Allowed

Bhandara Thermal Power Corporation Limited, v. -

Telangana HC5 Sept 2012CP/106/2012

Case brief

AI extract

What is this about?

The court sanctioned a scheme of amalgamation between Amaravati Thermal Power Private Limited (transferor) and Bhandara Thermal Power Corporation Limited (transferee). The court held that a creditors' meeting is not required when creditors' interests are not adversely affected. It rejected the objection requiring fresh fees for increased authorized capital, relying on prior precedents. The court found the scheme fair, reasonable, and in public interest.

What did the court decide?

Scheme of amalgamation between Amaravati Thermal Power Private Limited and Bhandara Thermal Power Corporation Limited sanctioned.

Bhandara Thermal Power Corporation Limited, Vs - — Writ and Judicial Review | Telangana HC (2012)

Outcome

Scheme of amalgamation between Amaravati Thermal Power Private Limited and Bhandara Thermal Power Corporation Limited sanctioned.

Issue for consideration

Whether a meeting of creditors is necessary under Section 391(1) of the Companies Act, 1956 when the scheme of amalgamation is between companies and their members. +3 more

Detailed headnote5 paragraphs

1. In a scheme of arrangement between a company and its members, a meeting of creditors is not statutorily required under Section 391(1) of the Companies Act, 1956. The Court exercises its discretion under Section 391(2) to convene such a meeting only if the interests of creditors are likely to be adversely affected. The burden lies on the petitioner to show such adverse effect.

2. Upon sanctioning an amalgamation scheme where authorized capital of the transferor company is added to the transferee company, the transferee is not required to pay registration fees or seek fresh approval for the capital that was already subjected to fees by the transferor. The right to issue capital and the liability thereof transfer by virtue of the sanction.

3. Before sanctioning a scheme, the Court must be satisfied that the scheme is fair, just, and reasonable from the point of view of a prudent businessman, that the statutory majority acted bona fide, and that the scheme is not prejudicial to the interests of members or public interest. The Court acts as a supervisor, not as a court of appeal, but cannot merely rubber-stamp majority approval without scrutiny.

4. Public interest in company amalgamation encompasses legitimate business expansion, integration of operations, efficiency, and profitability. A scheme valid on its face that promotes these interests and does not shock the conscience of the court cannot be rejected as being contrary to public policy.

5. The scheme was found to integrate business operations, reduce costs, and create a stronger unified entity, thereby serving public interest. The dissenting opinion regarding Section 97 compliance was rejected based on established precedents regarding transfer of capital in amalgamation.

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THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN COMPANY PETITION Nos.105 and 106 of 2012

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COMMON ORDER:

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Company Petition No.105 of 2012 is filed by Amaravati Thermal Power Private Limited (hereinafter called the ‘transferor company’), and Company Petition No.106 of 2012 is filed by Bhandara Thermal Power Corporation Limited (hereinafter called the ‘transferee company’), under Sections 391 and 394 of the Companies Act, 1956 (the Act) read with Rule 79 of the Companies (Court) Rules, 1959 (the Rules), for sanction of the scheme of amalgamation.

¶4

The transferor company was incorporated, under the provisions of the Act, on 22.04.2003 under the name and style of “TSR Power Private Limited”. Thereafter it changed its name and, consequent thereto, a fresh certificate of incorporation was issued by the Registrar of Companies, Hyderabad on 01.02.2008. The registered office of the transferor company is situated at Somajiguda, Rajbhavan Road, Hyderabad. The authorised share capital of the transferor company, as at 31.03.2011, was Rs.10,00,000/- divided into 1,00,000 equity shares of Rs.10/each. Its issued, subscribed and paid-up capital as on that date was Rs.1,00,000/- divided into 10,000 equity shares of Rs.10/each fully paid-up. The objects for which the transferor company was incorporated is to generate, harness, develop, accumulate, distribute and supply electricity by setting up power plants by use of liquid, gaseous, bagasse, biomass, coal husk etc; to construct, establish, operate, manage power stations, boiler houses, steam turbines, switch yards, transformer yards, substations, transmission lines etc; and to carry on the business of electrical, electronics, mechanical, civil and chemical engineers, contractors,

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suppliers of electricity for the purpose of light, heat, motive power or otherwise etc. The Balance Sheet, and profit and loss account, of the transferor company does not reflect its having carried on any commercial activities for the year ending 31.03.2011.

