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TMI Blog2007 (7) TMI 398X X X X Extracts X X X X X X X X Extracts X X X X ..... tal of the transferee company so that the post-amalgamation authorised capital of the transferee company swells by the amount of the authorised capital of the transferor company; secondly, whether following such increase of the authorised capital of the transferee company, if permissible; the transferee company is not obliged to pay the additional fee for the increase in its authorised capital in terms of Schedule X to the Companies Act, 1956. 3. The other issue is as to the treatment of the difference between the amount recorded as the additional share capital issued by the transferee company to the shareholders of the transferor companies in terms of the scheme and the amount of share capital of the transferor companies received by the transferee company in lieu whereof the additional shares of the transferee company are issued. 4. The first limb of the principal issue in these proceedings, is, in effect, an issue as to the form, but this has a bearing on the second part of the issue. If by virtue of a scheme of amalgamation, all assets and liabilities of a transferor company merges into and vests in the transferee company and if the right to the unissued authorised capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime, represent money in the coffers of the company, or assets of any kind, but the amount of nominal capital at any given time limits the power of the company to limit shares. ( Seventh Halsbury s Laws (4th edition) paragraph 135)." 8. Even without the benefit of the definition of authorised capital as is now understood in the shores where such corporate principles originated, it is elementary that authorised capital does not represent any capital at all, but sets a limit that the paid up capital of a company may touch at any given point of time. There is no embargo on a company started with a small number of shares of small value having an ambitious figure for its authorised capital. Authorised capital is, as the first, word of the expression implies, the authority given by the subscribers or shareholders to the concerned company as to the upper limit, at any point of time, to which the paid up capital may tend or even reach. It is notional in nature and does not reflect any money in the till of the company, or any corporeal asset that it must relate or answer to. The worth of a company is not decided by its authorised capital, its paid up capital may reflect upon it. 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r company; ( iv )the dissolution, without winding up, of any transferor company; ( v )the provision to be made for any persons who, within such time and in such manner as the court directs, dissent from the compromise 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 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 me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey 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". 13. The application for sanction of a scheme, whether one of amalgam-ation or of compromise or reconstruction is, in effect, a combined appli-cation to obtain a single-window approval in respect of various matters that would otherwise have required multiple applications being made. A scheme of amalgamation may provide, for instance, for the alteration of the objects clause in the memorandum of association of the transferee company; the reduction of the transferee company s paid up capital; and the alteration of one or more of its articles, in addition to the transfer for which the imprimatur of the court is sought. In the usual course, the transferee company would have had to apply to the Company Law Board for the addition of further objects cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rganisation of the share capital, which would be part of the arrangement that would be brought about between the company and its members. In case of reduction of share capital, in view of rule 85, the procedure prescribed under section 100 and onwards will have to be gone through. Looking at the matter from a slightly different angle, it appears that section 391 is a special provision for sanction of a scheme of reconstruction of companies, of amalgamation of companies and for a scheme of compromise and arrangement. The scheme of compromise and arrangement, or for that matter even the scheme of amalgamation of two companies, may envisage reorganisation of share capital of one or the other company. The Companies Act no doubt makes provision for reduction of share capital simpliciter, increase of share capital simpliciter, or fresh issue of capital simpliciter without its being part of any scheme of compromise and arrangement. The scheme of compromise and arrangement can be brought about only between the company which is liable to be wound up under the Companies Act and its members or creditors. The special provision contained in section 391, namely, sanction of the scheme of comprom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a common endeavour, an undertaking or enterprise J. K. (Bombay) (P.) Ltd. v. New Kaiser-I-Hind Spinning and Weaving Go. Ltd. [1970] 40 Comp. Cas. 689 (SC). Once the Court sanctions the amalgamation, the amalgamation is made effective and binding by virtue of statutory power, inter alia, by the transferor to the transferee company of the whole or any part of the undertaking, property rights and liabilities of the transferor company by virtue of the provisions of section 394 of the Act, which are intended to