9911796707
TMI Blog1995 (4) TMI 239X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 each. The issued, subscribed and paid-up capital as on 31-3-1993 and 31-3-1994 is Rs. 8.15 crores. Hereinafter, this company will be referred as 'the transferor company'. 3. In a meeting of the Board of Directors of the respondent company, held on 27-2-1994, it was decided to amalgamate the transferor company with the respondent as it was considered to be advantageous and beneficial to both the companies. In the opinion of the Directors such merger will enable the respondent to diversify its activities into a very good area with enormous potential for growth and also the transferor company to get adequate financial help. Similarly, in a meeting held on 29-3-1994, the Board of Directors of the transferor company decided to amalgamate the same with the respondent for the same reason. It should be mentioned that both the companies have a common Managing Director and they belong to the same Group (Sakthi Group of Companies). The transferor company filed C.A. No. 263 of 1994 in this Court for necessary directions for convening and conducting an extraordinary general meeting of the shareholders to consider the proposed Scheme of Amalgamation. The respondent filed C.A. No. 264 of 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... get adequate financial help. Further, the respondent company will be able to diversify into a very good area with enormous potential for growth. ( iv )This amalgamation would enable the respondent company to employ its financial resources to the fullest extent. Further, the managerial, technical and marketing expertise of both the compa- nies would compliment each other beneficially. 6. The salient features of the Scheme are that the assets and liabilities of the transferor company would become the assets and liabilities of the respondent with effect from 1-4-1993 and the equity shareholders of the transferor company will get two equity shares at a premium of Rs. 40 per share of the respondent as fully paid up for every ten equity shares of the transferor company held by them. It is averred in the petitions that the assets of the respondent are adequate to discharge and satisfy all the binding obligations of the transferor company and the creditors thereof will not be prejudiced in any manner by the scheme of amalgamation. It is also averred that the fixed assets of the transferor company were revalued on 31-3-1993 and the same was duly approved and adopted by its sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whose survival depends upon the income derived from the respon- dent company. The petition is mala fide and the proposal is only to protect the interest of a few Directors who have given personal guarantee in favour of the financial institutions for loans taken by the transferor company. On the aforesaid averments, the appellant prayed for dismissal of the petitions. 8. The appellant also filed C.A. Nos. 959 and 960 of 1994 praying to set aside the report of the Advocate-Chairman dated 21-5-1994 and to appoint a Chairman to convene a fresh meeting of the shareholders of the respondent company under the provisions of the Companies (Court) Rules, 1959. The appellant also filed C.A. No. 999 of 1994 praying to pass an order to appoint a Chairman to convene a fresh meeting of the creditors of the respondent at the registered office of the company after issue of notices to the creditors for the purpose of considering and if it thought fit, approving the scheme of amalgamation of the companies and cones- quently directing the said Chairman to file a report of the said meeting into this Court. 9. C.A. Nos. 959 and 960 of 1994 were dismissed by an elaborate order by Jayasimha Bab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned counsel, the object with which the amalgamation is proposed can be achieved by other methods and the Court should not in such cases approve of amalgamation. Finally it is contended by the learned counsel that the Court ought not to have passed the order sanctioning the amalgamation without first obtaining the report of the Official Liquidator as regards the affairs of the transferor company. According to him, such a report is a pre-condition under the second proviso to section 394(1) of the Act. 12. Per contra, the learned counsel for the respondent has submitted that the amalgamation is in the interest of both the companies and so long as it is fair and reasonable, the Court has to accept the same. According to him, in the absence of any fraud or mala fide, the Court will not substitute its own views with regard to economic soundness of the proposal when the required majority of the shareholders has approved of the same. It is contended by him that each case has to be decided on the facts and circumstances thereof and not on any hard and fast rule based on general principles. It is submitted that there is no suppression of any material fact, either before the sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrange- ment, or by a subsequent order, where it is shown to the Court in an application under section 391, that the compromise or arrangement has been proposed for the purposes of or in connection with a scheme for the reconstruction of any