Allowed

M/s Avanti Feeds Limited v. -

Telangana HC18 Apr 2012CP/24/2012

Case brief

AI extract

What is this about?

The Court sanctioned a scheme of amalgamation between two companies engaged in shrimp feed manufacturing. After confirming creditor consents and review of official reports, the Court held the scheme fair, reasonable, and beneficial to public interest, subject to a bank guarantee for government dues.

What did the court decide?

Sanction of the scheme of amalgamation subject to the transferee company furnishing an unconditional bank guarantee for the sales tax deferment loan in favor of the Government of Andhra Pradesh.

M/s Avanti Feeds Limited Vs - — Company and Corporate | Telangana HC (2012)

¶1

THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN COMPANY PETITION Nos.23 AND 24 of 2012 COMMON ORDER:

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These company petitions, under Sections 391 and 394 of the Companies Act, are is filed by M/s Avanti Thai Aqua Feeds Private Limited (hereinafter referred to as “the transferor company”) and Avanti Feeds Limited (hereinafter referred to as “the transferee company”) seeking sanction of this Court to the proposed scheme of amalgamation.

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The transferor company was incorporated as a private limited company in the State of Andhra Pradesh on 20.11.2008. Its registered office is situated at Hyderabad. Its authorized capital, as at 31.3.2011, was Rs.7.85 Crores divided into 78.50 lakhs equity shares of Rs.10/each. Its issued, subscribed and paid up capital, as at 31.3.2011, was Rs.7,83,96,000/- divided into 78,39,600 equity shares of Rs.10/- each fully paid up. The main objects of the transferor company are to manufacture, produce, make, process, mix, refine, prepare, pack, store, sell, import, export and deal in all kinds of machinery, equipment, medicines, chemicals, feeds, supplements, nutritive and additives used in aquaculture, poultry and live stock and to act as procurers, processors, dealers, importers, representatives, consultants and collaborators in all matters relating to the business of aquatic products, poultry products and other stock products and their by-products; to establish and carry on the business of rearing, catching, culturing, hatchery, breeding, cultivating, harvesting all varieties of marine products such as shrimp, prawn, lobster, crab, fish, shell fish or other aquatic animals or plants or part thereof, whether in inland waters or in the seas or in land by operation of mechanized trawlers, boats, country boats or otherwise and to process through manual, mechanical,

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chemical, and such other means, and to pack and prepare them or any product or by-product therefrom for sale and delivery in foreign and inland markets. For the year ending 31.3.2011, the transferor company made a profit before tax of Rs.18,76,381/-, and its profit after tax was Rs.11,87,827/-. Its reserves and surplus, as at 31.3.2011, was Rs.27,54,683/-.

¶5

The transferee company was originally incorporated under the name and style of M/s Avanti Industries Private Limited on 6.1.1993 in the State of Andhra Pradesh. It changed its name later to M/s Avanti Industries Limited, and a fresh certificate of incorporation, consequent on change of name, was issued by the Registrar of Companies, Andhra Pradesh on 11.11.1994. The registered office of the transferee company is situated at Hyderabad. Its authorised share capital is Rs.8.00 crores divided into 80.00 lakhs equity shares of Rs.10/- each. Its issued, subscribed and paid-up capital, as at 31.3.2011, was Rs.8.00 crores divided into 80.00 lakhs equity shares of Rs.10/- each. The objects, for which the transferee company has been incorporated, are to carry on business of importers, exporters, manufacturers and dealers in all kinds of tobacco, cigars, cigarette filter material of all descriptions, cigarette shells, slides, boxes including printing of whatsoever process and any other articles and things required by or convenient to smokers requisites; to establish and carry on the business of rearing, catching, culturing, hatchery, breeding, cultivating, harvesting all varieties of marine products such as shrimp, lobster, crab, fish, shell fish or other aquatic animals or plants or part thereof, whether in inland waters or in seas or on land by operation of mechanised trawlers, boats, country boats or otherwise and to process through manual, mechanical, chemical and such other means, and to pack and prepare them or any product or by-product therefrom for sale

