Allowed

M/s.Nsl Sez (Chennai) Private Limited. v. -

Telangana HC22 Mar 2012CP/211/2011

Case brief

AI extract

What is this about?

The court sanctioned a scheme of amalgamation between a transferor and transferee company. It held that separate petitions by both companies are not mandatory and a creditors' meeting is dispensed with if the creditors have already consented to the scheme, emphasizing the court's peripheral supervisory role.

What did the court decide?

Sanction of the scheme of amalgamation with the proviso to comply with Section 394(3) by filing the certified order with the Registrar.

M/s.Nsl Sez (Chennai) Private Limited. Vs - — Company and Corporate | Telangana HC (2012)

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THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN

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COMPANY PETITION No. 211 OF 2011

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ORDER:

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This Company Petition is filed by M/s.NSL SEZ (Chennai) Private Limited (hereinafter referred to as the ‘transferor company’), under Sections 391 and 394 of the Companies Act, 1956 (the Act), for sanction of the scheme of amalgamation with M/s.Serene Estates Private Limited (hereinafter referred to as the ‘transferee company’) and their respective shareholders with effect from 31.03.2011.

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The transferor company was originally incorporated, in the State of Andhra Pradesh on 05.12.2001, under the name and style of M/s.Zillion Estates Private Limited. The company changed its name to M/s.NSL SEZ (Chennai) Private Limited, and a fresh certificate of incorporation was issued by the Registrar of Companies, Andhra Pradesh, Hyderabad on 02.06.2007. The registered office of the transferor company is situated at Hyderabad. Its authorized share capital is Rs.7,50,00,000/- divided into 75,00,000/- equity shares of Rs.10/- each. Its issued, subscribed and paid up capital as at 31.03.2011 was Rs.7,49,99,110/- divided into 74,99,911 equity shares of Rs.10/- each fully paid up. The entire paid up share capital of the transferor company is held by the transferee and its nominee. The main objects for which the transferor company was incorporated is (i) to carry on the business of real estate promoters, to purchase land, layout, convert, develop housing plots, commercial plots and industrial plots, and sell them on outright basis, or by any mode or method, which is convenient and suitable to the company; (ii) to layout, develop, construct, build, erect, demolish, re-erect, alter, repair, remodel or any other work in connection with any building or building

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scheme, roads, highways etc; (iii) to carry on the business of hotels, restaurants, amusement and holiday resorts; and (iv) to carry on the business of development, maintain Special Economic Zones (SEZ), commercial and residential complex and infrastructural facilities. For the financial year ending 31.03.2011, the transferor company suffered a loss of Rs.2,85,50,071/-.

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The transferee company was incorporated in the State of Andhra Pradesh on 04.01.2006. Its registered office is situated at Hyderabad. Its authorized share capital is Rs.6,01,00,000/- divided into 60,10,000 equity shares of Rs.10/- each. Its issued, subscribed and paid up share capital is Rs.6,01,00,000/- divided into 60,10,000 equity shares of Rs.10/- each. The main objects for which the transferee company was incorporated is (i) to carry on the business of real estate builders, developers, promoters, architects, supervisors, contractors, consultants, dealers and agents for real estate, including development of townships and sale of plots; and (ii) to pursue, sell, develop, take in exchange, lease, hire, acquire, real or personal estate including lands, buildings, easement or interest with respect to any property, carry on business of real estate dealers, estate owners, undertake construction activities and development of housing plots etc. For the financial year ending 31.03.2011, the transferee company suffered a loss of Rs.70,87,97,072/-.

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On the question whether a single petition can be filed or whether two separate petitions are required to be submitted on behalf of both the transferor and the transferee companies, in a scheme of amalgamation of a 100% subsidiary with its holding company, there is nothing in Section 394 of the Act which requires an application to be made both by the transferor and the transferee companies separately as long as the proposed scheme is not prejudicial to the interests of

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the members of the company or to public interest. The Court is required, under the said section, to ascertain whether the proposed scheme is in any manner prejudicial to the interests of the members of each of the companies or to public interest. As long as the scheme, which is the same for both the transferor and the transferee companies, does not affect the rights of members of the transferee company or its creditors, and does not involve a reorganisation of the share capital of the transferee company, there is no need or necessity for the transferee company to file an application under Section 391 or 394 of

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the Act. (Andhra Bank Housing Finance Limited., In re .^[1] ) . Whether each one of the companies involved in the scheme should file a separate application, or whether both the companies can file a single application, is a matter of practice. The Act is silent on this aspect and the rules, framed under the Act, have not made any provision in this

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regard. (In re Nebula Motors Limited^[2] ) . If the scheme of amalgamation is between a 100% subsidiary, and its holding company, then the scheme of amalgamation, if it otherwise satisfies the requirements, can be sanctioned without there being a corresponding application taken out by the transferee company. There is no further necessity for the transferee company to seek separately the sanction of the Scheme of Amalgamation of the transferor company with it. (In re M/s. Sreenivasa Pharma Private Limited^[3] ; and In re M/s. Odyssey India Ltd^[4] ) .