¶6

The transferee company was incorporated, under the provisions of the Act, on 07.01.2008 under the name and style of Gayatri Thermal Power Corporation Limited. Its name was later changed to Bhandara Thermal Power Corporation Limited, and a fresh certificate of incorporation was issued by the Registrar of Companies, Andhra Pradesh at Hyderabad on 08.11.2010. The registered office of the transferee company is also situated at Hyderabad. The authorised share capital of the transferee company was Rs.5,00,00,000/- divided into 50,00,000 equity shares of Rs.10/- each. Its issued, subscribed and paid-up share capital is Rs.5,00,000/- divided into 50,000 equity shares of Rs.10/- each. The objects for which the transferee company was incorporated is to carry on business to generate, produce, buy, sell, resell, acquire, distribute, deal in electrical power by establishment of Thermal power plants and other power plants based on any source or energy; and to construct, establish, operate and maintain power/energy generating stations etc. For the year ending 31.03.2011, the transferee company suffered a loss before tax of Rs.7,20,176/-.

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Before sanctioning a scheme of arrangement, the Court must be satisfied that the statutory provisions are complied with; 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 well represented; and the scheme of arrangement is such as a man of business would reasonably approve. It is the commercial wisdom of the parties to the scheme, who have taken an informed

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decision about the usefulness and propriety of the scheme supporting it by the requisite majority vote, that has to be kept in view by the Court. The Court would not act as a court of appeal and sit in judgment over the informed view of the parties to the compromise as it has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the scheme by the requisite majority. The Company Court’s jurisdiction to that extent is peripheral and supervisory and not appellate. The supervisor cannot ever be treated as the author or the policy-maker. The propriety and the merits of the compromise or arrangement has to be judged by the parties who as sui juris, with their eyes open and fully informed about the pros and cons of the scheme, arrive at their own reasoned judgment and agree to be bound by such a compromise or arrangement. The Court cannot scrutinise the scheme to find out whether a better scheme could have been adopted by the parties. (Miheer H. Mafatlal v. Mafatlal Industries Lt d^[1] ) .

¶9

When a scheme of amalgamation/merger of a company is placed before the Court for its sanction, the Court should, in the first instance, direct holding of the meetings in the manner stipulated in Section 391 of the Act. This Court, by order in Company Application No.406 of 2012 dated 18.04.2012, noted that the entire paid up share capital of the transferor company was held by two shareholders; and both of them had given their letters of consent to the proposed scheme of amalgamation. This Court, therefore, dispensed with the holding of the meeting of the shareholders of the transferor company. The Balance Sheet of the transferor company, as at 31.03.2011, would show that it had a share application money of Rs.1,86,35,498/-, of which the share

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application money received from the holding company of the transferee company, (Gayatri Energy Ventures Private Limited), was Rs.1,69,93,456/-, and from others for Rs.16,42,042/-. In the affidavit dated 04.09.2012, filed by the authorized signatory of the transferor company, it is stated that the share application money of Rs.16,42,042/- has since been refunded; the share application money pending allotment as on 31.12.2011 was Rs.1,69,93,456/-; and the entire amount belonged to Gayatri Energy Ventures Private Limited of which the transferee company is a subsidiary. Enclosed to the said affidavit is a certified copy of the resolution dated 04.01.2012 passed by the Board of Directors of Gayatri Energy Ventures Private Limited approving the scheme of amalgamation between the transferor and transferee companies.

