Power To Amalgamate – “An inherent right of the Company”

[Ravi kapoor]

Mergers and acquisitions has become an indispensible part of the external corporate restructuring in the wake of modern economic scenario. They have been playing an important role in the growth of a number of leading companies the world over. They have become popular because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalization of businesses. In order to achieve synergistic operational advantage and economies to scale, the concept of merger & acquisitions has been embraced by the Indian Companies also. In fact, Hon’ble Supreme Court of India in the landmark judgment of HLL-TOMCO merger has said that "in this era of hypercompetitive capitalism and technological change, industrialists have realized that mergers/acquisitions are perhaps the best route to reach a size comparable to global companies so as to effectively compete with them.”

In Indian context, the concept of corporate restructuring is governed by section 390 to 396A of the Indian Companies Act, 1956. This article is intended to address an important legal issue that the companies face in the event of amalgamation – “whether it is essential for two or more companies under a scheme of reconstruction or arrangement to have power in their memorandum to go for reconstruction or arrangement”.

Before going into the core issue we have to develop an understanding about the concept of amalgamation and importance of Memorandum of Association. The term Amalgamation is the blending of two or more existing undertaking into one undertaking, the shareholder of each blending company becoming substantially the shareholder in the company, which is to carry on the blending undertaking. There maybe amalgamation either by the transfer of two or more undertaking to a new company, or by the transfer of one or more undertaking to an existing company. In generic sense, amalgamation is non-organic (external) unification of two entities or undertakings or the fusion of one with another. 

Whereas the Memorandum of association (MOA) of a company contains the fundamental conditions upon which alone the company has been incorporated. According to section 2 (28) of the Indian Companies Act, 1956 " memorandum" means the “memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act”. It contains the object for which the company is formed and therefore identifies the possible scope of its operation beyond which its actions cannot go. In the case of Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653, the role of MOA has been enunciated, wherein Lord Cairns observed that the “memorandum states affirmatively the ambit and extent of vitality and power which by law is given to the corporation and it states, if it is necessary to state, negatively, that nothing shall be done beyond that ambit”. Therefore from the above analysis it is evident that anything done beyond the powers expressed in the memorandum will be ultra vires the company and thus void.

Now let us address the moot issue - “Memorandum of Association of a company should contain express power to amalgamate with another company and in the event if the same is missing, whether it is essential to alter the MOA before presenting the scheme to the court for sanction”. According to Companies Act, any scheme of amalgamation is subject to the sanction of the jurisdictional High Court. The statue has conferred wide powers upon the court in this regard. Now the issue rose before the court was whether it can sanction a scheme of merger/amalgamation where the object clause of MOA of the companies (intending to merge/amalgamate) is silent in this regard (i.e. power to amalgamate).  According to the decision of the English Court in the case of Oceanic Steam Navigation Co. Ltd., In re 1938 (7) TMI 10 - IN THE CHANCERY DIVISION = [1938] 3 ALL ER 740, it was held that the court has no jurisdiction to sanction a scheme of amalgamation if it ultra vires the MOA. This position was maintained in the Indian context also but in the year 1970, the Calcutta High Court in the landmark judgement of Hari Krishna Lohia v Hoolungooree Tea Co Ltd., 1968 (8) TMI 82 - HIGH COURT OF CALCUTTA  =  In re [1970] 40 comp cas .458. took a contrary viewpoint. In this case the court held that "The power to amalgamate may flow from the memorandum or it may be acquired by resorting to the statute. Section 17 of the Companies Act indicates that a company which desires to amalgamate with another company will take necessary steps to come before a court for alteration of its memorandum in aid of such amalgamation. The statute confers a right on a company to alter its memorandum in aid of amalgamation with another company. The provisions contained in Sections 391 to 396 and 494 illustrate some instances of statutory power of amalgamating a company with another company without any specific power in the memorandum." Similar view has been expressed by the Calcutta High Court in the case of Marybong & Kyel Tea Estates Ltd., In re 1974 (2) TMI 58 - HIGH COURT OF CALCUTTA  = [1977] comp.cas.802  and by the Bombay High Court in the case of Sir Mathuradas Vesanji Foundation, In re [1992]8 CLA 170.