company or companies or amalgamation of any two or more companies and that under the scheme, the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme, referred to as a transferor company, is to be transferred to another company, referred to as a transferee company. Under the first proviso to sub-section (1), no compromise or arrangement proposed for the purposes of and in connection with a scheme for amalgamation of the company which is being wound up with any other company or shall be sanctioned by the Court, unless the Court has received a report from the CLB or the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interests of the members or to public interest. The second proviso to sub-section (1), which is relevant in this case, reads as follows : "Provided further that no order for the dissolution of any transferor company under clause ( iv ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n into account in sanctioning the scheme. The Bench said: "... The jurisdiction of the Court which is called upon to sanction a scheme transcends the mere consideration that a majority of those affected by the scheme is willing to submit to the scheme. The creditors of a company may agree to accept a fraction of the amount due to them from the company and yet, on considerations of more lasting importance, like public or commercial morality, the Court may refuse to accept the verdict of the majority. It may also refuse to accept the scheme on the ground that it is not reasonable or that it is not feasible or that there is no chance that it will yield to a smooth and satisfactory execution. By 'reasonable' is generally meant that the arrangement cannot reasonably be supposed by sensible business people to be for the benefit of the class which they represent. The Court will also not sanction the scheme if the facts which would have influenced decision of the majority were not known or disclosed into the majority, or if the sponsors of the scheme have misrepresented the true position of the company. Finally, if the acceptance of the scheme would lead to the stifling of an inquiry int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. That is the well recognised approach of the court to a scheme of compromise and arrangement. The scheme should not be examined in the way a carping critic, a hairsplitting expert, a meticulous accountant or a fastidious counsel would do it. It must be tested from the point of view of an ordinary reasonable shareholder acting in a businesslike manner taking within his comprehension and bearing in mind all the circumstances prevailing at the time when the meeting was called upon to consider the scheme in question ( vide In re, Sidhpur Mills Co. Ltd AIR 1962 Guj. 305)." 20. The same learned Judge has in Wood Polymer Ltd., In re [1977] 47 Comp. Cas. 597 (Guj.) held that, if the only purpose discernible behind the amalgamation is defeating tax by creating a paper company and transfer-ring an asset to such company which can, without c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n oblique purpose to defeat the provisions of any law. (6)The object cannot be achieved by resort to the other provisions of the Companies Act. (7)The scheme as a whole is fair and reasonable and not vitiated by bad faith, fraud or mala fide and once the Court is satisfied to that effect, the Court should not substitute the decision of the majority with its own views. 23. Bearing the above principles in mind, we shall now examine the present case. The first contention of the appellant that the material facts are not disclosed either at the meeting or before the Court is unsustainable. The counsel on both sides have taken us through the entire records. We find that none of the facts which according to the appellant have not been disclosed, has been omitted to be set out in detail by the respondent in the affidavits filed before the Court. It will be an unnecessary exercise to repeat the contents of those affidavits. As regards the alleged staggering liability in a sum of Rs. 116.88 crores in the event of amalgamation, one of the Directors of the respondent company by name Mr. N.K. Vijayan has pointed out in his additional counter-affidavit that the appellant has omitted to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kh tonnes of sugarcane. Dhenkanal Sugar Unit is expected to commence commercial production during 1993-94 season. Favourable working results are expected in this division." At page 38, Note (1) to Schedule 25 reads thus : "The Company has taken 1250 TCD sugar unit from a co-operative society in the State of Orissa under Management Contract." 