Allowed

Deccan Research Park Private Limited v. -

Telangana HC22 Aug 2012CP/17/2012

Case brief

AI extract

What is this about?

The Court sanctioned a scheme of amalgamation between Deccan Research Park Private Limited and Alexandria Gachibowli II Tech Park Private Limited. The Court held that while it must scrutinize schemes for fairness and public interest, it need not act as an appellate court. It found no meeting of creditors or Official Liquidator report necessary as all debts were cleared and no prejudice was shown.

What did the court decide?

Sanction of the scheme of amalgamation between the transferor and transferee companies and dissolution of the transferor company without winding up.

Deccan Research Park Private Limited Vs - — Specific Performance | Telangana HC (2012)

¶1

THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN

¶2

COMPANY PETITION Nos. 17 and 18 OF 2012

¶3

COMMON ORDER:

¶4

C.P.No.17 of 2012 is filed by Deccan Research Park Private Limited (hereinafter referred to as the ‘transferor company’), and C.P.No.18 of 2012 is filed by Alexandria Gachibowli II Tech Park Private Limited (hereinafter referred to as the ‘transferee company’) for sanction of the scheme of amalgamation under Section 394 of the Companies Act, 1956 (the Act).

¶5

The transferor company was incorporated on 09.07.2010, under the name and style of Prasanth Bio Sciences Private Limited, in the State of Andhra Pradesh at Hyderabad. The company subsequently changed its name to Deccan Research Park Private Limited, and a fresh certificate of incorporation was issued by the Registrar of Companies, Andhra Pradesh on 12.09.2011. Its authorized share capital is Rs.20,00,000/- divided into 2,00,000/- equity shares of Rs.10/- each. The issued, subscribed and paid up capital of the transferor company was Rs.17,11,180/- divided into 1,71,118 equity shares of Rs.10/- each fully paid up. The main objects for which the transferor company was incorporated is to carry on business as developers, builders, general construction contractors of laboratory, space research and development centers, incubation space, life science parks, bio technology parks etc; and to constitute, execute, equip, improve, work, advertise research and development centers, industrial parks and technological parks etc. For the financial year ending

¶6

31.03.2011, the transferor company is said to have not carried on any business, and the profit and loss account for the said period has not even been drawn up.

¶7

The transferee company was incorporated on 26.03.2010 in the State of Andhra Pradesh. Its authorized share capital is Rs.1,00,00,000/- divided into 10,00,000 equity shares of Rs.10/each. Its issued, subscribed and paid up share capital is Rs.21,36,580/- divided into 2,13,658 equity shares of Rs.10/- each fully paid up. The main objects for which the transferee company was incorporated is to carry on business as developers, builders, general construction contractors of all kinds of immovable properties including specialized life science parks, bio-technology parks etc; and to carry on the business of purchase, lease, exchange and otherwise deal in residential property, shops and commercial buildings for development. For the financial year ending 31.03.2011, the transferee company suffered a loss of Rs.10,09,422/-.

¶8

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 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

¶9

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] ) .

¶10

Under Section 391 of the Act, where a compromise or arrangement is proposed between a Company and its members, the Court may, on the application of the company or of any creditor or member of the company, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs. Sub-section (2) provides that, if a majority in number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the said compromise or arrangement shall, if sanctioned by the

¶11

Court, be binding on all the creditors and all the members of the Company.

¶12

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. Thereafter, even if the proposed scheme is approved by a majority of the concerned members or creditors, the Court should, before sanctioning such a scheme, satisfy itself that the company, or any other person moving an application for sanction under sub-section (2) of Section 391, has disclosed all the relevant matters mentioned in the proviso to the said sub-section. The first proviso to Section 394 of the Act stipulates that no scheme of amalgamation of a company, which is being wound up, with any other company, shall be sanctioned by the Court unless the Court has received a report from the Company Law Board or the Registrar to the effect that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest. Similarly the second proviso to the said Section 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

¶13

interest of its members or to public interest. (Sesa Industries

¶14

Limited v. Krishna H. Bajaj^[2] ) .

¶15

This Court, by order in C.A.Nos.1978 and 1979 of 2011 dated 02.01.2012, noted that there were only two shareholders in each of the transferor and transferee companies; both the shareholders had placed on record their letters of consent for the proposed scheme of amalgamation; and, in that view of the matter, convening of the meeting of the shareholders of both the transferor and transferee companies was dispensed with.

¶16

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 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 3/4^th 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

¶17

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

¶18

On this issue, 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

¶19

advertisement, (Union of India v. Asia Udyog Pvt. Lt d^[3] ) , and that the legislature has cast a duty on the Court to ascertain whether the Scheme affects the interests of the creditors to such

¶20

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^[4] ) .