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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

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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 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 the 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.

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(Miheer H. Mafatlal v. Mafatlal Industries Ltd^[5] ) .

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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

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by the Court, be binding on all the creditors and all the members of the Company. The proviso to Section 391(2) requires the Court to be satisfied that the Company, which has made an application under subsection (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 auditors report on the accounts of the Company or pendency of any investigation proceedings in relation to the Company under Sections 235 to 251 and the like before sanctioning any compromise or arrangement. Under sub-section (3), the order made by the Court shall have no effect until a certified copy of the Order had been filed with the Registrar.

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The Transferor Company filed C.A. No.1665 of 2011 requesting this Court to dispense with the convening of the meeting of its shareholders. This Court, in its order in C.A.No.1665 of 2011 dated 04.11.2011, observed that as there were only two shareholders in the transferor company, and both of them had placed on record their notarized affidavits consenting to the proposed scheme of amalgamation, there was no necessity for convening the meeting of the shareholders of the transferor company for consideration of the proposed scheme of amalgamation, and the convening of the meeting of the shareholders of the transferor company was, therefore, dispensed with. The company petition was admitted on 29.11.2011, and the date of notice of hearing of the company petition was published in “Business Standard” (english daily) and “Andhra Bhoomi” (telugu daily) (Hyderabad editions) on 02.12.2011. Notices were issued both to the Central Government and the Registrar of Companies as required under Section 394A and the second proviso to Section 394(1) of the Act respectively. On behalf of the Central Government, the Regional Director, South Eastern Region, Ministry of

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Corporate Affairs, Hyderabad has filed his report. The Official Liquidator has also filed his report.

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The next question which arises for consideration is whether in a scheme of arrangement between a company and its members, a meeting of the creditors of the company is required to be called for? A creditor, who has a debt due from the transferor company, would, on the scheme of amalgamation being sanctioned, be required to look not to the transferor company for repayment of his dues but to the transferee company with whom he neither had any dealings in the past nor privity of contract prior to its substitution in the place of the transferor company. In a given case, the net worth of transferee company may have eroded or it may not have sufficient liquidity to repay the creditor, as per the original terms agreed between him and the transferor company. Whether the creditor would be adversely affected by being required to deal with the transferee company, in substitution of the transferor company, is a matter of perception of the creditor. (Zee Interactive Multi Media Ltd., In re^[6] , Mayfair Limited and Zodiac Clothing Co. Ltd In re^[7] , Union of India v. Asia Udyog Pvt. Ltd^[8] ) .

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Can failure to hold a meeting of the Creditors, in a scheme of arrangement between the Company and its members, be justified on the ground that it is always open to the Court, on a bare perusal of the audited financial statements placed before it, to ascertain whether or not their interests are safeguarded? Would that not amount to usurping the rights of the creditors to decide for themselves whether or not to approve the scheme? In the light of the settled legal position that the Court has no power to usurp the rights of the class of members or creditors to decide whether or not to approve the scheme, if the class

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whose interests are affected by the scheme, neither assent to the scheme nor approve of it in a meeting held in accordance with the statutory provisions, and the Court cannot confirm the scheme even if it considers that the class concerned has been fairly dealt with or that it would have approved the scheme, (Palmers Company Law, 21st Edn., page 742), would the Court be justified in examining the scheme and recording its satisfaction that the interests of the creditors are not affected, when these are matters which the creditors should have been permitted to examine and decide for themselves in a meeting to be called for this purpose?

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If the jurisdiction of the Company Court, in examining a scheme of arrangement, is peripheral, supervisory and not appellate, (since it does not have the expertise to delve deep into the commercial wisdom of the members who have ratified the scheme by the prescribed majority, (Miheer H. Mafatlal⁵ ) on what basis would the Court decide that, in the facts and circumstances of a given case, a meeting of the creditors or a class of them should or should not be held to ascertain whether they approve of the scheme or not?

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Section 391(1) enables the Court, on the application of a 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 3/4^th in value of the creditors or members agree, in the meeting, to approve 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) is construed as requiring the Court to

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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 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^th 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 or the creditors, is accepted would that not render the words “as the case may be” in Section 391(1) mere surplusage? These are several questions which need answers.

