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TMI Blog1990 (10) TMI 288X X X X Extracts X X X X X X X X Extracts X X X X ..... ing April 1, to March 31, following. The latest balance-sheet and profit and loss account for the year ending March 31, 1989, has shown huge profits. The object of the transferee-company is mainly to carry on the business of hotel as enumerated in the memorandum of association, viz ., hotel, restaurant, cafe, tourism, refreshment room, beer house, lodging house keepers and licensed victuallers in the city of Bangalore and elsewhere in India and the incidental objects are to purchase, erect or otherwise acquire and equip any hotels in India and to purchase or otherwise acquire landed property. It did not have either the main or incidental objects of the transferor-company. The transferee-company, to have similar objects, as the transferor-company, got its memorandum of association amended by passing a resolution in its general meeting of the members held on July 17, 1989, and got the same approved by the Company Law Board by its order dated March 13, 1990, passed in Petition No. 41/17 SRB/90 by which order the objects clause of the transferee-company's memorandum of association has been amended including the objects: (1)to manufacture iron, steel, brass, bronze and aluminium and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articles of association, both the transferor-company and the transferee-company are entitled to carry on the business of manufacture of iron, steel, brass, bronze, aluminium and other metal products, machinery of all kinds, and to manufacture cement and allied products, and to manufacture polymer concrete products. It is not in dispute that their manufacture and their business activities are analogous and can be combined effectively and economically. The transferee-company has come into existence much earlier to the transferor-company. The directors of both the companies are more or less the same and belong to the same family. Over a period of years, the transferee-company has made large profits. By all standards, it has been and is an affluent company with large profit-making potentialities. The transferor-company appears not to have been able to run through its big scheme of putting its products into effective commercial sale. It has been stated that the transferor-company has installed capacity to manufacture 4,500 metric tons per annum of polymer concrete. Its factory is situated in a notified industrially backward area near Bangalore and is entitled to several concessions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds and make it available to launch its products and to meet the working capital requirements. It was thus contemplated by the respective board of directors of the two companies that an amalgamation/merger of the transferor-company with the transferee-company would be beneficial to both. On such merger, the transferee-company could effectively execute the project of the transferor-company which had come to a standstill for want of funds. By an amalgamation, it is averred that the transferee-company could certainly be able to raise funds from banks and financial institutions, having regard to its increased capital and fixed assets. It is averred that the tax structure of the transferee-company would benefit considerably by the scheme of amalgamation. Further, it is stated that the transferee-company would carry out its proposed manufacturing activities profitably. It is stated that the ratio of exchange of shares is based upon the valuation of shares of both the companies made by V. M. Shetty and Co., chartered accountants, who are also the statutory auditors of both the companies. The board of directors of both the companies have accepted the exchange ratio as fair and reasona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferee-company were duly held on February 15, 1990, under the chairmanship of Narayana Shetty. In both the meetings of equity shareholders and unsecured creditors, the scheme of amalgamation was unanimously approved and the following resolution was passed. "Resolved that the scheme of amalgamation of Shankaranarayana Steel and Polymer Concrete Ltd., its members and creditors with Shankaranarayana Hotels Private Ltd., a copy whereof was placed before the meeting and initialled by the chairman for the purpose of identification, be and is hereby approved, that the board of directors of the company be and is hereby authorised to take all necessary steps to do all such acts, matters, deeds and things as it may consider necessary or as may be required for carrying the said scheme into effect and further agree to any modifications, conditions or directions as may be imposed by the High Court of Karnataka while sanctioning the said scheme". The salient features of the scheme of amalgamation of the transferor-company with the transferee-company may be seen. The scheme provides for amalgamation of the transferor-company with the transferee-company and resulting in the dissolution of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme of amalgamation would result in future reduction in the income-tax liability of the transferee-company and it would amount to tax avoidance in the light of the observations made in the judgments of the Supreme Court and High Courts. Further, he has stated that, as regards the observation relating to tax avoidance made by the auditors, the official liquidator is not in a position to express any view. Further, it has averred that except the irregularities pointed out by the chartered accountant, the affairs of the