2009 (9) TMI 581 - HC - Companies Law

Scheme of amalgamation challenged - Held that - Merely because the concerned chartered accountants had in the past worked for the transferor company, they do not come under the influence of the transferor company or its board of directors. The appellants have not even remotely suggested that the chartered accountants or experts were acting under the influence of or under the instruction of the transferor company or of any of its directors or officers. It is undisputed that the procedure set out in section 391 of the Act has been followed ; the proposed scheme has been approved by the requisite majority. The learned company judge has recorded satisfaction that the valuation of properties of the transferor company and the transferee company was made by experts by known and accepted methods. Appeal dismissed.

Summary

Issues Involved:
1. Scheme of amalgamation between the transferor company and the transferee company.
2. Allegations of fraud and non-disclosure of material facts by the transferor company.
3. Validity and fairness of the proposed share exchange ratio.
4. Compliance with procedural requirements under Section 391 of the Companies Act, 1956.
5. Objections raised by equity shareholders.
6. Role and independence of the chartered accountants in valuation.

Issue-wise Detailed Analysis:

1. Scheme of Amalgamation:
The appeals arise from a judgment approving the scheme of amalgamation between the transferor company and the transferee company. The scheme proposed that for every 16 shares in the transferor company, shareholders would receive one share in the transferee company. The scheme was approved by the board of directors of the transferor company and subsequently by the secured creditors, unsecured creditors, and equity shareholders by a majority of more than 99%.

2. Allegations of Fraud and Non-Disclosure:
The appellants, who are equity shareholders of the transferor company, contested the sanction of the scheme on grounds of fraud and non-disclosure. They alleged that the transferor company did not present true and complete facts about its liabilities and worth. They also claimed that the latest audited accounts as of March 31, 2009, were not produced, and the reports by chartered accountants were unreliable due to lack of independence and transparency.

3. Validity and Fairness of the Proposed Share Exchange Ratio:
The appellants argued that the proposed exchange ratio of 16:1 was not supported by any material and was unfair. They contended that the shareholders were being offered far fewer shares than due. The court, however, noted that the valuation report justifying the exchange ratio was presented before the learned company judge and was found to be fair and reasonable. The appellants failed to demonstrate how the ratio was unfair or propose a better ratio.

4. Compliance with Procedural Requirements under Section 391:
The court observed that the procedure set out in Section 391 of the Companies Act, 1956, was followed. The meetings of the equity shareholders, secured creditors, and unsecured creditors were held as directed, and the proposed scheme was approved by the requisite majority. The court found no procedural lapses that would warrant interference with the scheme.

5. Objections Raised by Equity Shareholders:
The appellants raised objections regarding the non-disclosure of the latest financial statements and the fairness of the valuation report. The court noted that the latest audited balance-sheet as of March 31, 2008, and the unaudited balance-sheet as of March 31, 2009, were produced. The court also found that the appellants did not call upon the transferor company to produce additional financial statements during the proceedings.

6. Role and Independence of Chartered Accountants in Valuation:
The appellants questioned the independence of the chartered accountants who prepared the valuation report, alleging they were connected to the transferor company. The court rejected this claim, stating that the chartered accountants were reputed and used known and accepted methods for valuation. The court found no evidence to suggest that the chartered accountants were influenced by the transferor company.

Conclusion:
The court dismissed the appeals, upholding the scheme of amalgamation. It found that the objections raised by the appellants were not substantiated by facts or evidence and that the procedural requirements under Section 391 were duly followed. The court was satisfied with the fairness of the proposed share exchange ratio and the independence of the valuation process. The interim stay was vacated, and the request for continuation of the stay was rejected.