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and delivery in foreign and inland markets; to manufacture, produce, make, process, mix, refine, prepare, pack, store, sell, import, export and deal in all kinds of machinery, equipment, medicines, chemicals, feeds, supplements, nutritive and additives used in aquaculture, poultry and live stock, and to act as procurers, processors, dealers, importers, representatives, consultants and collaborators in all matters relating to the business of aquatic products, poultry products and other live stock products and their by-products. For the year ending 31.3.2011, the transferee company made a profit before tax of Rs.5,11,13,953, and its profit after tax was Rs.3,41,79,643/-. Its reserves and surplus, as at 31.3.2011, was Rs.63,24,84,880/-.

¶7

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 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

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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.

¶9

(Miheer H. Mafatlal v. Mafatlal Industries Ltd^[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 Court, be binding on all the creditors and all the members of the Company.

¶11

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. By order of this Court, in C.A.No.1873 of 2011 dated 14.12.2011, the requirement

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of holding a meeting of the members of the transferor company was dispensed with as both the shareholders had given their affidavits consenting to the proposed scheme of amalgamation. This court held that there was no need for convening the meeting of the shareholders of the transferor company for considering the proposed scheme of amalgamation. Pursuant to the order of this Court, in C.A.No.1874 of 2011 dated 14.12.2011, the meeting of the members of the transferee company was directed to be convened and conducted on 21.1.2012. The Chairman of the said meeting, in his report dated 27.1.2012 submitted to this Court, stated that notices were served individually to all the equity shareholders, and also by advertisement published in Business Standard (English daily) and Andhra Bhoomi (Telugu Daily); the meeting was attended by 34 members in person holding shares valued at Rs.5,62,49,260/- divided into 56,24,926/- equity shares of Rs.10/- each, and 11 members who held shares valued at Rs.23,30,290/-, divided into 2,33,029 equity shares of Rs.10/- each had voted by proxy, aggregating to the value of Rs.5,85,79,550/divided into 58,57,955 equity shares of Rs.10/- each out of the issued, subscribed and paid up capital of the transferee company; and the share holders had unanimously resolved to approve 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

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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 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

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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?

¶16

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] ) .

¶17

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

¶18

Bharat Ferro Alloys In re^[4] ; Mafatlal Industries Ltd., In re^[5] ;

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Coimbatore Cotton Mills Ltd and Lakshmi Mills 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 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.

¶20

A perusal of the Balance Sheet of the transferor company, as at 31.3.2011, would show that its secured loans on that date was Rs.3,74,71,051/-. The entire loan is a term loan from State Bank of India. Along with the affidavit, filed by the Director of the transferor company dated 20.3.2012, is the letter addressed by the transferor company to SBI seeking their consent for the proposed scheme of amalgamation as they had financed a term loan to the transferor company the outstanding of which, as on 31.3.2011, was Rs.3,74,71,051/-. In reply to the transferor company’s letter dated

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7.12.2011 SBI, vide letter dated 22.2.2012, informed that the competent authority had accorded approval for a no objection certificate to be given for amalgamation of the transferor company with the transferee company. As the letter of consent has been obtained from the sole secured creditor, the holding of a meeting of the secured creditor of the transferor company is wholly unnecessary. The deferred tax liability of Rs.88,300 is explained as being the difference between the depreciation provided under the Companies Act vis-à-vis the depreciation which is allowed under the Income Tax Act. The transferor company does not have any unsecured loans. However, under the head “current liabilities” for Rs.52,41,697/-, are the sundry creditors (a) dues to Micro and small enterprises – Rs.2,95,207/-; (b) for goods and service – Rs.17,66,365/-; (c) for capital works – Rs.11,87,765/- ; (d) others – Rs.6,71,406/-; and (e) provision for income tax of Rs.13,20,954/-. Enclosed to the affidavit dated 20.3.2012 is the statement giving details of the current liabilities. It is evident therefrom that the current liabilities of Rs.52,41,697/-, as at 31.03.2011, has been repaid subsequently in its entirety. Instead of showing Rs.52,41,697/-, the affidavit dated 20.3.2012 records the current liabilities to be Rs.52,21,245/-. In the additional affidavit dated 10.4.2012, the Director of the transferor company would state that the correct amount of current liabilities is Rs.52,41,697/-; a detailed statement for this amount had been submitted with the affidavit; the amount shown as Rs.52,21,245/- was due to a typographical error; and that the current liabilities as on 31.3.2011 may be read as Rs.52,41,697/- instead of Rs.52,21,245/-. Since the sundry creditors, under the head “current liabilities”, have been repaid their dues in its entirety after 31.3.2011 (as has been detailed in the statement enclosed to the affidavit dated 20.3.2012) the holding of meeting of the

