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TMI Blog2002 (8) TMI 772X X X X Extracts X X X X X X X X Extracts X X X X ..... titioners were directed to serve a copy of the petition upon the learned Advocate-General and the matter was adjourned till May 20, 2002. On May 20, 2002, both the petitioners and the learned Advocate-General made their respective submissions. The matter was partly heard. The State of West Bengal was added as a party to this application. A large number of applications for sanction of scheme of reconstruction or amalgamation were subsequently tagged with this application in order to facilitate the learned advocates appearing in other matters to appear and make their submissions on the common question raised in these cases. Accordingly, various learned advocates appearing in other matters also made their respective submissions against the issue whereas the learned Advocate-General made his submission for the issue. The issue debated before this court is as follows: "Whether an order sanctioning a scheme of reconstruction or amalgamation under section 394 read with section 391 of the Companies Act, 1956, is liable to be stamped in accordance with the provisions of the Indian Stamp Act in its application to the State of West Bengal." An answer to this issue largely depends upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members, or class of members, as the case may be, present and voting either in person or, where proxies are allowed, under the rules made under section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company: Provided that no order sanctioning any compromise or arrangement shall be made by the court unless the court is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like." Section 394 of the Companies Act, 1956, in so far as the same is material for our present purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r company stand transferred to the transferee company by virtue of an order of court. The statutory form of an order under section 394(2) of the Companies Act provides for three different Schedules in order to incorporate therein the properties transferred. It would be useful to take notice of the statutory form of an order under section 394(2) of the Companies Act. "THE COMPANIES (COURT) RULES, 1959 FORM NO. 42 [ See rule 84] Upon the above petition and application coming on for further hearing on... upon reading etc., and upon hearing, etc. THIS COURT DOTH ORDER (1) That all the property, rights and powers of the transferor company specified in the first, second and third parts of the Schedule hereto and all other property, rights and powers of the transferor company be transferred without further act or deed to the transferee company and accordingly the same shall pursuant to section 394 ( 2 ) of the Companies Act, 1956, be transferred to and vest in the trans feree company for all the estate and interest of the tansferor company therein but subject nevertheless to all charges now affecting the same other than (here set out any charges which by virtue of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is that by the same order provision is also made for dissolution of the transferor company. Is such a transfer a voluntary act of the parties, i.e ., transferor company, the transferee company and their respective shareholders? In the case of General Radio and Appliances Co. Ltd. v. M.A. Khader [1986] 60 Comp. Cas. 1013 ; AIR 1986 SC 1218, a question arose as to whether a transfer of assets and properties by virtue of an order of court under section 394 of the Companies Act, 1956, is an involuntary transfer. Their Lordships answered this question in the negative. It would be appropriate to notice the relevant portion of the said judgment (p. 1017): "...The only question which falls for consideration in this appeal is whether, in view of the order made by the High Court of Bombay on February 27, 1968, sanctioning the scheme of amalgamation proposed by appellant No. 1-company under sections 391 and 394 of the Companies Act in Company Petition No. 4 of 1968, the subsequent transfer of tenancy right in the suit premises and vesting of the same in the second appellant can be deemed to be subletting of the tenancy right of appellant No. 1 or transfer or assignment of inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dation to another company styled in the section as transferee company. Where an order of court made under the section provides for the transfer of the assets and liabilities of a company in liquidation to another company, the assets are, by virtue of that order, without anything more, transferred to and vest in the transferee company and the liabilities of the former company are also cast upon the transferee company. Under the ordinary law of contract, while assets are assignable, liabilities under contracts or duties arising thereunder are not assignable, but the effect of section 153(A) is to some extent to override the ordinary law. Thus, by an order sanctioning amalgamation, the rights, interest and liabilities of the transferor company are transferred and vested in the transferee company. It appears that by the order of amalgamation, the interest, rights of the transferor company in all its properties including leasehold interest and tenancy rights are transferred and vested in the transferee company." (p. 1020) The next question of some importance is "whether such a transfer is sale". In Wall v. London and N. Assets Corporation [1898] 2 Ch. 469, Lindley, M.R. observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equity shares, the relative gearing of the shares of the two companies. The 'gearing' of an ordinary share is the ratio of borrowings to the equity capital. (6)The values of the net assets of the two companies. Where the transaction