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TMI Blog1995 (9) TMI 275X X X X Extracts X X X X X X X X Extracts X X X X ..... ies manufacturing particle boards and to conduct business in such product. The reasons for amalgamation are set out on page 10 of the affidavits filed in support of the applications. It is also stated that the board of directors of both companies approved the scheme of amalgamation. On a perusal of the averments made in the affidavits filed by the transferor and transferee-companies an order was passed by my learned brother, P. Venkatarama Reddi, J., on 29-3-1995, in both these applications holding that there was no legal impediment for ordering meetings to be convened for the purpose of considering the scheme of amalgamation by laying certain conditions. 2. As per the above directions, Mr. P. Nagaseshaiah and Mr. K. Padmanabha Goud were appointed as chairmen to convene and hold meetings of the shareholders of the transferor and transferee-companies respectively. They reported that a unanimous resolution was passed at the meeting of the shareholders of both the companies held on 26-4-1995, as follows: "Resolved that a scheme of amalgamation of Novopan India Limited with G.V.K. Hotels Limited, and arrangement between G.V.K. Hotels Limited, and its members including capital res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g. Co. Ltd, In re [1970] 40 Comp. Cas. 819. 5. The Registrar of Companies further states that the transferee-compa- ny in its petition has prayed for reduction of capital and further issue of shares to members of the transferor-company on the basis of the exchange ratio, which itself is calculated after such reduction of capital. According to the Registrar, in fact, for reduction of capital, a separate set of procedure had to be followed as laid down in rules 46 to 65 of the Rules. He further states that in terms of section 101(2) of the Act, the proposed reduction involved not only diminution in liability or payment of share-holders, but also 'in any other case', the court may direct the petitioners to obtain the consent of creditors. He further states that it could be seen from the petition filed by the transferee-company that the IDBI as a lead financial institution had given permission only for reverse merger and not for reduction of capital. This apart as per the outstanding position of loans as on 31-3-1994, the transferee company had obtained secured loans not only from IDBI, but also from Canara Bank and Bank of India, whose consent for capital reduction was wanting. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 95. The Registrar of Companies further submitted that the scheme under para 1( a ) of Part V provided for a change of name of the transferee-company, which was outside the purview of the scheme. Further, according to him, the transferee company had to comply with the requirements under section 21 of the Act, and was also required to take steps to obtain a fresh certificate of incorporation from the Registrar of Companies, Andhra Pradesh, Hyderabad, which was not possible at this stage, and, therefore, the High Court may pass appropriate orders for deletion of the said from the scheme. 6. As stated earlier, the meeting of the shareholders of the petitioners (transferor and transferee-companies) was held on 26-4-1995, for consid-ering the scheme of amalgamation of the transferor-company with the transferee-company and also arrangement between the transferee com- pany and its members, and that a unanimous resolution was passed at that meeting approving the scheme of amalgamation and arrangement, which has already been extracted above. The Official Liquidator has also filed his report in terms of the second proviso to sub-section (1) of section 394, stating that the affairs of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and paid-up share capital of the transferee- company is proposed to be reduced from Rs. 14,78,74,800 divided into 1,47,87,480 equity shares of Rs. 10 to 2,95,74,960 divided into 1,47,480 equity shares of Rs. 2 each, such reduction to be effected by cancelling the paid-up share capital to the extent of Rs. 8 per equity share. 11. Forthwith upon such reduction of the share capital taking effect, 1,47,87,480 equity shares of Rs. 2 are proposed to be consolidated in such a manner that every five shares of Rs. 2 shall constitute one equity share of Rs. 10 fully paid-up. A clause is also proposed to be added to the scheme of capital restructuring that the transferee-company shall not be re- quired to use the words 'and capital reduced' as part of the corporate name, and such usage is proposed to be dispensed with. 12. The debenture holders of 1,17,500 redeemable non-convertible debentures of Rs. 65 each in the transferor-company are proposed to be allotted an identical number of non-convertible debentures by the transferee-company and such debentures are proposed to be secured by the same assets now constituting the security and are proposed to carry the same rights which are pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced: "...If section 391 were not to be treated as complete code and if it is intended that various things that can be done by way of scheme of compromise and arrangement, if they were to fall under different provisions of the Companies Act which prescribe certain procedure for doing the same and that procedure has to be gone through, it was not necessary to provide specifically that if the scheme of compromise and arrangement includes reduction of capital special procedure in respect of reduction of capital must be gone through before it could be sanctioned as part of the scheme of compromise and arrangement. There seems to be good reason for making such a provision in rule 85...." (p. 854) 15. It, therefore, becomes necessary for us to have another look at the decision of the Gujarat High Court in the case of Maneckchowk Ahmedabad Mfg. Co. Ltd. (supra), in which it is observed that the scheme as finally submitted to the court for its sanction envisaged reorganisation of the share capital of the company which included reduction of the share capital by reducing the face value of the ordinary share of Rs. 1,000 fully paid to Rs. 250 fully paid, and preference share of Rs. