Allowed

Edelweiss Trading and Holdings Limited, v. -

Telangana HC13 Apr 2012CP/25/2012

Case brief

AI extract

What is this about?

The Court sanctioned a composite scheme of arrangement and amalgamation involving three related companies. The Court held that convening meetings with creditors was unnecessary as their interests were not adversely affected and consents were obtained. The scheme was found fair and in the public interest, facilitating a demerger of the transferor's securities business.

What did the court decide?

Composite scheme of arrangement and amalgamation between the three companies sanctioned and ordered to be registered.

Edelweiss Trading and Holdings 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 Nos. 25, 26 and 27 OF 2012

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COMMON ORDER:

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These Company Petitions are filed, under Sections 391 to 394 of the Companies Act, 1956 (the Act), by M/s.Edelweiss Trading & Holdings Limited (hereinafter called the ‘transferor company’) (petitioner in C.P.No.25 of 2012); M/s.Edelweiss Securities Limited (hereinafter called the ‘transferee company No. 1’) (petitioner in C.P.No.26 of 2012); and M/s.Comfort Projects Limited (hereinafter called the ‘transferee company No.2’) (petitioner in C.P.No.27 of 2012), seeking sanction of this Court to the proposed scheme of arrangement and amalgamation between the transferor and the transferee companies, and their respective shareholders. The securities business division of the transferor company is to be demerged, and transferred to transferee company No.1, and the remaining business (mainly commodities and other material division) is to be merged with transferee company No.2 in the manner, and on the transactions, specified in the composite scheme of arrangement.

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The Transferor company is a company registered under the Act. It was originally incorporated, in the State of Maharashtra, on 05.10.2004. It changed its registered office to the State of Andhra Pradesh and, after obtaining permission of the Company Law Board, a fresh certificate of incorporation was issued by the Registrar of Companies, Andhra Pradesh on 18.01.2007. The transferor company changed its name firstly on 06.09.2007, and again on 31.12.2008. It changed its name to M/s. Edelweiss Trading & Holdings Limited, and a fresh certificate of incorporation was issued by the Registrar of Companies, Andhra Pradesh on 31.03.2011. The registered office of the transferor company is situated at Hyderabad. The main objects of the transferor company are (i) to carry on the business of trading in agricultural products, metals including precious metals, precious

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stones, diamonds, petroleum and energy products, all other commodities and securities, spot markets and futures, and all kinds of derivatives of all the above commodities and securities; (ii) to carry on business as brokers, sub-brokers, market makers, arbitrageurs, investors and/or hedgers in agricultural products, metals including precious metals, precious stones, diamonds, petroleum and energy products and all other commodities and securities, spot markets and futures and all kinds of derivatives of all the above commodities; (iii) to become members and participate in trading, settlement and other activities of commodity exchange/s (including national multi - commodity exchange/s) facilitating, for itself or for its clients, trades and clearing/settlement of trades in spots, in futures and in derivatives of all the above commodities permitted under the laws of India; and (iv) to purchase, own, develop, sell, transfer, exchange and cultivate agricultural land and indulge in farming, harvesting, flowering, gardening and all other agricultural activities and to do all other activities relating to and connected with the utilization of agricultural land, sowing, growing, harvesting, utilizing, marketing of farm produce. The authorised share capital of the transferor Company is Rs.4,20,00,000 divided into 25,00,000 equity shares of Rs.10/- each and 17,00,000 preference shares of Rs. 10/- each. The issued, subscribed and paid up share capital of the transferor company is Rs.2,90,00,000 divided into 19,00,000 equity shares of Rs.10/- each fully paid up, and 10,00,000 7% non-convertible and non-cumulative redeemable preference shares of Rs. 10/- each fully paid up. For the year ending 31.03.2011, the transferor company made a profit before tax of Rs.7,59,56,163/-, and its profit after tax was Rs.4,75,45,497/-. This amount coupled with the balance in the profit and loss account of Rs.101,24,41,868/- was carried forward to the next year for a total sum of Rs.105,99,87,365/-.

