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TMI Blog2007 (9) TMI 402X X X X Extracts X X X X X X X X Extracts X X X X ..... IN COMPANY APPLICATION NO. 289 OF 2007 - - - Dated:- 21-9-2007 - RAMESH RANGANATHAN, J. V.S. Raju for the Appearing Parties. ORDER 1. In this petition, filed under sections 391 and 394 of the Companies Act, 1956, the petitioner-transferor company prays that the scheme of amalgamation, as approved by the respective Board of Directors of the transferor and transferee companies, be sanctioned and confirmed by this Court so as to bind all members, creditors and employees of the petitioner, for an order that the petitioner be dissolved without the process of winding up, for an order that the petitioner shall, within thirty days of its receipt, cause a certified copy of the order to be delivered to the Registrar of Companies for registration, that on such certified copy being delivered, the Registrar of companies should take necessary consequential action in respect of the petitioner including its dissolution, and that the parties to the scheme, or other persons interested, be at liberty to apply to the High Court for any direction that may be necessary to carry out the scheme of amalgamation. 2. The petitioner was incorporated in the State of Andhra Pradesh on 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d publication of the petition in Andhra Jyothi (Telugu daily) and New Indian Express (English Daily) (Hyderabad editions), and directed notice to the Central Government as well as to the Official Liquidator. 6. A brief reference can usefully be made to the relevant provisions of the Act and the Rules. Under section 391(1) of the Companies Act, while examining a proposal of compromise or arrangement ( a ) between a company and its creditors or any class of creditors or ( b ) between a company and its members or any class of members, the Court has the power, to order that a meeting of the creditors or class of creditors or of the members or class of members be held and to issue directions on the manner in which such a meeting should be conducted. Under section 391(2), if a majority of the creditors or class of creditors, or members or class of members, representing three-fourth in value of the persons voting in the meeting, approve the compromise or arrangement it would, on its being sanctioned by the Court, bind all the creditors, all the members and the company. Before sanctioning a scheme of compromise or arrangement, the proviso to section 391(2) requires the Court to satisfy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cription and liabilities to include duties of every description. Under clause ( b ), while a transferee company does not include any company, other than a company within the meaning of the Companies Act, the transferor company includes any body corporate whether a company or not. Section 394A requires the Court to give notice of every application made to it, under section 391 or 394, to the Central Government and take into consideration representations, if any, made to it by that Government before passing any order. 8. Rules 67 to 87 of the Companies (Court) Rules, 1959 are the rules relating to compromise or arrangement under sections 391 to 394. Under rule 69, upon hearing of the summons, the Judge shall give such directions as he may think necessary in respect of (1) determining the class or classes of creditors and/or of members whose meeting or meetings have to be held for considering the proposed compromise or arrangement; (2) fix the time and place of such meeting (3) appoint a chairman for the meeting (4) fix the quorum and the procedure to be followed at the meeting including voting by proxy; (5) the procedure for determining the value of the creditors and/or the mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk fit. A certified copy of the order is required to be filed before the Registrar of Companies within 14 days or within such other time as may be fixed by the Court. The order is required to be filed in Form-41 with such variations as may be necessary. Rule 83 relates to directions at the hearing of the application and, thereunder, upon hearing of the summons, the Court may make such order or give such directions as it may think fit as to the proceedings to be taken for the purpose of reconstruction or amalgamation as the case may be including, where necessary, an enquiry as to the creditors of the transferor company and the securing of the debts and claims of any dissenting creditor, in such manner as the Court may deem just. Rule 84 requires the order under section 394 to be in Form-42 with such variations as the circumstances may require. Approval of the scheme of amalgamation by the court: scope of enquiry : 9. Before sanctioning a scheme of arrangement the Court must be satisfied that the statutory provisions are complied with, that in case a meeting, of the members or a class of members or of the creditors or a class of creditors, is called for, the class is fairly w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 391(1) requires the Court to direct that a meeting of the members be called for. This Court, by order in C.A. 289 of 2007 dated 20-2-2007, had dispensed with the requirement of holding a meeting of the shareholders