Allowed

Galla Foods Limited v. -

Telangana HC20 Apr 2012CP/236/2011

Case brief

AI extract

What is this about?

The Court sanctioned a scheme of amalgamation between Galla Foods Limited and Mangal Precision Products Limited, holding that creditor meetings were unnecessary given their explicit consent and applying conditions regarding stamp duty, object clause amendments, and a bank guarantee for outstanding sales tax dues.

What did the court decide?

Sanctioned the scheme of amalgamation subject to conditions: unconditional bank guarantee for tax dues, payment of stamp duty, and amendment of the transferee company's objects clause.

Galla Foods 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.236 OF 2011 AND COMPANY PETITION No.237 OF 2011

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COMMON ORDER:

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Company Petition No.236 of 2011 is filed by Galla Foods Limited (hereinafter called ‘the transferor company’) and Company Petition No.237 of 2011 is filed by Mangal Precision Products Limited (hereinafter called ‘the transferee company’), seeking sanction of this Court to the scheme of arrangement cum amalgamation under Section 394 read with Section 391(2) of the Companies Act, 1956 and Rule 79 of the Company Court Rules, 1959.

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The transferor company was incorporated on 11.03.2004 under the name and style of “Galla Foods Private Limited”. It was subsequently converted into a public limited company, and its name stood changed to “Galla Foods Limited” on 09.03.2009. The registered office of the transferor company is situated at Renigunta –Cuddapah Road, Karakambadi, Tirupathi. The authorised capital of the transferor company, as at 31.03.2011, was 2.5 crore equity shares of Rs.10/- each for Rs.25 crores. Its issued, subscribed and paid-up capital as on that date was 1,60,90,000 equity shares of Rs.10/- each fully paid-up for Rs.16,09,00,000/-. The objects for which the transferor company was incorporated is to carry on business of manufacturers and for refinement, processing, preservation, dehydration, canning, bottling, freezing, packing and repacking of fruits and vegetable products, squashes, soups, syrups, juices and ice concentrates, nectars, jelly flavoured drinks, beverages etc and to carry on business of export and import and to act as commission agents and dealers of food products of all kinds; to carry on business of manufacturers and act as agents, brokers, exporters, importers, stockists, dealers and for refinement, processing, preservation, dehydration, canning, bottling, packing and

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repacking of milk and milk products, milk powder, cream butter, ghee, cheese, condensed milk, flavoured milk etc; to carry on business of manufacturers, buy, sell, import, export, prepare for the market and deal in food specialities such as processed foods, cereals, fruits and vegetables and canned, bottled or in any other consumable packing; deep frozen cooked and semi-cooked varieties of food, breakfast snacks, papads and instant foods, other food specialities, principally made out of corn, potatoes, cereals, grains, pulses and other edible articles, pickles and chutnies of all types, and various types of seasoning; to buy, sell, manufacture, import, export, prepare for market and deal in all types of confectioners, all types of sweets, chocolates, tamarind and tamarind paste and its products, groceries and provisions of all kinds, whether liquid or solid, tea, coffee, cooking oils and green pepper etc.

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Among the objects, incidental or ancillary to the attainment of the main objects, is Clause 24 whereunder the transferor company is empowered, to amalgamate or to enter into partnership or any arrangement for sharing profits, union of interests, cooperation, joint venture or reciprocal concession with any other person or persons, company or companies carrying on or engaged in or about to carry on or engage in or which can be carried on in conjunction therewith or which is capable of being conducted, so as directly to benefit the company. For the year ending 31.03.2011, the transferor company suffered a loss before tax of Rs.15,52,42,428/-.

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The transferee company was incorporated on 09.11.1990 under the name and style of Harsha Electronics Private Limited which changed its name to Mangal Precision Products Private Limited. After obtaining approval of the Central Government, vide proceedings dated 21.10.2004, it was subsequently converted into a public limited company on 19.03.2009. It changed its name to Mangal Precision Products Limited, and a fresh certificate of incorporation was issued by the Registrar of Companies, Andhra Pradesh at Hyderabad. The Registered Office of the transferee company is situated at Renugunta–Cuddapah Road, Karakambadi,