company have not been conducted in a manner prejudicial to the interests of the members or to the public interest. However, the official liquidator is in full agreement with the views expressed by the chartered accountant in the reports dated May 28, 1990, and August 17, 1990, that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to the public interest However, he has submitted that, taking into consideration the report of the auditor, it is clear that the proposed scheme of amalgamation would result in future reduction in the income-tax liability of the transferee-company and that there would be likelihoo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... August 17, 1990, there is likelihood of the transferee-company reducing its tax liability without further investment in such a big project by the amalgamation, and, by such amalgamation, the transferor-company gets itself dissolved. Further, he has argued that, by the scheme of amalgamation, there would be, in the future, tax reduction in the income-tax liability of the transferee-company. Learned counsel relied on the decision of the Supreme Court in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148; AIR 1986 SC 649 and Wood Polymer Ltd., In re [1977] 47 Comp Cas 597 (Guj). When a scheme of compromise and/or arrangement is submitted to the court for its sanction, the court would ordinarily pose to itself three questions, viz ., ( i ) whether the statutory provisions have been complied with or not; ( ii ) whether the class or classes have been fairly represented; and ( iii ) whether the arrangement is such as a man of business would reasonably approve. In respect of these three questions, I find that there is absolutely no dispute between the parties. The members in the case of the transferor-company and unsecured creditors as well as equity and preference shareholders o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the transferor-company shall be made by the petitioner-company at the rate of Rs. 10 per equity share of the transferor-company. Such newly allotted shares shall be entitled to participate in the dividend, if any, declared by the petitioner-company for the accounting year ending 31st March, 1990". The principles governing the amalgamation/compromises and merger of the transferor and transferee-companies are well-settled. Amalgamation should not only be beneficial to the companies, but should also be in the interest of creditors and members of both the transferor and transferee-companies and should be in the public interest. The court, in exercising its discretion under sections 391 and 394 of the Act, has to see that the scheme as a whole, having regard to the general conditions and background and object of the scheme is reasonable and fair. If the court finds that the scheme of amalgamation is beneficial to the members of both the companies and the affairs of the company which is going to be dissolved the transferor-company have not been conducted in any manner prejudicial to the interest of its members or to- public interest, it is not for the court to launch any investigat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to find out whether it is required to investigate and find out whether there is likelihood of tax avoidance by the transferee-company in the matter of sanctioning amalgamation of companies by the court. Section 391 of the Act envisages amalgamation of companies. Section 394(1)( a ) of the Act makes provision for amalgamation of companies by resorting to the provisions of section 391. There are two provisos to section 394(1), and the second proviso, which is relevant for discussion, reads as follows: "Provided further that no order for the dissolution of any transferor company under clause ( iv ) shall be made by the court unless the official liquidator has, on scrutiny of the books and papers of the company, made a report to the court that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest" As per the provisions, it is clear that no order for dissolution of any transferor-company under clause ( iv ) (which refers to the transferor-company) could be made unless the official liquidator scrutinises the books and papers of the company and makes a report to the court that the affairs of the company have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to dubious methods. It is the obligation of every citizen to pay the tax honestly without resorting to subterfuges". As already pointed out by me there is no report by the official liquidator to show that the transferor-company is going to avoid tax or reduce its payment of tax liability by getting itself merged with the transferee company. In my opinion, in this case, there can be no dispute that, by the amalgamation scheme, it cannot be said that it is for the avoidance of tax or, for that matter, of any .other tax liability. Therefore, I reject the contention of the official liquidator. After careful consideration of the amalgamation scheme, I am of the opinion that the amalgamation scheme is fair, good, reasonable and that it is in the interests of the members and creditors of both the transferee and transferor-companies and also in public interest. I do not find any legal or equitable bar in sanctioning the scheme. The scheme has been passed by a statutory majority of both the companies. In the facts and circumstances of the case, I have no hesitation to accord my sanction to the said scheme. In the result, I make both the company petitions, viz ., Company Petitions Nos. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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