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On these questions one view is that the creditors are not

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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, (Asia Udyog Private Limited⁸ ), 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 re^[9] ) .

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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

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Bharat Ferro Alloys In re^[10] ; Mafatlal Industries Ltd., In re^[11] ; Coimbatore Cotton Mills Ltd and Lakshmi Mills Co. Ltd., In re^[12] ; and Telesound India Ltd., In re^[13] ) .

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However, a different view was taken by the Bombay High Court, i n Re ICICI Bank Limited^[14] , and it was held that Section 391(1) gives a discretion to the Court to convene a meeting of the creditors or

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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 Subsection (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.

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A perusal of the balance sheet of the transferor company would show that its unsecured loans are for Rs.61,99,29,136/-, out of which Rs.61,84,29,136/- represents the unsecured loan advanced by M/s. NSL Infratech Private Limited, (the parent company of the transferor company), and the amount due to the directors is Rs.15,00,000/-. Along with the memo dated 24.01.2010, the transferor company has placed before this Court a letter dated 27.09.2011 addressed to it by Ms M. Asha Priya of M/s. NSL Infratech Private Limited wherein they acknowledged having advanced Rs.61,84,29,136/-. By the said letter, M/s. NSL Infratech Private Limited accorded their consent to the proposed scheme of amalgamation. Also enclosed to the memo is a copy of the resolution dated 12.09.2011 passed at the meeting of the Board of Directors of M/s. NSL Infratech Private Limited giving their consent, as an unsecured creditor of the transferor company, and authorising Ms M. Asha Priya and Sri P. Nageswara Rao to take all

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necessary steps to do all acts and things as may be considered necessary as an unsecured creditor of the transferor company. Sri M. Prabhakar Rao, by his letter dated 13.10.2011, informed the Board of Directors of the transferor company that he had advanced an unsecured loan of Rs.15,00,000/-; he had gone through the scheme of the amalgamation; and was giving his consent to the proposed scheme of amalgamation.

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Under the head “current liabilities”, in the Balance Sheet of the transferee company, Rs.25,76,604/- are the dues of the sundry creditors; dues to the holding company is for Rs.4,57,144/-; the total outstanding dues of creditors, other than micro enterprises and small enterprises, is Rs.16,93,962/-; and other liabilities are for Rs.4,25,498/. Along with the memo dated 22.02.2011, the break up of the sundry creditors for Rs.25,76,604/- is furnished, of which Rs.12,94,762/- is said to have been subsequently paid off. From out of the current liabilities of Rs.25,76,604/-, only Rs.12,81,842/- is said to be outstanding as on 28.02.2011. The affidavit of Sri M. Prabhakar Rao, the Director of the transferor company dated 28.02.2012, is filed wherein it is stated that out of Rs.25,76,604/-, dues for Rs.12,94,762/was subsequently discharged, and only Rs.12,81,842/- remains due. This sum of Rs.12,81,842/- represents the amount due and payable to M/s. NSL Infratech Private Limited; and Rs.1,07,400/- are the dues payable to Sri Siva Koteswara Rao. Also enclosed is a letter dated 21.01.2012 addressed by the Director of M/s. NSL Infratech Private Limited acknowledging that they are the unsecured creditors of the transferor company for Rs.4,57,144/-; they had gone through the scheme of amalgamation; and they were giving their consent to the proposed scheme of amalgamation. Also enclosed are similar letters from Sri A.V.V. Siva Prasad for Rs.4,00,000/-; M/s. NSL Infratech

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Private Limited for Rs.3,17,298/-; and Sri Siva Koteswara Rao for Rs.1,07,400/-. It is evident, therefore, that all the sundry creditors, under the head “current liabilities”, have either been paid their dues or have given their consent to the proposed scheme of amalgamation. It is wholly unnecessary, therefore, for the meeting of the creditors representing unsecured loans, or those shown under the head “current liabilities”, to be held, and failure to hold a meeting of the class of creditors representing unsecured loans and sundry creditors under the head “current liabilities”, is of no consequence. As both M/s. NSL Infratech Private Limited and Sri M. Prabhakar Rao who had advanced an unsecured loan of Rs.15,00,000/- to the petitioner, had given their consent to the proposed scheme of amalgamation, the holding of the meeting of this class of creditors (unsecured loans) is also unnecessary.

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While the Balance Sheet of the transferee company, as at 31.03.2011,shows that it suffered a loss after tax of Rs.3,44,636/-, its Reserves and Surplus as at 31.03.2012 is in excess of Rs.41.62 crores. Likewise, the Balance Sheet of the transferor company shows that it suffered a loss after tax of Rs.2,74,88,940/-. However its Reserves and Surplus, as at 31.03.2011, is Rs.5,98,47,892/-.

