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TMI Blog2015 (12) TMI 1085X X X X Extracts X X X X X X X X Extracts X X X X ..... of cultivation and sale of tea. It is stated that Transferor Company has maintained proper Books of Accounts as required by law and its annual accounts have been audited as on March 31, 2012. Value of the assets of the Transferor Company is Rs. 19,53,87,760.00 whereas, liabilities of the Transferor Company stood at Rs. 6,26,27,175.00, thus excess of assets over liabilities stood at Rs. 13,27,60,585.00. It is stated that subsequent to March 31, 2012, there has been no substantial change in the financial position of the Transferor Company, except what would be consequent to usual course of business. The Transferee Company was incorporated on 01.06.1915 under the provisions of the Indian Companies Act, 1913 in the name of Barasali Tea Company Pvt. Ltd. It is an existing public limited company within the meaning of the Act and is presently known as B & A Ltd. w.e.f. 06.12.2000. The registered office of the Transferee Company is situated at Indu Bhawan, MG Road, Jorhat. Authorized share capital of the Transferee Company is Rs. 10,00,00,000.00 divided into 50,00,000 equity shares of Rs. 10.00 each and 5,00,000.00 Redeemable Cumulative Preference Shares of Rs. 100.00 each. The issued, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en over by Rockland Realty Pvt. Ltd. Thus Transferor Company came under the same management and control as the Transferee Company. Operation of the Govindapur Tea Estate resumed thereafter. It is stated that under the new management, the said tea estate has been able to achieve a turn around by producing 8.5 lakh kgs of tea in green leaf form. Business of the Transferor Company has revived and has stabilized. It has good potential now. However, the Transferor Company does not have a processing unit of its own and has to sell its tea leaf. It is stated that Govindapur Tea Estate is situated at a distance of 55 kms from Mokrung Tea Estate belonging to the Transferee Company, which has its own processing unit having a capacity of 20 lakh kgs of black tea, but is presently under-utilized. In case of amalgamation, business of both the companies can be combined together, and can be carried out more conveniently and advantageously. On the one hand, the amalgamation will enable the Transferee Company to expand its business with an established tea estate and utilize its surplus tea processing capacity more gainfully in processing the larger quantities of its own production of green leaf, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said scheme of amalgamation. The Court appointed Chairman for the said meetings. Notices of the said meetings were sent to the equity share holders of both the companies by post and also published in two local news papers on 27.02.2013, "The Assam Tribune" in English and the "Dainik Janambhumi" in Assamese. On 23.03.2013, meetings of the equity share holders of the two companies were held separately. In the meeting of the equity share holders of the Transferor Company, which was attended by five equity share holders entitled together to 503 equity shares of Rs. 1,000.00 each fully paid up, the scheme was approved. Similarly, in the meeting of the equity share holders of the Transferee Company, which was attended by 19 equity share holders entitled together to 15,27,938 equity shares of Rs. 10.00 each fully paid up, the scheme was approved. Both the companies approved the scheme without any modification. Proceedings of the aforesaid two meetings were placed before this Court by the Court appointed Chairmen. Respective Boards of Directors of the two companies had also approved the scheme of amalgamation. It is stated that the Transferor Company and the Transferee Company are under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the parties to maintain status quo in respect of the aforesaid block of shares lying in the demat account of HDFC Bank. Another title suit being TS No.47/2012 was filed by Hemendra Prasad Barooah and others against the Objector and 4 others in the Civil Court at Jorhat, questioning the transfer of 2,21,230 shares of Rs. 10.00 each of the Transferee Company by Late Usha Barooah, wife of Hemendra Prasad Barooah to the Objector. In the said suit, an injunction application was also filed, which was registered as Misc.(J) Case No.32/2012. Learned Civil Judge, Jorhat passed order dated 29.08.2012 restraining defendant No.1 i.e., the Objector from selling, dealing with, transferring, alienating, encumbering or exercising voting right over the said 2,21,230 shares and also restrained the Transferee Company and the concerned bank i.e. HDFC Bank Ltd. from making payment of any dividend on the said shares to the Objector. However, the aforesaid order dated 29.08.2012 was modified by this Court in FAO No.19/2012 filed by the Objector. Vide order dated 09.11.2012, this Court directed release of the dividend to the Objector for the financial year 2011-2012 without prejudice to the rights of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge Board of India (SEBI) dated 14.02.2013, which lays down certain steps to be taken prior to submission of the scheme before the High Court. In view of non-compliance with the SEBI circular dated 14.02.2013, sanction should not be granted. A reply-affidavit has been filed by the petitioners to the affidavit filed on behalf of the Objector. It is stated that objector does not represent any class of shareholders and is not a bonafide shareholder of the Transferee Company. Personal and private disputes that existed