facilitate the process of amalgamation: Sailendra Kumar Ray v. Bank of Calcutta Ltd. [1948] 18 Comp. Cas. 1 (Cal.). The expression property and liabilities , which can be transferred on amalgamation, under section 394(1) have been defined in very wide terms by sub-section (4)( a ) of that section, so as to include rights and powers of every description and duties of every description respectively. The expression property would, therefore, be wide enough to include rights under a contract, including a contract of tenancy. These are co-extensive with the property and right which the transferor company has in relation, to its assets, but could not be wider tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eath of a natural person and yet in a larger and deeper sense the same. It is unlike it, because a natural person, as ordinarily understood, does not survive the death in any physical form. The transferor company, however, does survive, in that there is a continuity even after dissolution of its members, its assets, undertaking, etc. The estate of a natural person continues in the hands of the successor for a limited period. In a larger and a deeper sense even a natural person survives his physical death in the continuation of a being, which is supposed to merge in the wider cosmic whole. That, however, is an area of study of life after death, or what is sometimes described as life after life, where the process is of a different dimension, and defies description and is, in any event, too deep and wide for the narrow compass of this judgment. The analogy, therefore, between the death of a natural person and dissolution without winding up is inappropriate." (p. 942) 16. The next judgments cited by the petitioner, reported at PMP Auto Industries Ltd., In re [1994] 80 Comp. Cas. 289 (Bom.) and Rangkala Investments Ltd., In re [1997] 89 Comp. Cas. 754 1 (Guj.), also recognise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found more in Schedule X to the Act than in Chapter V of Part VI of the Act. It is irrelevant whether such fee, as the one payable for increase in authorised capital, is regulatory or compensatory; it is enough that a fee is recognised to be payable upon increase of the authorised capital of a company. 18. Counsel for the petitioner argues that if the abstract right under a licence enjoyed by a transferor company can become the property of the transferee company upon the transferor s merger, there should be no difficulty in the right to increase the authorised capital of the transferor company and the fee paid in that regard being vested in the transferee company upon amalgamation, for the transferee company to enjoy the benefit of such fee already paid. Though such analogy appears attractive, there are some other factors that differentiate the two situations. Licence, however personal it may be to the grantee, is a more tangible right than the notion that authorised capital denotes and the right that accrues to a company to increase its paid up capital to its authorised capital upon deposit of the requisite fee for the authorised limit. 19. Rights under a licence and right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny, be carried forward. Such matters again attach to the useless shell that is left behind. 21. Every company required to pay a fee for its registration and such fee gives a right to the company or its shareholders through the company to carry on business. Upon the merger of a company with another, the registration fee paid by the transferor company, and the rights corresponding thereto, are not carried forward to the transferee company. The transferee company had already paid a fee upon its registration and such fee would permit it to continue its business, receive assets under any scheme from another company or give up assets under any scheme to another company. The registration fee paid by the transferor company is lost to the transferor company upon the merger of its properties with another. There is no reason why the fee paid for the authorised capital of a transferor company should not be similarly lost. Conceptually, there is nothing that requires the fee paid for the authorised limit of capital to be treated on a higher pedestal than the fee paid by a company for its registration. If the one can be lost upon merger and dissolution, so can the other. 22. This leads t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not come into the transferee company and remains with the transferor company that is capable of being abandoned upon its dissolution. The matter would be different if the right were to be a more tangible right. Say, the shareholders of a transferee company do not approve of the transfer of one of the immovable properties of the transferor company in the proposed scheme of merger. The effect of that would be that there would be no merger at all; as in merger nothing is left behind in the transferor company. If, say, the shareholders of the transferee company were not to approve of the vesting of the rights relating to a registered trademark or a copyright, again there would be no complete merger though the right in such intellectual property is an intangible right which may as well be abandoned by the transferor company and its dissolution may be obtained with the goodwill in the excepted intellectual property right going a begging. 