2008 (4) TMI 498 - HC - Companies Law

Compromise and arrangement - Held that - Avoidance of capital gains can be no reason for not sanctioning a scheme which is otherwise lawful or valid. There is no allegation of fraud or unreasonableness and the shareholders are astute businessman accomplished in the commercial field and it must be presumed that the terms of the scheme have been approved only if it benefits the companies and its shareholders. There is no allegation of the scheme being unfair or unreasonable. The current assets shall be transferred at book value and the specified assets are contingent in nature. The clause relating to the aforesaid has also been approved by the shareholders. Therefore, this objection also be rejected. As regards the third objection no shareholder has filed any objection to the scheme and it is only at the meeting that four shareholders have voted against the scheme. Therefore, the third objection be rejected. The scheme cannot be faulted on a mere apprehension or speculation as to what might happen in future. The present is certain. No objection has been filed to the scheme after advertisements. The fourth objection is not pressed, as the quarterly financial results were open for inspection as will be borne out from the explanatory statement. The fifth objection cannot be sustained as North India Plantation Division was an undertaking of the transferor-company and has been shown as an asset of the transferor-company in its balance-sheet. The sixth objection cannot be sustained in view of clause 10.3 of the scheme wherein the consideration has been mentioned and it is only if considered necessary for effective functioning of the transferee-company that additional assets may be transferred. Such transfer is also subject to terms and conditions agreed. This is contingent in nature and for the same provisions have been made and agreed by the shareholders. The scheme has been approved by the majority shareholders and as no allegation of fraud, unreasonableness, unfairness or illegality has been made the scheme cannot be termed as vague, incomplete or uncertain. No investigation proceeding is pending and the scheme is one for arrangement and/or reconstruction.

Summary

Issues:
1. Application for sanctioning a scheme of arrangement between two companies and their shareholders.
2. Objections raised by the Central Government regarding the scheme.

Analysis:
1. The petitioners sought approval for a scheme of arrangement between two companies and their shareholders. The shareholders had approved the scheme without modification, as evidenced by the chairperson's report. Advertisements were published, and financial documents were made available for inspection. The petitioners argued that the scheme should be sanctioned based on shareholder approval, citing legal precedents supporting shareholders' judgment on the fairness of a scheme.

2. The Central Government raised several objections to the scheme. Firstly, it contended that the scheme aimed to avoid capital gains tax and deprived shareholders of consideration. It also raised concerns about potential loss of money, lack of interest provisions, insufficient shareholder majority approval, and discrepancies in financial information. Additionally, objections were made regarding the assets' valuation, non-disclosure of certain divisions, and lack of clarity on additional assets transfer.

3. In response, the petitioners argued that the scheme complied with legal requirements, including financial disclosures and shareholder approval. They refuted the objections, stating that the scheme's provisions were lawful and beneficial to the companies and shareholders. They emphasized that no fraud allegations were made and that the scheme was approved by majority shareholders and regulatory bodies, justifying its legality and fairness.

4. The court considered the arguments and rejected the Central Government's objections. It found that the scheme met legal standards, including financial disclosures, shareholder approval, and compliance with tax laws. The court emphasized the shareholders' authority to approve the scheme and dismissed objections related to potential losses, interest provisions, shareholder dissent, asset valuation, and additional assets transfer. The court directed the petitioners to provide a computerized scheme copy to the Department and ordered the payment of costs to the Central Government. The court ultimately approved the scheme and disposed of the case.