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This Court, by order in Company Application No.407 of 2012 dated 18.04.2012, after noting that all the eight shareholders (six individuals and two companies) had given their consent to the proposed scheme of amalgamation, dispensed with the holding of the meeting of the shareholders of the transferee company. A perusal of the Balance Sheet, as at 31.03.2011, shows that the share application money pending allotment was Rs.12,93,570/-. In the affidavit dated 04.09.2012, filed by the authorized signatory of the transferee company, it is stated that the entire share application money with the transferee company has now been refunded, and there is no share application money which the transferee company holds as on date. In these circumstances it is wholly unnecessary that a meeting be held of the members of both the transferor and the transferee companies.

¶12

On the question whether, in a scheme of arrangement between the company and its members, a meeting of the creditors or a class of creditors must be held, it is necessary to note that

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the expression “as the case may be” finds place both in subsections (1) and (2) of Section 391. If the words “as the case may be” in Section 391(1) is 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, then should the expression “as the case may be” in Section 391(2) not be read as to bind only the members where a meeting of the members is held and the creditors where a meeting of the creditors is held? The safeguard in the provision, of ¾ of the members or creditors in value voting in the meeting to approve the scheme, is that the wishes of a majority of the class should prevail, and the dissenting minority of 1/4^{t h} or less of the class should not be permitted to derail the scheme of arrangement unless, of course, the Court, on examining the scheme, finds that the objection of the minority is justified. If no meeting of the creditors is required to be held, in a Scheme of arrangement between the Company and its members, then, in the absence of ascertaining whether 3/4^th in value of the creditors approve the scheme or not, would the Court be justified in statutorily imposing such a Scheme of arrangement on the creditors, even though their consent has not been obtained or their wishes ascertained? If it were held that not holding the meeting, and ascertaining the wishes of the creditors, would result in the Scheme of arrangement not to bind them, would the very purpose of sanctioning the Scheme by the Court not be defeated, and approval of the Scheme not be an exercise in futility? If, on the other hand, the view, that a meeting of the creditors/members must necessarily be held in all cases irrespective of whether the Scheme of arrangement is between the Company and its members

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or the creditors, is accepted would that not render the words “as the case may be” in Section 391(1) mere surplusage?

¶15

On this question, 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 creditors at any stage either prior to the making of the order or subsequent thereto, except in so far as the creditors may have notice of it by public advertisement, (Union of India v. Asia Udyog Pvt. Lt d^[2] ) , and that the legislature has cast a duty on the Court to ascertain whether the Scheme affects the interests of the creditors to such an extent that holding of their meeting is essential and, if the Court were of the view that the interest of the creditors were adversely affected, it could refuse to sanction the scheme unless their consent has been obtained. (Ansal Properties and Industries Ltd., In r e^[3] ) .

¶16

Another facet of this view is that, under Section 391 of the Act, a compromise or arrangement is either between a company and its creditors or between a company and its members. An arrangement, in the nature of amalgamation, is the result of an agreement between the amalgamating company and its members, as well as a corresponding agreement between the transferee company and its members, and there is, therefore, no provision for the participation of persons other than the members of the two companies to vote on an arrangement of amalgamation proposed between a company and its members. (Nava Bharat Ferro Alloys In r e^[4] ; Mafatlal Industries Ltd., In r e^[5] ; Coimbatore Cotton Mills Ltd and Lakshmi Mills Co. Ltd., In r e^[6] ; and Telesound

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India Ltd., In r e^[7] ) . However a different view was taken by the Bombay High Court, In Re ICICI Bank Limite d^[8] , and it was held that 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 participation in the process of consideration of the Scheme; if the creditors have no right of hearing at the time of hearing of the petition under Section 391, 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 is entitled to convene under sub-section (1) of Section 391; and, therefore, the Court would exercise its discretion as a matter of course to convene a meeting of the creditors of the Company under subsection (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 scheme.