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sundry creditors shown under the head “current liabilities” is wholly unnecessary.

¶23

A perusal of the Balance Sheet of the transferee company as at 31.03.2011 would show that its secured loans, as at 31.3.2011, was Rs.43,51,60,603/-. The break up of the secured loans is as under:

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Term Loans ICICI Bank -- State Bank of India 2,90,00000 Other Loans From SBI – Working capital loans 39,65,18,451 From ICICI Ltd – Hire purchase 56,62,615 From Magma Finance 34,21,552 From HDFC Bank Limited – Hire purchase

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From Tata Capital Limited 5,57,985

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Enclosed to the affidavit dated 20.3.2012, filed by the Joint Managing Director of the transferee company, is the letter addressed by the transferee company to SBI dated 7.12.2011 informing them that the term loan outstanding as on 31.3.2011 was Rs.2.90 Crores, and the working capital loan as on that date was Rs.39,65,18,451/-; and that they grant approval for the proposed scheme of amalgamation. In reply thereto SBI, vide letter dated 22.2.2012, conveyed their no objection to the proposed scheme of amalgamation. Also enclosed to the said affidavit is the letter addressed by the transferee company to ICICI Bank Limited on 13.12.2011 informing them that the car loan, outstanding as on 31.3.2011, was Rs.29,18,042/-. ICICI Bank was requested to convey their consent to the proposed scheme of amalgamation. In reply thereto ICICI Bank Limited, vide letter dated 10.1.2012, conveyed their consent and agreement to the scheme of amalgamation. Also enclosed to the said affidavit is the letter addressed by the transferee company to ICICI Bank dated 13.12.2011 informing them that the car loan outstanding dues as on 31.3.2011 was Rs.27,44,573/-, and that they convey their no objection to the proposed

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scheme of amalgamation. In reply thereto ICICI Bank, vide letter dated 14.12.2011, conveyed their consent to the proposed scheme of amalgamation. Similar letters were addressed by the transferee company to Tata Capital Limited on 13.12.2011 informing them that the outstanding loan amount as on 31.3.2011 was Rs.5,57,985/-, and that they should accord their consent to the proposed scheme of amalgamation. In reply thereto Tata Capital Limited, vide their letter dated 19.1.2012, gave their consent to the scheme of amalgamation. The transferee company addressed letter dated 7.1.2011 to Magma Finance informing them that the loan outstanding as on 31.3.2011 was Rs.26,54,377 to which M/s Magma Finance, vide letter dated 7.1.2012, informed the transferee company of their no objection to the scheme of amalgamation. A letter dated 7.12.2011 was addressed to Magma Fincorp Limited informing them that the loan outstanding as on 31.3.2011 was Rs.7,67,165/-, and that they accord their consent to the proposed scheme of amalgamation. Magma Fincorp Limited, vide letter dated 7.1.2012, informed the transferee company that they had no objection to the scheme of amalgamation.

