2012 (7) TMI 513 - HC - Companies Law

Challenging the scheme of Arrangement by Objector holding 0.001% of the total share capital of the Transferee Company - scheme is propounded to avoid capital gains tax that would have arisen if the Transferor Companies would have directly transferred their shares to the Promoters & colourable device to evade tax - Held that - Scheme involves merger of Transferor Companies with Transferee Company with consequent cancellation of the shares held by the Transferor Companies in the Transferee Company and consequent reduction in share capital of the Transferee Company by issuance of shares of the Transferee Company to the shareholders of the Transferor Companies.The purpose of the Scheme is to provide long term stability and transparency in the Transferee Company as it was felt that it would be in the interest of the Transferee Company to merge the five Transferor Companies with the Transferee Company, and to enable the Promoter thereof to hold shares directly in the Transferee Company rather than indirectly. The object of the Scheme is not to avoid any tax - Under the Scheme the only difference is that the Promoter will now hold shares directly in the Transferee Company. It is correctly submitted by the Transferee Company that there is nothing illegal or unlawful or dubious or colourful in the Scheme and the same is a perfectly legitimate scheme and permissible by law. Therefore, the objection of the Objector that the Scheme is a tax avoidance device and ought not to be approved, stands rejected. Scheme shall become null and void and be of no effect if the same is not sanctioned by this Court by March 31, 2012 - Held that - Transferor Companies and the Transferee Company have passed resolutions on 01st May, 2012 and 9th May, 2012 respectively, extending the time for securing the sanction of this Court in respect of the Scheme to May 31, 2012 and on 11th May, 2012 and 12th May, 2012 respectively, passed further resolutions extending the cut off date from May 31, 2012 till the time the Scheme is sanctioned by appropriate Court and filing the Court order with the Registrar of Companies for the Scheme to become otherwise effective. Therefore, the submission of the Objector that the Scheme has become null and void, cannot be accepted. Company Secretary of the Transferee Company was not authorized to file the Affidavit in Rejoinder - Held that - Considering certified true copy of the resolutions passed at the Board Meeting of the Transferee Company held on 14th May, 2011 that Company Secretary is interalia authorized to file Affidavits in this Court in connection with the Scheme. In view thereof, this objection also stands rejected. Transferee Company in its Affidavit filed before the Regional Director, has failed to disclose certain proceeding where prosecution was launched against the Transferee Company and its Chairman and Managing Director - Held that - Transferee Company has filed an Affidavit dated 26th March 2012 of its abovenamed Company Secretary, explaining why some of the proceedings were not mentioned in the Affidavit filed before the Regional Director. The explanation is accepted. In view thereof, the said objection is rejected. Challenging the Valuation report - Held that - Valuation Report has been obtained to comply with the provisions of the Listing Agreement and there is no change in the shareholding pattern of the Transferee Company, as it will issue equivalent number of shares to the Promoters as already held by the Transferor Companies. The pre and post shareholding pattern of the Transferee Company, including Promoters and Mr. Shailesh Mehta will remain unchanged as disclosed in the Notice and Explanatory Statement. Thus no substance in this objection and the same is rejected. Valuation of the shares of the Transferor Companies which are unlisted was not done as per the rules prescribed under the Wealth Tax Act - Held that - Provisions of the Wealth Tax Act, does not apply in the instant case. Again, the only assets (apart from cash and bank balance) of the Transferor Companies were the shares held by them in the Transferee Company. As such, it was reasonable and proper to value the Transferor Companies on the basis of the value of their shareholdings in the Transferee Company. No pending cases for infringement of Trademark or Patent filed against the Transferee Company and as such there is no question of providing any contingent liability. Transferee Company that by virtue of Regulation 3(1)(i) of the SEBI Takeover Regulations 1997 and Regulation 10(1)(d) of the SEBI (Substantial Acquisitions and Takeover) Regulations, 2011, the provisions thereof do not apply to the acquisition of shares under a scheme of arrangement or merger - there is nothing illegal, unlawful, dubious or colourful in the Scheme and the same is a perfectly legitimate Scheme, which is permissible in law - decided against objector.