¶21

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^[5] ; Mafatlal Industries Ltd., In r e^[6] ; Coimbatore Cotton Mills Ltd and Lakshmi Mills Co. Ltd., In r e^[7] ; and Telesound India Ltd., In r e^[8] ) . However, a different view was taken by the Bombay High Court, In Re ICICI Bank Limite d^[9] , 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

¶22

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 discretion as a matter of course to convene a 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 scheme.

¶23

A perusal of the Balance Sheet of the transferor company as at 31.03.2011 would show that its unsecured loans as on that date was Rs.1,72,50,000/-; and Rs.1,30,620/- was payable to Sri P.Doraiswamy, a creditor. The director of the transferor company, in his affidavit dated 24.04.2012, would submit that Rs.1,72,50,000/-, shown as an unsecured loan, was the amount due to Touchstone Property Developers Private Limited; the said unsecured loan has since been satisfied; and a copy of the ‘no-due letter’ dated 20.07.2011 received from Touchstone Property Developers Private Limited has been enclosed to the said affidavit. It is also stated therein that Rs.1,30,620/- due to Sri P.Doraiswamy, which was shown as a liability under the head “current liabilities” in the Balance Sheet as at 31.03.2011, has since been satisfied; and a copy of the ‘no-due letter’ dated 20.07.2011 received from Sri P.Doraiswamy was annexed to the affidavit. Annexure-A to the said affidavit is the letter dated

¶24

20.07.2011 from Touchstone Property Developers Private Limited acknowledging that they had received Rs.1,72,50,000/- by way of demand draft No.396274 dated 19.07.2011 drawn on HSBC Bank as full and final payment towards the existing loan; and no other amounts were payable to them in relation to the existing loan as interest or otherwise; and the existing loan stood completely satisfied. Annexure-B to the said affidavit is a letter dated 20.07.2011 addressed to the transferor company by

¶25

Sri P.Doraiswamy stating that he had received Rs.1,30,620/- by way of demand draft No.396273 dated 19.07.2011 drawn on HSBC Bank as full and final payment towards the existing loan; no other amounts were payable to him in relation to the existing loan as interest or otherwise; and the existing loan stood completely satisfied/discharged.

¶26

A perusal of the Balance Sheet of the transferee company as at 31.03.2011 would show that there were no loans either secured or unsecured; and the secured creditors, under the head “current liabilities”, was only for Rs.1,76,748/-. In his affidavit dated 24.04.2012, the director of the transferee company has specifically stated that the said amount of Rs.1,76,748/- related to accounting charges (professional charges for maintenance of books of accounts) as it was outsourced to a Chartered Accountancy firm i.e. M/s.Laxminivas Neeth & Company, Chartered Accountants; the outstanding amount has since been paid; and the ‘no-due letter’ received from the sundry creditor was being enclosed thereto. The said affidavit also gives details of the amounts due and payable to the company under the head “loans

¶27

and advances”.

¶28

Under the proviso to Section 391(2) of the Act, no order sanctioning any compromise or arrangement shall be 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.

¶29

Sri A.Sanjay Kishore, Learned Counsel for the petitioners, in both these company petitions, would state that the Balance Sheet as at 31.03.2012, has not as yet been drawn up; and, as such, the question of its being audited or placed for approval before the general body of the shareholders does not arise. The latest financial position of the transferor and transferee companies is the Balance Sheet as at 31.03.2011, and the auditor’s report for the said period has also been filed. In paragraph 22 of the company petitions, it is stated, both by the transferor and the transferee companies, that no investigation or proceeding is pending under Sections 235 to 237 or other provisions of the Companies Act, or under any Act against them.

¶30

A combined reading of the first and second provisos of Section 394(1), with Section 394A of the Act, shows that the scheme of amalgamation would 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.

¶31

Section 448 of the Act provides for the appointment of an Official Liquidator for each High Court. The principal function of the Official Liquidator is, undoubtedly, in relation to the winding up of the company, but that does not mean that the official liquidator has not been entrusted any other functions under the Act. Section 448 merely prescribes the manner and mode of appointment of the official liquidator and, once such an appointment is made by the Central Government, it is for the Legislature to clothe the official liquidator with any other duty which it considers expedient and necessary. The second proviso to sub-section (1) of Section 394 of the Act demands submission of the report from the official liquidator in cases of dissolution of the company without winding up. (Sumani Pvt. Ltd., In re¹⁹ ).

¶32

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 with another company, by

¶33

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 Limited² ).