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The unsecured loans include sales tax deferment loan of Rs.5,89,62,295/-; loans from subsidiaries of Rs.43,29,428/-; and from others of Rs.2,04,36,800/-. It is stated, in the affidavit dated 9.4.2012, that the balance unsecured loan of Rs.2,47,66,228/-, availed from the company’s subsidiaries and others, have subsequently been repaid in its entirety details of which are filed as Annexure – III to the said affidavit. The annexure gives a break up of the unsecured loans as on 31.3.2011, and payments made to the class of creditors under the head “unsecured loans” subsequent thereto. It is evident, therefrom, that the balance unsecured loans, other than sales tax deferment loan outstanding as on 31.3.2011, has subsequently been repaid in its

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entirety. With regards sales tax deferment loan it is stated that this amount is liable to be paid in four yearly instalments starting from June, 2015 and ending on June 2018. In the affidavit dated 18.4.2012 the Joint Managing Director of the transferee company states that they were approaching the Government of Andhra Pradesh seeking their consent to the proposed scheme of amalgamation; the transferee company undertook to furnish a bank guarantee from SBI/ICICI Bank or any other Nationalized Bank in favour of the Government of Andhra Pradesh for Rs.5,89,62,295/- for a period of one year; if they received no objection for the proposed scheme of amalgamation, from the Government of Andhra Pradesh, within the stipulated period of one year, necessary application would be filed before this Court for return of the bank guarantee; in case the transferee company was unable to obtain sanction within the period of one year, they undertook to extend the bank guarantee till the sales tax deferment loan is totally repaid. In view of this unconditional undertaking and, as furnishing a bank guarantee for the entire sales tax deferment loan would protect the interests of the Government of Andhra Pradesh which is the creditor, it would suffice if the requirement of furnishing a bank guarantee, and if need be its renewal, is made a condition for according sanction to the scheme of amalgamation. It would not be appropriate to refuse to sanction the scheme of amalgamation as the interest of the Government of Andhra Pradesh, for the sales tax deferment loan, is secured by way of a bank guarantee.

¶30

Under the head “current liabilities” the amount shown as outstanding to sundry creditors, and others, is Rs.17,16,76,200/-, the break up of which is as under:

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Current liabilities Sundry creditors Total outstanding dues of micro and small enterprises --

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Due to others 10,14,95,551
Creditors for expenses 3,10,63,235
Unclaimed dividend 13,06,030
Trade deposit from customers 3,78,11,384

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In the affidavit dated 20.3.2012, it is stated that the creditors for Rs.13,25,58,786/- represent the total outstanding dues (to others for Rs.10,14,95,551/-; and creditors for expenses of Rs.3,10,63,235/-). It is stated that the entire dues outstanding for Rs.13,25,58,786/- has been discharged subsequent to 31.3.2006, the details of which are furnished by way of a tabular statement. The unclaimed dividend for Rs.13,06,030/- is said to be the amounts, still lying in specific bank accounts, which are to be paid to the shareholders on receiving claims from them in accordance with Section 205-C of the Companies Act 1956; and the unclaimed dividend, for the years 2003-04, was transferred to the Investor Education and Protection fund upon expiry of seven years from the date of declaration of dividend. Details of the unclaimed dividend is furnished by way of a tabular statement, along with the affidavit dated 20.3.2012. The trade deposits from customers is for Rs.3,78,11,384/-. In the affidavit dated 20.3.2012, it is stated that, against these trade deposits of Rs.3,78,11,384/-, the transferee company had supplied goods to the tune of Rs.2,58,61,384/- and the rest of the amount of Rs.1,19,50,000/- was kept as security deposit against the credit supplies made to these parties. Details of sales made, against the deposits received from the dealers, and details of the security deposits from dealers, are enclosed as part of the said affidavit. It is evident, therefore, that all the creditors under the head “current liabilities”, except for trade deposits and unclaimed dividend, have been repaid their entire dues subsequent to 31.3.2011.

¶34

Under the proviso to Section 391(2), no order sanctioning any

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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. As required under the proviso to Section 391(2) both the transferor and the transferee companies have filed the latest audited financial statement, (balance sheet and profit and loss account) for the year ending 31.3.2011. As the subsequent financial year ending 31.3.2012 expired just a fortnight ago, the Balance Sheet and Profit and Loss account, as on 31.3.2011, represents the latest financial position of both the transferor and the transferee companies and the latest audited accounts of the company. In the company petitions, filed by both the transferor and transferee companies, it is stated that no investigation or proceedings are pending under Section 235 and 237 or other provisions of the Companies Act against the petitioner companies.

