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TMI Blog2017 (1) TMI 961X X X X Extracts X X X X X X X X Extracts X X X X ..... ry for disposal of the present application are as follows: a. The registered offices of the Applicants are situated at New Delhi, within the jurisdiction of this Court. b. The Transferor Company was incorporated under the Act on 03.01.2014, with the Registrar of Companies, N.C.T. of Delhi & Haryana at New Delhi. c. The Transferee Company was incorporated under the Act on 22.10.2009, with the Registrar of Companies, N.C.T. of Delhi & Haryana at New Delhi. d. It has been stated by counsel for the Transferor Company and the Transferee Company that the Applicants herein are Private Limited Companies and their shares are not listed in any stock exchange. e. The authorized share capital of the Transferor Company as on 31.03.2015 is Rs. 10,00,000/- divided into 1,00,000 equity shares of Rs. 10/- each. The issued, subscribed and paid-up share capital of the Transferor Company as on 31.03.2015 is Rs. 1,00,000/- divided into 10,000 equity shares of Rs. 10/each. f. The authorized share capital of the Transferee Company as on 31.03.2015 is Rs. 5,00,00,000/- divided into 50,00,000 equity shares of Rs. 10/- each. The issued, subscribed and paid-up share capital of the Transferee Company as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shareholding. 4 (Four) All 65 (Sixty-Five) 20 (Twenty) in number constituting 97.49 of value. 4. The prayer sought by learned counsel appearing on behalf of the Applicants, is to seek dispensation of the meetings of the equity shareholders and unsecured creditors of the Applicants; the secured creditors of the Transferee Company; thereby seeking dispensation of the requirement of giving individual notices in Form No. 35 of the Company (Court) Rules, 1959 and publication of notices of the meetings of the said shareholders and creditors. 5. In support of the prayer sought, learned counsel appearing on behalf of the Applicants would urge that no prejudice will be caused to equity shareholders or creditors of the Applicants if their meeting, as contemplated under Section 391(1) of the Act, is dispensed with. Learned counsel appearing on behalf of the Applicants would further urge that the Transferor Company is the wholly owned subsidiary of the Transferee Company. Additionally, it would be canvassed that the proposed scheme is not a compromise or an arrangement with the creditors of either of the Applicants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsecured creditors out of which 20 unsecured creditors (representing 97.49% in value of the total unsecured debt) have given their written consents/NOCs to the proposed scheme and the same have been placed on record. The said written consents/NOCs have been examined and found in order. 15. Before proceeding further, it would be beneficial to examine the legal position with regard to the subject issue and consider the decisions relied upon by the learned counsel appearing on behalf of the Applicants. 16. In Masterji Mettalloys (P) Ltd. & Good Luck Steel Tubes Ltd. (supra) a Single Judge of this Court, whilst considering a scheme of amalgamation, dispensed with the requirement of convening meetings of the shareholders and creditors of the Transferee Company under section 391(1) of the Act on the basis, that the Transferor Company was the wholly owned subsidiary of the Transferee Company and the rights of the said shareholders and creditors of the Transferee Company would remain unaffected by the Scheme. 17. A single judge of this Court in Madhusudan Auto Ltd. & Anr. (supra), dispensed with the requirement of convening meetings of the equity shareholders, creditors and unsecured d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers of M/s. Choudhari Metal Industries (P.) Ltd., i.e. the transferee-company. I had noticed a decision of the Bombay High Court, Bank of India Ltd. v. Ahmedabad Manufacturing & Calico Printing Co. Ltd. [1972] 42 Comp Case 211 (Bom), where this question had been analysed. It had there been noticed that in certain cases it would be necessary for the transfereecompany to get the proposed compromise or scheme sanctioned by the court before it would become binding on both companies. I also noticed that the transferor-company (the petitioner) was a wholly-owned subsidiary company of the transferee-company and, therefore, it was not necessary for the transferee-company to approve the scheme. The reason I reached this conclusion was that Section 391 of the Act deals with two special cases: (a) when there is a compromise or arrangement between a company and its creditors or any class of them and (b) where the compromise or arrangement is between a company and its members or any class of members. Considered from the point of view of the petitioner-company there is a scheme affecting the members of the company because as a result of the scheme, the transferor-company will cease to exist and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... features of the present scheme under consideration are that two companies are merging with each other. Therefore, it is a contract between 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 and creditors, etc. That is why the scheme requires to be placed for consideration in the manner required by Section 391. It also requires the sanction of the court. Seen from the point of view of the transferee-company, the agreement is essentially a contract which does not affect the creditors or members of the transferee-company in any manner. Therefore, the scheme does not require to be sanctioned from the point of view of the transferee-company under Section 391 of the Act. However, if the scheme had some flaws whereby the rights of the transferee-company were affected, it would require the approval of those persons at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransferee-company has not only approved the scheme but has actively brought about the arrangement and certainly wants to enforce the scheme. For these reasons, I think that in the present case, there can be no doubt that the scheme is not going to be thrown overboard . and there is no such intention. The contract is, therefore, binding on the transferee-company. All it requires now is the approval of the court. As soon as the scheme is sanctioned, it becomes effective." (Emphasis supplied.) 