2014 (1) TMI 1818 - HC - Companies Law

Scheme of demerger - Held that - The observations made by the Regional Director, Ministry of Corporate Affairs, do not survive as we have come to the conclusion that the present scheme of arrangement is in the interest of its shareholders and creditors as well as in the public interest and the same deserves to be sanctioned. However considering the objections of the Regional Director as noted in paragraph 11(d) above and considering the fact that the Petitioners have, as noted in paragraph 13(d) above, also no objection for deletion of the proviso to Clause 40 of the Scheme, direct that the modified Scheme after deletion of the proviso to Clause 40 is hereby sanctioned. The Reduction of share capital of the Resulting Company and reduction in the share premium account of the Demerged Company and the Resulting Company as envisaged in their respective Petitions are approved and the Minutes dealing with respective reduction of the Petitioner Companies being Annexures U and R are hereby approved.

Summary

Issues Involved:
1. Sanction of the Scheme of Arrangement between the Demerged Company and the Resulting Company.
2. Reduction of capital in the respective companies.
3. Compliance with legal and procedural requirements, including those raised by the Regional Director, Ministry of Corporate Affairs.

Issue-wise Detailed Analysis:

1. Sanction of the Scheme of Arrangement:
The Petitioner Companies sought the court's sanction for a Scheme of Arrangement under Sections 391 to 394, read with Sections 78, 100 to 104 of the Companies Act, 1956. The Scheme involved the demerger of the Demerged Undertaking from the Demerged Company to the Resulting Company, which is a wholly-owned subsidiary of the Demerged Company. The court noted that the Scheme had been approved by the requisite majority of equity shareholders, secured creditors, and unsecured creditors of the Demerged Company in meetings convened as per the court's directions. The Scheme's rationale and benefits were detailed in the petitions, and the court found that the Scheme was in the interest of shareholders, creditors, and the public.

2. Reduction of Capital:
Part III of the Scheme dealt with the reduction of share capital held by the Demerged Company in the Resulting Company and the reduction in the share premium account of the Demerged Company. Clauses 51 and 52 of the Scheme provided for these reductions to be effected as integral parts of the Scheme, in accordance with Sections 78, 100 to 104 of the Companies Act, 1956. The court approved the reduction of share capital and share premium account as envisaged in the respective petitions and the related Minutes.

3. Compliance with Legal and Procedural Requirements:
The Regional Director, Ministry of Corporate Affairs, raised several observations, including issues related to the share exchange ratio, compliance with SEBI circulars, accounting standards, selling of shares, stamp duty payment, appointed date, and the use of the suffix "and reduced." The Demerged Company addressed these observations in an Additional Affidavit, and the Resulting Company adopted the same responses.

(a) Share Exchange Ratio: An independent valuer determined the share exchange ratio, which was approved by the requisite majority of shareholders and creditors without objections. The court found the ratio to be a commercial decision of well-informed equity shareholders.

(b) SEBI Circulars Compliance: The Demerged Company complied with the SEBI circulars dated 4th February 2013 and 21st May 2013 and undertook to continue compliance.

(c) Accounting Standards: The court noted that there is no specific accounting standard for demergers, but the Scheme complied with existing standards. The court referenced previous decisions supporting this view.

(d) Selling of Shares and Credit of Proceeds: Although not strictly required by law, the Petitioner Companies agreed not to insist on the proviso to Clause 40 of the Scheme, addressing the Regional Director's concern.

(e) Stamp Duty Payment: The Petitioner Companies agreed to pay the requisite stamp duty and other applicable fees as required by law after the Scheme's sanction.

(f) Appointed Date: The court found that the appointed date was not a material consideration for stakeholders, referencing previous court decisions that supported this view.

(g) Use of Suffix "and reduced": The court agreed that there was no need for the Demerged Company and the Resulting Company to add the suffix "and reduced."

Conclusion:
The court concluded that the Scheme of Arrangement was in the interest of shareholders, creditors, and the public. The court sanctioned the modified Scheme, approving the reduction of share capital and share premium account. The Petitioner Companies were directed to comply with procedural requirements, including lodging copies of the order with relevant authorities, publishing notices, and paying costs to the Central Government's Standing Counsel.

Final Orders:
The petitions were disposed of with directions for compliance with the procedural requirements, including publication of notices and payment of costs. The court dispensed with the filing and issuance of drawn-up orders and directed all concerned authorities to act on the authenticated copy of the order.