¶36

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 subsection (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

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been conducted in a manner prejudicial to the interests of its members or to public interest. Thus, Section 394 of the Act casts an obligation on the Court to be satisfied that the scheme of amalgamation or merger is not prejudicial to the interest of its members or to public interest.

¶38

(Sesa Industries Limited v. Krishna H. Baja j^[9] ) .

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Both C.P.Nos.23 and 24 of 2012 were admitted on 8.2.2012 and advertisement of admission of the petitions was published in Business Standard (English Daily) and Andhra Bhoomi (Telugu Daily) o f Hyderabad editions on 13.2.2012. Notices were issued to the Central Government in both the company petitions on 13.2.2012, and to the Official Liquidator in C.P.No.23 of 2012. Both the Official Liquidator and the Regional Director (On behalf of the Central Government) have filed their respective reports. No objections have been received from any creditor to the proposed scheme of amalgamation.

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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 it considers expedient and

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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 re^[10] ) .

¶42

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 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 ).

¶43

In his report dated 2.3.2012, the Official Liquidator stated that the transferor company had furnished information/documents called for on 24.2.2012. Reference is made to the date of incorporation of the transferor company, the audited balance sheet as on 31.3.2011, the capital structure of the transferor company, and the objects for which

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the transferor company was incorporated. It is stated that, as per the audited Balance Sheet as on 31.3.2011, huge amounts have been incurred under the head capital work in progress; the profit and loss account, attached to the Balance Sheet, showed that, while the income was Rs.19,42,571/- through interest, the schedules reflected a huge expenditure under the head “travelling and conveyance” and “legal & professional charges”, and these aspects needed to be explained by the transferor company. Thereafter various provisions of the proposed scheme of amalgamation is referred to by the Official Liquidator and he states that, basing on the information made available by the transferor company, he was of the opinion that, except for the observations aforementioned, the affairs of the company appear to have not been conducted in any manner prejudicial to the interests of the members or to public interest.

¶45

In the additional affidavit dated 9.4.2012, filed by the Director of the transferor company, it is stated that the transferor company had set up a 10,000 MT per annum Shrimp Feed manufacturing plant in Balda village, Vapi, Gujarat ; they had acquired land in the month of April, 2010 for the purpose of construction of a factory building; after obtaining necessary approvals, construction was started and erection and installation of plant and machinery commenced from August, 2010 onwards; as on 31.3.2011, the project implementation work was still in progress; as such the amounts were shown under the head “capital work in progress” as on 31.3.2011; the break up of these expenses included land and site development; the factory building under construction; plant and machinery imported (under erection); and plant and machinery – indigenous (under erection) and these amounts had been met from the shareholders funds and secured loans. With regards the travelling and conveyance, and legal and professional

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charges, it is stated that, in connection with the identification of suitable land for the project and subsequently for implementation of the project, the Project Directors, Senior employees and consultants had to travel to the project site at Kovvur in Andhra Pradesh from Hyderabad; Rs.11,97,593/-, incurred for travel, was reasonable for a project of this size; the transferor had engaged consultants from various disciplines, advocates, chartered accountants and valuers for advising the company on various project related issues; and thereby Rs.20,13,752/was incurred towards consultancy services rendered by professionals and consultants in this regard. The explanation furnished by the petitioner to the Official Liquidator’ objections is reasonable. The Regional Director, South Eastern Region, Ministry of Corporate Affairs, Hyderabad, in his report dated 9.3.2012, has not raised any objection to the proposed scheme of amalgamation, and has merely observed that no complaints were received by his office regarding pendency of any investigation against either the transferor or the transferee companies.

¶47

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 whether the scheme is fair, just and reasonable to the concerned

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members, and is not contrary to any law or to 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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In examining whether the scheme of amalgamation is in public interest or not, 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 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,

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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.

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Mahindra Ugine Steel 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 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, 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.