between the Objector and her father and other persons cannot be a ground to oppose amalgamation of the two companies, which decision has been taken on the basis of sound business policy. It is stated that Objector was appointed as a whole time Director of the Transferee Company w.e.f. 01.06.2010. However, she did not devote any time and attention to the affairs of the company and did not even attend a single meeting of the Board of Directors. Taking the view that her continuance as whole time Director was not in the interest of the Company, resolution dated 19.09.2011 was adopted by the Board of Directors terminating her appointment as Director of the Transferee Company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Transferee Company. According to him, the provision to pay 786 equity shares of Rs. 10.00 each of the Transferee Company against one equity share of Rs. 1,000.00 of the Transferor Company is not at all justified considering the status of the two companies. The balance sheet of the Transferor Company does not portray the correct picture of the said company, having a direct impact on the share exchange ratio of 1:786. He submits that the scheme appears to be against the interest of the minority shareholders and is meant to give exclusive benefits to the promoter group. Petitioners have filed reply-affidavit to the affidavit of the Regional Director. Contentions made by the Regional Director have been denied. In fact, his role has also been questioned. It is stated that the exchange ratio of shares has been fixed on the basis of the earning capacity of the Transferor Company and not on the basis of its net asset value or net worth as appearing from its balance sheet as alleged by the Regional Director. The exchange ratio has been fixed on the basis of profitability and earnings of the Transferor Company and not on basis of the net worth of the two companies. Value of assets a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the petitioner since she is the only member of the Barooah family residing in India and concerned with the affairs of the Transferee Company. The scheme has been devised to dilute her share holding and control in the Transferee Company. When the scheme was devised, litigation was already pending before the Company Law Board, u/s 111 A of the Act instituted by the father seeking to de-register her name from the share register of the company in respect of 8,61,918 shares which stood jointly in the name of her father and herself. The said petition was dismissed by the Company Law Board. No notice of any share holders meeting to consider the scheme was served on her. It is stated that following the death of her father, an attempt was made by the said group of employees of the Transferee Company to usurp the control over the company alongwith its valuable assets and properties. Complaining of mismanagement and oppression committed by the present management in running the affairs of the Transferee Company, she has filed a company petition u/s 397 and 398 of the Act before the Company Law Board, Kolkata Bench which is now pending for disposal wherein interim order was passed on 24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he executor subject to orders passed in Title Suit No.41/2012. Conduct of the Objector has been highlighted to contend that she was never concerned about the affairs of the Transferee Company either as a Director or as a share holder. Her elder sister Smti. Anuradha Farley is now the Chairperson of the company. All allegations made in the supplementary affidavit have been denied. It is reiterated that Objector on her own holds only 3.06% of the share holding of the Transferee Company. Late Hemendra Prasad Barooah during his lifetime had disowned and dis-inherited the Objector from his estate. After denying and disputing the allegations made by the Objector, petitioners seek sanctioning of the scheme. Mr. R. Banerjee, learned Senior Counsel appearing on behalf of the petitioners submits that the scheme presented before the Court jointly by the two companies i.e. by the Transferor Company and by the Transferee Company whereby the Transferor Company would be merged with the Transferee Company, is in the best interest of both the companies, their share holders, employees etc. It is a decision based on practical logic backed by sound business and commercial considerations. All formali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid block of shares belongs entirely to him. Another civil suit was instituted questioning the gift deed whereby a block of 2, 21, 230 shares were gifted to the Objector by her mother late Usha Barooah. Changes were made in the Articles of Association of the Transferee Company adversely affecting the interest of the Objector in respect of the joint share holding. It is in the light of these developments that the scheme is required to be critically examined. The Transferor Company was for all intent and purport a sick concern. Proceedings were instituted before this Court for voluntary liquidation of the said company. It was at that stage that Rockland Realty Private Limited, a company formed entirely of the members of the Board of Directors and employees of the Transferee Company took over the management of the Transferor Company by purchasing the shares to the extent of 87%. He submits that it is an admitted position that Govindapur tea estate, which is the only tea estate belonging to the Transferor Company, had stopped production in the year 2005. Comparing the financial and market standing of the two companies, learned Senior Counsel for the Objector submits