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The transferee company No.1 was originally incorporated in the State of Maharashtra on 20.08.1993. It changed its name firstly on

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13.02.1998, and later on 04.05.1998. Its status was changed from a private to a public limited company, and a fresh certificate of incorporation was issued by the Registrar of Companies, Andhra Pradesh on 08.06.2007. The Registered Office of transferee company No. 1 is also situated at Hyderabad. Its main objects are (i) to engage in, commence and/or carry out and/or undertake financial researches, analysis and appraisal of shares and securities including money market survey, to provide the results of such research to any person or persons for commercial consideration through any suitable media, and particularly by publishing brochures or pamphlets on such research and market survey treating it as part of the service to clients or persons having dealings with the company in terms of dissemination of information that may be considered likely to assist the business of the company; (ii) to carry on the business of an investment company and to acquire by purchase or otherwise deal in shares, stocks, debentures, debenture-stock, bonds, obligations or securities of any company or corporation and to carry on business as brokers, subbrokers or underwriters or sub-underwriters, IPO Managers, Mutual Fund distributors, distributors of banking products and other financial products, portfolio manager, depository participants, underwriters, subunderwriters or in any other capacity whatsoever and providing investments and brokerage services, carrying on proprietary trading, dealing in existing and future financial products; (iii) to become a member of any one or more stock exchanges including over the counter stock exchanges and of any other association, market, club, or other institution or organization, whether in India or outside India, and to carry on the business of capital and debt instruments brokers, shares and stock brokers, dealers, traders, underwriters, subunderwriters, agents, sub-agents or market makers in shares, stocks, debentures, bonds, units, bills, notes, warrants, coupons, saving certificates, commercial papers, treasury bills, and all other kinds of securities and financial instruments and for this purpose, either for

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itself or on behalf of any person, body corporate, company, firm or association of persons, whether incorporated or not, to subscribe or acquire, buy, hold, sell or otherwise trade and deal for commission or other wise in all kinds of money market or capital market, debt or commercial, negotiable or transferable instruments of any government or government body, whether incorporated or not etc. The authorised share capital of the transferee company No.1 is Rs.20,00,00,000 divided into 1,95,40,000 equity shares of Rs. 10/- each and 4,60,000 preference shares of Rs. 10/- each. The issued, subscribed and paid up share capital of transferee company No. 1 is Rs.4,50,00,000 divided into 45,00,000 equity shares of Rs.10/- each fully paid up. For the year ending 31.03.2011, transferee company No. 1 made a profit before tax of Rs.42,74,52,847/-, and its profit after tax was Rs.49,09,48,670/-. This profit, along with the profit and loss account brought forward from the previous year of Rs.2,96,40,50,420/-, was transferred to the profit and loss appropriation account, and was thereafter transferred to the general reserves and capital redemption reserves. After payment of dividend, the balance carried forward to the Balance Sheet was Rs.233,45,58,342/-.

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The transferee company No.2 was originally incorporated in the State of Maharashtra on 17.10.2006. It changed its name on 07.05.2009 to the present name for which a fresh certificate of incorporation was issued on 13.01.2011. The said company shifted its registered office to the State of Andhra Pradesh by order of the Company Law Board dated 09.12.2011, and was given a corporate identity number by the Registrar of Companies, Andhra Pradesh. The registered office of transferee Company No. 2 is situated at Hyderabad. Its main objects are (i) to carry on business of immovable properties as owners, lessors, licensors, developers, builders, caretakers or otherwise, and for the same purpose to acquire, buy, purchase, lease, develop, renovate, repair, improve, maintain, exchange or otherwise own property, estate, lands, buildings,

