2009 (4) TMI 456 - HC - Companies Law

Amalgamation - Held that - In the present case while considering the objections raised by the chartered accountant the court is of the view that these objections would not affect the scheme and on the basis of these objections it is not possible for this court to come to the conclusion that the affairs of the company have been conducted in a manner prejudicial to the interest of the shareholders or to the public interest. Certain irregularities which are pointed out by the chartered accountant have been taken care of by the transferee company. There is no substance with regard to avoidance of the stamp duty nor there is any evidence in the objection that the whole scheme was proposed by the petitioners only with a view to avoid the capital gain tax.

Issues Involved:
1. Sanction of the scheme of arrangement for amalgamation under sections 391 and 394 of the Companies Act, 1956.
2. Dispensation of meetings for equity shareholders and unsecured creditors.
3. Observations by the Official Liquidator and Chartered Accountant.
4. Compliance with statutory provisions and accounting standards.
5. Potential evasion of stamp duty and income tax.
6. Objections raised by the Official Liquidator and Chartered Accountant.
7. Precedents and previous court decisions related to similar objections.
8. Central Government's observations on the latest financial reports.

Detailed Analysis:

1. Sanction of the Scheme of Arrangement for Amalgamation:
The petitions were filed by the petitioner-companies for the sanction of a scheme of arrangement in the nature of amalgamation of five transferor companies with the transferee company under sections 391 and 394 of the Companies Act, 1956. All the petitioner-companies belong to the same group of management and are wholly owned subsidiaries of the transferee company.

2. Dispensation of Meetings for Equity Shareholders and Unsecured Creditors:
Meetings of the equity shareholders and unsecured creditors of the transferor companies were dispensed with based on written consent letters. There were no secured creditors. The scheme was unanimously approved by all equity shareholders present and voting at the meeting convened on 19-6-2008.

3. Observations by the Official Liquidator and Chartered Accountant:
The Official Liquidator, in his report, stated that the auditors' report was qualified, pointing out violations of sections 3(1)(iii)(d), 40, and 212 of the Companies Act, 1956, and Accounting Standards AS-4 and AS-18. The auditors also noted evasion of stamp duty and income tax, a cash shortfall, and the functioning of the company without a valid board of directors for a specified period.

4. Compliance with Statutory Provisions and Accounting Standards:
The transferor companies provided explanations and clarifications for the observations made by the chartered accountant. They clarified that the shareholding pattern was correctly incorporated based on the annual general meeting date. The cash shortfall was written off after board approval, and there were no objections from the Registrar of Companies regarding the accounts.

5. Potential Evasion of Stamp Duty and Income Tax:
The purpose of the amalgamation was not to avoid stamp duty or capital gains tax. The transferee company would pay stamp duty as per the Bombay Stamp Act. The transferor companies were not incorporated solely for amalgamation purposes.

6. Objections Raised by the Official Liquidator and Chartered Accountant:
The Official Liquidator observed that the explanations provided by the company were not satisfactory, particularly regarding the evasion of stamp duty and income tax. However, the petitioner-companies argued that the chartered accountant's report was without basis and beyond jurisdiction.

7. Precedents and Previous Court Decisions:
The court referred to previous decisions where similar objections were raised, and the schemes were sanctioned subject to certain reservations. The court noted that the objections raised did not warrant disapproval of the scheme and that any pending or future inquiries would not be prejudiced by the amalgamation.

8. Central Government's Observations on the Latest Financial Reports:
The Central Government, through its counsel, raised an observation related to the latest financial reports. This issue was addressed by filing provisional balance sheets of all transferor companies and the transferee company.

Conclusion:
The court concluded that the objections raised by the Official Liquidator and the chartered accountant were properly explained by the petitioner transferor companies. The court found no substance in the objections regarding the avoidance of stamp duty or capital gains tax. The scheme of amalgamation was sanctioned, subject to the observations made, and the petitions were disposed of accordingly. The costs to be paid to the Central Government standing counsel were quantified at Rs. 3,500 per petition.

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