that the exchange r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the Court is satisfied that the company or any other person who has made the application under sub-section (1) has disclosed to the Court all material facts relating to the company. As per sub-section (3), an order made by the Court under sub-section (2) shall have no effect until a certified copy of the order made by the Court has been filed with the Registrar of Companies. During the pendency of the application, the Court may stay the continuation of any suit or proceeding against the company on such terms as the Court thinks fit [sub-section (6)]. Section 392 of the Act deals with power of Court to enforce compromise and arrangement. As per sub-section (1), where the Court makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company, it shall have power to supervise the carrying out of the compromise or the arrangement and may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement. Under sub-section (2), if the Court is satisfied that a compromi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the light of the aforesaid provisions. It was held that the jurisdiction of the Court in sanctioning a scheme of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical test. A Company Court does not exercise an appellate jurisdiction. It exercises a jurisdiction which is founded on fairness. The Court's obligation is to be satisfied that valuation was in accordance with law and it was carried out by an independent body. The determination should not be contrary to law and should not be unfair to the shareholders of the company. The Court must be satisfied that the scheme for amalgamation or merger is not contrary to public interest - it should not be unfair or contrary to public policy or unconscionable. The Apex Court examined in detail the provisions of sections 391 and 393 of the Act in Miheer H. Mafatlal Vs. Mafatlal Industries Ltd., reported in AIR 1997 SC 506. That was a case where Mafatlal Fine Spinning and Manufacturing Company Ltd. being the Transferor Company was to be amalgamated with Mafatlal Industries Ltd. being the Transferee Company. The appellant was one of the Directors of the Transferor Company. Since the registered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is an unconscionable or an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. Consequently it cannot be said that a Company Court before whom an application is moved for sanctioning such a scheme which might have got the requisite majority support of the creditors or members or any class of them for whom the scheme is mooted by the concerned company, has to act merely as a rubber stamp and must almost automatically put its seal of approval on such a scheme. It is trite to say that once the scheme gets sanctioned by the Court it would bind even the dissenting minority shareholders or creditors. Therefore, the fairness of the scheme qua them also has to be kept in view by the Company Court while putting its seal of approval on the concerned scheme placed for its sanction. It is, of course, true that so far as the Company Court is concerned as per the statutory provisions of Sections 391 and 393 of the Act the question of voidability of the scheme will have to be judged subject to the rider that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and can judiciously X-ray the same. 7. That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the majority in order to promote any interest adverse to that of the latter comprising of the same class whom they purported to represent. 8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. 9. Once the aforesaid broad parameters about the requirement of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . There are more than one method of valuation of shares and valuation would vary if different methods are adopted. While observing that the shares are the properties of the shareholders and they are the ultimate and the best judge of the value which they would put on their shares, it was however stated that in the best interest of all concerned and to prevent controversy, a proper basis of valuation should be recorded. The Division Bench of the Calcutta High Court put in a caveat that in the event any shareholder of the Transferor Company had appeared before the Court and had objected to the valuation of the shares or to the exchange ratio, the matter would have taken an entirely different complexion and the Court would have been inclined to probe further into the question of exchange ratio to ensure that shareholders were not treated unfairly. In the absence of any challenge from any of the shareholders of the Transferor Company, the Court declined to interfere in the matter at the instance of the Regional Director. In Maknam Investments Ltd. & Ors., In Re 87 Company Cases 689, a Single Bench of the Calcutta High Court held that the Court is not supposed to set its seal upon a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and fair to the whole class of creditors or members, including the dissenting minority. Having noticed the broad legal provisions as discussed above, the scheme, which has been placed before the Court for sanction may now be examined. The scheme provides for amalgamation of the Transferor Company with the Transferee Company. The rationale for the scheme has been explained by stating that the Transferee Company is an established company operating seven tea gardens in Upper Assam, producing high quality black tea. It has three processing units with an annual capacity of 8 million kgs of black tea. However, the Transferee Company