2010 (1) TMI 577 - HC - Companies Law

Composite scheme of arrangement - demerger - Held that - The composite scheme of arrangement proposed by the Company is sanctioned and binding on the petitioners, their shareholders and creditors. The Transferor Companies 1 to 7 shall stand dissolved without there being an order of winding up, the demerged Companies 1 to 3 shall ensure compliance of the accounting standards post-sanction, the office is directed to draw up a decree in Form No. 42,Petitioners are directed to serve a copy of this order on the Registrar of Companies in the State of Karnataka within 30 days, the petitioner in Demerged Company No. 1 to comply with the undertaking in relation to the observations made by the Regional Director & petitioners shall serve relevant papers, along with the affidavit of valuation, on the Inspector General for Registration and Stamps in the State of Karnataka, to have his say over the stamp duty and registration fee.

Issues Involved:

1. Sanction of the composite scheme of arrangement involving demerger and merger.
2. Compliance with statutory requirements and court orders.
3. Observations by the Regional Director of Company Affairs.
4. Issuance of shares post-sanction.
5. Transfer of employees to the Transferee Company.
6. Judicial scrutiny of shareholders' approval.

Detailed Analysis:

1. Sanction of the Composite Scheme of Arrangement:

The petitioners sought the sanction of a composite scheme of arrangement involving the demerger and merger of various companies. The Transferee Company, M/s. Dynasty Developers Private Limited, proposed to demerge its rented retail property business, rented commercial business, and non-rented commercial business into three separate Demerged Companies and merge seven Transferor Companies into itself. The court, with the consent of the learned counsel, clubbed the petitions together, heard them, and disposed of them by a common order.

2. Compliance with Statutory Requirements and Court Orders:

The Transferee Company and the Demerged Companies filed applications for directions to convene and hold meetings of their secured creditors. The court initially directed the convening of these meetings but later dispensed with them upon securing written consent from the creditors. The Board of Directors of all involved companies approved the composite scheme in their respective meetings held on 10-11-2008. The affidavits and reports submitted by the Official Liquidator and the Chartered Accountant appointed by the court confirmed that the affairs of the companies were not conducted in a manner prejudicial to the interest of the public, shareholders, or creditors.

3. Observations by the Regional Director of Company Affairs:

The Regional Director of Company Affairs, Chennai, through the Registrar of Companies, noted that the authorized capital of LJ-Victoria Properties Private Limited (Demerged Company No. 1) was insufficient and required an increase. The petitioner undertook to comply with this observation. The Regional Director also emphasized that the demerged companies must follow the accounting standards as provided under the Companies (Accounting Standards) Rules, 2006, post-sanction.

4. Issuance of Shares Post-Sanction:

Upon the scheme being sanctioned and becoming effective, the Demerged Companies were required to issue shares to the shareholders of the Transferee Company as follows:
- Demerged Company No. 1: One fully paid-up equity share of Rs. 10 each for every 50 fully paid-up equity shares of Rs. 10 held in the Transferee Company.
- Demerged Company No. 2: One fully paid-up equity share of Rs. 10 each for every 170 fully paid-up equity shares of Rs. 10 each held in the Transferee Company.
- Demerged Company No. 3: One fully paid-up equity share of Rs. 10 each for every 800 fully paid-up equity shares of Rs. 10 each held in the Transferee Company.

5. Transfer of Employees to the Transferee Company:

All employees of the Transferor Companies and Demerged Companies in service on the effective date would become employees of the Transferee Company without any break or interruption in service and on terms and conditions not less favorable than those subsisting with the Transferor Companies and Demerged Companies. No employees opposed the composite scheme of arrangement.

6. Judicial Scrutiny of Shareholders' Approval:

The court noted that the shareholders had unanimously approved the composite scheme of arrangement. It emphasized that it was not within the court's purview to sit in appeal over the valued judgment of the equity shareholders, who are considered to possess worldly wisdom.

Final Order:

(i) The composite scheme of arrangement proposed by the Company is sanctioned and binding on the petitioners, their shareholders, and creditors.
(ii) The Transferor Companies 1 to 7 shall stand dissolved without an order of winding up.
(iii) The Demerged Companies 1 to 3 shall ensure compliance with the accounting standards post-sanction.
(iv) The office is directed to draw up a decree in Form No. 42.
(v) Petitioners are directed to serve a copy of this order on the Registrar of Companies in Karnataka within 30 days.
(vi) The petitioner in Demerged Company No. 1 must comply with the undertaking regarding the observations made by the Regional Director.
(vii) Petitioners shall serve relevant papers, along with an affidavit of valuation, on the Inspector General for Registration and Stamps in Karnataka, to address the stamp duty and registration fee.

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