1975 (4) TMI 58 - HC - Companies Law

Issues Involved:
1. Fairness of the cash resources allocation to the transferor-bank and its shareholders.
2. Utilization of funds by the transferee-company, Straw Products Ltd.
3. Financial position and working reports of Straw Products Ltd.
4. Conversion rate of convertible bonds of Straw Products Ltd.
5. Non-liability to capital gains tax for transferor-bank shareholders.
6. Fairness of the cash option amount offered to dissenting shareholders.

Detailed Analysis:

1. Fairness of the Cash Resources Allocation:
The contention raised was that due to the present credit squeeze, cash resources are not being fully awarded to the transferor-bank and its shareholders under the proposed scheme. The judgment emphasized that the scheme was approved by over 99% of the shareholders, indicating its perceived benefit. The burden of proving the scheme's unfairness lies heavily on the dissentients, as noted in the judgment of In re Grierson, Oldham & Adams Ltd. The affidavit of Sumantrai Shah countered this contention by highlighting the substantial reserves and surplus of Straw Products Ltd., indicating its prosperity and potential for providing steady returns to the shareholders.

2. Utilization of Funds by Straw Products Ltd.:
The contention was that Straw Products Ltd. would invest Rs. 2 crores in J. K. Industries Ltd., a company in a recession-hit industry, making the investment unremunerative. The affidavit of Sumantrai Shah clarified that the funds would be used for setting up a new plant for manufacturing packaging paper, for which a government license was granted, thus ensuring beneficial use of the funds for expansion.

3. Financial Position and Working Reports of Straw Products Ltd.:
The contention was that the working reports did not reflect the correct financial position of Straw Products Ltd. due to the recession in the paper industry. The affidavit of Sumantrai Shah and Radhey Shyam Agrawal provided facts and figures demonstrating the company's strong financial position, with substantial reserves and surplus, indicating that the company is prospering and capable of benefiting the shareholders of the transferor-company.

4. Conversion Rate of Convertible Bonds:
The issue was that the convertible bonds of Straw Products Ltd. would be converted into equity shares at Rs. 20 per share against the current market value of Rs. 17 to 18 per share. The judgment did not specifically address this contention but implied that the overall financial health and future prospects of Straw Products Ltd. justified the conversion rate.

5. Non-liability to Capital Gains Tax:
The contention was that the benefit of non-liability to capital gains tax would not be available to the shareholders of the transferor-bank but would transfer to Straw Products Ltd. and its shareholders. The judgment did not provide a detailed analysis of this point, focusing instead on the overall fairness and benefits of the scheme to the shareholders.

6. Fairness of the Cash Option Amount:
The main contention was that the dissenting shareholders were being paid an unfairly low amount of Rs. 110 per share, which was Rs. 35 per share lower than the market value of Rs. 145. The judgment acknowledged some substance in this contention and decided to modify the scheme under section 392(1)(b) of the Companies Act. The court decided that Rs. 120 per share, which is a little over 17% less than the value of the package per share, would be a fair amount for the dissenting shareholders. This modification was based on comparisons with similar schemes for other nationalized banks and the necessity to balance fairness with business considerations.

Conclusion:
The court sanctioned the scheme with a modification to clause 10, increasing the cash option amount for dissenting shareholders to Rs. 120 per share. The judgment emphasized the heavy burden on dissentients to prove unfairness when a large majority of shareholders approve a scheme. The modification ensures a fairer deal for dissenting shareholders while maintaining the scheme's viability for the transferee-company. The order is subject to the sanction of the appropriate High Court under sections 391 and 394 of the Companies Act. A certified copy of the order must be filed with the Registrar of Companies within four weeks from the date of signing the judgment.

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