20. In M/S. GE Capital Transportation Financial Services Ltd. (supra), the Court dispensed with the requirement of convening meeting of the creditors of the transferor and transferee companies on account of the applicant companies therein giving an undertaking to the effect that, upon Court notice being issued in the confirmation petition, the applicant companies would issue notice to their creditors inviting objections, if any, to the proposed scheme. The same was done in view of the circumstance that upon the scheme coming into effect, the entire business and undertaking would stand transferred to the Transferee Company thereby leading to no variation of rights of the said creditors. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s if the same had been passed at a general meeting of the company duly convened and held." Further, section 143 of the English Companies Act, 1948 now expressly enables written resolutions which are not passed at a general meeting to be registered. This change is reflected in India also. Under section 82 of the Indian Companies Act, 1913, special and extraordinary resolutions passed at general meetings alone were capable of being registered. But section 192 of the Companies Act, 1956 enables written resolutions not passed at general meetings to be registered. The second inroad on the requirement of a formal meeting is that the consent of the shareholders may be ascertained without calling any meeting at all. Further, the doctrine of lifting the veil of incorporation and looking at the reality of the action of the members of the company enables us to hold that the consent of the overwhelming majority of the shareholders outside a meeting is sufficient to show that the resolution was supported virtually by all the members of the company. Professor L. C. B. Gower calls this as "informal ratification by the members of the acts done on behalf of the company." He draws the distinction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a formally called meeting is made by the doctrine of acquiescence. If all the shareholders acquiesce in a certain arrangement, the question of a meeting having been called does not arise at all, Professor R. R. Pennington in the third edition of his "Company Law" at pages 557-558 has expressed this doctrine of acquiescence in the following words: - "The court has said in some cases that a company may be treated as bound by a resolution, even though it is not shown that it was duly passed at a general meeting or that it was assented to by all the members. Thus, it has been held that a company loses its right to rescind a contract with its promoters if substantially all its members are aware of the right to rescind and fail to act for an unreasonable length of time. (Erlanger v. New Somrero Phosphate Co. (1878) 3 A.C. 1218) (16). It has also been held that a company could not sue its directors for borrowing beyond the powers conferred on them by the articles (Re Norwich Yarn Co. Ex parte Bignold (1856) 22 Beav. 143) (17), nor treat an irregular surrender of partly paid shares as void (Phosphate of Lime Co. v. Green (1871) L.R. 7 C.P. 43) (18), when all the members had an opportunity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/S Mazda Theatres Pvt. Ltd. (supra) and S.M. Holding Finance (P) Ltd. (supra) were relied upon in the decision of this Court in Company petition No. 251 of 2000 titled as 'In Re: DCM Estates and Infrastructure Limited' rendered on 30.09.2003. The relevant paragraphs thereof are reproduced hereinunder: "In the backdrop of this decision as well as on proper interpretation of section 391(2) which is not mandatory, but directory and there has been substantial compliance that three-fourths value of the unsecured creditors have agreed to and approved the scheme, the contention of the objector that there was no proper compliance with the Act and that the court has no jurisdiction to sanction the scheme will have to be rejected. As already noticed, once the scheme is held to be reasonable and proper, merely because there is one objector to the approval of the scheme, who is none other than the sole dissenter, the court should not refuse to sanction the scheme. What the court could do in such circumstances is to give protection to the dissenter, by amending the scheme. The above views of mine receive support from Palmer's Company Law, volume 1, twenty-third edition, para 7913, which r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 sufficient liquidity to repay the creditor, as per the original terms agreed between him and the transferor company. Whether he would be adversely affected by being required to deal with the transferee, in substitution of the transferor, is a matter of perception of the creditor. (Zee Interactive Multi Media Ltd., In re (2002) 3 Comp Cas 733 (Bomb), Mayfair Limited and Zodiac Clothing Co. Ltd. In re (2003) 4 Com. L.J. 102 (Bom), Union of India v. Asia Udyog Pvt. Ltd. (1974) Vol.44 Com. Cases 359 (Delhi)). 