¶18

The Balance Sheet of the transferor Company, as at 31.03.2011, shows that it did not have any secured or unsecured loans as on that date. Under the head “current liabilities & provisions”, Rs.15,000/- is the provision for audit fees. It is stated in the affidavit filed on behalf of the transferor company that this amount had been subsequently paid to the statutory auditors viz., M/s.Vas & Co. on 26.09.2011; and there are no amounts outstanding under the head “current liabilities” as at 31.12.2011. The Balance Sheet of the transferee company, as at 31.03.2011, does not also reflect any secured or unsecured loans having been

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obtained by them. However, under the head “current liabilities & provisions”, the total amount shown as due, as at 31.03.2011, are (i) sundry creditors - Rs.44,672/-; (ii) audit fees - Rs.77,210; and (iii) Tax Deducted at Source (TDS) - Rs.4,964/-. In the Company Petition, filed by the transferee company, it is stated that Rs.44,672/- was paid to Gianender & Associates on 05.05.2011 vide cheque No.559812; Rs.4,964/- payable towards TDS was paid to the Income Tax Department on 05.05.2011 vide cheque No.559813; and Rs.77,210/- is still payable to the statutory auditors who had issued a certificate giving their consent to the proposed scheme of amalgamation. A copy of the certificate issued by the statutory auditors, conveying their consent to the proposed scheme of amalgamation, is enclosed to the Company Petition.

¶20

Under the proviso to Section 391(2), no order sanctioning any compromise or arrangement shall be made unless the Court is satisfied that the company 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.

¶21

Both the transferor and transferee companies have filed the audited Balance Sheets as at 31.03.2011, and unaudited Balance Sheets as at 31.12.2011. In their respective affidavits dated 04.09.2012, the authorized signatory of both the transferor and transferee companies have respectively stated that the latest audited Balance Sheets are the Balance Sheets as at 31.03.2012, and the annual general meeting for the present year is yet to be convened by them. It is evident, therefore, that the latest financial

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position of the company, and the latest auditors report on the accounts of the companies, has been placed before this Court.

¶23

In the Company Petitions, filed by both the transferor and transferee companies, it is specifically stated that no investigation or proceeding is pending under Sections 235 to 237 or any other provisions of the Companies Act or under any Act against them. This assertion is supported by the report of the Regional Director (South Eastern Region), Corporate Affairs, Hyderabad who, in his report dated 09.08.2012, specifically stated that as per the report of the Registrar of Companies dated 03.08.2012, both the transferor and transferee companies are regular in filing their statutory returns, and no complaints or investigations are pending against them.

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A combined reading of the first and second provisos of Section 394(1), with Section 394-A of the Act, requires the scheme of amalgamation not be sanctioned unless the Court has considered the report of the Official Liquidator or the representation of the Central Government, as the case may be. (Sumani Pvt. Ltd's cas e^[9] ) . The second proviso to Section 394 provides that no order for the dissolution of any transferor company under clause (iv) of sub-section (1) of Section 394 of the Act shall be made 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 members or to public interest. Thus, Section 394 of the Act casts an obligation on the Court to be satisfied that the scheme of amalgamation or merger is not prejudicial to the interest of its members or to public

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interest. (Sesa Industries Limited v. Krishna H. Bajaj^[10] )

¶26

An Official Liquidator acts as a watchdog of the Company Court reposed with the duty of satisfying the Court that the affairs of the company, being dissolved, have not been carried out in a manner prejudicial to the interests of its members and the interest of the public at large. In essence, the Official Liquidator assists the Court in appreciating the other side of the picture before it, and it is only upon consideration of the amalgamation scheme, together with the report of the Official Liquidator, that the Court can arrive at a final conclusion that the scheme is in keeping with the mandate of the Act, and that of public interest in general. For examining the questions as to why the transferor-company came into existence; for what purpose it was set up; who were its promoters; who were controlling it; what object was sought to be achieved by dissolving it and merging it with another company, by way of a scheme of amalgamation, the report of an official liquidator is of seminal importance and, in fact, facilitates the Company Judge to record his satisfaction as to whether or not the affairs of the transferor company had been carried on in a manner prejudicial to the interest of the minority, and to the public interest. (Sesa Industries Limite d² ) .