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Tirupathi. The authorised share capital of the transferee company, as at 31.03.2011, was 1,00,00,000 equity shares of Rs.10/- each for Rs.10 crores. Its issued, subscribed and paid-up share capital as on that date was 68,03,500 equity shares of Rs.10/- each for Rs.6,80,35,000/-. The main objects of the transferee company is to carry on business as manufacturers and producers, assemblers, dealers, importers, exporters, stockists, distributors, agents or otherwise deal in storage batteries used in industries, railways, post & telegraphs, navigation, ship army tanks, mining, power plants, automobiles and for any other industrial, commercial or domestic purposes; to carry on business of manufacturers, producers, assemblers, dealers, importers, exporters, stockists, distributors, agents or otherwise deal in the manufacture of dry batteries, button batteries, battery plates, battery separators, battery containers, cells, lids and battery components; to carry on business as manufacturers, producers, assemblers, dealers, importers, exporters, stockists, distributors, agents or otherwise deal in the manufacture of items such as voltage regulators, laminations for transformers, U.P.S. systems, chargers, investors and other related electrical equipment, sheet metal combiners for storage and office equipment, lead and plastic parts for storage batteries, galvanization of metal parts; to carry on business of manufacturers of items containing battery as main component like trickle charges, battery charges, emergency lighting systems, uninterruptible power systems etc. and all other electronic systems and components. Clause 24 of the objects, incidental or ancillary to the attainment of the main objects, of the transferee company is similar to Clause 24 of the objects, incidental or ancillary to the attainment of the main objects, of the transferor company. For the year ending 31.03.2011, the transferee Company made a profit before tax of Rs.15,43,70,266/-. Its profit after tax, for the year ending 31.03.2011, was Rs.10,38,63,293/-.

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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

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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 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

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the parties. (Miheer H. Mafatlal v. Mafatlal Industries Ltd^[1] ) .

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

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When a scheme of amalgamation/merger of a company is placed

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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.

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By order, in Company Application No.1611 of 2011 dated 20.10.2011, this Court appointed a Chairperson to conduct the meeting of the shareholders of the transferor company. The quorum for the meeting was fixed as five members, and the meeting of the shareholders was directed to be notified in an English Daily and a Telugu Daily. In his report dated 08.12.2011, the Chairperson reported that ten members holding 1,46,14,425 equity shares of the transferor company attended the meeting of which eight members personally attended, another person attended by authorisation and the other through his natural guardian; all the ten members present cast their vote in favour of the resolution for approving the scheme of arrangement and amalgamation between the transferor and transferee companies. The Chairperson’s report records the unanimous resolution of the members, present and voting at the meeting of the shareholders, according their approval to the proposed scheme of amalgamation.

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By order, in C.A.No.1612 of 2011 dated 12.12.2011, this Court directed the convening of the meeting of the shareholders of the transferee company, as on 30.11.2011, and appointed a Chairperson. In his report dated 08.12.2011, the Chairperson stated that ten members holding 60,52,500 equity shares of the transferee company attended the meeting of the shareholders; eight shareholders personally attended the meeting; one member was represented by way of authorization; and another was represented by his natural guardian. All the shareholders of the transferee company unanimously resolved to approve the proposed scheme of amalgamation between the transferor and transferee companies and authorized either the Board of Directors or a committee thereof to sign and

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execute necessary documents and perform all acts and deeds as were necessary to give effect to the proposed scheme of amalgamation.

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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 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 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 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

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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?

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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 advertisement, (Union of India v. Asia Udyog Pvt. Ltd^[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 re^[3] ) .

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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 Bharat Ferro Alloys In re^[4] ; Mafatlal Industries Ltd., In re^[5] ; Coimbatore Cotton Mills Ltd and Lakshmi Mills

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Co. Ltd., In re^[6] ; and Telesound India Ltd., In re^[7] ) . However, a different view was taken by the Bombay High Court, In Re ICICI Bank Limited^[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 the 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 to be heard 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.

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A perusal of the Balance Sheet of the transferor company, as at 31.03.2011, reveals that its secured loans was for Rs.48,85,17,110/-. The notes on accounts, of the Balance Sheet as at 31.03.2011, records that the secured loan was a term loan from State Bank of India and working capital loans from State Bank of India and Bank of Nova Scoita. Letters of consent from State Bank of India and Bank of Nova Scoita are enclosed whereby both these banks have given their consent to the proposed scheme of amalgamation. Under the head “unsecured loans”, in the Balance Sheet of the transferor company as at 31.03.2011, are the outstanding dues for Rs.8,91,99,000/-. The break up of the “unsecured loans” is as under:

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Name Amount 1. Dr.Ramachandra N.Galla Rs.3,26,99,000 2. Sri Jayadeve Galla Rs.5,53,00,000 3. Dr.G.Ramadevi Rs. 12,00,000

