THE FACT OF AMALGAMATION DOES NOT GIVE ANY IMMUNITY FOR PAST DEEDS OF DIRECTORS

[Mr. M. GOVINDARAJAN]

     Sec. 394 of the Companies Act provides for facilitating reconstruction and amalgamation of companies.  The High Court is empowered to sanction the scheme of amalgamation of the transferor company and the transferee company.  The High Court, while finding that the affairs of the transferee as well as transferor company has not been conducted in a manner prejudicial to the interest of its creditors, members or to public interest,  sanction the scheme of amalgamation.   In the process of sanction of the scheme of amalgamation any criminal or legal proceedings, if any, initiated against any of the transferor companies or the directors, the said proceedings will not be a bar in sanctioning the scheme of amalgamation.   The said fact has been confirmed by the High Court of Gujarat in the case 'In Re. C.M. Smith & Sons Ltd., - (2009) 88CLA 137 (Guj).

     The fact of the case is as follows:

     Three petitioners were filed by three petitioner companies for sanction of the scheme of arrangement in the nature of amalgamation of Madhu Auto Cast (P) Ltd., and Smith Techno Cast (P) Ltd., the transferor companies with C.M. Smith & Sons Ltd., the transferee company under Sec. 391 read with Sec. 394 of the Companies Act, 1956.  All the three companies belong to the same group of management. The three companies are engaged in similar commercial activities in the related sector.   It would be advantageous for the three companies to amalgamate the transferor companies with the transferee company as the amalgamation would reduce the administrative costs.  Another advantage is that the resources of the companies would be conveniently merged and pooled together leading a more effective and centralized management and reduction in the administrative expenses and overheads which are presently being multiplied because  of the three companies are separate entities.  It will also cause to broaden its asset base and in the long run improve financial gearing.  Further it would reflect the new economic value of the business.  Operations would be streamlined through new management initiatives.  After amalgamation, the merged entity could install and implement adequate and suitable measures for corporate governance. 

     In the matter of C.M. Smith & Sons Ltd., it was ordered to dispense with the meeting of equity shareholders in view of the written consent letters placed on record. In the matter of Madhu Auto Cast (P) Ltd., order was passed to dispense with the meetings of equity shareholders and unsecured creditors in view of the written consent letters placed on record.  There are no secured creditors and certificate of Chartered Accountant for such purpose was produced on the record of the company application.  In the matter of Smith Techno Cast (P) Ltd., order was also passed to dispense with the meetings of equity shareholders and unsecured creditors in view of the written consent letters placed on record.   In this case also there are no secured creditors and certificate of the Chartered Account for such purpose was produced on the record of the company application.

     All the three petitions of the three companies were admitted vide separate orders.   The public notices for these company petitioners were duly advertised.   The publication in the Government Gazette was dispensed with.  No objection has been received even after publication.

     Notices of the petition of the petitioner transferor companies were served upon the Official Liquidator of the High court, the Regional Director, Corporate Affairs, Mumbai.  The Official Liquidator reported that the affairs of the companies have not been conducted in a manner prejudicial to the interest of their members or to the public interest.  It is reported on behalf of the Regional Director that the scheme is not prejudicial to he interest of the creditors, shareholders and public.   However they have pointed out two points to the notice of the court as follows:

·        The transferee company has not complied with the requirements of Sec. 58A of the Companies Act; and

·        There is contravention of Sec. 297 of the Companies Act.

The Registrar of Companies directed to initiate separate legal proceedings against the transferee company and its directors.

     Therefore Shri Ratilal Chimanlal Smith, Director of C.M. Smith & Sons Ltd., has filed an additional affidavit dealing with the aforesaid points.  He submitted:

§         The transferee company has already filed a statement in lieu of advertisement as well as return of deposit and informed the Registrar of Companies and Regional Directors offices;

§         The transferee company has already filed an application for compounding of offence with Registrar of Companies;

§         Since the compliance has been made the objections do not survive.

§         Since all the statutory and regulatory compliances have been made by the petitioner companies, there is no reason to with hold the sanction of the scheme of arrangement.

The High Court, after considering the facts and circumstances of the case, held that the scheme of amalgamation is required to be sanctioned since according to the Central Government the scheme is not prejudicial to the interest of the creditors, shareholders and the public and according to the official liquidator, the affairs of the petitioner companies have not been conducted in a manner prejudicial to their members and the public and amalgamation would be in the interest of the companies and their members and creditors.

     However, the court ordered that if any criminal proceedings/legal proceedings are initiated against any of the transferee companies or the directors of any of the transferor companies, the order of sanctioning the scheme of amalgamation of these companies with the transferee company shall be come in the way of such proceedings.  The fact of amalgamation shall not give any immunity for such past deeds.