¶27

In his report No.140 of 2012 dated 07.08.2012, the Official Liquidator would state that he had, vide letter dated 17.07.2012, called for the statutory books and other relevant information from the transferor company; and the information/documents called for were furnished on 24.07.2012 and 31.07.2012. The Official Liquidator would refer to the incorporation of the transferor company, capital structure, registered office, and its objects. He would also note that, under Clause (B) 26 of the Memorandum of Association, the transferor company is empowered to amalgamate with any other company or companies having similar objects or in

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part thereof. The Official Liquidator, thereafter, refers to various clauses of the scheme and concludes that, basing on the information made available, he was of the opinion that the affairs of the transferor company appeared to have not been conducted in a manner prejudicial to the interests of the members or to public interest. In para 3(c), the Official Liquidator notes that share application money was pending allotment to the extent of Rs.1,69,93,456/- to Gayatri Energy Ventures Private Limited, and Rs.16,42,042/- to others. As noted hereinabove, the share application money of Rs.16,42,042/-, received from others, has since been repaid, and Gayatri Energy Ventures Private Limited has given their consent to the proposed scheme of amalgamation.

¶29

In his report dated 09.08.2012, filed on behalf of the Central Government, the Regional Director (South Eastern Region), Corporate Affairs, Hyderabad would submit that, under clause 12(1) of the scheme, upon the scheme being sanctioned by the Court, the authorized capital of the transferor company shall stand transferred to, and added to, the authorized share capital of the transferee company; and the transferee company was required to comply with the provisions of Sections 95 and 97 of the Act.

¶30

The objection raised by the Regional Director, (South Eastern Region), Corporate Affairs, Hyderabad regarding compliance with the provisions of Sections 95 and 97 of the Act is only to be noted to be rejected. Section 97 of the Act provides for notice of increase of share capital. Under sub-section (1) thereof, where a company increases its share capital beyond the authorised capital, it is required to file with the Registrar a notice of the increase of capital within thirty days after passing of the resolution authorising the increase; and the Registrar is required to record the increase, and make alterations as may be necessary,

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in the company's memorandum or articles, or both.

¶32

In Re: Magnaquest Solutions Private Limite d¹¹ , after placing reliance on Saparna Infotech Ltd. v. Relinfo Limited (Judgment in C.P. Nos. 149 and 150 of 2001 dated 04.01.2002); Krishnan Products Pvt. Ltd. v. Krishna Poly Packs Pvt. Ltd. (Judgment in C.P. Nos. 68 and 69 of 2005 dated 13.8.2007); R.K.S. Motors (P) Ltd., In R e¹² ; and In Re Kemira Laboratories Limited (Judgment in O.S.A. Nos. 24, 44 and 46 of 2005 and C.P. Nos. 144, 145 and 146 of 2003 dated 25.01.2007), this Court held as under:

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“On the scheme of amalgamation being sanctioned by the Court, the rights, property and liabilities of the transferor become the rights, property and liability of the transferee company and, as a consequence thereof, the right which the transferor has to issue share capital and the existing liability in the form of its authorized capital stand transferred to and are vested in the transferee company. Since the authorised capital of the transferor, which is transferred to and stands vested in the transferee, has already been subjected to payment of the prescribed fee, absence of a specific provision either in the Companies Act, 1956, or the Rules made thereunder, requiring the transferor to again seek approval of the Registrar of Companies or to pay fees on such authorized capital, the contention, that approval of the Registrar must again be sought and fees paid all over again, must necessarily be rejected.”

¶34

In Re Kemira Laboratories Limited, a Division Bench of this Court held as under:

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“No good reason has been shown why the two merged companies should be required to pay fees again, on the same authorized capital on which the prescribed fee has already been paid by the transferor Company (Jaypee Cement Ltd .¹³ ) . An order can be passed, under Section 391 of the Companies Act itself, regarding increase of the authorized share capital by merger of the authorized capitals of the two companies, (Vasant Investment 14 Corporation Limited v. Official Liquidator and Jaypee Cement Ltd.).”