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Letters of consent to the proposed scheme of amalgamation is given

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both by Dr.Ramachandra N. Galla and Sri Jayadeve Galla. In his affidavit dated 30.01.2012 Dr.Ramachandra N. Galla has stated that he was the power of attorney holder of Dr. G.Ramadevi; a copy of the proposed scheme of amalgamation between the transferor and transferee companies and their respective shareholders was sent to Dr. G.Ramadevi at Illinois, United States of America; after perusing the scheme, she had confirmed her no objection to the proposed scheme of amalgamation; she had requested Dr.Ramachandra N. Galla to file her no objection to the proposed scheme of amalgamation on her behalf; and he, being the attorney of Dr. G.Ramadevi, had filed the no objection to the proposed scheme of amalgamation. A copy of the registered general power of attorney whereby Dr. G.Ramadevi had appointed her father Dr.Ramachandra N. Galla as her lawful attorney is also placed before this Court. It is thus evident that all the creditors under the head “unsecured loans” have given their consent to the proposed scheme of amalgamation; and, as such, the holding of the meeting of this class of creditors under the head “unsecured loans” is wholly unnecessary. Under the head “current liabilities”, in the Balance Sheet of the transferor company as at 31.03.2011, Rs.10,51,74,190/- is shown as due to the sundry creditors, and as advance from customers. In his affidavit dated 29.02.2012 Sri U.Satish Kumar, the Company Secretary of the transferor company, has stated that the sundry creditors of the transferor company, as at 31.03.2011 under the head “current liabilities”, was for Rs.7,26,82,964/- (which included trade creditors for Rs.4,95,41,270/- and Rs.2,31,41,694/- as liabilities for expenses). It is further stated that a majority of the trade creditors, constituting 82.84%, had given their consent to the proposed scheme of amalgamation. A list of sundry creditors who had given their consent to the proposed scheme of amalgamation is also furnished along with their letters of consent, the details of which are as under:

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A. Sundry C	reditors
Sl.No.	Name of the Supplier	Amount(in Rs.)
1.	Mangal Precision Products Ltd	2,45,90,356
2.	Shreenidhi Logistic Pvt Ltd.	50,43,460
3.	Pranav International Ltd.	43,70,651
4.	Gati Ltd	31,26,573

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5.	Vorx Bv	31,23,884
6.	Do-All Engineering Industries	13,58,549
7.	Amara Raja Industrial Services Pvt Limited	10,73,350
8.	SriRaja Enterprises	2,72,068
9.	Carre Mediterranean De Commercial International	2,12,850
10.	Max Chem Corporation	1,94,593
11.	Srinidhi Raja Corrugators	1,93,191
12.	Sri Vasavi Electricals & Engineering	1,56,877
	Total representing 88.24% of the total sundry for supplies of Rs.4,95,41,270/-	4,37,16,402

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Also furnished are the details of liabilities for expenses as on 31.03.2011 for Rs.2,31,41,694/-. Most of these amounts have been paid after 31.03.2011, or the provisions made in this regard were reversed. In his affidavit dated 29.02.2012, the Company Secretary would further state that the advance from customers, as on 31.03.2011, was for Rs.3,24,91,226/- out of which Rs.3,01,35,939/- was from M/s.Mangal Precision Products Limited (the transferee company). Along with the memo dated 17.04.2012, a letter of consent of the Company Secretary of the transferee company is enclosed (for this advance of Rs.3,01,35,939/-) conveying the no objection of the transferee company to the proposed scheme of amalgamation. It is evident, therefore, that the creditors under the head “current liabilities” have either been paid or have given their letters of consent to the proposed scheme of amalgamation except for a small minority of 11.76% from amongst the trade creditors. Since, even in a scheme of arrangement between the company and its creditors, Section 391(2) of the Act prescribes only a 3/4^th majority, and as more than 88% of the trade creditors have given their consent to the scheme of arrangement, holding of the meeting of the sundry creditors under the head “current liabilities” is wholly unnecessary.

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A perusal of the Balance Sheet of the transferee company, as at 31.03.2011, would show that the secured loans of the transferee company as at 31.03.2011 was for Rs.28,77,33,161/-. The break up of the secured loans is furnished in Schedule-3 to the said balance sheet. The term loan from Andhra Bank is for Rs.99,98,716/-; the term loan from State Bank of India is for Rs.8,09,71,553/-; the cash credit facility from Andhra Bank is for Rs.12,97,00,780/- and from State Bank of India for Rs.6,70,62,112/-. Letters

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of consent from Andhra Bank and State Bank of India are enclosed whereby these two banks have given their consent to the proposed scheme of amalgamation.