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

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“Something in which the public, the community at large, has some

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

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It is an expression of wide amplitude. A scheme, valid and good, may yet be bad if it is against public interest. The basic principle of the satisfaction, that the scheme is not contrary to public interest, is none other than the broad and general principles inherent in any compromise or settlement entered into between the parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, Courts have evolved the principle of “prudent business management test” or that the scheme should not be a device to evade the law. (Hindustan Lever Employees' Union¹¹ ). 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

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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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The scheme of amalgamation is in five parts. Part I is the definitions part. Part II relates to the amalgamation of the transferor company with the transferee company. Part III relates to issue of equity shares. Part IV relates to accounting treatment. Part V to general terms and conditions. Under clause 10.1, upon the scheme becoming effective and in consideration for the transfer of and vesting of the assets and liabilities of the transferor company in the transferee company in terms of the scheme, the transferee company is required, without any further act or deed, to issue and allot for 71 equity shares of Rs.10/- each fully paid up held by the shareholder in the transferor company, 20 fully paid up equity shares of Rs.10/- each in the transferee company. Clause 8 deals with staff, workmen and employees. Under Clause 8.1, upon the scheme becoming effective, all staff, workmen and employees of the transferor company in service on the effective date shall be deemed to have become the staff, workmen and employees of the transferee company on such date without any break or interruption in their service and on terms and conditions of their employment not less favourable than those subsisting as on the said date; on the scheme becoming effective, the

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provident fund, gratuity fund, superannuation fund or any other special fund or trusts created or existing for the benefit of the staff, workmen and employees of the transferor company shall become the trusts/funds of the transferee company for all purposes whatsoever in relation to the obligation to the administration or operation of such fund or funds. Under Clause 4 the entire business and whole of the undertaking of the transferor company, including all its moveable or immoveable, tangible or intangible assets etc., shall stand transferred to and be deemed to have been transferred to, and vested in the transferee company, so as to become the properties and assets of the transferee company.

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The objects sought to be achieved by the scheme are that both the transferor company and the transferee company are engaged in the business of Shrimp Feed manufacturing etc., the transferee company is presently selling Shrimp Feed in the West Cost Region with a 35% market share in that region; pursuant to the amalgamation, the same brand and marketing arrangement would cater to the market without disturbing the existing market; the total shrimp feed requirement in India has increased significantly due to introduction of new shrimp species called Vannamei, in addition to the existing species; the stocking density of Vannamei species per square meter of water spread is as much as three to four times the other species resulting in significant increase in demand for feed; there is also increase in demand for shrimp feed in the east coast region, and the transferee company’s two plants in Andhra Pradesh were unable to meet the requirements fully; the proposed amalgamation would enable the transferee company to utilise the transferor company’s surplus plant capacity to cater to the demands of the east coast region after meeting the demand of the west coast region; it would also help in

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consolidation of the existing line of business as both the companies are engaged in the same line of business, and also provide advantages of large scale operations in respect of raw material procurement and other operational issues; the proposed amalgamation would also help in pooling of the financial, managerial, technical and marketing resources of the respective companies to improve efficiency; and, in view of the above advantages, it was decided to amalgamate the transferor with the transferee which would not only be beneficial to its shareholders, but also its employees and stake holders. It cannot, therefore, be said that the scheme, if approved, would be against public interest.

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I consider it appropriate, therefore, to sanction the scheme of amalgamation on condition that the transferee company furnishes an unconditional bank guarantee, as mentioned hereinabove, in favour of the Government of Andhra Pradesh for Rs.5,89,62,295/- (being the Sales Tax deferment loan amount) valid for a period of one year and, in case the consent of the Government of Andhra Pradesh to the scheme of amalgamation is not obtained within the aforesaid period, the said unconditional bank guarantee shall be extended till the Sales Tax deferment loan is discharged in its entirety. A copy of the said bank guarantee, along with a letter from the concerned officer of the Government of A.P. acknowledging receipt of the bank guarantee, shall be enclosed along with the certified copy of the sanction order to be filed with the Registrar of Companies. 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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asp

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