2009 (7) TMI 767 - HC - Companies Law

Demerger - Compromise and arrangement - Held that - Having regard to the fact that the Petitioner Companies have produced the audited Books of Account till 31-3-2008 and unaudited till 31-12-2008 which discloses all the relevant information coupled with the fact that the valuer has also referred to the figures of the value of the assets of the Optic Fiber Undertaking it is neither a case of vague nor of non-transparent disclosures made by the Companies. The argument of the Applicant that the same valuer is regularly appointed by the Company for valuation purpose cannot be the basis to hold that the subject report submitted by the said Valuer is dishonest or manipulated one. Such inference cannot be lightly drawn in absence of tangible material to substantiate the same. Significantly it is noticed during the course of argument that the valuation is in excess of the net book value of the assets. Suffice it to note that the grievance made by the Objectors that the basis and methodology of valuation is not spelt out in the valuation report is devoid of merits. As it was suggested that the Court may consider of specifying the rate of interest to be not less than 1 per cent over and above the Benchmark Primary Lending Rate or not less than 1 per cent over and above the Weighted average cost of debt of the Demerged Company whichever is lower thus it would be just and proper to accept this offer made by the Companies as it is seen that the Average Lending Interest Rate paid by the Company is far less than the Benchmark Primary Lending Rate. The Company cannot be made to pay interest at a higher rate. Accordingly on accepting this offer of the Companies on the above terms the Scheme will stand modified to that limited extent. It is not a Scheme of Arrangement to affect the claim of the unsecured Creditors. Scheme allowed.

Issues Involved:
1. Sanction of the Scheme of Arrangement between Reliance Communications Ltd. and Reliance Infratel Ltd.
2. Compliance with the Companies Act, 1956, particularly sections 391 and 394.
3. Valuation and transparency of assets being transferred.
4. Impact on shareholders and creditors.
5. Adherence to mandatory Accounting Standards.
6. Public interest and potential tax implications.
7. Procedural fairness in convening and holding meetings of shareholders and creditors.

Issue-wise Detailed Analysis:

1. Sanction of the Scheme of Arrangement:
The petitions sought the court's sanction for the Scheme of Arrangement under section 394 of the Companies Act, 1956, where the Optic Fiber Undertaking of Reliance Communications Ltd. (Demerged Company) would be transferred to Reliance Infratel Ltd. (Resulting Company). The rationale included reduced setup and operating costs, segregation of businesses, and promoting high-value standalone business by sharing infrastructure.

2. Compliance with the Companies Act, 1956:
The court noted that the Scheme was approved by the Board of Directors of both companies and received overwhelming support from shareholders. Meetings were convened as directed by the court, and notices were issued to creditors. The court found no winding-up petitions or investigations pending against the companies, and the Scheme did not contravene any regulations or guidelines under the Act.

3. Valuation and Transparency of Assets:
Objections were raised regarding the transparency and valuation of assets. The court found that the valuation report was available for inspection before the meeting and was included in the affidavit filed by the Regional Director. The valuation methodology was detailed, and the court found no reason to doubt the integrity of the valuation report. The court rejected objections about the lack of transparency and found the disclosures adequate.

4. Impact on Shareholders and Creditors:
The Scheme received overwhelming approval from shareholders, with only a minuscule fraction voting against it. The court noted that the creditors were not adversely affected as the Scheme involved the transfer of assets for consideration. The court addressed concerns about user charges and deferred payment of consideration by modifying the Scheme to specify an interest rate not less than 1% over the prevailing Benchmark Primary Lending Rate or the Weighted Average Cost of Debt, whichever is lower.

5. Adherence to Mandatory Accounting Standards:
The Regional Director raised concerns about non-compliance with Accounting Standard-11. The court accepted the petitioners' undertaking to comply with Accounting Standards-11 and -5. The court noted that potential deviations from accounting standards could not be the sole basis to disapprove the Scheme, provided necessary disclosures were made.

6. Public Interest and Potential Tax Implications:
Public interest objections were raised by Rajkot Saher/Jilla Grahak Suraksha Mandal, which the court found to have no locus as the applicant was neither a shareholder nor a creditor. The court accepted the petitioners' undertaking that they would not use the court's approval of the Scheme as a defense in any tax proceedings. The court found no substantial public interest concerns that would warrant disapproval of the Scheme.

7. Procedural Fairness in Convening and Holding Meetings:
The court found that the meetings of shareholders were convened and held as per the court's directions, with adequate notices issued to creditors. The court rejected objections about non-service of notice on certain creditors, noting that public notice was duly published. The court found the procedural conduct fair and in compliance with legal requirements.

Conclusion:
The court approved the Scheme of Arrangement, subject to modifications regarding the interest rate on deferred consideration and compliance with accounting standards. The petitions were made absolute, and costs were awarded to the Regional Director. The court directed all concerned to act on an ordinary copy of the judgment along with the Scheme.

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