1992 (3) TMI 280 - HC - Companies Law

Summary

Issues Involved:
1. Approval of the scheme of amalgamation.
2. Compliance with procedural formalities.
3. Objections raised by the official liquidator.
4. Allegations of tax avoidance and public interest concerns.
5. Court's discretion in sanctioning the scheme.

Issue-wise Detailed Analysis:

1. Approval of the Scheme of Amalgamation:
The petitions filed by three private limited companies sought the court's sanction for a scheme of amalgamation where Kasta Extrusions Pvt. Ltd. and Purti Pipes and Processors Pvt. Ltd. would merge into Kriti Plastics Pvt. Ltd. The scheme was unanimously approved by the board of directors and shareholders of all three companies. The court appointed a chairman to oversee the shareholders' meeting, and the unanimous approval of the amalgamation and share exchange ratio was reported.

2. Compliance with Procedural Formalities:
The court required a report from the official liquidator, assisted by a chartered accountant, to scrutinize the accounts and ensure compliance with the Companies Act. The companies argued that all procedural formalities were followed, including issuing necessary notices and obtaining unanimous approval from shareholders and creditors. The share exchange ratio was based on audited accounts and modified with the consent of all stakeholders.

3. Objections Raised by the Official Liquidator:
The official liquidator's report highlighted several concerns, including the scheme's potential to avoid capital gains tax and stamp duty, defective asset valuation, and non-compliance with the Import Trade Control Order, 1955. The liquidator emphasized that the scheme might be a device to avoid taxes and was prejudicial to public interest. The companies countered these objections by asserting that the valuation was conducted by authorized valuers and that the scheme was not intended to avoid taxes but to streamline family-held businesses.

4. Allegations of Tax Avoidance and Public Interest Concerns:
The court considered the Supreme Court's stance on tax planning, emphasizing that while legitimate tax planning within the law is acceptable, the use of colorable devices to avoid taxes is not. The court referred to precedents where schemes of amalgamation were scrutinized for their potential to defeat tax liabilities. The court concluded that the amalgamation scheme did not solely aim to avoid taxes and that necessary safeguards could be imposed to protect public interest.

5. Court's Discretion in Sanctioning the Scheme:
The court acknowledged its discretion to sanction or refuse the scheme, even if procedural formalities were met. The court emphasized the importance of the official liquidator's report in assessing whether the scheme was prejudicial to shareholders or public interest. The court found that the unanimous approval by shareholders and creditors indicated that the scheme was not against their interests. However, the court imposed conditions to ensure compliance with tax laws and other legal requirements.

Conclusion:
The court approved the amalgamation scheme subject to conditions ensuring compliance with the law and protecting public interest. These conditions included:
1. Execution of necessary conveyance instruments for property transfer.
2. Liability for capital gains tax arising from the transfer.
3. Accountability for any legal breaches committed before the amalgamation.

The court's decision was influenced by the unanimous approval from stakeholders and the assurance that the scheme was not a device to avoid taxes. The amalgamation was approved on March 31, 1992, with conditions to address the official liquidator's concerns.