1997 (5) TMI 349 - HC - Companies Law

Summary

Issues Involved:
1. Financial standing and management of the companies involved.
2. Purpose and benefits of the proposed scheme of amalgamation.
3. Compliance with statutory requirements and procedural formalities.
4. Objections raised by the Central Government regarding the scheme.
5. Validity of the scheme in terms of business dissimilarity and legal considerations.

Issue-Wise Detailed Analysis:

1. Financial Standing and Management of the Companies Involved:
The petitioners submitted that the financial standing of Mcleod Russel (India) Ltd., Faith Investments Ltd., and Eveready Industries India Ltd. was beyond reproach, with significant excess of assets over liabilities. It was noted that Faith Investments Ltd. is a wholly-owned subsidiary of Mcleod Russel (India) Ltd., and all companies were under the same management. The businesses of the companies were distinct but managed collectively.

2. Purpose and Benefits of the Proposed Scheme of Amalgamation:
The petitioners argued that the amalgamation aimed to optimize growth, development, and diversification. The merger was expected to create a larger company with more substantial resources and financial base, enabling easier fund-raising for expansion and modernization. Additional benefits included reduction of overheads, better utilization of resources, and enhanced productivity. The scheme was also intended to leverage Eveready Industries' strong distribution network for Mcleod Russel's packet tea business.

3. Compliance with Statutory Requirements and Procedural Formalities:
The petitioners confirmed that separate meetings of equity shareholders had been held, and the majority required under the statute approved the scheme. However, the Central Government objected that the Chairpersons of the meetings had not filed their reports in Form No. 39 as prescribed in Rule 78 of the Companies (Court) Rules, 1959, making it difficult to ascertain the voting pattern. The petitioners countered that the failure to follow the proforma strictly did not invalidate the resolution, as the reports provided sufficient information on the voting pattern.

4. Objections Raised by the Central Government:
The Central Government raised several objections:
- Non-compliance with Form No. 39: The petitioners argued that the guidelines were substantially followed, and the majority required by section 391(2) was met.
- Impracticality of the Scheme: The Central Government contended that the dissimilar businesses could not justify amalgamation. The petitioners cited legal precedents indicating that business similarity is not a necessity for amalgamation.
- Reduction of Share Capital: The Central Government argued that the scheme involved a reduction of share capital without compliance with sections 100-103 of the Companies Act, 1956. The petitioners responded that Rule 85 did not apply to a scheme of amalgamation where the entire assets and liabilities were transferred.
- Misrepresentation of Financial Condition: The Central Government pointed out discrepancies in Mcleod Russel's balance sheet. The petitioners did not directly address this issue in the judgment.
- Void Scheme for Faith Investments Ltd.: The Central Government argued that the scheme was void under section 25 of the Indian Contract Act, 1872, due to lack of consideration. The petitioners countered that since Faith Investments was a wholly-owned subsidiary, no consideration was necessary.

5. Validity of the Scheme in Terms of Business Dissimilarity and Legal Considerations:
The court observed that it is not imperative for amalgamating companies to be involved in similar businesses. The primary consideration is whether the amalgamation benefits the companies commercially. The court found sound business logic in utilizing Eveready Industries' distribution network for Mcleod Russel's products. The objections regarding the lack of consideration for Faith Investments Ltd. were dismissed as it was a wholly-owned subsidiary.

Conclusion:
The court concluded that the objections raised by the Central Government did not warrant refusal of the scheme. The scheme was approved as it was beneficial to the companies, shareholders, and creditors, and complied with statutory requirements. The petition under sections 391(2) and 394 was disposed of with orders as prayed for, and the costs of the application were to be borne by the petitioners.