as all shareholders had submitted their affidavits/letters of consent to the proposed scheme of amalgamation. Scheme of arrangement between the company and its members : should a meeting of the creditors be held? 12. While the sole secured creditor of the transferor company, M/s Centurian Bank of Punjab, for Rs. 44,021 and its unsecured creditors for Rs. 93,98,865 have given individual letters of consent to the scheme of amalgamation, the sundry creditors, as reflected in the Balance sheet under the head "Current liabilities", have not. 13. A creditor, who has a debt due from the transferor company, would, on the scheme of amalgamation being sanctioned, be required to look not to the transferor for repayment of his dues but to the transferee with whom he neither had any dealings in the past nor privity of contract prior to its substitution in the place of transferor. In a given case, the transferee company may have negative assets or may not have suffi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., In re [1983] 53 Comp. Cas. 926 (Delhi) and Nav Chrome Ltd. s case ( supra ). 16. A slightly different view was taken by D.K. Karnik, J. of the Bombay High Court, in ICICI Bank Ltd., In re [2002] 36 SCL 682 to quote : "13. I have my own doubts about the view taken by the Delhi High Court in expressing that the creditors have no right to participate in the process of consideration of the Scheme of Arrangement between the Company and its members. Section 391(1) gives a discretion to the Court to convene a meeting of the creditors or any class of them. The Court would exercise the discretion by convening a meeting of creditors if the creditors are likely to be adversely affected by an arrangement between the company and its members. Attending the meeting and voting are steps of participating in the process of consideration of the Scheme. . . . 14. I am of the firm view that while considering any Scheme of Arrangement or Compromise proposed under sections 391 to 394 of the [Companies] Act the Court is duty-bound to consider the interests of all the creditors. What importance should be given to the fact that the creditors are likely to be affected would vary from c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the statutory provisions and that the Court cannot confirm the scheme even if it considers that the class concerned has been fairly dealt with or that it would have approved the scheme ( Palmers Company Law ), would the Court be justified in examining the scheme and recording its satisfaction that the interests of the creditors are not affected, when these are matters which the creditors should have been permitted to examine and decide for themselves in a meeting to be called for this purpose? 18. If the jurisdiction of the Company Court, in examining a scheme of arrangement, is peripheral, supervisory and not appellate, since it does not have the expertise to delve deep into the commercial wisdom of the members who have ratified the scheme by the prescribed majority, Miheer H. Mafatlal s case ( supra ), on what basis would the Court decide that, in the facts and circumstances of a given case, a meeting of the creditors or a class of them should or should not be held to ascertain whether they approve of the scheme or not? 19. Section 391(1), enables the Court, on the application of a company or a creditor or a member of the company, to order a meeting of the credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge? These are several questions which need answers. Lifting the corporate veil: permissible in cases where a holding company and its subsidiary are involved 20. It is, however, not necessary for us to seek answers to the aforesaid questions in the present case, as a wholly owned subsidiary is sought to be amalgamated with its holding company. Under section 4(1)( a ) and ( b )( ii ) of the Companies Act, a company shall be deemed to be the subsidiary of another only if that other controls the composition of its Board of Directors or where the other company holds more than half, in nominal value, of its equity share capital. In the present case, the entire nominal value of the equity share capital of the transferor is held by the transferee. 21. The legal entity of the Corporation is separate from that of its shareholders; it bears its own name and has a seal of its own; its assets are separate and distinct from those of its members; it can sue and be sued exclusively for its own purpose; its creditors cannot obtain satisfaction from the assets of its members; the liability of the members or shareholders is limited to the capital invested by them. Similarly, the creditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duties to anyone in relation to the management of the subsidiary companies, and that, therefore, the agreement cannot be construed as entitling them to assign any such duties to the respondent. The argument was rejected by Lord Reid with the observation : "This is too technical an argument", "This is an argument in re mercatoria , and it must be construed in the light of the facts and realities of the situation." 