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The unsecured loans of the transferee company, as at 31.03.2011, is for Rs.14,72,54,034/-. The break up of the unsecured loans shows that the loan from Kotak Mahindra Bank was for Rs.12,11,46,575/-; interest free sales tax deferment loan was for Rs.1,05,47,271/-; and the unsecured loans from directors was for Rs.1,55,60,188/-. Letters of consent dated 26.09.2011 from Kotak Mahindra Bank, whereby they conveyed their no objection to the proposed scheme of amalgamation, is enclosed. The break up of the unsecured loans from directors (inclusive of interest) shows that these loans were from Dr.Ramachandra N. Galla for Rs.1,25,00,000/- and from Dr. G.Ramadevi for Rs.12,00,000/-. On this principal loan amount, the interest accrued in favour of Dr.Ramachandra N. Galla was for Rs.17,30,588/-, and in favour of Dr. G. Ramadevi for Rs.1,29,600/-. Letters of consent of Dr.Ramachandra N. Galla both as an unsecured creditor, and as the power of attorney holder for Dr.G.Ramadevi, have been placed before this Court. Except for the interest free sales tax deferment loan, all the other creditors, under the head “unsecured loans”, have given their consent to the proposed scheme of amalgamation and, as such, the holding of the meeting of such creditors is wholly unnecessary.

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The Balance Sheet of the transferee company, as at 31.03.2011, includes sundry creditors under the head “current liabilities” for Rs.30,71,19,034/-. Letters of consent from such sundry creditors, for a value of Rs.24,88,83,736/-, is enclosed, the break up of which is as under:

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A. Sundry	Creditors
Sl.No.	Name of the Supplier	Amount(in Rs.)
1.	Nyrstar Sales & Marketing Ag rep. its authorized agent The British Metal Corporation (India) Private Limited.	5,11,75,097
2.	Asian Plastic Machinery Co., Ltd.	3,91,44,842
3.	Bhagyanagar India Limited.	2,38,65,055
4.	Pennar Industries Limited.	2,32,06,273
5.	Mukan Limited.	1,92,19,413
6.	Amara Raja Infra Private Limited.	1,82,00,458
7.	Indian Oxides and Chemicals Ltd.	1,60,87,756

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8.	Formulated Polymers Limited	1,53,59,008
9.	Blend Colours Pvt Ltd	73,28,520
10.	Kundan Industries Limited	53,65,689
11.	RSAL Steel Private Limited	41,81,657
12.	ExxonMobil Chemical Asia Pacific	39,15,450
13.	Sabic Innovative Plastics India Pvt Ltd	29,71,678
14.	Titan Paints and Chemicals Ltd.	26,80,210
15.	Sri Rajeswari Enterprises	24,41,907
16.	M.J.N Industries	21,39,888
17.	Simplex Steels	20,93,904
18.	Trans(India) Shipping Private Limited	18,01,205
19.	Metal Guard Private Limited	15,95,061
20.	Expo Freight Pvt. Ltd.	14,10,783
21.	Good Tight Fasteners	12,55,111
22.	Shreenidhi Logistics Pvt Ltd	12,11,106
23.	Galaxy Tools & Hardwares	11,48,955
24.	Rajiv Plastics Limited	10,95,711
	Total representing 81.04% of the total sundry creditors of Rs.30,71,19,034/-	24,88,83,736

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It is evident from the afore-extracted table that, as against the stipulated 75% majority even in a scheme of arrangement between the company and the creditors, more than 81% of the sundry creditors under the head “current liabilities” have given their consent to the proposed scheme of amalgamation; and, as such, holding of the meeting of the sundry creditors, under the head “current liabilities”, is wholly unnecessary.

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In addition thereto, are the dues payable towards sales tax, excise duty/service tax, TDS and TCS payable and outstanding liabilities. A tabular statement, furnishing details of these statutory payments, is filed by the company secretary of the transferee company along with his affidavit dated 17.04.2012. The outstanding liabilities under the head “current liabilities” is for Rs.2,56,12,824/-. Details of payment of this amount is also furnished by way of a tabular statement along with the affidavit dated 17.04.2012 filed by the company secretary of the transferee company. As the payments aforementioned have been made subsequent to 31.03.2011, and details of such payment have been furnished, no useful purpose would be served in the transferee company being asked to obtain letters of consent for such dues.

