2007 (7) TMI 410 - HC - Companies Law

Issues Involved:
1. Sanction of the scheme of arrangement under sections 391 to 393 of the Companies Act, 1956.
2. Compliance with section 117C of the Companies Act, 1956.
3. Treatment of bonus debentures as dividends and applicability of section 205A(3) of the Companies Act, 1956.
4. Legality of issuing bonus debentures from the company's reserves under section 77 of the Companies Act, 1956.

Issue-wise Detailed Analysis:

1. Sanction of the Scheme of Arrangement:
The petitioner sought the court's sanction for a scheme of arrangement under sections 391 to 393 of the Companies Act, 1956. The petitioner-company, incorporated as Astra IDL Ltd. and later renamed Astra Zeneca Pharma India Ltd., proposed issuing fully paid non-redeemable debentures from its general reserve. The board of directors approved this scheme, which was subsequently endorsed by the equity shareholders and unsecured creditors in a meeting convened as per the court's directions. The scheme received unanimous approval from the shareholders and creditors, with no opposition from any party.

2. Compliance with Section 117C of the Companies Act, 1956:
The Regional Director objected to the petition on the grounds that the petitioner sought to dispense with the creation of a debenture redemption reserve, as mandated by section 117C of the Companies Act. The petitioner responded by filing an affidavit, undertaking to comply with section 117C and create a debenture redemption reserve fund for the redemption of the debentures. Given this unconditional undertaking, the court found that the objection regarding section 117C did not survive for consideration.

3. Treatment of Bonus Debentures as Dividends and Applicability of Section 205A(3) of the Companies Act, 1956:
The Regional Director argued that the petitioner-company was treating bonus debentures as dividends and remitting dividend distribution tax, thus invoking section 205A(3) of the Act. However, the court clarified that section 205A pertains to unpaid dividends that are to be transferred to a special dividend account. In this case, the amount converted into bonus debentures was not declared as a dividend and remained unpaid to shareholders. Therefore, section 205A was deemed inapplicable.

4. Legality of Issuing Bonus Debentures from the Company's Reserves under Section 77 of the Companies Act, 1956:
The Regional Director contended that issuing bonus debentures from the company's reserves violated section 77, which restricts companies from purchasing their own shares or providing loans for such purchases. The court examined the statutory provisions and legal precedents, concluding that there was no prohibition under the Act against issuing bonus debentures from free reserves. The court referenced authoritative texts and judicial decisions, noting that bonus debentures are not issued gratuitously but are paid in full by capitalized profits or reserves, which could otherwise be distributed as dividends.

Conclusion:
The court found no legal impediments to the proposed scheme of arrangement and deemed it based on sound principles. The scheme had unanimous approval from shareholders and creditors and faced no opposition. Consequently, the court sanctioned the scheme, subject to compliance with section 117C and any necessary approvals from concerned authorities.

Order:
(i) Petition allowed.
(ii) Scheme of arrangement sanctioned subject to compliance with section 117C and necessary approvals.
(iii) Petitioner to serve a copy of the order to the Registrar of Companies within 30 days.
(iv) Registry directed to draw the decree as per Form No. 42 of the Companies (Court) Rules, 1959.

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