of both companies. Parties were directed to bear their own costs.