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hereditaments, flats, garages, houses, halls, godowns, shops, warehouses, office premises, mills, factories, dwelling houses, residential accommodation, bridges or other immovable properties, and to turn the same to account as may be expedient and in particular by laying out and preparing land for building purposes and to prepare building sites, and to construct, reconstruct, pull down, renovate, develop, alter, improve, decorate and furnish and maintain offices, flats, maisonettes, dwelling houses, hotels, business centres, shops, showrooms, buildings, industrial estates etc; and (ii) to carry on business of trading, brokers, sub-brokers, market makers, arbitrageurs, investors, importers, exporters, suppliers, commission agents, trading adviser, pool operator and/or hedgers in agricultural products, metals including precious metals, precious stones, diamonds, petroleum and energy products and all other commodities of any kind or nature, in spot markets and in futures and all kinds of derivatives of all the above commodities etc. The authorised share capital of transferee company No.2 is Rs. 55,00,000/- divided into 5,10,000 equity shares of Rs.10/each and 40,000 preference shares of Rs.10/- each. The issued, subscribed and paid up capital of transferee company No.2 is Rs. 32,50,000/- divided into 2,85,000 equity shares of Rs. 10/- each and 40,000 5% non-cumulative non-convertible redeemable preference shares of Rs. 10/- each. For the year ending 31.03.2011, transferee company No.2 earned a profit before tax of Rs.61,91,533/-. It suffered a loss after tax of Rs.43,450/-. After adding the carry forward loss for the previous year of Rs.2,18,95,931/-, the loss carried forward to the Balance Sheet was Rs.1,78,12,948/-.

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By order of this Court, in C.A.No.1982 to 1984 of 2011 dated 02.01.2012, the convening and holding of the meeting of the shareholders of all the three companies, as also a meeting of the unsecured creditors, was conditionally dispensed with. This Court recorded that there were seven equity shareholders in the transferor company including six shareholders as nominees of the shareholding

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company in the transferor company as on 31.10.2011; the transferor company was the holding company of transferee company No.2; M/s. Edelweiss Financial Services Limited, which held 100% of the equity paid up capital of the transferor company, had given its consent to the scheme of arrangement; there were seven shareholders including six shareholders as nominees of the first transferee company as on 31.10.2011; the first transferee company was a wholly owned subsidiary of Edelweiss Financial Services Limited, and its consent was placed on record; there were seven shareholders, including six shareholders as nominees of the second transferee company as on 31.10.2011; the second transferee company was a wholly owned subsidiary of the transferor company; and its letter of consent was placed on record; there were eight secured creditors in the transferor company; no objection certificates had been obtained from State Bank of India, Bank of India, Syndicate Bank, Canara Bank and Indus-Ind Bank; the transferor company undertook to place on record, either the consent letters or the no dues certificates from Laxmi Vilas Bank and Kotak Mahindra Bank; there were six unsecured creditors in the transferor company, and their consent letters had been placed on record. With regards transferee company No.1, this Court noted that there were three secured creditors; consent letters had been obtained from Canara Bank; the transferee company No.1 undertook to place on record either the consent letters or the no dues certificates from HDFC Bank and Kotak Mahindra Bank; there were seven unsecured creditors of transferee company No.1; and their consent letters had been placed on record. With regards transferee company No.2, this Court noted there were no secured creditors, and the consent of the sole unsecured creditor had been placed on record. This Court again reiterated the submission made on behalf of the transferor company, and transferee company No.1, that they undertook to place on record the no objection certificates from Laxmi Vilas Bank and Kotak Mahindra Bank at the time of moving the company petitions; and,

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therefore, ordered all the company applications dispensing with the convening of the meeting of the shareholders, secured and unsecured creditors of the transferor company, transferee company No.1 and transferee company No.2.

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The scheme of amalgamation is an arrangement between the company and its members. Under Section 391(1) 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.

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Section 391(1) enables the Court, on the application of a company or a creditor or a member of the company, to order a meeting of the creditors/or the members “as the case may be” to be held and conducted in such a manner as the Court directs. Under Section 391(2) if a majority, representing 3/4^th in value of the creditors or members, agree in the meeting to approve the compromise or arrangement, the scheme, on its sanction by the Court, would be binding on all the creditors/members “as the case may be” and also on the company. The expression “as the case may be” finds place both in sub-sections (1) and (2) of Section 391. If the words “as the case may be” in Section 391(1) is construed as requiring the Court to order the meeting of only the members, in a Scheme of arrangement between the Company and its members, and only a meeting of the

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

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On these questions 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,

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(Union of India Vs. Asia Udyog Pvt. Ltd^[1] ) , 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^[2] ) .

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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^[3] ; Mafatlal Industries Ltd., In re^[4] ; Coimbatore Cotton Mills Ltd and Lakshmi Mills Co. Ltd., In re^[5] ; and Telesound India Ltd., In re^[6] ) .