is a thoroughgoing merger, this may be more of a talking-point than a matter of substance, since what is relevant is the relative values of the two undertakings as going concerns. (7)The voting strength in the merged enterprise of the shareholders of the two companies. (8)The past history of the prices of the shares of the two companies." In the case before their Lordships Mr. Malegam the valuer adopted a combination of three well-accepted methods to arrive at the fair value of the shares. The methods were : ( i ) the yield method; ( ii ) the asset value method; and ( iii ) the market value method. After considering all the relevant factors, the valuer recommended an exchange ratio of two equity shares of HLL for every 15 ordinary shares of "TOMCO". In that case the scheme had been approved by the trial court. The Division Bench dismissed the appeal. The matter was taken up to the apex court. The apex court dismissed the special leave petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either of the court or of the committee of inspection." A Division Bench of this court in the case of Hari Krishna Lohia v. Hoolun-gooree Tea Co. Ltd., AIR 1969 Cal 312 ; [1970] 40 Comp. Cas. 458 , held that "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". Sale of goods has been defined in section 4(1) of the Sale of Goods Act as follows : "4. (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another." Section 2(10) of the Sale of Goods Act provides as follows : "2(10) 'price' means the money consideration for a sale of goods." Sale under section 54 of the Transfer of Property Act is defined as follows: "54. 'Sale' defined. 'Sale' is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised." Benjamin's Sale of Personal Property (second edition 1873) page 1 was quoted in the judgment of the House of Lords reported in Kirkne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. Thus the meaning of 'agricultural produce' in the above definition is not restricted to any products of agriculture as specified in the Schedule but also includes such items which come into being in processed form and further includes such items which are called as gur, rab, shakkar, khandsari and jaggery". A document creating or transferring a right is an instrument. Can it be said that an order effectuating the transfer is a document ? An answer in the affirmative was given by the apex court in the case of Haji Sk. Subhan v. Madhorao, AIR 1962 SC 1230, wherein their Lordships held 'the question is whether the word "document" includes a decree of the court. We do not see any good reason why a decree of the court, when it affects the proprietary rights and is in relation to them, should not be included in this expression'. In the case before the apex court the intermediary sought to evict the person in possession on the basis of a decree of court declaring his title whereas prior to passing of the decree M.P. Abolition of Proprietary Rights (Estates, Mahals, Alienated Land) Act, 1950, came into force ; sub-section (1) of section 4 of the aforesaid Act provided as foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transferor company to the transferee company. The court merely accords its sanction to the arrangement entered into between the transferor company and the transferee company". Reference may also be made to the case of Sharat Hardware Industries P. Ltd., In re [1978] 48 Comp. Cas. 23 , 27 (Delhi) wherein it was held that (p. 26): "In essence, a scheme is a contract between two or more parties. It requires the necessary approval in accordance with section 391 of the Act, if it is a scheme covered by that provision, otherwise any other contract entered into by a company does not require such approval. The essential features of the present scheme under consideration are that two companies are merging with each other. Therefore, it is a contract between two companies. Such a contract does not require the approval of the court. But, as one of these companies will merge into the other and will thereafter have to be dissolved under section 394 of the Companies Act, 1956, considered from the point of view of that company which is to cease to exist, the scheme or arrangement between the two companies is also a scheme or arrangement between the transferor company and its shareholders an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In re [1917] 1 Ch. D. 431, 441. The aforesaid commentary of the learned author was quoted with approval by the apex court in the case of J . K. ( Bombay ) Pvt. Ltd. v. New Kaiser-I-Hind Spinning and Weaving Co. Ltd. [1970] 40 Comp. Cas. 689 ; AIR 1970 SC 1041, in paragraph 35 thereof. In the case of Li Taka Pharmaceuticals Ltd. v. State of Maharashtra, AIR 1997 Bom 7 ; [1998] 91 Comp. Cas. 871 , the question pointedly arose whether an order under section 394 of the Companies Act is an instrument and, therefore, liable to be stamped. This case is however distinguishable because the State of Maharashtra has made an amendment to the Stamp Act by which an order passed under section 394 is specifically brought within the meaning of the word "conveyance". We shall deal with that aspect of the matter hereafter when the respective submissions made by the learned advocates will be noticed. At this stage what is to be noticed is the finding of the Division Bench that an order under section 394 of the Companies Act is based on agreement between the transferor and the transferee. The Division Bench opined as follows : As such, the amalgamation order passed under section 394 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omise or arrangement; and ( vi )such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out : Provided that no compromise or arrangement proposed for the purposes of or in connection with, a scheme for the amalgamation