2015 (8) TMI 238 - HC - Companies Law

Composite scheme of arrangement and amalgamation Regional Director, Ministry of Corporate Affairs opposed scheme as rule that transferee company only can allot shares towards consideration of transfer, and not any other person was not in consonance with section 394 of Companies Act, 1956 Held that - Clauses (i) to (vi) of Section 394(1), were merely enabling provisions and cannot be construed as compulsory in nature Company Court, while sanctioning scheme, may or may not make said provisions Acceptance of any particular consideration was part of commercial wisdom to be exercised by shareholders of transferor company As long as such consideration was not against public interest, it was not for company court to accept or reject such consideration Regional Director made it clear that there was no harm to public interest by present scheme Thus it was not for present Court to reject consideration, which was accepted by shareholders of transferor company Scheme of arrangement making provisions for consideration in terms of allotment of shares of companies other than transferee companies approved Petition allowed Decision of Miheer Mafatlal vs. Mafatlal Industries Ltd. 1996 (9) TMI 488 - SUPREME COURT OF INDIA , Pantaloon Retail (India) Limited Company 2010 (8) TMI 921 - BOMBAY HIGH COURT followed Decided in favour of petitioner. Composite scheme of arrangement and amalgamation Regional Director, Ministry of Corporate Affairs opposed scheme having regard to definitions of demerger and resulting company contained in Section 2(19AA) and 2(41A) read with Section 2(19AAA) of Income-tax Act, 1961 Held that - scheme of arrangement permissible both under Companies Act and Income-tax Act, does not amount to demerger within meaning of Income-tax Act Provision of scheme relating to demerger makes it clear that in case scheme was inconsistent with Section 2(19AA), provisions of Section 2(19AA) shall prevail and scheme shall stand modified Also sanction of scheme, does not bind Income-tax Department to take any particular view of scheme of arrangement insofar as tax implications of transaction were concerned.

Summary

Issues:
Sanction of a composite scheme of arrangement and amalgamation involving transferor and resulting companies with shareholders and creditors; Opposition based on non-compliance with Companies Act and Income-tax Act.

Analysis:

1. Compliance with Income-tax Act:
The Regional Director opposed the scheme on the ground of non-compliance with the Income-tax Act. However, the Court clarified that there is no prohibition in the Act for the proposed scheme. The scheme was structured to comply with the conditions of demerger as per Section 2(19AA) of the Income-tax Act. The Court emphasized that its sanction does not bind the Income-tax Department to accept the company's position on tax compliance. The objections based on Income-tax Act compliance were ultimately withdrawn.

2. Compliance with Companies Act - Allotment of Shares:
The main objection raised was regarding non-compliance with Section 394 of the Companies Act. The Regional Director argued that the scheme's demerger part did not adhere to the Companies Act as shares were allotted by a holding company, not the transferee company. The Court clarified that the provisions in Section 394 are enabling and not mandatory conditions. As long as the consideration is legitimate and not against public interest, the Court does not interfere with the commercial wisdom of the shareholders. Precedents were cited where High Courts approved schemes with consideration in the form of shares from companies other than the transferee. The objection based on non-compliance with the Companies Act was dismissed.

3. Approval and Directions:
After thorough analysis, the Court allowed both scheme petitions. The Petitioner Companies were directed to follow specific instructions, including lodging the order with the concerned authorities, filing copies of the order with the Registrar of Companies, and paying costs to the Regional Director. The filing and issuance of the drawn-up order were dispensed with, and regulatory authorities were instructed to act upon the order.

In conclusion, the Court approved the composite scheme of arrangement and amalgamation, dismissing objections related to non-compliance with the Companies Act and Income-tax Act. The judgment provided detailed reasoning, clarifications, and directions for the implementation of the scheme.