¶34

In his report dated 21.03.2012, the Official Liquidator would state that he had, vide letter dated 15.02.2012, called for the statutory books and other relevant information from the transferor company; and the transferor company had furnished the information/documents sought for by him on 27.02.2012. After referring to the capital structure, objects of the company, and to the scheme of amalgamation, the Official Liquidator would state that, though the Balance Sheet as at 31.03.2011 shows that the transferee company has availed an unsecured loan for Rs.1,72,50,000/-, the no objection certificate/consent letter of such creditor has not been furnished. As noted hereinabove, along with his affidavit dated 24.04.2012, the director of the transferor company has stated that the said loan has since been repaid; and a copy of the letter received from the said creditor was enclosed to the said affidavit. This objection of the Official Liquidator, in relation to the transferor company, no longer survives.

¶35

In his report dated 19.03.2012, the Regional Director, South Eastern Region, Hyderabad, would state that no objection certificates were required to be obtained from the secured creditors, if any; and the stamp duty must be paid in accordance with the Indian Stamp Act, 1899 upon sanction of the scheme by

¶36

the Court. Paragraph 6 of the said report is extracted as under:

¶37

“I respectfully submit that as per the report of the Registrar of Companies, Andhra Pradesh, Hyderabad, dated 10.03.2012 furnished to this office there are no complaints received and investigations are pending against the Transferor and Transferee Companies”.

¶38

Learned Assistant Solicitor General appearing on behalf of the Regional Director would submit that the language employed therein is deficient; and, in fact, there are no complaints or investigations pending either against the transferor or the transferee companies.

¶39

The deficiency in the language employed by the Regional Director notwithstanding, I see no reason to disbelieve what had been stated in the Company Petitions more so as the Regional Director has not even referred to any investigation or complaint being pending against the transferor or the transferee companies.

¶40

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

¶41

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.,^[10] ; Central Inland Water Transport Corporation Limited. Vs. Brojo Nath Gangul y^[11] ) . 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 bona fide 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 )

¶42

The only question which remains to be examined is whether the scheme of amalgamation is in public interest. 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 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 strait-jacket formulae. No enumeration contained in judicial decisions of the

¶43

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. Vs. Mahindra Ugine Steel Co. Ltd.^[12] ) . 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.²⁵ and Bengal Hotels P. Ltd. In r e^[13] ) .

¶44

The amalgamation must fulfil some felt need, some purpose, some object and that must have some co-relation with public interest. The Court is charged with a duty to ascertain whether the affairs, of both the transferor and the transferee, have been carried on not only in a manner not prejudicial to its members but also that it is not against public interest. The expression “public interest” must take its colour and content from the context

¶45

in which it is used. (Union of India v. Ambalal Sarabhai Enterprises Lt d^[14] ) . 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:-

¶46

“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.”

¶47

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' Union²³ ). 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

¶48

putting its seal of approval on the scheme.

¶49

The High Court should examine whether the proposed 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 n^[15] ) .

¶50

A perusal of the scheme would show that, upon a scheme being sanctioned with effect from the appointed date, all assets of the transferor company would be transferred, and be vested in the transferee company, on a going concern basis so as to become the business, undertakings and properties of the transferee

¶51

company. Clause 4 relates to the transfer of the employees of the transferor company, and it is specifically stated thereunder that there were no employees in the transferor company; and the provisions relating to the employees service conditions and employees benefits are not applicable. Clause 6 gives details of the consideration and, upon the scheme coming into effect, the shareholders of the transferor company are to be issued 11 equity shares of Rs.10/- each of the transferee company in lieu of 25 equity shares of Rs.10/- each held by them in the transferor company; and these equity shares are to rank pari passu with the existing equity shares of the transferee company. Clause 16 stipulates that, upon the scheme being sanctioned by this Court under Section 391 read with 394 of the Act, and on its becoming effective, the transferor company shall be dissolved without going through the process of winding up with effect from the appointed date or such other date as may be fixed by the Court.

¶52

Both the transferor and the transferee companies, in their respective company petitions, detail the rationale for amalgamation of both the companies. It is stated that the amalgamation would enable them to synergise the customer offerings under one management; consolidation of the business would enable the transferee company to offer a unique value proposition to its customers; it would bring administrative and operational rationalization resulting in economies such as reduced overheads and expenses and optimal utilization of various resources; it would enable more efficient and economical control and conduct of the companies; and the financial resources of the

¶53

companies would be conveniently merged leading to a more and effective centralized management. In view of the aforesaid objects, it cannot be said that the scheme of amalgamation, if approved, would be against public interest.

¶54

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, the petitioner-transferor company 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.

RAMESH

RANGANATHAN,J

Date:22.08.2012

usd