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As noted hereinabove among the unsecured loans, of the transferee

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company, includes the interest free sales tax deferment loan for Rs.1,05,47,271/-. From out of Rs.1,05,47,271/-, a sum of Rs.3,53,102/- is said to have been paid on 27.7.2011 and 15.3.2012 leaving the outstanding balance due of Rs.1,01,94,169/-. In the affidavit filed by the Company Secretary, of the transferee company dated 19.4.2012, it is stated that the transferee company is approaching the Commissioner of Industries, Government of A.P. seeking their consent for the proposed of scheme of amalgamation of the transferor company with the transferee company; the transferee company undertook to furnish a bank guarantee in favour of the Government of A.P. for the outstanding dues of Rs.1,01,94,169/- for a period of one year; if the transferee company received no objection/consent letter for the proposed scheme of amalgamation from the Government of A.P. within a period of one year they would file the necessary application before this Court seeking return of the bank guarantee; in case the transferee company was unable to obtain consent from the Government of A.P., within a period of one year, they undertook to extend the bank guarantee till the entire sales tax deferment loan was totally repaid. In view of the undertaking furnished on behalf of the transferee company, by its Company Secretary, I consider it appropriate to stipulate, as a condition for according sanction to the scheme of amalgamation, the requirement of the transferee company furnishing an unconditional bank guarantee for Rs.1,01,94,169/- from a Nationalized Bank in favour of the Government of A.P., or any competent officer of the Government of A.P., for a period of one year, and in case the transferee company does not obtain letter of consent/no objection from the Government of A.P. to the scheme of amalgamation within a period of one year, then the said bank guarantee shall be renewed till the entire outstanding dues of Rs.1,01,94,169/- is repaid in its entirety. The Balance Sheet of the transferee company, as at 31.3.2011, also reflects a deferred tax liability of Rs.6,58,62,688/-. In the affidavit filed by the Company Secretary of the transferee company dated 19.4.2012, this liability is explained as the difference between the depreciation provided for in the books of accounts of the transferee company, and the depreciation required to be provided in

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accordance with the provisions of the Income Tax Act.

¶42

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. The latest financial position of the transferor and the transferee companies, and the latest auditors report as furnished, is for the year ending 31.3.2011. It is no doubt true that the subsequent year ending 31.3.2012 also expired three weeks ago. Let alone the books of accounts of the transferor and transferee companies being audited, the financial statements for the year ending 31.3.2012 would not even have been finalized by the date of this order. The requirement of the proviso to Section 391(2), regarding furnishing of the latest financial position and the auditors report, must, therefore, be held to have been complied with. In the petition filed both by the transferor and the transferee companies it is specifically stated that no investigation proceedings under Sections 235 to 251 of the Act are pending against the transferor and transferee companies.

¶43

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. Section 394 of the Act casts an obligation on the Court to be satisfied that the scheme of amalgamation or merger is not

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prejudicial to the interest of its members or to public interest. (Sesa Industries Limited v. Krishna H. Baja j^[9] ) . 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. 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 is 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's case^[10] ) .

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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 the official liquidator is of

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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 Limited⁹ ).

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A perusal of the report of the Official Liquidator (O.L. Report No.13/12) would show that the Official Liquidator had called for the information and statutory books from the transferor company and the same had been furnished by the said company. The Official Liquidator records his observations regarding the capital structure, the name and registered office and objects of the transferor company as also the scheme of amalgamation. The objection taken by him is that the transferor company has not obtained the consent of the unsecured creditors for Rs.8,91,99,000/-. As letters of consent have since been obtained from the class of creditors under the head “unsecured loans”, and has been placed before this Court, the objection of the Official Liquidator in this regard is no longer valid. The Official Liquidator would state that he was of the opinion that the affairs of the transferor company do not appear to have been conducted in a manner prejudicial to the interests of the members of the company or to the public interest.

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In his report, filed on behalf of the Central Government, the Regional Director, South Eastern Region, Ministry of Corporate Affairs, Hyderabad, would state that the transferee company has to pay the necessary stamp duty under Article 20(d) of the Indian Stamp Act, 1899 as applicable to the State of A.P. upon the sanction of the said scheme by this Court; the transferee company would also be required to amend the objects suitably to undertake the transferor company’s business also. Both the objections raised on behalf of the Central Government do not necessitate the proposed scheme of amalgamation being rejected, and it would suffice if compliance with these two requirements is made a condition for sanction of the scheme.

