1976 (8) TMI 105 - HC - Companies Law

Meetings and proceedings - Explanatory statement to be annexed to notice Compromise and arrangement

Issues Involved:
1. Whether a profit-making company can amalgamate with a loss-making company under Section 391 of the Companies Act, 1956.
2. Whether proper disclosures were made as per Sections 173 and 393 of the Companies Act, 1956.
3. Validity of the revaluation of assets and the ratio and proportion of shares fixed.

Issue-wise Detailed Analysis:

1. Amalgamation of Profit-Making and Loss-Making Companies:
The primary argument against the amalgamation was that a profit-making company cannot amalgamate with a loss-making company under Section 391 of the Companies Act, 1956. The dissentient shareholders argued that Section 391 applies only to companies in financial difficulties and liable to be wound up. They relied on the judgment in Seksaria Cotton Mills Ltd. v. A.E. Naik [1967] 37 Comp. Cas. 656 (Bom.), which stated that Section 391 does not apply to companies in sound financial condition.

However, the court clarified that the observations in Seksaria Cotton Mills were obiter dicta and not binding. The court emphasized that the expression "any company liable to be wound up under this Act" in Section 390(a) includes all companies to which winding-up provisions apply, not just those in financial difficulties. The court held that Section 391 applies to both companies being wound up and those that can be wound up, irrespective of their financial condition. Therefore, the amalgamation of a profit-making company with a loss-making company is permissible under Section 391.

2. Proper Disclosures under Sections 173 and 393:
The dissentient shareholders contended that the companies did not make proper disclosures as required by Sections 173 and 393 of the Companies Act, 1956. They argued that the notices for the meetings did not mention the revaluation report, the chartered accountants' report, or the fact that there were common directors on the boards of both companies.

The court held that Section 173 deals with general meetings of a company, while Sections 391 and 393 specifically address meetings for schemes of arrangement. The court concluded that Sections 391 and 393 form a complete code for such meetings, displacing the general provisions of Section 173. The court further held that the statement annexed to the notice complied with the requirements of Section 393(1)(a), which does not mandate the disclosure of all material facts but only specific details. The court found no breach of Section 393 in the notices issued.

3. Validity of Revaluation of Assets and Share Ratio:
The dissentient shareholders challenged the revaluation of the transferee company's assets, arguing that it was unjustified and that the valuers adopted erroneous principles. They contended that the valuation of leased lands at market price was incorrect and that the approach to valuing plant and machinery was flawed.

The court found sufficient justification for the revaluation, noting that the transferee company was established in 1919, and its assets' true worth needed to be reflected. The court accepted the companies' explanation that no revaluation was necessary for the transferor company, as its assets were acquired in 1960 and valued in 1962. The court rejected the argument that leased lands could not be valued at market price, stating that such valuations are permissible and common in compensation determinations for compulsory acquisitions. The court also upheld the valuers' approach to categorizing and valuing plant and machinery based on replacement value.

Conclusion:
The court found no legal or equitable bar to sanctioning the schemes of amalgamation and merger. It held that the schemes were fair, reasonable, and passed by the statutory majorities of the companies. Consequently, the court sanctioned the schemes and directed the petitioners to communicate the orders to the Registrar of Companies within 30 days. The petitions were made absolute, and costs were awarded to the Regional Director, Company Law Board.

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