has its own leaf production of 3.4 million kgs only. There is thus shortfall of 4.6 million kgs to achieve optimum utilization of production capacity. For this purpose, the Transferee Company has to bring in bought tea leaf. On the other hand, Transferor Company has a tea garden, namely, Govindapur Tea Estate in the district of Golaghat, Assam with 190.47 hectares of land under tea cultivation but without any factory. Amalgamation will result in a larger and stronger company with a strong asset and capital base, which will have beneficial results for both t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, 786 fully paid equity share of Rs. 10.00 each of the Transferee Company shall be issued and allotted for every one equity share of Rs. 1000.00 each held in the Transferor Company. In other words, for every thousand rupees value of shares in the Transferor Company, the shareholders of the Transferor Company would be entitled to Rs. 7860 value of shares of the Transferee Company. It is true that valuation of shares and consequently the exchange ratio of shares between two merging companies is a complex issue requiring technical expertise. This is an issue which is required to be decided by the experts. The Court in its supervisory jurisdiction can however certainly look into and examine the justification or otherwise of the valuation and exchange ratio proposed and in appropriate cases may lift the veil to see the real purpose. As already discussed above, the Company Court exercises jurisdiction which is founded on fairness. While exercising its jurisdiction, the Court is competent to examine the bonafides or fairness of the valuation of shares or the exchange ratio and whether the proposal conforms to commercial morality. The Calcutta High Court in Bengal Tea Industries Ltd. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garden. The records of statutory dues were missing when the Transferor Company was taken over by the present management and were reportedly destroyed by vandals. The operations of the Transferor Company were in lock out since 2005-2006 and accumulated loss resulted from the same. Transferor Company made cash profit only in the year under consideration and the management was hopeful that the accumulated loss would be written off within a reasonable period of time. It is stated in the company petition that prior to taking over of the Transferor Company by Rockland Realty Pvt. Ltd., a petition for voluntary liquidation of the Transferor Company was pending before this Court, which was allowed to be withdrawn on 07.05.2011. Thus from a careful comparison of the two companies and the business profile of the Transferor Company vis-a-vis the Transferee Company it is quite apparent that the exchange ratio proposed in the scheme which is heavily loaded in favour of the shareholders of the Transferor Company appears to be unrealistic and illogical, if not downright absurd. Shares of a company which was under lock out for long period with accumulated losses with petition filed in the High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.09.2011. Hemendra Prasad Barooah filed a petition before the Company Law Board under sections 111 and 111A of the Act seeking deletion of the name of the Objector from the share register of the Transferee Company and the demat account lying with the HDFC Bank with regard to joint holding of 8,61,981 shares contending that he alone was the beneficiary of those shares. This petition was dismissed by the Company Law Board by holding that there was no case to invoke jurisdiction under sections 111 and 111A of the Act. In the meanwhile, the scheme was proposed and it was decided by the Transferee Company to approve the scheme. Also Articles of Association of the Transferee Company was altered which the Objector claims is to her detriment. Hemendra Prasad Barooah also filed a civil suit in the Court of Civil Judge, Jorhat being TS No.41/2012 wherein Objector has been made the principal defendant. The said suit pertains to the block of 8,61,981 shares jointly held in the name of Hemendra Prasad Barooah and the Objector. In the said suit, injunction order has been passed by the Civil Court directing the parties to maintain status quo in respect of the said block of shares. Hemendra Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xperts and determine a fair and just exchange ratio. Accordingly and in the light of the above, the following orders are passed: - i) Court has no objection to sanction the scheme for amalgamation of Buragohain Tea Company (Transferor Company) with B & A Ltd. (Transferee Company). ii) However, having regard to the litigation history in the Transferee Company involving the Objector and other related developments and also having regard to the financial status of the Transferor Company as discussed above, objection raised by the Objector and by the Central Govt. through the Regional Director regarding the exchange ratio of shares between the two companies cannot be brushed aside. iii) The exchange ratio of 786 fully paid up equity shares of Rs. 10.00 each of the Transferee Company to be issued and allotted for every one equity share of Rs. 1,000.00 held in the Transferor Company does not appear to be fair and justified. iv) Accordingly, Court directs the Registrar of Companies, Shillong to work out the exchange ratio in a fair manner through independent experts keeping in view the discussions made above and submit the same to the Court in two months time. v) Thereafter C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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