PURPOSE OF NOTICE TO THE CENTRAL GOVERNMENT OF PETITION FOR SANCTION OF SCHEME OF AMALGAMATION

[Mr. M. GOVINDARAJAN]

            Sec. 391 to 394 of the Companies Act, 1956 deal with the merger, amalgamation and take over.  At present merger, amalgamation and take over are frequently seen since in the international business scenario such reconstruction would yield greater result.   In case of amalgamation various formalities are there.   The same has to be approved by the Company Court.   During this process the notice is sent to the Government for its opinion to be filed before the court in this regard.  The Central Government is to file reply before the court expressing its opinion whether it is a fit case or not for giving approval. 

       In  Re. 'Modus Analysis & Information (P)Ltd., - (2008) 84 CLA (40) CAL, the High Court of Calcutta gave guidelines to the Central Government as to what are to be done when petition is issued to Central Government in a case of amalgamation.  For this purpose we have to know the facts of the case which run as follows: 

       The petitioners have applied for sanction of a scheme of amalgamation that has been approved by the shareholders of the companies as per the requirements of the provisions of Companies Act, 1956.   The transferors and the transferee companies are carrying on same business of the same nature and it would be convenient for the businesses to be combined for smooth and efficient management and for proper utilization of resources. 

       The petition has been advertised as is the usual practice and as required by the Companies Act.   The Central Government has also been served the copy of the petition.  The Regional Director, Eastern Region, Ministry of Corporate Affairs, on behalf of the Central Government filed an affidavit.  The material paragraph in the Regional Director's affidavit reads as follows: 

"2.That it is submitted that on examination of the petition in detail and report of the Registrar of Companies, West Bengal, it appears that there is no complaint and representation received against the proposed scheme of amalgamation.  The Central Government has, therefore, decided that the petition/application need not be opposed and the matter be decided by the Hon'ble Court on merits" 

       No one has opposed the petition.   However the Court found some variance and unusual clause in the proposed scheme.  The Court analyzed Clause 13 (a), 13(b) and 13(d) of Part II of the proposed scheme. 

       Clause 13(a) provides - 'Even though the shares of external shareholders of MAIPL, MMPL, MSPL, RIPL have been purchased by transferee-company resulting in transferor-companies becoming 100% subsidiaries of the transferee-company after 31^st March, 2006, the scheme of merger provides for such subsequent changes in the shareholding pattern of transferee-companies.   The amount due to the external shareholders aggregating Rs.20,02,400 as detailed in paragraph (e), has been shown as a current liability in the post-merger balance sheet of GFK Mode". 

       Clause 13(b) provides - 'Upon this scheme becoming operative, the difference of the amount paid for acquisition of shares of transferor-companies and book value of assets taken over being Rs.29,00,000 have been debited to reserves to the extent the balance available i.e., Rs.11,24,945 and remaining amount, i.e., Rs.17,75,055 has been adjusted against the profit and loss account in the books of GFK Mode.' 

       Clause 13(d) provides for payment being made by the transferee company to external shareholders of the transferor-companies from which the shares of transferor-companies have been purchased. 

       It appears to the Court that the word 'external' has been used to imply shareholders other than those belonging to the group which is in management of all the five petitioning companies in these proceedings.   Further the shares of three of the transferee-companies have been shown to have been acquired by the transferee-company at face value adding up to Rs.2,200.   The 670 shares held by the external shareholders of Mode Services (P) Ltd., (MSPL) of the face of value Rs.100/- each is shown to be acquired at Rs.20,00,200.   There is no explanation as to the skewed consideration for the acquisition of MSPL shares by the transferee-company, nor any attempt to justify such price.  All the companies involved are private companies and their shares are not quoted.  

       The court observed that ordinarily such a matter would not detain the court as it would be a matter for the shareholders of the concerned companies and if no shareholder is present to object such valuation, the court would not waste time over it.  It is, however, the implication of clause 13(b) and the attempt made thereby to adopt a procedure which is at substantial variance with accounting principles, that engages the court's attention.   But the Regional Director in his affidavit has not referred to such matter.

        The court observed another unusual clause in the proposed scheme.   Clause 9 in Part III of the scheme provides as follows:

 "9. All costs, charges and expenses of MAIPL, MMPL, MSPL and RIPL and GFK Mode respectively in relation to or in connection with this scheme and incidental to the completion of the amalgamation of MAIPL, MMPL, MSPL and RIPL with GFK Mode in pursuance of this scheme, shall be borne and paid GFK Mode.

 In the event of any of the said sanctions and approvals referred to in the preceding clause above not being obtained and/or the scheme not being sanctioned by the Hon'ble High Court of Calcutta and/or the order or orders not being passed as aforesaid before 31^st March, 2007, or within such further period or periods as may be agreed upon between MAIPL, MMPL, MSPL and RIPL through and by its Board of Directors and GFK Mode through and by its Board of Directors (and which Board of directors of each of the companies are hereby empowered and authorized to extend the aforesaid period from time to time without any limitations in exercise of their powers), this scheme shall stand revoked, cancelled and be of no effect, save and except in respect of any Act or deed done prior thereto as it contemplated hereunder or as to any right, liability or obligation which has arisen or accrued pursuant thereto and which shall be governed and be preserved or worked out as specifically provided in the scheme or as may otherwise arise in law and in that event each party shall bear their respective costs'

        The court observed that it would appear from such clause that despite seeking an order for sanction of the proposed scheme, the petitioners seek to reserve a right whether or not such order of sanction would be implemented.  Apart from the impropriety of such attempt, such clause is open to misuse.   The court wondered how such clause could escape the attention of the Regional Director who has exhorted in his affidavit that the scheme may otherwise be sanctioned.

        It is a matter of regret, the Court felt, that adequate assistance is not received from the Central Government in matters where the court may not have the wherewithal or accounting acumen to assess the impact of certain clauses in a scheme.  In another case the court recorded that no assistance was rendered by the Central Government in matters relating to accounting that formed part of that scheme.

        The court held that the purpose of a petition for sanction of a scheme being required to be served on the Central Government under the Companies Act is,-

·  To allow the Central Government to look into the mechanics of the scheme and to apprise the court upon scrutiny as to the legality, propriety and reasonableness of the clauses thereof;

·  To ensure that there is procedural compliance by the concerned companies and that the terms of the scheme are not opposed to public policy and that no attempt is made thereby to defraud revenue or otherwise bypass statutory or fiscal requirements;

·  To look into the terms of  the scheme to ascertain whether the accounting standards are sought to be bypassed and a blanket sanction of court is sought to be obtained in a matter that the court may not be equipped to easily detect;

·  To ensure that accounting tricks in any proposed scheme are discerned and the matter is reported to court.

 The Court rejected the present scheme.