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As required under Section 391(2), copies of the Balance Sheets and Profit and Loss accounts of both the transferor and transferee companies, for the year ending 31.03.2011, have been furnished. The Auditors report on the financial statements of both the transferor and transferee companies as at 31.03.2012 has also been placed before this Court. It is stated in paragraph 19 of the proposed scheme that no investigation or proceedings are pending under Sections 235, 237 or other provisions of the Act against the transferor company.

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In his report submitted on behalf of the Central Government, the

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Regional Director, South Eastern Region, Corporate Affairs, Hyderabad refers to the proposed scheme of amalgamation in detail, and submits that, since there are no shares allotted, and as no consideration is being paid by the transferee company to the shareholders of the transferor company, the transferee company need not pay stamp duty under Article 20(d) of the Indian Stamp Act, 1899 as applicable to the State of Andhra Pradesh upon the sanction of the scheme by this Court. He also states that neither were complaints received nor is an investigation pending against either the transferor or the transferee and, if any, company law violations are noticed, they would be dealt with separately against the transferee company.

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In his report, the Official Liquidator would state that he had called for the statutory books and other relevant information which were furnished to him and he had examined the books of accounts, the audited balance sheet and the various clauses of the proposed scheme of amalgamation; and letters of consent for Rs.15,00,000/-, due to the directors, have not been obtained. As noted hereinabove, the amount shown as due to the directors of Rs.15,00,000/- is the amount payable to Sri M. Prabhakar Rao who, by his letter dated 13.10.2011, had given his consent to the proposed scheme of amalgamation. The said letter dated 13.10.2011 of Sri M. Prabhakar Rao has, evidently, not been brought to the notice of the Official Liquidator. The only objection taken by the Official Liquidator to the proposed scheme of amalgamation does not survive as the director, who had advanced Rs.15,00,000/- as an unsecured loan to the petitioner, has given his consent to the proposed scheme of amalgamation.

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The proposed scheme of amalgamation, as filed in this Court, would show that the entire business and the whole of the undertaking

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of the transferor company shall, pursuant to the sanction of the scheme by this Court, and under the provisions of Sections 391 to 394 of the Act and other applicable provisions, if any, of the Act, be and shall stand transferred, and be deemed to and stand vested in the transferee company without any further act, instrument or deed. Clause 4.2 of the scheme relates to transfer of assets. Under clause 4.2.1 (a), all the assets and properties comprised in the transferor company shall stand transferred to and vested in the transferee company. Likewise all debts, loans, advances, licences, permits, quotas, approvals held or availed by the transferor shall stand transferred to and be vested in the transferee. Clause 4.3 deals with transfer of liabilities and, under clause 4.3.1, all secured, unsecured debts, sundry creditors, liabilities etc of the transferor shall stand transferred to, and vest in, the transferee along with any charge, encumbrance lien or security. Clause 4.4 relates to encumbrances; and, under clause 4.4.2, all existing securities, mortgages, charges, encumbrances or liens created by the transferor over the assets transferred to the transferee shall continue to relate to and attach to such assets or any part thereof to which they are related or attached prior to that date, and as are transferred to the transferee. Clause 5 relates to consideration and provides that, since the entire issued, subscribed and paid up share capital of the transferor company is held by the transferee and, upon the scheme becoming effective, no shares of the transferee company shall be allotted in lieu or exchange of its holding in the transferor company and the share capital of the transferor company shall stand cancelled, extinguished without any further application, act or deed. Clause 9 relates to employees and, under clause 9.1, upon the scheme becoming effective, the employees of the transferor company shall become the employees of the transferee company without any

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break or interruption in their service, and on the same terms and conditions on which they were engaged earlier. Clause 13 relates to the dissolution of the transferor company and, under clause 13.1, upon the scheme becoming effective, the transferor company shall stand dissolved without winding up, and the Board of Directors and any committees thereof of the transferor company shall, without any further act, instrument or deed, be and stand transferred to the transferee company. Clause 16 relates to the conditionality of the scheme, and is subject to sanction of the High Court and, under Sections 391 and 394 of the Act, on all necessary orders under Section 394 of the Act being obtained and filed with the Registrar of Companies.

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The rationale of the scheme, as is evident from the proposed scheme of amalgamation, is that both the transferor and transferee are engaged in real estate business, and the scheme of amalgamation would enable them to consolidate their business operations, and ensure reduction in administrative cost, overheads and redundancies. 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, 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.

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RAMESH RANGANATHAN, J

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Date:22.03.2012 usd

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