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TMI Blog2012 (8) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent-IRSL set up a second unit in Butibori near Nagpur for expansion of spinning business as well as for commencing polymer production. 4. It is the Applicant's case that the second unit at Butibori, Nagpur, including the housing colony had been constructed out of the funds of the spinning business. 5. In 2002, respondent-IRSL decided to vertically split its business by way of a Scheme of Arrangement. Under the said Scheme, spinning business was to be demerged as a going concern and transferred to IRTL, while the polymer business was to be retained by respondent-IRSL. 6. On 27th February, 2003, the Scheme qua IRTL was sanctioned by this Court, whereas Madhya Pradesh High Court on 24th March, 2003 sanctioned the Scheme qua respondent-IRSL. The relevant portion of the Scheme is reproduced hereinbelow:- "AND WHEREAS Indo Rama Synthetics (India) Limited ("IRSL") is a public limited company engaged in the manufacture and marketing of Polyester Staple Fibre ("PSF"), Partially Oriented Yarn ("POY"), Fully Drawn Yarn ("FDY"), Textile grade polyester Chip, Draw Texturised Yarn ("DTY") and Spun Yarn. IRSL today is the largest Integrated Polyster Company in India. Its businesses can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means and includes the following: (a) All properties and assets, movable and immovable, tangible and intangible, real and personal, corporeal and incorporeal, in possession or in reversion, present and future contingent or of whatsoever nature where-so-ever situated, as on the Appointed Date along with land (as mentioned in Schedule-1) and buildings plant and machinery, capital work in progress, vehicles, equipments, furniture and fittings, sundry debtors, investments inventories, cash and bank balances, bills of exchange, deposits, loans and advances etc. of Spinning Business of the Transferor Company at Pithampur and Butibori as mentioned in Schedule-II. (b) All leases or parts thereof, tenancy, rights and agency of the Transferor Company, pertaining to the Spinning Business and all other interests or rights in or arising out of or relating to such properties together with all rights, powers, interests, charges, privileges, benefits, entitlements, industrial and other licences (and/or conditions attached thereto), registrations, quotas, trademarks, patents, copyrights, brand names, Import quotas, liberties, easements, advantages pertaining to the Spinning Business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was changed to Indo Rama Projects & Investments Limited and a fresh Certificate of Incorporation in the changed name was issued on November 29, 1994. The Company has once again changed its name to its present name and a fresh Certificate of Incorporation consequent upon change of name was issued on July 16, 2002. The Transferee Company is having its Registered Office at Mohan Dev, 13, Tolstoy Marg, New Delhi-110001. ** ** ** PART-II THE SCHEME Transferred/Demerged Undertaking: 3. With effect from the Appointed Date, all the properties, estates and interests of the Transferor Company in the Spinning Business in its entirety (including but not restricted to its assets, liabilities, rights, licences, benefits, obligations etc.) shall, pursuant to Section 394(2) of the Act and without any further act or deed be transferred to and vested in or be deemed to have been transferred to and vested in the Transferee Company on a "going concern" basis, subject to all existing charges, mortgages, liens, encumbrances, if any created/existing in favour of banks and/or financial institutions and/or other lenders. ** ** ** 6. The Transferor Company currently generates its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue shall arise between the parties hereto or any of their shareholders, creditors, employees and/or any other person, as to the construction hereof or as to any account, valuation or apportionment to be taken or made of any asset or liability transferred under this Scheme or as to the construction hereof or as to any account, valuation or apportionment to be taken or made of any asset or liability transferred under the Scheme or as to the accounting treatment thereof or as to anything else contained in or relating to or arising out of this Scheme, the same shall be referred to the sole arbitration of Shri O.P. Lohia, resident of R-69, Greater Kailash-I, New Delhi-110048 or any person nominated by him whose decision shall be final and binding. The Courts in New Delhi shall have exclusive jurisdiction in respect of any disputes arising out of or relating to this Scheme. ** ** ** SCHEDULE-I DETAILS OF THE IMMOVABLE PROPERTY OF SPINNING BUSINESS 1. Plot No.51-A The Plot of land in the Industrial Area No.3,Pithampur, Tehsil Dhar, District Dhar comprising of an area measuring 1,25,000 sq. mts. or there about, held by way of Lease Deed dated July 23, 1988 for a period o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taluka and Registration Sub-District & Registration District Nagpur containing by admeasurement 404607 sq. mtrs or thereabouts. The land is held by way of Lease for 95 years dated July 29, 1994 executed with the Maharashtra Industrial Development Corporation. The Plot is surrounded by: On or towards the North by: MIDC Road On or towards the