¶36

This objection is, therefore, misconceived.

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While the Court, called upon to sanction a scheme of amalgamation, would not act as a Court of appeal and sit in

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judgment over the informed view of the concerned parties to the scheme, as the same is best left to the corporate and commercial wisdom of the parties concerned, it is clear that the Court, before whom the scheme is placed, is not expected to put its seal of approval on the Scheme merely because the majority of the shareholders have voted in favour of the scheme. Since the Scheme, which gets sanctioned by the Court, would be binding on the dissenting minority shareholders or creditors, the Court is obliged to examine the scheme in its proper perspective together with its various manifestations and ramifications to find out whether the scheme is fair, just and reasonable to the concerned members, and is not contrary to any law or public policy. The expression “public policy”, though incapable of precise definition, connotes some matter which concerns the public good and the public interest. (Sesa Industries Limited² ; Hindustan Lever Employees' Union v Hindustan Lever Ltd.,¹⁵ ; Central Inland Water Transport Corporation Limited. v. Brojo Nath Gangul y¹⁶ ) . Before according its sanction to a scheme of amalgamation, the Court has to see that the provisions of the Act have been duly complied with; the statutory majority has acted bonafide and in good faith, and are not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purport to represent; and the scheme, as a whole, is just, fair and reasonable from the point of view of a prudent and reasonable businessman taking a commercial decision. (Sesa Industries Limited² ).

¶39

The Court cannot abdicate its duty simply because the statutory majority has approved it and there is no opposition to the scheme of amalgamation in Court. It must scrutinize the scheme

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to find out whether it is an arrangement which can, by reasonable people conversant with the subject, be regarded as beneficial to those who are likely to be affected by it. In pursuit of such an enquiry the Court is not tied down by any rigid principles or straitjacket formulae. No enumeration contained in judicial decisions of the factors which can be taken into account, howsoever precise, can be treated as exhaustive so as to limit the scope of the inquiry which, having regard to varying circumstances, might differ from case to case. The burden lies on the petitioner-company to show that the scheme of amalgamation is fair, reasonable, workable and is such that a man of business would reasonably approve. The Court would, of course, take into account the fact that it has been approved by a big majority vote, but it would not shirk its duty to scrutinize the scheme. (Bank of Baroda Ltd. v. Mahindra Ugine Steel Co. Ltd.¹⁷ ) . When it exercises the power, conferred on it by Section 391(2), to sanction the scheme of compromise or arrangement the Court, by its act, is imposing the scheme on the dissenting members of that class. Before taking such an action, 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. (Mahindra Ugine Steel Co. Ltd.¹⁶ and Bengal Hotels P. Ltd. In r e¹⁸ ) .

¶41

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

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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 Lt d¹⁹ ) . 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 strait-jacket. It is a dynamic concept which keeps on changing. It has been explained in Black’s Law Dictionary as:-

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“Something in which the public, the community at large, has some pecuniary interest, or some interest by which their legal rights or liabilities are affected. It does not mean anything so narrow as mere curiosity, or as the interests of the particular locality which may be affected by the matters in question. Interest shared by citizens generally in affairs of local, State or national Government.”

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It is an expression of wide amplitude. A scheme, valid and good, may yet be bad if it is against public interest. The basic principle of the satisfaction, that the scheme is not contrary to public interest, is none other than the broad and general principles inherent in any compromise or settlement entered into between the parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, Courts have evolved the principle of “prudent business management test” or that the scheme should not be a device to evade the law. (Hindustan Lever Employees' Union¹⁵ ). No court of law would ever countenance any scheme of compromise or arrangement if it finds that it is an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. The fairness of the scheme, qua the disputing minority shareholders or creditors, also has to be kept in view by the High Court while putting its seal of approval on the scheme.

¶45

The High Court should examine whether the proposed

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scheme of compromise and arrangement is violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously x-ray the same. The High Court has also to satisfy itself that the members or class of members or the creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to them. It must also ensure that the scheme as a whole is also 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. (Miheer H. Mafatlal¹ ). 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., In rei n²⁰ ) .