25. In the common affidavit of the Managing Director, it is stated as follows: "22. I further submit that the allegation of the Applicant/respondent in ground No. 14 that the Transferee Company is facing serious problems with its existing units at Baramba and at Dhenkanal at Orissa is wholly incorrect. The Transferee company has taken over a sugar mill with 1250 TCD capacity at Baramba in Orissa State since January 1991. As per the terms of the Agreement, the Transferee Company has to pay an annual rent of Rs. 50 lakhs and not Rs. one crore as erroneously mentioned by the Applicant/respondent. I further state that when the Baramba Sugar Unit was taken over, there was only 10,000 tonnes of sugarcane to crush. I further submit that the Transferee company has put in vigorous efforts for extensive cane development in the command area of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... future potential of the business of the transferor company. The two companies are agro based industries and a shrewd businessman may visualise a bright future for both the companies by amalgamating the two, so that the resources can be utilised for the benefit of both. One of the tests is to find out the debt-equity ratio as pointed out by learned counsel for the respondent. It is submitted by him that out of the total liability of Rs. 116.88 crores of rupees, of the two companies put together a sum of Rs. 69.51 crores represents the term loan liability. The balance of Rs. 47.37 crores was borrowed for meeting the working capital needs against hypothecation of current assets. The liability representing the working capital varies from month to month according to the stock position of inventories and receivables. It is submitted by him that the debt-equity ratio works out to only 1.1:1, because the term loan being Rs. 69.51 crores, the net owned funds being Rs. 62.97 crores. The profit of the Transferee-Company after taking into account interest on working capital borrowings and interest on secured and unsecured loans is a sum of Rs. 20.45 crores. Hence, the interest burden will not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention of the learned counsel for the appellant that the scheme is against public interest as it will affect sugarcane growers is unsustainable. It is rightly pointed out by the respondent that it enters into an agreement with the sugarcane growers for every season and as per the agreements, price is payable as per the provisions of the Sugar- cane (Control) Order, 1966. A copy of the English translation of the agreement has also been placed before the Court. A perusal of the same shows that there is a clear contract to pay at the controlled price as may be determined by the Government from time to time for the entire quantity of the sugarcane planted or to be planted on the lands mentioned in the Schedule. The statutory minimum price has to be paid to the sugarcane growers within 14 days from the date of delivery of the sugarcane. That price is notified by the Central Government from time to time. Later, after the closure of the season, the Central Government notifies additional price to be paid for the sugarcane under clause 5A of the Sugarcane (Control) Order. The State Government further recom- mends the State-advised price. The respondent company is liable to pay only prices f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er service of notices and publication thereof in accordance with the statutory requirements. The fact that the majority have accepted the scheme is a relevant matter in this regard. Hence, we reject the contention of the appellant. 32. The last contention of the appellant is that a report from the official liquidator as regards the affairs of the transferor company is a condition precedent before the Court sanctions amalgamation. Reliance is placed on the second proviso to section 394(1) of the Companies Act which we have already extracted. Our attention is drawn to the judgment of Madhya Pradesh High Court in Kriti Plastics (P.) Ltd., In re [1994] 78 Comp. Cas. 138. The Court said: "... The Official Liquidator is actually an agency of the court to satisfy itself that the affairs of the company to be dissolved have not been conducted in a manner prejudicial to the interest of its members and public interest. Therefore, the Court has to ascertain that the schemes of amalgamation are sanctioned only after the court has the other side of the picture before it and the report filed by the Official Liquidator along with the scheme of amalgamation leads the court to arrive at a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent situations and may apply to two different compa-nies. Referring to the expression 'dissolution', the Full Bench said that the position in dissolution need not be identical as in amalgamation and the word 'dissolution' as used in the Act has a perceptible connotation. Ultimately, the Full Bench concluded thus: "The survey of the above provisions indicates that the legal process of dissolution can take place after commencement of the steps for winding up. Dissolution without winding up only means dissolution without completely winding up the company. Thus what is envisaged in clause ( iv ) of section 394 as 'Dissolution without winding up' need not be the consequence of amalgamation of two companies." 33. The above rulings do not help the appellant to contend that the report of the Official Liquidator should be obtained before an order sanctioning amalgamation is passed. In our opinion, when a company is wound up or liquidated, the first proviso requires a report on the affairs of the company prior to amalgamation. In this case, the prayer is for dissolution without winding up the transferor company and the first proviso is not applicable. In such cases, the order tran ..... X X X X Extracts X X X X X X X X Extracts X X X X
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