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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 judgment over the informed view of the concerned parties to the scheme, as the same is best left to the

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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 Limited⁹ ; Hindustan Lever Employees' Union v Hindustan Lever Ltd. ,^[11] ; Central Inland Water Transport Corporation Limited. Vs. Brojo Nath Ganguly^[12] ) . 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 Limited⁹ )

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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 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

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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

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Co. Ltd .^[13] ) . 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

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Ugine Steel Co. Ltd.¹³ and Bengal Hotels P. Ltd. In re^[14] ) .

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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 companies, 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 in which it is used. (Union of India v. Ambalal Sarabhai Enterprises Ltd^[15] ) . 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 straitjacket. 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

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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' Union¹⁰ ). 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.

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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 bonafide 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 bonafide scheme under Section 391. (Zee Interactive Multimedia Ltd., In rein^[16] ) .

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A perusal of the scheme of amalgamation would show that it is in three parts. Part I titled as “preliminary” contains the definitions, the capital structure, the date of taking effect, and the operation date. Part II deals with the Scheme, and Clause 4 thereunder relates to transfer of the undertaking. Clause 4.2 relates to transfer of assets, and Clause 4.3 relates to transfer of debts and liabilities. Clause 4.4 relates to inter-se transactions. Clause 8 deals with employees and, under Clause 8.1, upon the scheme becoming effective all permanent employees of the transferor company shall become the employees of the transferee company without any break or interruption in service, and on terms and conditions not less favourable than those on which they were engaged by the transferor company; and the services of all permanent employees with the transferor company shall not be treated as having been broken or interrupted for the purpose of Provident Fund or Gratuity or superannuation or other statutory purposes. Clause 8.2 provides that the Provident Fund, gratuity fund and pension and/or superannuation fund or any other special fund created or existing for the benefit of the staff, workmen and other employees of the transferor company shall stand substituted by the transferee company. Clause 10 deals with issue and allotment of shares by the transferee company and, thereunder, the members of the transferor company are be issued one equity share of Rs.10/- each for every 75 equity shares of Rs.10/- each held by them in the transferor company.

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The rationale of the scheme is that the amalgamation of the transferee and the transferor companies would enable the amalgamated company to carry on the combined business more economically and efficiently; the amalgamation is expected to bring greater management focus, greater financial strength and economies of scale and also consolidate and streamline the holdings of the shareholders for a better and a more efficient control; the amalgamation would further enable the companies to pool their financial, managerial and technical resources in order to meet the challenges of the competitive market; the amalgamation would also be conducive to avoidance of duplication and reduction in administration and other overhead

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expenses and the amalgamation would, therefore, be in the best interest of both the companies and their respective shareholders. It is also stated that both the transferor and the transferee companies are closely held limited companies, and the shareholders of both the companies are almost common; and both the companies ought to amalgamate in the interest of its members and creditors and to avail common managerial expertise and efficiency in furtherance of business operations of both the companies more efficiently. In view of the objects aforementioned it cannot be said that the scheme if approved, subject to conditions, would be against public interest. I consider it appropriate, therefore, to sanction the scheme of amalgamation on the

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following conditions:

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(i) An unconditional bank guarantee from any Nationalized Bank for Rs.1,01,94,169/for a period of one year shall be furnished by the transferee company in favour of the Government of Andhra Pradesh or any competent authority in this regard. In case the consent as mentioned above is not forthcoming from the Government of Andhra Pradesh to the scheme of amalgamation, then the said bank guarantee shall be renewed periodically till the entire interest free sales tax deferment loan is repaid in its entirety;

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(ii) stamp duty shall be paid as stipulated under Article 20(d) of Schedule 1-A of the Indian Stamp Act, and proof of payment shall be enclosed along with the certified copy of the sanction order to be filed with the Registrar of Companies; and

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(iii) the transferee company shall not undertake or carry on the business being carried on hitherto by the transferor company unless and until its objects are suitably amended in accordance with the provisions of the Companies Act to enable the transferee company to carry on the business hitherto being carried on by the transferor company.

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As required under Section 394(3) of the Companies Act, read with Rule 81 of the Companies (Court) Rules, 1959, the petitioner 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:20.04.2012 MRKR/USD/ASP

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[1] 1997(1) SCC 579 [2] (1974) Vol.44 Com. Cases 359 (Delhi)

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