12. On the question whether a meeting of the creditors isstatutorily required to be called for, even in a scheme of arrangement between the company and its members, one view is that the creditors are not entitled, as of right, to participate in the process of consideration of sanction of the scheme, as the Companies Act does not contain a specific provision for notice being given to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngement 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 case to case but the Judge would certainly treat whether the creditors are adversely affected or not as the relevant circumstance. How then Court is to ascertain as to whether the creditors are adversely affected? If the creditors have no right of hearing at the time of hearing of the petition under Section 391 as held by Delhi High Court and this Court, (I have my own doubts about the correctness of this view) the only way of ascertaining whether the creditors are affected or not would be through the wishes of the creditors which may be expressed by them in a meeting which the Court undoubtedly is entitled to convene under Sub-section (1) of Section 391. Therefore, the Court would exercise discretion as a matter of course to convene meeting of the creditors of the Company under Sub-section (1) of Section 391 unless the Court is prima facie satisfied that the interests of the creditors are not likely to be adversely affected by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain whether they approve of the scheme or not? 17. Section 391(1), enables the Court, on the application ofa company or a creditor or a member of the company, to order a meeting of the creditors/or the members "as the case may be" to be held and conducted in such a manner as the Court directs. Under Section 391(2), if a majority representing 3/4th in value of the creditors/members agree, in the meeting, for the compromise or arrangement, the scheme, on its sanction by the court, would be binding on all the creditors/members "as the case may be" and also on the company. The expression "as the case may be" finds place both in Sub-sections (1) and (2) of Section 391. If the words "as the case may be" in Section 391(1) are construed as requiring the Court to order the meeting of only the members, in a Scheme of arrangement between the Company and its members, and only a meeting of the creditors in a Scheme of arrangement between the Company and its creditors, should the expression "as the case may be" in Section 391(2) then not be read as to bind only the members where a meeting of the members is held and only the creditors where a meeting of the creditors is held? The safeguard in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditors 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 creditors or the members have no right to the assets of the Corporation. However the doctrine, that the Corporation or a Company has a legal and separate entity of its own, has been subjected to certain exceptions by the application of the fiction that the veil of the Corporation can be lifted and its face examined in substance. The doctrine of the lifting of the veil has been applied in five categories of cases: where companies are in the relationship of holding and subsidiary (or sub-subsidiary) companies; where a shareholder has lost the privilege of limited liability and has become directly liable to certain creditors of the company on the ground that, with his knowledge, the company continued to carry on business six month after the number of its members was reduced below the legal minimum; in certain matters pertaining to the law of taxes and stamps, particularly where the question of "controlling interest" is in issue; in the law relating to exchange control; and in the law relating to trading with the enemy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation.... The horizon of the doctrine of lifting of corporate veil is expanding.... 23. Lifting the corporate veil, in cases where a whollyowned subsidiary is amalgamated with its holding company, would establish that the creditor is, and has always been, dealing with the transferee company de-facto though he is the creditor of the transferor company de-jure. In such limited cases of amalgamation, as the creditors' rights cannot be said to be affected, holding of a meeting to ascertain their views, and obtain their consent to the scheme of amalgamation, may not be necessary." 25. The legal position that emerges from a conspectus of the above decisions can be summarized as follows: i. The Court may dispense with the requirement of convening meetings of members and/or creditors or a class thereof, in view of the circumstance that a scheme is not being proposed to members and/or creditors or a class thereof. ii. The Court may dispense with the requirement of convening meetings of the members and/or creditors of the holdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. **************" 27. Section 391 of the Act is a complete code in itself and acts as a 'single window clearance' system, so to speak in order to safeguard the rights of parties, members and creditors, or any class thereof, of companies; and to ensure that they are not put to any avoidable, unnecessary and cumbersome procedures in order to effectively implement such a scheme of compromise or arrangement proposed by the companies. It vests wide amplitude of powers in the Court to approve a scheme which is for the benefit of the companies and the members and creditors thereof. 