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot approved by a statutory majority of creditors and members; but assuming that the other view is possible, the court on the analysis of votes recorded at the meeting should not exercise its discretion in favour of the scheme so as to impose it on the dissenting members and creditors. 7.The scheme was not commercially and economically viable or feasible and was in fact unfair and unreasonable and the court should not exercise its discretion in favour of such a scheme." (p. 820) 16. It is further stated in the said decision that the court overruled the objections and sanctioned the scheme with certain modifications to ensure and facilitate the proper working of the scheme. In overruling the objections the court laid down general principles governing the sanction- ing of schemes for compromise and arrangements with members and creditors and made the following propositions on the interpretation and object of the relevant provisions of the Companies Act: "( i )The court in exercising its discretion in sanctioning a scheme of compromise with members and creditors under section 391(2) of the Companies Act, treated it as a cardinal rule that its function does not extend to usurpin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired in Form No. 34, as stated in the aforesaid decision of the Gujarat High Court. The details required to be mentioned in the affidavit have been so prescribed as to enable the court to give proper directions and no disclosures are required to be made as required by the proviso at that stage. It was not possible to accept the view that disclosures as required by the proviso should be made at the initial stage when the application was made under section 391(1); these disclosures are required to be made only when a petition is filed under section 391(1) for sanctioning the scheme and must be available when the court proceeds to examine the scheme to find out whether sanction should be accorded to it or not. The court at the initial stage is concerned with the financial position of the company in its broad outlines. The court would primarily be concerned with the assets and liabilities of the company; a few minor details here or there would not be of any consequence while consid-ering the scheme of compromise and arrangement. These details may be of importance when the claim of each creditor qua the company was being considered; but while considering the scheme of compromise and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the intention to move a resolution as special resolution could not be mandatory. The requirement that the resolution ought to be adopted as special resolution is mandatory, but the setting out of the requisite intention in the notice convening the meeting could not be mandatory but only directory. Considering the provision in juxtaposition with clauses ( b ) and ( c ) , it would appear that the provision contained in clause ( a ) is directory and it is sufficient if it is substantially complied with. ( xiii )Though fresh capital cannot be issued without the permission of the Controller of Capital Issues under the Capital Issues (Control) Act, 1947, section 3, where a scheme envisages increase of capital the fact that permission for issue of fresh capital was not obtained from the Controller of Capital Issues need not come in the way of the court considering the scheme because that part of the scheme can come into operation after obtaining the permission of the Controller of Capital Issues. ( xiv )Where a scheme proposed that in order to write off the loss of capital, the share capital is being reduced by reducing the face value of ordinary shares of Rs. 1,000 fully pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out and wherever it is directory has been substantially complied with. ( xix )When the capital is reduced by cancelling any paid-up share capital which is lost or is otherwise unrepresented by available assets, it is not mandatory to follow the procedure prescribed in sub-section (3) of section 101 unless the court so directs. ( xx ) to ( xxiv )****** ( xxv )The essential requirement of section 393(1)( a ) is that the creditors and members who are to assemble in the meeting should have advance information of the proposed scheme of compromise and arrange-ment and its effect on their interest as members and creditors. If the whole of the proposed scheme was annexed to the notice, anyone having a bare perusal of the scheme would be able to find out what was intended to be done by the scheme of compromise and arrange-ment and what would be its effect on his interest as creditor or member of the company and the first part of clause ( a ) of section 393(1) will be fully complied with. ( xxvi )In respect of the latter part of clause ( a ) , it must be stated that the material interest of the director and managing director in their capacity as such or as creditor or a member ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r reducing share capital. 20. Section 101 provides for application to the court for confirming order, objections by creditors, and settlement of list of objecting creditors. 21. In the instant case, the transferee-company proposes to cancel its paid-up share capital which is lost or is unrepresented by available assets. As against the share capital of Rs. 14.79 crores as on 31-3-1994, the transferee-company had accumulated losses to the extent of Rs. 15.76 crores resulting in erosion of its paid-up share capital. The proposed reduction of capital in the instant case involves only an adjustment of unrepresented share capital to the extent of Rs. 11.83 crores leaving a balance of unrepresented capital to the extent of Rs. 3.93 crores, and this arrangement does not involve any loss to the creditors considering the fact that this is only an unrepresented loss which is sought to be adjusted against the share capital by way of reduction and the total assets and liabilities of the transferee-company do not indicate any change. 