2012 (7) TMI 1001 - HC - Companies Law

Approval of a scheme of arrangement - reserve utilized for the purpose of declaring dividends - Held that - The reserve can be utilized for the purpose of declaring dividends. Since aforesaid aspect was not pointed out to the learned Counsel for the appellant either at the time of hearing of the petition or when the matter was kept for dictating the order in our view there was no justification in imposing such a condition while sanctioning the Scheme in connection with nonutilization of amalgamation reserve for the purpose of declaring dividend. Here it is required to be noted that no objection was taken by the Regional Director to the said clause and even the shareholders have unanimously approved the Scheme with the original Clause-10.5. Considering the same it cannot be said that incorporation of the said clause is in violation of public policy and as held by various Courts such amalgamation reserve can be utilized for the purpose of declaring dividends. Even the learned Single Judge of this Court has earlier taken the similar view. In view of the same the direction given by the learned Single Judge that such amalgamated reserve shall not be used in any manner for declaring dividend requires to be set aside and the Scheme is held to have been sanctioned as a whole including the original Clause-10.5 of the Scheme. In view of the above discussion all the appeals are ALLOWED. The Scheme is SANCTIONED as a whole including the original CLAUSE-10.5 of the Scheme.

Summary

Issues:
Challenge to order of Single Judge regarding approval of scheme of arrangement for amalgamation under Companies Act, 1956.

Analysis:
The judgment involved a challenge to the order of a learned Single Judge regarding the approval of a scheme of arrangement for amalgamation under Sections 391 to 394 of the Companies Act, 1956. The appellant companies had filed company petitions seeking approval for the amalgamation of three companies. The Single Judge approved the scheme but directed that the amalgamation reserve fund should not be used for declaring dividends. The appellants challenged this direction on various grounds.

The appellant argued that the commercial activities of the companies were similar, and no objections were raised during the process. They contended that utilizing the reserve for dividends was necessary for future use. The appellant also highlighted that the learned Single Judge's direction was unexpected and not raised during the proceedings. They argued that various courts had allowed such reserves to be used for dividends, citing relevant case laws.

On the other hand, the respondent-Regional Director submitted that the Single Judge may have imposed the condition considering the provisions of the Companies Act. Reference was made to Section 205 of the Companies Act, which stipulates that dividends should be paid only out of profits.

The Court examined Clause-10.5 of the original scheme and referred to relevant case laws to support the argument that reserves could be used for dividends. The Court noted that the direction by the Single Judge was unwarranted, especially since no objections were raised by the Regional Director or shareholders. The Court held that the reserve could be utilized for declaring dividends and set aside the Single Judge's direction. Consequently, all appeals were allowed, and the scheme was sanctioned as a whole, including the original Clause-10.5.

In conclusion, the Court directed the appellants to bear the costs of the respondent-Regional Director and disposed of the appeals accordingly.