of a company, which is being wound up, with any other company or companies, shall be sanctioned by the court unless the court has received a report from the Company Law Board or the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest: 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. (2) Where an order under this section provides for the transfer of any property or liabilities, then, by virtue of the order, that property shall be transferred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale and thus, cannot be construed to be a conveyance on sale. Further an order under section 394 of the Companies Act is not an instrument by which property is transferred inter vivos. This is so for the following reasons : ( i )A court order is not an instrument ( Jodrell v. Jodrell [1868-69] 7 Equity Cases 461 ; [1887] 11 ILR Bom 566 and 512). ( ii )An order under section 394 of the Companies Act not an instrument of transfer Sailendra Kumar Ray v. Bank of Calcutta Ltd. [1948] 18 Comp. Cas. 1 (Cal). ( iii )In the event it is held that an order under section 394 is an instrument even then it will not be a conveyance within the meaning of section 2(10) of the Stamp Act as : ( a )Section 2(10) of the Stamp Act only covers instruments by which property alone is transferred. It does not deal with instruments by which liabilities are transferred. ( b )There is no transfer inter vivos where the order under section 394 of the Act provides for dissolution of the transferor company as well as vesting of its properties upon the transferor company." This submission is not acceptable for the following reasons : ( a )For reasons discussed hereinabove I am inclined to hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration and the consideration which is made liable to stamp duty. To illustrate, take the present case itself. The properties which had been treated as sufficient security by the bank for the liability of Rs. 65,00,000 must be ordinarily much more valuable than Rs. 65,00,000 but on the date of conveyance stamp duty would have become payable only on Rs. 7,76,000 but for the above rule in section 24 of the Act. In this case the amount of Rs. 7,76,000 must have been fixed by the parties taking into consideration the liability to the bank under the mortgage which might arise in future." (g)It is true that an order for dissolution of the transferor company can be passed simultaneously with the sanction of the scheme provided the transferor company has got a clean chit from the Company Law Board or the Registrar or the official liquidator as the case may be. But that does not mean that the company stands dissolved prior to completion of the transfer. In that case, the transfer will never be completed. The transferor company gets dissolved upon the certified copy of the order dissolving the company being delivered to the Registrar of Companies as would appear from Form No. 42 extra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r-I-Hind Spinning and Weaving Co. Ltd. [1970] 40 Comp. Cas. 689, 711 ; AIR 1970 SC 1041." The aforesaid submission of Mr. Mukherjee cannot be accepted for the following reasons : ( a )In the case of Ruby Sales and Services (P.) Ltd. [1994] 1 SCC 531, the apex court held that the consent decree was an instrument. It was not held to be an instrument because it was a consent decree. It was held to be an instrument because it conveyed the title in the property in dispute from the defendant to the plaintiff. Therefore it is obvious that it was held to be an instrument because it had the effect of conveying the title and not because it was a consent decree. Once this distinction is realised it would be clear that consent or no consent when a decree or order of court purports to transfer title, it becomes an instrument. ( b )I am unable to accept that the observation of the apex court in the case of Ruby Sales and Services ( P. ) Ltd. [1994] 1 SCC 531 "it appears to us that the amendment was made out of abundant caution and it does not mean that the consent decree was not otherwise covered" is not the ratio of the said judgment. From paragraph 14 of the said judgment it woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )I have already discussed hereinabove that an order passed under section 394 is based on agreement of the transferor and the transferee. Therefore, I am unable to accept that equation of an order under section 394 with a consent order is misplaced. Therefore, reference to J . K. ( Bombay ) Pvt. Ltd. v. New Kaiser-I-Hind Spinning and Weaving Co. Ltd. [1970] 40 Comp. Cas. 689 ; AIR 1970 SC 1041 cannot alter the situation. The fourth submission of Mr. Mukerjee was as follows : "A scheme of amalgamation or demerger is not a transfer for the purposes of the Income-tax Act. (see sections 2(19AA), 47, 72A and Chapter XXC). An order sanctioning a scheme is not a consent order. It binds dissenting parties and can operate as res judicata. In effect an order sanctioning such scheme is a dissolution of the transferor company (in the case of amalgamation) and a dissolution of the concerned unit of a transferor company (in case of demerger) and distribution in specie to the shareholders of the transferor company by allotment of shares in the transferee company. There is no sale or exchange involved in amalgamation or demerger. Transfer of properties and liabilities takes place by opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e parties. (AIR 1967 SC 593 ( sic )) ." I am unable to accept this submission because I have already held that the judgment of the apex court in the case of Ruby Sales and Services ( P. ) Ltd. [1994] 1 SCC 531 has to be understood in its proper perspective. Consent or no consent, an order would become an instrument if it purports to effectuate transfer of title. The sixth submission