24. What is commercially known as merger of one company into another is; legally speaking, the merger of the properties and liabilities of the transferor company with the transferee company. Companies do not merge, their assets and liabilities may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g made in respect of several matters and for all of them being combined into one. Such abridged or facilitating procedure cannot affect the right of the revenue to receive fees that would otherwise be payable in respect of any part of the approval or for the purpose of giving effect to the approval. The procedure is simplified, the obligations under the various parts of the Act that are required to be complied with are not discharged or exempted and, payment of fees is much more than the compliance with statutory requirements. An order sanctioning a scheme may approve the reduction of share capital of a company, but only upon section 100 or other relevant provisions in that regard being complied with. The court sanctioning a scheme may permit the memorandum of association of a company being altered, but subject to the requirements of section 17 being met. The single-window clearance does not give a go-by to the requirements under section 100 for reduction of capital or the requirements of section 17 for alteration of the memorandum. Chapter V of Part VI of the Act merely empowers the sanctioning court to receive one composite application for approval under divers provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Companies Act and on payment of fees to the Registrar of Companies and stamp duty to the State Government and thus, paragraph 2.9 of Part II of the scheme of amalgamation should not be allowed. This contention is ill founded. In case of a merger like this where it is provided that the share capital of the transferor companies become the authorised capital of the transferee company, no such payment of fee to the Registrar of Companies or stamp duty to the State Government is payable. This issue is no more res integra and stands settled by series of judgments of various High Courts, including the judgment of this Court in the case of Telesound India Ltd., In re [1983] 53 Comp. Cas. 926 (Delhi). . . ." (p. 369) 32. The Delhi High Court thereafter referred to a judgment rendered by the Andhra Pradesh High Court, reported at Saboo Leasing (P.) Ltd., In re [2003] 117 Comp. Cas. 728 2 , which has also been cited by the petitioner in the present proceedings. Upon noticing the Saboo Leasing (P.) Ltd., In re case ( supra ), the Delhi High Court, ordered as follows : "In the aforesaid circumstances and having regard to the averments made in this petition and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the scheme by this Court is required to be filed before the Registrar for the purpose of its registration, there is no reason as to why it shall not be treated as notice to the Registrar as envisaged under sections 95 and 97 of the Companies Act. Inasmuch as, as discussed hereinabove, the object being the same, the necessary changes that are required to be made in the concerned register by the Registrar of Companies can be effected after receiving the certified copy of the order of this Court sanctioning the scheme. The sanction of the scheme by this Court has its own effect. It is not a mere act of the parties individually and volitionally. The scheme upon being sanctioned by this Court, becomes operational by virtue of the orders passed by this Court. In other words, by operation of law, such changes would come into effect. Therefore, it has statutory genesis and statutory character, but not mere individual acts of the companies. In that view of the matter, no separate notice informing the registrar under section 95 or 97 of the Companies Act need be given, unlike the other cases which do not require the sanctions of the Court, in my considered view, inasmuch as the scheme i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibed statutory form, upon increase of its authorised capital, or upon increase of its paid up capital. A company is required to inform the concerned Registrar, again in pre- scribed form, of the changes in its board of directors. The mailbox at a Registrar s office is also open to receive divers other intimations from companies within his territory and documents such as annual accounts of such companies. There is a statutory limit prescribed by the Act as to the time within which intimations in such prescribed manner must be deposited. It is onething for the Act to require intimation to be given and quite another for such intimation to be accorded the status of an application for approval of the matters covered by the intimation. If no intimation in the prescribed form is given, the court may in appropriate proceedings doubt that such decision was taken. A company or its officers may be visited by penal consequences upon a statutory form not being filed, or not being filed within the prescribed time. The failure to file such form will not impinge upon the company s right to take a decision or to implement it though it is susceptible to challenge, as is usually seen in proceedings u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td., In re [1994] 80 Comp. Cas. 289 (Bom.) (at pages 295, 296) and by the Gujarat High Court in the case of Maneckchowk Ahmedabad Manufacturing Co. Ltd., In re [1970] 40 Comp. Cas. 819 (at page 854). Therefore, both the objections of the Regional Director, Northern Region, Department of Company Affairs, Kanpur, are overruled." (p. 874) 37. There is no dispute with the proposition found in the judgment quoted by the Allahabad High Court or with the recognition in the Maneckchowk Ahemdabad Manufacturing Co. Ltd. In re case ( supra ), of the sanctioning court being the single window to receive approvals relating