South by: MIDC Land Plot No.A-31/P On or towards the East by : MIDC Land Plot No. A-31/P and A-31/2 On or towards the West by: MIDC Boundary and Plot A-31/P-1 SCHEDULE-II Details of Assets and liabilities of Spinning Business as on April 1, 2002 Total Assets (Rs. Lacs) 1. Gross Fixed Assets 33,940.87 Accumulated Depreciation (13,247.04) Net Fixed Assets Including revaluating reserves 20,693.83 Less: Revaluation Reserves 5,798.46 Net Fixed Assets 14,895.37 2. Capital WIP 12.82 3. Deferred Tax Assets 1,422.70 4. Inventory 2,152.94 5. Debtors 1,554.77 6. Cash & Bank 47.38 7. Other Curr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. Housing Colony (Club, Cable TV and Recreation and Security for Colony maintenance etc.) Admin and HR Deptt. Employee Ratio 8. On 17th February, 2006, present Applicant executed a Share Purchase Agreement with Mr. O.P. Lohia. According to the said agreement, the Applicant and respondent-IRSL were to negotiate mutually acceptable terms for sharing common resources. The relevant portion of the Share Purchase Agreement is reproduced hereinbelow:- "Article 5A Covenants of the Parties (a) The Parties shall negotiate in good faith, to draw up mutually acceptable terms of sharing between the Company and IRSL, of the common resources that are currently being shared between them. The terms of sharing shall be such that it ensures that the resources would be available to the Company on such commercial terms as would suffice to be arms length transactions under Indian income tax law and so that the business of the Company is not disrupted. " 9. On 20th December, 2006, a Scheme of Amalgamation of Applicant with IRTL was approved by this Court under Section 391 of the Act, 1956. 10. It is the Applicant's case that in 2007 when respondent-IRSL demanded more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er that the property transferred became the property of the resulting company. 17. According to him, retaining an undertaking's property and then making it available to the resulting company as a resource under a contract was not in accordance with the statutory requirement. 18. Mr. Kapur stated that if immense costs were to be incurred by the Transferee Company, the transferred undertaking could not be regarded as a going concern apart from the fact that such incomplete transfer would not satisfy the requirement of sub-Section (i) of Section 2(19AA) of the Act, 1961. 19. Mr. Kapur submitted that the law postulated that the undertaking being hived off should be a going concern and it was irrelevant whether the residual undertaking was a going concern or not. According to him, a common asset which could not be divided into two, would have to be transferred to the demerged/hived off undertaking in order to satisfy the requirement of Section 2(19AA) of the Act, 1961. 20. Mr. Kapur pointed out that the Scheme did not refer to the workers/Housing colony or to any infrastructure. Thus, according to him, the workers/Housing colony stood transferred by operation of law to the resulting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitute a running business, which should be capable of carrying on uninterruptedly with such assets and liabilities alone. 26. Mr. Arvind Nigam further submitted that term "Going Concern'' was an accounting concept that implied that the business would continue to exist and operate for an indefinite period in the future. Accounting Standard (AS)-1, issued by the Institute of Chartered Accountants' of India, which dealt with Disclosure of Accounting Policies, considered ''Going Concern'' to be one of the generally accepted fundamental accounting assumption underlying the preparation and presentation of financial statements and is: ''a. Going Concern The enterprise is normally viewed as a Going Concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations.'' 27. Statement on Standard Auditing Practices (SAP) 16, "Going Concern'', issued by the Council of the Institute of Chartered Accountants of India, provides that -- ''When a question arises regarding the appropriateness of the Going Concern assumption, the auditor should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed below: 29. From the above, it is evident that for a sale to be termed as a 'slump sale', it is not essential that all the assets and liabilities must be transferred. Even if some assets and liabilities are retained by the transferor, the sale would not lose the character of being a slump sale, if the transfer is of a Going Concern, on that basis and the transferee is in a position to carry on the business without any interruption. In the present case, the right to use the technical know-how developed by the assessee was granted by the assessee to the transferee against the payment of a separate consideration. The proprietary rights therein were retained till 30-6-2000. On facts, in view of the above numerous judicial pronouncements, it cannot be said that what the transferee acquired was not a Going Concern. Rather, after the transfer, the transferee carried on the business without any disruption therein. In West Coast Chemicals & Industries Ltd.'s case (In Liquidation), F.X. Periera & Sons (Travancore) (P) Ltd.'s case, Premier Automobiles Ltd.'s case and Raka Food Products' case, amongst others, it has been held that in the case of a sale of an Undertaking as a whole, on a Goi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even at the time of demerger, only around 20% of the employees of demerged Spinning business were actually residing in those flats and rest were staying in either rented or own accommodation outside the housing colony. According to him, the Applicant had carried on business of the demerged Undertaking uninterruptedly for nearly a decade without transfer of the housing colony and consequently, he stated that the present application was devoid of merits. 