2012 (8) TMI 79 - HC - Companies Law

Scheme of De merger - spinning business was to be demerged as a going concern and transferred to respondent-IRSL - applicant contested agianst scheme stating the transferred undertaking could not be regarded as a going concern apart from the fact that such incomplete transfer would not satisfy the requirement of sub-Section (i) of Section 2(19AA) - Held that - Upon reading the Scheme of Arrangement in its entirety no hesitation in concluding that the Housing colony as well as common utilities were specifically agreed to be retained and owned by respondent-IRSL - Even the Applicant before entering into the share purchase agreement was aware of the Memorandum of Understanding which specifically stated that housing colony was being offered by respondent-IRSL as a resource to IRTL for five years upon payment of actual cost, thus if respondent-IRSL was not the owner of the common resources and infrastructure, there was no question of it offering the common assets for use to IRTL on payment of cost. This Court is not in agreement with the Applicant s submissions that in a Scheme of Demerger by virtue of Section 2(19AA) of the Act, 1961, all the properties of the undertaking become the property of the resulting company. This Court is of the view that non-transfer of some of the pervious common assets being used by the transferee undertaking will not affect IRTL status as a going concern - infact it is settled legal position that there is no requirement under the provisions of the Act, 1961 or Act, 1956 for transfer of all common assets and/or liabilities relatable to the Undertaking being demerged. Applicant s submission that all common assets that cannot be divided must be transferred to the transferee namely, IRTL overlooks the explicit language of Section 2(19AA)(i) of the Act, 1961, which states that all the properties of the undertaking being transferred by the demerged company, immediately before the demerger becomes the property of resulting company by virtue of the demerger. Whether or not Section 2(19AA) of the Act, 1961 has been complied with, is not to be determined pre-merger, but post merger and that too by the tax authorities. Thus if the Scheme of Arrangement is not tax complaint, then the tax authorities will levy capital gains tax, if any, on the transferor, namely, respondent-IRSL - Consequently, the contention urged by the Applicant that in view of Section 2(19AA) of the Act, 1961, the Scheme of Demerger must necessarily comply with Section 2(19AA) which is meant for availing tax concession cannot be read as a mandatory requirement for all schemes of amalgamation/arrangement/de-merger under Sections 391/392/394 of the Act, 1956, thus, the Applicant is in error in contending that the common infrastructure is liable to be made over to them by virtue of reasoning of Section 2(19AA) It is apparent that in the proceedings under Section 392(1)(b) of the Act, 1956, the Court cannot rewrite the scheme approved in the meeting called under Section 391(2) of the Act, 1956; but, it can only make such modification as it may consider necessary for proper working of the compromise or arrangement - when the scheme was sanctioned in the year 2003, both the Transferor and Transferee Companies were owned and managed by O.P. Lohia group but now as both the entities are owned and managed by different business groups. Consequently, to ensure that the scheme sanctioned by this Court is properly implemented, this Court modifies only the dispute redressal mechanism in Clause 36 of the Scheme by directing that in the event of any dispute, doubt or issue arising between the parties, the same shall be referred to a sole arbitrator to be appointed with the consent of the parties - application aginst the Scheme stands disposed of.

Summary

Issues Involved:
1. Modification of a Scheme sanctioned by the Court.
2. Transfer of assets or payment of their value.
3. Compliance with Section 2(19AA) of the Income Tax Act, 1961.
4. Interpretation and implementation of the Scheme of Arrangement.
5. Dispute resolution mechanism.

Detailed Analysis:

1. Modification of a Scheme Sanctioned by the Court:
The present application was filed under Section 392(1)(b) of the Companies Act, 1956 by Spentex Industries Limited (Applicant) for the modification of a Scheme sanctioned by the Court on 27th February, 2003. The modification sought was for the transfer of specific assets or, alternatively, the payment of their value amounting to Rs. 61,30,56,983/-.

2. Transfer of Assets or Payment of Their Value:
The Applicant claimed that the second unit at Butibori, Nagpur, including the housing colony, was constructed using funds from the spinning business. The Scheme of Arrangement in 2002 involved the demerger of the spinning business to Indo Rama Textile Limited (IRTL), while the polymer business was retained by Indo Rama Synthetics Limited (IRSL). The Applicant argued that the housing colony and common utilities should have been transferred to IRTL as part of the demerger. However, the Court found that the Scheme specifically mentioned the properties and assets to be transferred, and the housing colony and common utilities were agreed to be retained by IRSL. The shareholders and creditors were aware of this arrangement.

3. Compliance with Section 2(19AA) of the Income Tax Act, 1961:
The Applicant argued that the demerger should comply with Section 2(19AA) of the Income Tax Act, 1961, which stipulates that all properties of the undertaking being transferred should become the property of the resulting company. The Court, however, held that the definition of demerger under Section 2(19AA) would be satisfied if the undertaking being demerged constituted a business activity capable of being run independently. The Court noted that non-transfer of some common assets would not affect the status of IRTL as a going concern. The compliance with Section 2(19AA) was relevant only for determining tax neutrality and had consequences for IRSL only.

4. Interpretation and Implementation of the Scheme of Arrangement:
The Court emphasized that the Scheme of Arrangement must be read as a whole and not in a piecemeal manner. The Court found that the Scheme, including Clauses 1.1(vii), 3, 6, 24, along with the Schedules and map, indicated that the housing colony and common utilities were to be retained by IRSL. The Court concluded that the Scheme was properly implemented, and the Applicant's interpretation would amount to rewriting the Scheme, which the Court could not do.

5. Dispute Resolution Mechanism:
The Court modified the dispute resolution mechanism in Clause 36 of the Scheme. Initially, disputes were to be referred to a sole arbitrator nominated by Mr. O.P. Lohia. The Court directed that future disputes should be referred to a sole arbitrator appointed with the consent of both parties. If no consensus is reached, the sole arbitrator would be appointed by the concerned Court. The modified Clause 36 stated:
"If any dispute, doubt or difference or issue shall arise between the parties hereto or any of their shareholders, creditors, employees and/or any other person, as to the construction hereof or as to any account, valuation or apportionment to be taken or made of any asset or liability transferred under this Scheme or as to the construction hereof or as to any account, valuation or apportionment to be taken or made of any asset or liability transferred under the Scheme or as to the accounting treatment thereof or as to anything else contained in or relating to or arising out of this Scheme, the same shall be referred to the sole arbitrator to be nominated jointly by both the parties. The Arbitrator's decision shall be final and binding. If, however, there is no consensus upon the name of the sole arbitrator, the sole arbitrator shall be appointed by the concerned court. The Courts in New Delhi shall have exclusive jurisdiction in respect of any disputes arising out of or relating to this Scheme."

Conclusion:
The application for modification was disposed of with the modification to the dispute resolution mechanism, ensuring that the Scheme of Arrangement was properly implemented and complied with the relevant legal provisions.