24. The aforesaid judgments, in which the corporate veil was lifted, were quoted with approval by the Supreme Court in Delhi Development Authority v. Skipper Construction Co. (P.) Ltd. [1996] 4 SCC 622 and New Horizons Ltd. v. Union of India [1995] 1 SCC 478. In State of UP v. Renusagar Power Co. [1988] 4 SCC 59 the Supreme Court lifted the veil to hold that Hindalco, the holding company, and Renusagar Power Co., its subsidiary, should be treated as one concern and the power plant of Renusagar must be treated as the own source of generation of Hindalco and Hindalco would be liable to payment of electricity duty on that basis. It was observed : " 66. It is high time to reiterate that in the expanding horizon of modern jurisprudence, lifting of corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial position is not as strong as that of the transferee. It cannot, therefore, be said that the creditors of the transferor company, (which is yet to wipe off its accumulated losses), would be adversely affected on amalgamation with the transferee. Viewed in the light of the aforementioned facts, the submission of Sri V.S. Raju, learned counsel for the petitioner, that the net worth of the transferee company is more than adequate to protect the interests of the creditors of the transferor company cannot be said to be without basis. Relevant date up to which information regarding the latest financial position and the latest audited balance sheet, should be disclosed 27. Under the proviso to section 391(2), the petitioner-company must disclose all material facts, including its latest financial position and the latest auditors report on its accounts. The words "latest auditors report" connote the latest auditors report available or which should normally be available at the time of filing of the petition. There will always be a time gap between the date on which the auditor audits the accounts and prepares his report, the date on which the company petition is filed and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant provisions under the Companies Act have been complied with by the transferor and that, on verification of the material papers, books and records made available to him by the petitioner, he is of the opinion that the affairs of the transferor company do not appear to have been conducted in a manner prejudicial to the interests of its members or to public interest. As such the requirement of the second proviso to section 394(1) is also satisfied. 30. The Registrar of Companies has filed an affidavit, on behalf of the Central Government under section 394A, raising two objections to the scheme of amalgamation (1) that the transferee had not approached the High Court seeking dispensation of the meeting of the creditors and that the scheme may be considered subject to production of consent letters of the secured creditors of the transferee company, and (2) that Clause (10) of the Scheme, which contemplates combining the authorized capital of the transferor with the transferee, is impermissible since the authorized capital is the notional limit up to which the company can increase its paid up capital, that two notional limits cannot be clubbed together, that, since the authorized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to include property, rights, powers of every description and "liabilities" to include duties of every description. The authorized capital, a liability of the transferor company, also stands transferred to the transferee, on an order, sanctioning the scheme of amalgamation, being passed by the Court under section 391 read with section 394(1) (4)( a ) of the Companies Act. Section 94(1)( a ) enables a limited company having a share capital, if so authorized by its Articles, to alter the conditions of its Memorandum, to increase its share capital by such amount as it thinks expedient. Under section 97(1), where a company has increased its authorized capital, it shall file with the Registrar a notice of the increase of the capital within 30 days after passing of the resolution authorizing the increase and the Registrar shall record the increase and make any alterations which may be necessary in the Company s Memorandum or Articles or both. 34. In Telesound India Ltd. s case ( supra ), the Delhi High Court observed: "Amalgamation of a company with another or an amalgamation of two companies to form a third is brought about by two parallel schemes of arrangements entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a notion ignores the peculiar position of amalgamation in company law and its true legal incident. It is for historical reasons that the device of amalgamation was built into the company law for facilitating the merger of companies, inter alia, with a view to help restoration of sick units to health, better, more effective and economical management of the corporate sector to ensure continued production, increased employment avenues and generation of revenues. Section 72A of the Income-tax Act is one of the incentives for this kind of absorption of one company into another. On amalgamation the transferor-company merges into the transferee-company shedding its corporate shell, but for all purposes remaining alive and thriving as part of the larger whole. In that sense the transferor-company does not die either on amalgamation or on dissolution without winding up under sub-section 1 of section 394. It is not wound up because it has merged into