Summary

Issues Involved:
1. Objection on the grounds of tax avoidance.
2. Request to implead the income tax authority as a necessary party.
3. Validity of the Scheme post-March 31, 2012.
4. Authorization of the Company Secretary to file affidavits.
5. Disclosure of prosecution against the Transferee Company.
6. Allegation of conflict of interest in the Valuation Report.
7. Valuation of shares of the Transferor Companies.
8. Allegation of hidden civil proceedings and contingent liabilities.
9. Applicability of SEBI Takeover Regulations.

Detailed Analysis:

1. Objection on the Grounds of Tax Avoidance:
The Objector contended that the Scheme was a device to avoid capital gains tax and cited the Supreme Court's decision in McDowell and Company Limited v. Commercial Tax Officer. The Objector argued that the Scheme was a colorable device to evade tax. The Petitioners countered by citing the Supreme Court's rulings in Azadi Bachao Andolan and Vodaphone International Holdings, which clarified that not all tax planning is illegitimate and that McDowell's case did not entirely reject tax planning within the framework of law. The Court agreed with the Petitioners, stating that Azadi Bachao Andolan and Vodaphone International Holdings had settled the issue, and thus, the objection was rejected.

2. Request to Implead the Income Tax Authority as a Necessary Party:
The Objector requested that the income tax authority be made a necessary party to the proceedings. The Petitioners argued that it was unnecessary, citing the Jindal Iron & Steel Company Limited case, where the court held that the income tax department has no locus standi in proceedings under Sections 391-394 of the Companies Act, 1956. The Court agreed with the Petitioners and rejected the objection.

3. Validity of the Scheme Post-March 31, 2012:
The Objector claimed that the Scheme had become null and void as it was not sanctioned by March 31, 2012. The Petitioners showed that both the Transferor and Transferee Companies had passed resolutions extending the time for securing the sanction of the Court. Consequently, the Court found the Scheme still valid and rejected the objection.

4. Authorization of the Company Secretary to File Affidavits:
The Objector questioned the authorization of the Company Secretary to file affidavits. The Petitioners presented a certified copy of the resolution passed by the Transferee Company's Board, authorizing the Company Secretary to file affidavits. The Court accepted this evidence and rejected the objection.

5. Disclosure of Prosecution Against the Transferee Company:
The Objector alleged non-disclosure of certain prosecutions against the Transferee Company. The Petitioners provided an affidavit explaining why some proceedings were not mentioned. The Court accepted the explanation and rejected the objection.

6. Allegation of Conflict of Interest in the Valuation Report:
The Objector claimed a conflict of interest as Mr. Jayendra Natwarlal Shah, a joint shareholder in the Transferor Companies, was a partner in the firm that prepared the Valuation Report. The Petitioners clarified that the report was prepared by another partner and that Mr. Shah had no pecuniary interest. The Court found the report to be independent and rejected the objection.

7. Valuation of Shares of the Transferor Companies:
The Objector argued that the valuation was not done as per the Wealth Tax Act. The Petitioners explained that the Wealth Tax Act was not applicable and that the valuation based on the shares held in the Transferee Company was reasonable. The Court found the valuation proper and rejected the objection.

8. Allegation of Hidden Civil Proceedings and Contingent Liabilities:
The Objector alleged that the Transferee Company had hidden civil proceedings for damages and breach of Trademark. The Petitioners clarified that there were no pending cases for infringement of Trademark or Patent. The Court accepted this clarification and rejected the objection.

9. Applicability of SEBI Takeover Regulations:
The Objector contended that the Scheme triggered the SEBI Takeover Regulations due to a reduction in capital. The Petitioners argued that the SEBI regulations do not apply to acquisitions under a scheme of arrangement or merger, and approvals from the National Stock Exchange and Bombay Stock Exchange had been obtained. The Court agreed with the Petitioners and rejected the objection.

Conclusion:
The Court found that the Scheme was legitimate, lawful, and permissible under the law. All objections raised by the Objector were rejected. The Scheme was sanctioned, and the necessary statutory compliances were fulfilled. The Petitioner Companies were directed to lodge a copy of the order and the Scheme with the concerned authorities and to pay costs to the Regional Director and the Official Liquidator.