1968 (9) TMI 125 - HC - Companies Law

Summary

Issues Involved:
1. Application under sections 391 and 394 of the Companies Act, 1956 for the amalgamation of three companies.
2. Exchange ratio of shares and valuation of assets.
3. Objections raised by the Central Government under section 394-A.
4. Maintainability of the petition.
5. Role and adequacy of the auditors' report in determining the exchange ratio.
6. Compliance with statutory requirements for amalgamation.

Detailed Analysis:

1. Application under sections 391 and 394 of the Companies Act, 1956 for the amalgamation of three companies:
The application sought the amalgamation of Associated Hotels of India Ltd. (Associated), Hotels (1938) Pvt. Ltd. (Hotels), and The East India Hotels Ltd. (East India). The principal object of all three companies was to carry on business as hoteliers. The directors proposed a Scheme of Arrangement for the transfer of undertakings from Associated and Hotels to East India, which included provisions for the exchange of shares and the transfer of properties, rights, and liabilities.

2. Exchange ratio of shares and valuation of assets:
The Scheme proposed specific ratios for the exchange of shares:
- One 9.5% Cumulative preference share of Rs. 100 in East India for each 9.5% cumulative preference share of Rs. 100 in Associated.
- Three Equity shares of Rs. 10 each of East India for every ordinary share of Rs. 10 each in Associated.
- 100 Equity shares of Rs. 10 each of East India for every ordinary share of Rs. 100 each in Hotels.
The valuation was based on the assets and liabilities of the companies as of specific dates. The Scheme also considered the appreciation of assets and the financial collaboration with Inter-Continental Hotels Corporation of the USA.

3. Objections raised by the Central Government under section 394-A:
The Central Government raised several objections, summarized as follows:
- Appreciation of fixed assets in Associated and Hotels without corresponding appreciation in East India.
- The exchange ratio of shares appeared unduly favorable to the shareholders of Associated and Hotels, potentially prejudicing East India's shareholders.
- Concerns about the liquidity position and overtrading on creditors' equity by Associated and Hotels.
- Loans granted by Hotels to its directors and associates without interest, which could affect the amalgamation.
- The need for a fair exchange ratio and the appointment of an independent auditor or valuer.

4. Maintainability of the petition:
The Central Government objected to the maintainability of the petition, arguing that the statement of reasons required to be submitted to the shareholders was not disclosed. However, the Court found no substance in this objection, as the statement form is settled by the Court and sent along with notices to shareholders.

5. Role and adequacy of the auditors' report in determining the exchange ratio:
The auditors, Messrs. Ray & Ray, provided a certificate on the fair ratio of exchange. However, the Court noted the omission of grounds for arriving at the valuation of shares and fixing the exchange ratio. The affidavit filed by Mr. Girindra Mohan Saha, the senior partner of Messrs. Ray & Ray, did not disclose the relevant facts and circumstances considered in the valuation, leading to concerns about the adequacy of the auditors' report.

6. Compliance with statutory requirements for amalgamation:
The Court considered whether the absence of power to amalgamate in the Memorandum of Associated or East India would invalidate the Scheme. It referred to the Privy Council decision in Parashuram v. Tata Industrial Bank Ltd., which held that a scheme of amalgamation is authorized by statute and does not depend on the company's constitution. The Court agreed with this interpretation, finding that the absence of such power would not invalidate the Scheme.

Conclusion:
The Court was inclined to sanction the amalgamation but required a further affidavit from Mr. Girindra Mohan Saha to clarify the basis of the valuation and the exchange ratio. Upon receiving and reviewing the additional affidavit, the Court was satisfied that all relevant factors were considered and that the exchange ratio suggested by the auditors was reasonable. Consequently, the Court ordered the amalgamation in terms of the petition's prayers and assessed costs of Rs. 1,200 to be paid by the petitioner to the Central Government.