28. A bare reading of the provision of sub-section (1) of section 391 of the Act reveals that the expression that has been used therein is 'ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditors to consider and if thought fit, approve, with or without modification, such s scheme; OR iii. Dispense with the requirement of convening meetings of members and creditors or any class thereof, of the company proposing a scheme of compromise or arrangement. 33. However, it would be trite to state that when a statute confers discretionary power on the Court, such power has to be exercised judicially, as and when an occasion arises, to further the ultimate aim and objective of the statute which confers such discretion; and the specific provision therein. Therefore, ordinarily discretion must be brought to bear on every case as and when it comes up before the Court. 34. Thus, in order to further elaborate the circumstances in which the Court may exercise its judicial discretion to dispense with the requirement of convening meetings of members and/or creditors, or a class thereof, of the applicant companies, it would be necessary to advert to the facts of the present case. In the present case, the proposed scheme which is the subject matter of the present application is one of amalgamation between a wholly owned subsidiary and its holding company. The expressions 'wholly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of; (3) In determining whether one company is a subsidiary of another- (a) any shares hold or power exercisable by that othercompany in a fiduciary capacity shall be treated as not held or exercisable by it; (b) subject to the provisions of clauses (c) and (d), anyshares held or power exercisable- (i) by any person as a nominee for that other company(except where that other is concerned only in a fiduciary capacity); or (ii) by, or by a nominee for, a subsidiary of that othercompany, not, being a subsidiary which is concerned only in a fiduciary capacity; shall be treated as held or exercisable by that other company; (c) any shares held or power exercisable by any person byvirtue of the provisions of any debentures of the firstmentioned company or of a trust deed for securing any issue of such debentures shall be disregarded-, (d) any shares held or power exercisable by, or by a nominee for, that other or its subsidiary[ not being held or exercisable as mentioned in clause (c); shall be treated as not held or exercisable by that other, if the ordinary business of that other or its subsidiary, as the case may be, includes the lending of money and the shares are held or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral arrangement to merge or join in a common endeavour, an undertaking or enterprise. (J.K. (Bombay) P. Ltd. v. New Kaiser-I-Hind Spg. & Wvg. Co. 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 would not be wider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidiary amalgamating into its holding company, the wholly owned subsidiary merges its corporate identity into the corporate identity of its holding company. In order to ascertain whether the rights of the creditors of the wholly owned subsidiary would be affected by the proposed scheme, it becomes necessary to pierce the corporate veil of the wholly owned subsidiary and determine whether the creditors of the wholly owned subsidiary are, and have always been, dealing with the holding company de-facto though they are the creditors of the wholly owned subsidiary de-jure. [Ref: Magnaquest (supra)] 39. Ordinarily, seen from the lens of the holding company, a scheme of amalgamation is essentially a contract which does not affect the creditors or members of the holding company in any manner. Therefore, the scheme is not required to be sanctioned from the point of view of the holding company, under Section 391 of the Act. [Ref: Sharat Hardware industries (supra)] 40. However, if the Court, on examination of the record and the proposed scheme, is of the view that the scheme is found to have some flaws/drawbacks, inasmuch as, whereby the rights of the members and/or creditors or a class ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being offered by way of the proposed scheme to the creditors or shareholders of the Transferee Company; or the unsecured creditors of the Transferor Company. Therefore, in view of this circumstance and the foregoing discussion, the requirement of convening a meeting of the creditors and equity shareholders of the Transferee Company; and the unsecured creditors of the Transferor Company, to consider, and if thought fit, approve, with or without modifications, the proposed scheme can be dispensed with. Directed accordingly. 47. It has been noted that the sole equity shareholder of the Transferor Company is the Transferee Company, the former being the wholly owned subsidiary of the latter. The sole equity shareholder/Transferee Company has given its written consent to the proposed scheme and the same is on record. Therefore, the requirement of convening meeting of the sole equity shareholder of the Transferor Company to consider and if thought fit, to approve, with or without modifications, the proposed scheme is also dispensed with. 48. Since the Transferor Company has no secured creditors, therefore the question of convening a meeting thereof does not arise. Ordered accordingly. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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