¶47

Clause 5 of the scheme provides for transfer and vesting of the undertaking; and Clause 5.1, thereunder, stipulates that, with effect from the appointed date, the entire undertaking of the transferor company would, without any further act or deed, stand transferred to, and be vested in, the transferee company as a going concern so as to become the estate, assets, rights, title and interest of the transferee company subject to all charges, liens and mortgages etc. Clause 5.2 relates to transfer of assets of the transferor company to the transferee company. Clause 5.3 relates to transfer of liabilities. Clause 6 relates to contracts, deeds,

¶48

bonds and other instruments. Clause 7 relates to legal proceedings. Clause 8 relates to the transferor company’s staff, workmen and employees and, under clause 8.1 thereof, all staff, workmen and employees of the transferor company, immediately before the transfer of the undertaking, shall become the staff, workmen and employees of the transferee company as if they are in continuous or uninterrupted service by reason of the transfer of the undertaking; and the provident fund, gratuity fund, superannuation fund or any other special fund created or existing shall stand transferred to the respective trusts or funds of the transferee company. Clause 11 deals with consideration and, thereunder, the transferee is required to allot one equity share of Rs.10/- each fully paid for every three equity shares of Rs.10/each fully paid up held by the members of the transferor company. Clause 12 relates to increase in authorized capital of the transferee company and, under Clause 12.1 thereof, upon the scheme becoming effective, the authorized share capital of the transferor company shall automatically stand increased without any further act, instrument or deed on the part of the transferee company, (including payment of stamp duty and fees payable to Registrar of Companies), by Rs.10,00,000/- divided into 1,00,000 equity shares of Rs.10/- each; and shall, without any further act, instrument or deed, stand altered, modified and amended pursuant to Sections 16, 31, 94 and 394 and applicable provisions of the Act. Clause 12.2 provides that, consequent upon the amalgamation, the authorized share capital of the transferee company will be Rs.5,10,00,000/- divided into 51,00,000 equity shares of Rs.10/- each. Clause 13 provides for dissolution and, thereunder, the transferor company shall be dissolved without being wound up. Clause 16 provides that the scheme would

¶49

become effective subject to approval, including sanction of this Court, under Sections 391 and 394 of the Act; and the certified copies of the Court being filed with the Registrar of Companies, Andhra Pradesh.

¶50

The rationale of the scheme, as is evident from Clause 4 thereof, is that both the transferor and the transferee companies are in the business of generation and supply of power; in order to integrate the business of both the companies, it is proposed to merge the transferor into the transferee; and the amalgamation would have the following benefits; (i) it would integrate and combine the business of both the transferor and the transferee companies which would lead to greater and optimal utilization of resources, and would enable the transferee company to realize better and higher value from its operations and confer a competitive advantage to the transferee company; (ii) it would reduce administrative costs, avoid duplication of costs and enable the transferee company to effect internal economies and optimize profitability; (iii) it would improve cash management, provide access to increased cash flow generated by the combined business enabling the transferee company to fund business opportunities thereby growing into a larger and stronger entity; (iv) it would enable the transferee company to improve its finances, and have an increased asset base, and thereby enable the transferee company to expand its operations and avail new business opportunities; and (v) it would result in creation of a single larger unified entity in the place of separate entities thus resulting in increased profitability and efficient synergies of operations. In view of the aforesaid objects of the scheme, it cannot be said that the scheme of amalgamation, if approved, would be against public interest.

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I consider it appropriate, therefore, to sanction the scheme of amalgamation. As required under Section 394 (3) of the Act, read with Rule 81 of the Company (Court) Rules, 1959, both the transferor and the transferee companies shall file a certified copy of the order of this Court, with the Registrar of Companies, for its registration within thirty days from the date of the order.

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RAMESH RANGANATHAN, J

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Date:05.09.2012 USD

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[1] 1997(1) SCC 579

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