2009 (5) TMI 541 - HC - Companies Law

Compromise and arrangement - scheme of arrangement in the nature of purchase of shares and demerger - Held that - Considering the entire facts and circumstances of the case the court is of the view that the scheme of arrangement as proposed is in the interest of the companies and their members and hence prayers in terms of paragraph 22 in Company Petition No. 59 of 2009 and paragraph 17 of Company Petition No. 60 of 2009 are hereby granted.

Summary

Issues:
Petitions for sanction of a composite scheme of arrangement involving purchase of shares, demerger of hotel business, and reconstruction of share capital under Companies Act, 1956.

Analysis:
1. Scheme of Arrangement: The petitions were filed for the sanction of a composite scheme of arrangement involving the purchase of shares and demerger of the hotel business of a company. The proposed scheme aimed at realigning the shareholding pattern of the demerged company by purchasing equity shares from shareholders and subsequently reducing the equity share capital. The demerged company was engaged in real estate and hotel business, while the resulting company would focus solely on hotel business post-arrangement. The board of directors decided to spin off the hotel business into a separate company to provide focused attention to both real estate and hotel businesses separately, outlining the synergies and benefits of the proposed arrangement.

2. Meetings Dispensation: Meetings of equity shareholders and unsecured creditors of the demerged company were dispensed with due to consent letters from all stakeholders being placed on record, and no secured creditors were involved. The reconstruction of capital, including the reduction of paid-up share capital and utilization of the share premium account, was proposed as part of the scheme. The court granted dispensation with the prescribed procedure under the Companies Act and related rules due to approval from stakeholders.

3. Publication and Objections: The petitions were advertised in newspapers and the Government Gazette, with no objections raised by any party post-publication. Additional affidavits were filed quantifying the reduction in equity share capital and addressing observations regarding the accounting treatment proposed for the resulting company.

4. Accounting Treatment: The Regional Director raised concerns about the proposed accounting treatment in the scheme, suggesting that the capital profit on demerger should be transferred to the capital reserve instead of the general reserve. The petitioner explained that the Accounting Standard-14 was not applicable to demergers and proposed treating the difference in share value as a share premium account. The court agreed with the petitioner's interpretation, referencing decisions from other High Courts and the Supreme Court supporting the utilization of reserves for specific purposes.

5. Court Decision: After considering arguments from both parties and additional affidavits, the court concluded that the proposed scheme of arrangement was in the interest of the companies and their members. The court granted the prayers in the petitions and disposed of the matter accordingly. The costs to be paid to the Central Government counsel were quantified and directed to be paid accordingly. The court found the scheme fair, reasonable, and legally sound, aligning with the Companies Act provisions and accounting principles.

This detailed analysis covers the key aspects of the judgment, including the scheme of arrangement, stakeholder approvals, accounting treatment concerns, legal precedents, and the court's final decision in the matter.