2010 (10) TMI 911 - HC - Companies Law

Scheme of amalgamation - Held that - The proposed scheme is not just, fair and reasonable, but is prejudicial to public interest. The revival plan submitted by the petitioners, makes it obvious that the proposed scheme is not financially viable, since it is structured on many ifs and buts and presumptions and surmises. Therefore, the court cannot permit consciously, the transfusion of the blood of several members of the public, to a patient who has suffered multiple organ failure and various other ailments and whose chances of survival depends only on miracles. Hence, both these petitions are dismissed

Summary

Issues Involved:
1. Validity of the court-convened meeting.
2. Right to withdraw consent.
3. Non-impleadment of the provisional liquidator.
4. Financial viability of the scheme.
5. Public interest and transparency.

Issue-wise Detailed Analysis:

1. Validity of the Court-Convened Meeting:
The court convened a meeting of the shareholders and creditors to consider the scheme of amalgamation. The quorum for the meeting was fixed at two members, which was challenged as being contrary to Section 174(1) of the Companies Act, 1956. However, it was argued that Sections 391 and 393, being a complete code in themselves, allowed the court to fix a smaller quorum. The court upheld the validity of the meeting, noting that the provisions of Sections 391 to 394 were special provisions that overrode general provisions.

2. Right to Withdraw Consent:
Two shareholders and several creditors, who initially consented to the scheme, later sought to withdraw their consent, citing fraud, misrepresentation, and a material adverse change in the financial condition of the company. The court held that while fraud must be specifically pleaded, the shareholders and creditors were not estopped from withdrawing their consent, especially if there were significant changes in circumstances. The court emphasized that the consent given at the meeting did not preclude them from raising objections during the court proceedings.

3. Non-Impleadment of the Provisional Liquidator:
The court appointed a provisional liquidator for the transferor company during the pendency of the petitions. The objection regarding the non-impleadment of the provisional liquidator was dismissed as the petitions were ripe for hearing before the appointment of the provisional liquidator. The court noted that the official liquidator had already filed a report stating no objections to the scheme.

4. Financial Viability of the Scheme:
The scheme was scrutinized for its financial viability. The court noted that the transferor company was in severe financial distress, with over 1,600 retail outlets closed and significant defaults in statutory and creditor payments. The memorandum of understanding between the transferor and transferee was found to be suspicious, with no actual flow of funds despite claims of substantial payments. The court concluded that the scheme was not financially viable and was based on presumptions and surmises.

5. Public Interest and Transparency:
The court examined whether the scheme was in public interest, noting that the financial status of the transferor and transferee companies was precarious. The proposed scheme aimed to raise funds from the public, which the court found to be potentially prejudicial to public interest. The court emphasized that the scheme must be just, fair, and reasonable, and should not lead to the exploitation of the public. The court also highlighted the historical context of "vanishing companies" and the need for stringent scrutiny to protect investors.

Conclusion:
The court dismissed the petitions for sanctioning the scheme of amalgamation, concluding that the scheme was not financially viable, lacked transparency, and was prejudicial to public interest. The court emphasized the importance of protecting the interests of the public and ensuring that any scheme of amalgamation is just, fair, and reasonable.