of Mr. Mukherjee contained in his note is as follows: "Being a fiscal statute the Stamp Act is to be construed strictly. The Schedule makes no provision for stamping of orders under section 394 of the Act. An interpretation that the word 'conveyance' as defined in the Stamp Act includes such an order under section 394 will put two dissimilarly situated persons at par and thus make the Act operate unjustly which ought not to be permitted ( S.K. Dutta, ITO v. Lawarence Singh Ingty [1968] 68 ITR 272 ; AIR 1968 SC 658, State of Karnataka v. Shivappa Gurusiddappa, AIR 1998 SC 1536 and Rajendra Mahton v. State of Bihar, AIR 1998 SC 1546). States which have required stamp duty to be paid on orders under section 394 of the Act have provided for the same expressly. In Gujarat it has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme should not be held to be covered by the definition of the words "conveyance" and "instrument". Interpretation of statute is decisively in the domain of judiciary and not in the domain of Legislature. The seventh submission of Mr. Mukherjee appearing in the note is as follows : "Section 24 of the Stamp Act does not apply for the following reasons : ( i )Consideration for a scheme is not the take over of liabilities of the tranferor companies by the transferee companies. ( ii )Section 24 applies when transfer is made in consideration of liquidation of an outstanding debt owed by the transferor to the transferee which is not the case in the case of an amalgamation or demerger. ( iii )Even in the case of mortgages as referred to in section 24 there has to be a sale and an order under section 394 is not a sale. ( iv )Section 24 of the Stamp Act applies to voluntary transfers." I am not impressed by this argument for the following reasons : ( a )This point has already been answered hereinabove and I need not reiterate the reasons. Suffice it to say that in consideration of the transfer the shareholders of the transferor company are allotted shares in the transferee co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 430, paragraphs 20 to 22 pages 433, 434, paragraphs 32 and 33, page 434)." ( a )This court is called upon to decide whether or not an order sanctioning a scheme is liable to stamp duty on the basis of the provisions of the Stamp Act as it is. This court is not called upon to decide as to how the same will become operational or whether there will be any difficulty in applying the provision. If any such difficulty is faced, the same would be taken care of by the Legislature. ( b ) Gauri Singh v. Ramlochan Singh, AIR 1948 Patna 430, is a judgment concerning the Arbitration Act, 1940. Relevance of this judgment was not indicated at the hearing nor does this judgment appear to have any bearing to the question in hand. Mr. Mukherjee may have inadvertently omitted to refer in his note to a notification dated January 16,1937, to which attention of the court was drawn by him. Pursuant to his request the learned Advocate General was requested to ascertain from the department whether the aforesaid notification continues to be in existence to which his reply was in the affirmative. The said notification provides as follows : "Central Board of Revenue, Notification No. 1, dated Janu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heme of amalgamation does not by itself transfer any thing or create, limit, extend, extinguish or record any right. (6)An order of the court passed under section 394 is also not an 'instrument' or a 'conveyance'. It becomes operative as soon as it is pronounced even though not written or signed. ( Smt. Basanti Devi v. Abdul Sattar, AIR 1976 Raj 239 and Surendra Singh v. State of U. P., AIR 1954 SC 194). (7)Section 17 of the Stamp Act stipulates as to when instruments are to be stamped. An oral is incapable of stamping." The first submission of Mr. Deb is in aid of his sixth and seventh submissions noted above, the sum and substance of which is that there can be an oral transfer; an order sanctioning a scheme becomes effective as soon as it is pronounced ; it is as it were a transfer effected orally and an oral transfer cannot be stamped because in order to become stampable there should be in existence an instrument which can be stamped before or at the time of execution. This submission in my view totally overlooks the provision contained in section 391(3) of the Companies Act which provides that "an order made by the court under sub-section (2) shall have no effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership of the wagons in question from the taxpayers to the Transport Commission, which occurred automatically by process of law when they vested in the Commission under section 29 of the Transport Act, 1947, without any act of assent by either party. The payment of compensation on the scale provided by the Act cannot be regarded as a sufficient substitute for the contractual element which is lacking". The apex court in the case of General Radio and Appliances Co. Ltd. v. M. A. Khader [1986] 60 Comp. Cas. 1013 held that a transfer pursuant to an order under section 394 of the Companies Act is not involuntary in nature. In the case of Indian Steel and Wire Products Ltd. v. State of Madras, AIR 1968 SC 478, it was held "so long as mutual assent is not completely excluded in any dealing in law it is a contract". I have demonstrated above that the entire edifice culminating in an order under section 394 of the Companies Act is based on agreement. Therefore, the submission of Mr. Deb cannot be accepted. The second submission of Mr. Deb does not in any way affect the answer to the question posed before us. The fifth submission of Mr. Deb is correct. I can only add that a sc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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