33. In rejoinder, Mr. P.V. Kapur, learned senior counsel for Applicant submitted that for the purposes of ascertaining the true intent of the parties, Section 2(19AA) of the Act, 1961 had a bearing. According to him, it was represented to the shareholders of the company as also to this Court in 2003 that all the assets of the undertaking within the meaning of Section 2(19AA) of the Act, 1961 were being transferred in such a manner that their title would stand transferred to and vested in IRTL and it was on this representation and understanding that the then Company Court sanctioned the Scheme of Arrangement. 34. Mr. P.V. Kapur further submitted that the judgments relied upon by Mr. Arvind Nigam, learned senior counsel for responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that-- (i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger; (ii) all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger; (iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger; (iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis; (v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany by virtue of the demerger''. The expression ''being transferred'' is relatable to such assets as are being transferred to make it a going concern. Moreover, if the applicant's submission is accepted it would put all the schemes of demerger in a 'straightjacket' format and it would also infringe upon the two company's freedom to negotiate with regard to the transfer of common assets. This Court is of the view that while framing a scheme of demerger, the existing and the resulting companies after ensuring that both of them are a going concern, are free to negotiate which common asset/liability would be transferred to which undertaking. After all, it is on this asset/liability transfer basis that share swap ratio are assessed, determined and allotted. 44. The Applicant's submission also overlooks the primary function of the Company Court, namely, to ensure that the Scheme serves larger public interest, that means, to ensure both the existing and resulting unit are economically and technically viable. Consequently, merely because certain common assets and liabilities have not been transferred, the transaction would not cease to be demerger of an Undertaking, provided the assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Scheme of Arrangement which refers to Section 2(19AA) of the Act, 1961 is accepted then it would amount to re-writing the Scheme of Arrangement, which this Court cannot do in the present proceedings. In fact, the Supreme Court in S.K. Gupta and Another v. K.P. Jain and Another [1979] 3 SCC 54 has held as under:- "13. When a scheme is being considered by the Court, in all its ramifications, for according its sanction, it would not be possible to comprehend all situations, eventualities and exigencies that may arise while implementing the scheme. When a detailed compromise and/or arrangement is worked out, hitches and impediments may arise and if there was no provision like the one in Section 392, the only obvious alternative would be to follow the cumbersome procedure as provided in Section 391(1), viz., again by approaching the class of creditors or members to whom the compromise and/or arrangement was offered to accord their sanction to the steps to be taken for removing such hitches and impediments. This would be unduly cumbersome and time-consuming and, therefore, the legislature in its wisdom conferred power of widest amplitude on the High Court under Section 392 not only to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme was sanctioned in the year 2003, both the Transferor and Transferee Companies were owned and managed by O.P. Lohia group but now both the entities are owned and managed by different business groups. Consequently, to ensure that the scheme sanctioned by this Court is properly implemented, this Court modifies only the dispute redressal mechanism in Clause 36 of the Scheme by directing that in the event of any dispute, doubt or issue arising between the parties, the same shall be referred to a sole arbitrator to be appointed with the consent of the parties. If, however, no consensus is reached between the parties, then the sole arbitrator shall be appointed by the concerned Court. Accordingly, Clause 36 of the Scheme shall now read as under:- "36. If any dispute, doubt or difference or issue shall arise between the parties hereto or any of their shareholders, creditors, employees and/or any other person, as to the construction hereof or as to any account, valuation or apportionment to be taken or made of any asset or liability transferred under this Scheme or as to the construction hereof or as to any account, valuation or apportionment to be taken or made of any asset or lia ..... X X X X Extracts X X X X X X X X Extracts X X X X
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