2016 (5) TMI 594 - HC - Companies Law

Scheme of Arrangement in the nature of Demerger - Held that - The observations made by the Regional Director, Ministry of Corporate Affairs do not survive. In fact, most of the observations are frivolous and unwarranted. This Court, therefore, arrives at 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. The Scheme is, accordingly, sanctioned. The Reduction of Issued, Subscribed and Paid up share capital of the Demerged Company viz. Zenith Silk Mills Private Limited as envisaged under clause 14 of the Scheme is specifically granted. The prayers in terms of Paragraph Nos. 17(a) and 17(b) as well as the Minutes under Section 103(1) of the Companies Act, 1956, in terms of Paragraph 14 of the Company Petition No. 340 of 2015 for the Demerged Company viz. Zenith Silk Mills Private Limited and prayers made in Paragraph 15(a) of the Company Petition No. 341 of 2015 for the Resulting Company viz. Zenitex Mill Private Limited are granted.The petitions are disposed, of accordingly. So far as the costs to be paid to the Central Government Standing Counsel are concerned, they are quantified at ₹ 7,500/per petition. The same may be paid to Mr.Devang Vyas, learned Assistant Solicitor General of India. The Petitioner Companies are further directed to lodge a copy of this Order, the Schedule of immovable assets of the demerged undertakings being transferred to the Resulting Company, as on date of this order and the Scheme duly authenticated by the Registrar, High Court of Gujarat, with the concerned Superintendent of Stamps, for the purpose of adjudication of Stamp Duty, if any, on the same within 60 days from the date of the order. The Petitioner Companies are directed to file a copy of this Order along with a copy of the Scheme with the concerned Registrar of Companies, electronically, along with INC 28 in addition to physical copy as per relevant provisions of the Act.

Issues Involved:

1. Sanction of Scheme of Arrangement involving Demerger and Transfer.
2. Compliance with procedural requirements.
3. Observations and objections raised by the Regional Director, Ministry of Corporate Affairs.
4. Reduction of Equity Share Capital.
5. Share Exchange Ratio.
6. Compliance with Accounting Standards.
7. Address of Registered Office.
8. Permissions and licenses for power generation business.
9. Compounding of offences.

Issue-wise Detailed Analysis:

1. Sanction of Scheme of Arrangement involving Demerger and Transfer:
The petitions were filed by two companies for the sanction of a Scheme of Arrangement involving the demerger and transfer of the Processing and Windmill Divisions of Zenith Silk Mills Private Limited (Demerged Company) to Zenitex Mill Private Limited (Resulting Company) under Sections 391 to 394, read with Sections 100 to 103 of the Companies Act, 1956. The demerger aims to enhance operational efficiency and management by focusing on core business activities.

2. Compliance with procedural requirements:
The Court noted that meetings of Equity Shareholders, Secured Creditors, and Unsecured Creditors were dispensed with based on written consent letters from all shareholders and creditors, as confirmed by a Chartered Accountant. Notices for the hearing were duly advertised, and no objections were received.

3. Observations and objections raised by the Regional Director, Ministry of Corporate Affairs:
The Regional Director made several observations, including non-compliance with Rule 12(2) of the Companies (Registration Offices and Fees) Rules, 2014, reduction of Equity Share Capital, obtaining licenses for power generation, address of the Registered Office, compliance with Accounting Standards, and the Share Exchange Ratio.

4. Reduction of Equity Share Capital:
The Court addressed the observation regarding the reduction of Equity Share Capital, clarifying that the reduction was consequential and did not affect the creditors' interests. The reduction was treated as a Special Resolution under Section 100 of the Companies Act, 1956.

5. Share Exchange Ratio:
The Regional Director's observation on the Share Exchange Ratio was addressed by explaining the methodology used in the Valuation Report. The Court found the Share Exchange Ratio to be just and fair, as it was approved by all shareholders and calculated by a firm of Chartered Accountants.

6. Compliance with Accounting Standards:
The Court addressed the observation regarding non-compliance with Accounting Standards, noting that the Demerged Company had complied with necessary standards and undertook to continue compliance.

7. Address of Registered Office:
The observation regarding the address of the Registered Office was clarified, stating that there was no change in the Registered Office address, and the address mentioned on the letterhead was a technical identification not required on the letterhead.

8. Permissions and licenses for power generation business:
The Court noted that requisite permissions and licenses were obtained by the Demerged Company, and the Resulting Company would undertake necessary procedures to obtain licenses from regulatory authorities.

9. Compounding of offences:
The Court observed that no offences had been registered against the petitioner companies, and thus, there was no question of compounding them.

Conclusion:
The Court concluded that the observations made by the Regional Director were frivolous and unwarranted. The Scheme of Arrangement was found to be in the interest of shareholders, creditors, and the public. The Scheme was sanctioned, and the Reduction of Issued, Subscribed, and Paid-up share capital of the Demerged Company was specifically granted. The petitions were disposed of, and costs were quantified at ?7,500 per petition. The Petitioner Companies were directed to comply with procedural formalities, including lodging a copy of the order with the Superintendent of Stamps and filing it with the Registrar of Companies.

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