2011 (3) TMI 1470 - HC - Companies Law

Sanction of scheme of arrangement - Under that scheme, it is proposed to demerge the passive infrastructure assets of eight transferor companies and transfer them to the transferee company. The transferor company Nos. 2 to 7, and the transferee company are the wholly owned subsidiaries of transferor company No. 1 - Scheme provides that the Scheme is intended to restructure, within the VEL Group, the holding of the assets constituting the Passive Infrastructure Assets in a more efficient manner consistent with the diverse needs of business, and does not involve any movement of assets or liabilities to any company outside the VEL Group. Since the transfer of the Passive Infrastructure Assets is within the VEL Group, such transfer shall be without any consideration. Accordingly, the transferee company shall not be required to issue any shares or pay any consideration to any of the transferor companies or their shareholders for acquiring the Passive Infrastructure Assets - Board of Directors of the petitioner/transferor company Nos. 2, 5 & 6 and the transferee company in their separate meetings held on 21-9-2007 & 30-4-2008 have unanimously approved the proposed Scheme of Arrangement Regional Director, while referring the Scheme regarding accounting treatment in the books of the transferee company, has further submitted that the transferor company Nos. 2, 5 and 6 have failed to submit a valuation report and that all the transferor and transferee companies may be directed to obtain a valuation report from a recognized firm of Chartered Accountants Held that - petitioner companies in their rejoinder have submitted that the petitioner companies, including the transferee company, are 100 per cent subsidiaries of transferor company No. 1 and that since the restructuring involves movement of assets within the Vodafone Essar Limited group of companies, such transfer of assets shall be without consideration, and therefore, no shares are required to be issued by the transferee company to any of the petitioner companies or to any of their shareholders, and accordingly, no valuation report is required to be prepared with respect to the Scheme According to counsel for the Income-tax Department, the present Scheme falls into neither of the above categories, and therefore, cannot be sanctioned by this Court in exercise of its jurisdiction under section 391 because it contemplates neither a compromise nor an arrangement. According to counsel, the scope of the expression arrangement , contemplated under section 391, is limited only to a contract which involves the transfer of consideration from each party to the other, and therefore, cannot include a gift - shareholders of the transferor companies and the transferee company have given their unanimous consent to the Scheme for transfer of the passive infrastructure assets for nil consideration, and that there was no dissent expressed by any one of them, nor is there any element of expropriation or surrender in the proposed Scheme. It was also averred by the petitioners that there is indeed a compensating advantage conferred on the transferor companies, i.e., that after the demerger, an asset which previously did not generate any revenue will become a revenue generating asset, and that the enormous maintenance and installation expenditure required to keep such an asset in working condition will be reduced for the transferor companies. Furthermore, this arrangement is in line with the policy of the Government of India Held that - Income-tax Department had any objection with regard to the accounting methodology, it would remain open to the tax authorities to proceed against the transferor companies and/or the transferee company after the demerger is effected. It was also stated on behalf of the petitioners that before the tax authorities, they would not take the stand that the issue of taxability cannot be gone into by reason of the order sanctioning the Scheme. Simply because the tax payable under the business structure adopted by the assessee, which he is otherwise entitled to adopt in law, is reduced, does not, in my view, ipso facto, make such adoption illegal or impermissible on the ground that it is opposed to the public interest.

Issues Involved:
1. Sanction of the Scheme of Arrangement under Sections 391 to 394 of the Companies Act, 1956.
2. Objections by the Regional Director regarding the transfer of employees and details of assets and liabilities.
3. Objections by the Income-tax Department concerning tax liabilities, accounting treatment, and public interest.

Issue-wise Detailed Analysis:

1. Sanction of the Scheme of Arrangement:
The petitioners sought court approval for a Scheme of Arrangement involving the demerger of passive infrastructure assets from several transferor companies to a transferee company. The Scheme aimed to segregate the passive infrastructure assets to enable further growth, maximize value, improve service quality, and align with global trends and government policy promoting infrastructure sharing.

2. Objections by the Regional Director:
The Regional Director raised concerns about the continuity of employment for employees engaged in passive infrastructure assets and the absence of detailed individual assets and liabilities in the Scheme. The petitioners responded by undertaking to file a final list of assets post-approval, which the court accepted, rendering the objection moot.

3. Objections by the Income-tax Department:

a. Tax Liabilities and Accounting Treatment:
The Income-tax Department argued that transferring assets without liabilities would reduce taxable profits for the transferor companies, adversely affecting revenue. They also contended that the Scheme's accounting treatment might lead to tax evasion. The petitioners countered that the Scheme involved intra-group transfers without consideration, supported by past court rulings. The court noted that the tax authorities could still examine the transactions for tax compliance post-approval.

b. Public Interest:
The Department claimed the Scheme was against public interest as it might reduce tax liabilities. The court, however, emphasized that the Scheme aligned with government policy promoting infrastructure sharing and cost reduction. The court also noted that similar schemes had been approved for other companies without objections from the Income-tax Department.

c. Solvency of Transferor Companies:
Concerns were raised about the solvency of transferor companies post-demerger. The petitioners demonstrated that the companies would continue to generate sufficient revenue to meet tax liabilities, even if their net worth decreased.

d. Precedent and Consistency:
The petitioners highlighted that similar schemes had been sanctioned for competitors without objections from the Income-tax Department. The court acknowledged this, noting the absence of objections in other jurisdictions.

Conclusion:
The court granted sanction to the Scheme of Arrangement, noting compliance with statutory requirements and the absence of objections from shareholders and creditors. The court reserved the right of the Income-tax Department to assess tax liabilities independently of the Scheme's sanction. The petition was allowed, with the order clarifying that it did not exempt the petitioners from stamp duty payments.

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