The Gujarat High Court dealing with such questions, in the matter of Maneckchowk & Ahmedabad Mfg. Co. Ltd., In re [1969 (12) TMI 57 - HIGH COURT OF GUJRAT ] held that "Basically, the court is given wide powers under Sections 391 of the Companies Act to frame a scheme for the revival of the company. Sections 391 of the Companies Act is a complete code under which the court can sanction a scheme containing all the alterations required in the structure of the company for the purpose of carrying out the scheme, except reduction of share capital which requires a special procedure to be followed by virtue of rule 85 of the Companies (Court) Rules. In the absence of rule 85, procedure for alterations in the memorandum and articles of association of a company prescribed under other provisions of the Companies Act is not required to be followed before sanctioning a scheme involving such alterations. The whole purpose of Sections 391 is to reconstitute the company without the company being required to make a number of applications under the Companies Act for various alterations which may be required in its memorandum and articles of association for functioning as a reconstituted company under the scheme."

The Bombay High Court following the dictum of the Gujarat High Court in the matter of PMP Auto Industries Ltd., In re 1991 (12) TMI 247 - HIGH COURT OF BOMBAY held that "Thus, the position in law appears to be clear. Sections 391 invests the court with powers to approve or sanction a scheme of amalgamation/ arrangement which is for the benefit of the company. In doing so, if there are any other things which, for effectuation, require a special procedure to be followed—except reduction of capital—then the court has powers to sanction them while sanctioning the scheme itself. It would not be necessary for the company to resort to other provisions of the Companies Act or to follow other procedures prescribed for bringing about the changes requisites for effectively implementing the scheme which is sanctioned by the court. Not only is Sections 391 a complete code as held by the courts, but in my view, it is intended to be in the nature of a ‘single window clearance' system to ensure that the parties are not put to avoidable, unnecessary and cumbersome procedure of making repeated applications to the court for various other alterations or changes which might be needed effectively to implement the sanctioned scheme whose overall fairness and feasibility has been judged by the court under section 394 of the Act."  The Uttaranchal High Court and the Madras High Courts in the matters of Jindal Photo Ltd., In re [2005] 65 CLA 246 and W. A. Beardsell & Co. Ltd. & Mettur Industries Ltd., 1967 (9) TMI 82 - HIGH COURT.OF MADRAS = 38 comp.cas 197  have also held to the same effect.

In the case of Liqui Box India (P.) Ltd., In re 2005 (8) TMI 393 - HIGH COURT OF PUNJAB AND HARYANA In a petition filed for sanctioning of scheme of amalgamation as approved by the members and the creditors of the transferor-company and the transferee-company, the Regional Director of Company Affairs raised objection that the Memorandum of Association of the transferee company could be amended only after following the procedures prescribed under the relevant provisions of the Act., which included passing of special resolution by the members of the company in the general meeting and filing of relevant form with the office of the Registrar of Companies. “Held that in view of decisions of the different High Courts, the objection raised by the Regional Director that the Memorandum of Association of the transferee-company was required to be amended by passing a special resolution had no substance and was, thus, to be rejected.”

In fact the court is empowered to sanction a scheme where the transferor and the transferee companies are in the dissimilar business. This position is enunciated in the case of E.I.T.A. India Limited And Others vs Unknown (1996 (3) TMI 398 - HIGH COURT OF CALCUTTA) on 20 March, 1996  (Equivalent citations: AIR 1997 Cal 208, (1997) 1 CALLT 414 HC), Morarji Goculdas Spinning & Wvg. Co. Ltd., In re: S.S. Miranda Ltd. reported in (1994) 80 Com-Cases 289.

It has been held in the case of Sadanand S Varde vs State of Maharastra, 2000 (6) TMI 16 - BOMBAY High Court that the provision contained in section 390 to 394 of the companies act constitutes a complete code on the subject of the amalgamation. Thus, it implies that if a scheme of compromise or arrangement for the purpose of or in connection with amalgamation of two or more companies is sanctioned by the court, then no separate provisions and procedures are required to be complied with for other events which are part and parcel of the scheme of amalgamation and consequent mention of power to amalgamate in MOA is of least relevance

Thus from the above discussion it is evident that power under section 390 to 394 are not circumscribed on the powers derived from the object clause to amalgamate.