22. There is also a substantial compliance with rule 85 as the proposed reduction of the share capital is already approved by the shareholders unanimous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reverse merger subject to certain conditions, such as similar approval by other member institutions, the IDBI and other connected authorities. The merger should not result in dilution of securities given to the bank, and after the merger, the total borrowings of the company should be within the MPBF of the merged company under lending method II. The company should submit for approval of the High Court the merger proposal and that merger would be subject to the approval of the shareholders and such others as may be required. 23. From the report dated 27-4-1995, submitted by the chairman of the meeting of the equity shareholders of the transferee-company, it be- comes abundantly clear that the scheme of amalgamation and arrange- ment was read over and explained by him to the shareholders present in the meeting and that unanimous resolution approving the scheme of amalgamation and restructuring of capital of the transferee company by way of reduction and consolidation of share capital was passed. It also becomes evident from the perusal of the notice convening the meeting of the shareholders that copies of the scheme of amalgamation and the statement under section 393 were circul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the share-holders, which could be treated as substantial compliance with the provisions of section 173 which provides for an explanatory statement to be annexed to the notice. The sole purpose of calling the meeting was to consider the scheme of amalgamation and arrangement. There was no other item of business to be transacted at that meeting, and therefore, there is no reason why the resolution proposed and passed by the shareholders could not be treated as satisfying all the requirements of the special resolution, more particularly, in view of the fact that it was passed unanimously. The Gujarat High Court also observed in Maneckchowk Ahmedabad Mfg. Co. Ltd. 's case (supra) that the requirement of setting out the intention to move a resolution as a special resolution in the notice could not be said to be such a mandatory requirement that failure to comply with it would invalidate the resolution. 27. It was further submitted by the learned counsel that the tenure of the managing director of the transferee-company expired on 9-8-1995, and therefore, the proposal with regard to her reappointment became infructuous. He further submitted that for reappointment as the manag- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, except the reduction of share capital, can be sanctioned. It will be necessary to find out whether the procedure prescribed for effecting reduction of share capital has been gone through or not." (p. 823) 30. Under section 102, the court can make an order confirming the reduction on such terms and conditions as it thinks fit, if the court is satisfied with respect to every creditor who under section 101 is entitled to object to the reduction, that either his consent to the reduction has been obtained or his debt or claim has been discharged. 31. We have already seen above that the creditors of the transferee-company have consented to the reduction of share capital. The require- ment of rendering necessary satisfaction to the court under section 102(1), therefore stands complied with. 32. In the instant case, the proposed reduction of share capital does not involve either the diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid-up share capital. The provi- sions of clauses ( a ) , ( b ) and ( c ) of sub-section (2) of section 101 are, therefore, not attracted. But the proposal of reduction of share capital falls under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proposal of restructuring of capital included in the scheme, on the ground that the requirements of section 101 have not been complied with. 36. Clause ( a ) of sub-section (2) of section 102 also provides that the court may, if for any special reason it thinks proper so to do, direct the company to add the words 'and reduced' to its name as the last words thereof during the period commencing from the date of the court's order till such time as the court specifies in its order. In the instant case, no special reason is shown by the Central Government to be existing which may call for giving such direction to the company. Nothing has also come to the notice of the court which may give rise to exercising such discretion vested in the court. I, therefore, do not find any necessity for giving such direction. 37. Under point ( xx ) of the Gujarat High Court's decision considered above, it is further observed that if the company has power to reduce its share capital as provided in its articles of association it is implicit therein that it can reduce both the ordinary share capital as well as the prefer- ence share capital unless specific provision to the contrary is made. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. There was really no reduction in capital as the bifurcation involved both assets and liabilities, to go with the divisions which could discharge these liabilities to creditors. 40. The proposed amalgamation of the transferor-company with the Transferee-company and the arrangement between the transferee-com- pany and its members, in the instant case, on applying the ratio laid down in the decisions of several High Courts, as discussed above, coupled with our own observation, gives us a good reason to believe that there is no constraint on sanctioning the scheme of amalgamation of the transferor- company with the transferee-company and the arrangement between the transferee-company and its members. The objections raised by the Registrar of Companies on behalf of the Central Government, therefore, do not come in our way, as elaborately discussed above, in sanctioning the scheme. 41. We have already seen above that the chairman appointed by the order of the court reported that the shareholders of the transferee-company and transferor-company have unanimously approved not only the scheme of amalgamation of the transferor-company with the transferee-compa- ny, but also the sc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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