another. Winding-up is unnecessary. It is dissolved not because it has died, or ceased to exist, but because for all practical purposes, it has merged into another forming part of one corporate shell. The dissolution is the death of its indep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd., In re [2004] 60 CLA 309 (AP), this court observed : ". . .Having regard to the objections raised by the learned Registrar of Companies, it is appropriate here to consider sections 95 and 97 of the Act. A perusal of both the provisions shows that in respect of consolidation of share capital or conversion of shares into stock, notice has got to be issued to the Registrar by the company within 30 days after such consolidation or conversion, in which event the Registrar shall record such notice and make necessary alterations in the memorandum or articles of association. The default entails penal consequences under sub-section (3) of the said section. Similarly, notice in the event of increase of share capital of the members shall be given to the Registrar of Companies within 30 days after passing of the resolution by the Board of directors authorizing the increase and upon receiving such notice, the Registrar shall include the particulars and class of shares affected and conditions if any subject to which the new shares are to be issued. The default on the part of the company again entails penal consequences under sub-section (3) of section 97. The object of sections 95 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... second objection raised by the learned Registrar of Companies merits no consideration. As regards first objection as to the cancellation of equity investment, the scheme shall be suitably modified by making it conditional by incorporating this objection...." [Emphasis supplied] (p. 311) 39. In Kemira Laboratories Ltd., In re [2007] 77 SCL 174 a Division Bench of this Court held: ". . .Now, all the Judges who have decided that no notice is necessary under section 97 of the Act, have relied on a judgment of the Delhi High Court Telesound India Ltd., In re [1983] 53 Comp. Cas. 926 . On merger, the two companies seize to exit, i.e., to say that neither the transferee company remains nor the transferor company remains, but a third company comes into existence on the basis of the scheme sanctioned by the Court. In such a situation, it is hard to accept that there would be an increase in the share capital of one of the companies. . . . 11. In view of the Law laid down by this Court and also the judgment of the Delhi High Court in Telesound India s case ( supra ) to which I am in respectful agreement, the order passed in C.P. No. 199 of 2003 to the effect that Clause 10 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it would be open to the Court to examine the scheme before imposing it on the unwilling/dissenting members of the class. Even if all the statutory formalities are duly carried out, the Court has still the discretion either to sanction or refuse to sanction the scheme - Bank of Baroda Ltd. s case ( supra ) and Bengal Hotels (P.) Ltd., In re [1977] 47 Comp. Cas. 597 (Guj.). 42. The amalgamation must fulfil some felt need, some purpose, some object and that must have some co-relation with public interest. The Court is charged with a duty to ascertain whether the affairs, of both the transferor and the transferee, have been carried on not only in a manner not prejudicial to its members but also that it is not against public interest. The expression "public interest" must take its colour and content from the context in which it is used - Union of India v. Ambalal Sarabhai Enterprises Ltd. [1984] 55 Comp. Cas. 623 (Guj.). The Indian law, a departure from the English law, enjoins a duty on the Court to examine objectively whether the merger is, or is not, violative of public interest. What would be in public interest cannot be put in a straitjacket. It is a dynamic concept w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficial to the class represented by them for whom the scheme is meant - Miheer H. Mafatlal s case ( supra ). Unless the scheme is shown to be contrary to any law or is such as to shock the conscience of the court or is patently unfair to the members or creditors or any class of them, or is against public interest or against public policy, the court should not come in the way of business by rejecting a bona fide scheme under section 391 - Zee Interactive Multimedia Ltd. s case ( supra ). 45. The petitioner-transferor company is presently engaged in the business of global customer management and billing (CM B) solutions provider to Pay TV, Broadband, Triple-play and IPTV services and in providing integrated billing and customer care solutions and services to video, data and content service providers. The transferor is a wholly owned subsidiary of the transferee company which is also engaged in similar activities. The underlying objects of the scheme is to synergise operations of both the companies and pool its resources to give more thrust and integrate their business facilities and infrastructure under one single unit, which would give them the financial edge necessary to w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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