to matters provided other than in Chapter V of Part VI of the Act. But neither the quoted passage nor Maneckchowk Ahmedabad Manufacturing Co. Ltd., In re case ( supra ) judgment expressly, or by implication, refers to the merger, of authorised capitals. The principles laid down in the Maneckchowk Ahmedabad Manufacturing Co. Ltd., In re case ( supra ) cannot be invoked to facilitate the non-payment of requisite fees upon increase in the authorised share capital of the transferee company as Maneckchowk Ahmedabad Manufacturing Co. Ltd., In re case ( s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e [2004] 122 Comp. Cas. 854 (All.). I have perused the judgment of this Court rendered rejecting similar contentions as put forth by the Regional Director herein. Following the abovesaid decisions, I do not find any merit in sustaining the objections made by the learned Additional Central Government Standing Counsel. In the absence of any contra decisions, the objections both on the count of two notional limits not to be clubbed as well as the necessity for complying with sections 94 and 95 of the Companies Act are hereby rejected. As I had stated that the transferor companies are subsidiaries of the transferee company, a single application at the instance of the transferor company would be sufficient. In the scheme of amalgamation, all the assets and liabilities of the transferor companies are transferred to and vested in the transferee company. It is stated in clause 12 that the employees of the respective transferor companies would become the employees of the transferee company and, thus, the interest of the employees are taken care of. There is no objectionable feature in the scheme of amalgamation which is detrimental to either the creditors or the employees of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed capitals of the three concerned companies. The limits set by the authorised capitals of the transferor companies are completely irrelevant to the issue. If the Central Government, is right in seeking fees on the basis of the authorised or notional capital of a company, a matter which is not in issue here, it is equally right, in insisting that the transferee company must pay the additional fee for the consequential increase of its authorised capital following the sanction of a scheme of amalgamation. The sanction accords the transferee company the approval to increase its authorised capital, it does not afford it the luxury of enjoying the enhanced limit without tendering like requisite fee. 42. Fees payable under Schedule X to the Act have undergone multiple upward revisions in the last decade or so. The argument now being made by the transferee companies based on the concept of merger of authorised capitals is a result of the phenomenal increase in the quantum of fees payable. At the time that Maneckchowk Ahmedabad Manufacturing Co. Ltd., In re case ( supra ) or Telesound India Ltd., In re case ( supra ) were decided, the fees payable for increase in authorised c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rger does not require the surplus or deficit to be made part of the capital. 47. Paragraph 28 of AS-14 provides that an amalgamation may be either in the nature of a merger or in the nature of a purchase. Paragraph 29 sets down five conditions and an amalgamation is considered to be one in the nature or merger when all such conditions are satisfied. It is not in dispute that each of the five conditions set out in paragraph 29, is met in the present case and the amalgamation here is one in the nature of merger. 48. The petitioner cites paragraphs 31, 35 and revised paragraph 42 of AS-14 and submits that if such accounting norms do not require the additional stipulation as sought by the Central Government herein, to be met, the modification sought in the Regional Director s affidavit should be disregarded, and the petitioner should be permitted to retain clause 12.3 of Part II of the proposed scheme in the form as approved by shareholders of the concerned companies. Paragraphs 31, 35 and revised paragraph 42 need to be examined to assess the petitioner s contention : "31. When an amalgamation is considered to be an amalgamation in the nature of merger, it should be accounte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but also for deviation from the Accounting Standards with the reason for, and impact of such deviation explained in the notes. 50. Conventional wisdom - and the court is no more than a layman in the absence of adequate assistance in such specialised matters from the Central Government - would require the difference between the paid up capital received from a transferor company and the amount covered by the value of shares issued pursuant to a scheme by a transferee company, to be treated as part of its share capital. There would be no difficulty in such conventional wisdom being applied if it can be conceived that in every case there would be a surplus that would come into the till of the transferee company. But it is not necessary that each time there is an amalgamation, there is a surplus on such account that comes into the transferee company. The shareholders involved may approve of a share exchange ratio that would lead to a deficit on such account being received by the transferee company. The court would ordinarily not interfere with the commercial sagacity of the shareholders concerned in arriving at the share exchange ratio, unless clear prejudice to a group of sharehol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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