2013 (12) TMI 1643 - HC - Companies Law

Summary

Issues Involved:
1. Terms of employment of the employees of the demerged undertaking.
2. Proposed accounting treatment under the scheme.
3. Approval to the scheme by creditors of the Resulting Company.
4. Disputed tax liability of the Demerged Company.
5. Transfer of Authorised Capital of the Demerged Company to the Resulting Company.
6. Reduction of Equity Share Capital of the Demerged Company.
7. Issue of Bonus Shares from Share Premium Account in the previous financial years.
8. Applicability of RBI guidelines and status of NBFC.
9. Use of suffix 'and reduced' in case of Demerged company.

Summary:

Terms of Employment:
The court noted that the Companies Act does not prescribe specific conditions for the disclosures to be made in the scheme pertaining to the terms of employment. The relevant clause in the scheme states that "the terms and conditions of service applicable to them, as aforesaid, will continue to govern them as employees of the Resulting Company." No further directions were required to modify the scheme.

Accounting Treatment:
The prevalent Accounting Standards are not applicable to the Scheme of Demerger. The petitioner is directed that in case of deviation from the accounting standard or practice, the Resulting Company shall make necessary disclosures in its first financial statements after the scheme is made effective.

Approval by Creditors:
The court observed that the proposed scheme does not affect the rights and interests of the creditors of the Resulting Company. No objections were received from creditors, and hence, no further directions were required to seek their approval.

Disputed Tax Liability:
The pendency of any litigation regarding disputed tax liabilities is not a relevant consideration for the sanction of the scheme. The scheme does not envisage absolution of the demerged company if such liability is crystallized later. The observation was overruled.

Transfer of Authorised Capital:
The issue of transfer of part of the Authorised Capital is settled by various High Court decisions, and there is no legal prohibition for such transfer. The observation was deemed redundant.

Reduction of Capital:
The contention that capital can only be reduced if there are accumulated losses was found to be ill-founded. The law allows for a wide range of types of reduction, and the proposed reduction was justified and permissible.

Bonus Shares:
The issuance of Bonus shares by the Demerged Company during the financial year 2011 was lawful and followed due process. There was no public interest affected, and no further directions were required.

RBI Guidelines and NBFC Status:
The RBI guidelines for NBFC are not applicable to the Resulting Company, and it is not required to obtain any clearances from the Reserve Bank of India.

Use of Suffix 'And Reduced':
The direction to add the suffix 'And Reduced' is discretionary. Given that the Demerged Company is a closely held company with no public interest affected, there was no justification for issuing such a direction.

Conclusion:
The court concluded that the present scheme of arrangement is in the interest of its shareholders and creditors as well as in the public interest and deserves to be sanctioned. The Reduction of Issued, Subscribed, and Paid-up share capital of the Demerged Company and the utilization of the Securities Premium Account were granted. The petitions were disposed of accordingly, and the petitioner companies were directed to comply with further procedural requirements.