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However, a different view was taken by the Bombay High Court, In Re ICICI Bank Limited^[7] , and it was held that Section 391(1) gives a discretion to the Court to convene a meeting of the creditors or any class of them; the Court would exercise the discretion by convening a meeting of creditors, if the creditors are likely to be adversely affected by an arrangement between the Company and its members; attending the meeting and voting are steps of participation in the process of consideration of the Scheme; if the creditors have no right of hearing, at the time of hearing of the petition under Section 391, the only way of ascertaining whether the creditors are affected or not would be through the wishes of the creditors which may be expressed by them in a

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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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In compliance with the undertaking given to this Court, in C.A.No.1982, 1983 and 1984 of 2011 dated 2.1.2012, the transferor company has placed on record the letters of consent. In the affidavit filed by the Director of the Transferor Company dated 3.4.2012 (affidavit filed in support of C.A.No.401 of 2012) the break up of the secured loans of the Transferee company as at 31.03.2011 is furnished. The bank over draft, shown under the head “secured loans”, is for Rs.754,70,61,196/-. The affidavit discloses that the overdraft facility, with Lakshmi Vilas Bank for Rs.22,48,55,647/-, is outstanding as on 31.3.2011. This was reduced to 1,01,141/- as on 31.10.2011, and the said overdraft facility has since been closed. The vehicle loan from Kotak Mahindra Bank is Rs.4,87,279/- as on 31.3.2011, and it stood reduced to Rs.3,33,543/- as on 31.10.2011. A letter from Kotak Mahindra Prime dated 6.1.2012 is placed on record whereby they have given their consent to the proposed scheme of amalgamation. It is evident, therefore, that, in compliance with the order of this Court aforementioned, a letter of consent has been obtained from Kotak Mahindra. As the account with Lakshmi Vilas Bank is, stated on oath, to have been closed the question of a letter of consent being obtained from them does not arise.

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From out of the unsecured loans for Rs.2478,73,61,791/-, the unsecured loans taken from Allcargo Global Logistics Limited, Dhanuka Agritech Ltd, Edelweiss Trustee Services Pvt. Ltd, Lichen Metals Pvt. Ltd, and Zee Entertainment Enterprises Ltd are said to have been subsequently repaid. Letters of consent to the proposed scheme of amalgamation has been obtained from the class of

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creditors, under the head “unsecured loans” i.e., from Edelweiss Financial Services Limited, ECL Finance Ltd, Edelweiss Trustee Services Ltd, Frugal Realty Pvt. Ltd and Edelweiss Asset Management Limited. The public deposits shown under the head “unsecured loans”, as on 31.3.2011, stood at 10,65,75,000/- and is stated to have been reduced to Rs.9,68,75,000/- as on 31.10.2011. In all there are said to be 109 individuals/companies which had opened fixed deposits with the transferor for a total sum of Rs.7,95,26,786/- as on 26.12.2011 ( the date on which the C.A. was filed seeking to have the meeting of the creditors dispensed with). Letters of consent from all these 109 fixed deposit holders have been placed on record. It is evident, therefore, that the unsecured loans have either been repaid or the consent letters from this class of creditors obtained. In the light of the earlier order of this Court, dispensing with the meeting of the creditors under the head “unsecured loans”, holding of the meeting of such a class of creditors is wholly unnecessary.

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The balance sheet of the transferor company, as at 31.3.2011, shows that the sundry creditors, under the head “current liabilities” as on that date, were for Rs.2698,42,79,771/- the break up of which is as under:

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Current liabilities: Sundry creditors 2682,17,77,763 (Refer Note 24.16) Book overdraft 35,20,558 Equity Index/stock options premium received 8,78,57,300 Equity index/stock options premium account Add: provision for loss on equity index/stock options Mark to Market Margin – commodity futures 54,819 Interest accrued but not due on unsecured

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loan 7,10,69,331

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_____________ ____

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2698,42,79,771

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_________________

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In the affidavit, filed in support of C.A.No.401 of 2012 dated 3.4.2012, the Director of the transferor company states that from out of the amount due to sundry creditors, under the head “current liabilities” as at 31.3.2011, Rs.2681,32,34,133/-, (details of which are furnished in Annexure 2 to the said affidavit), has since been re-paid. The remaining balance of Rs.85,43,630/- is said to represent the property tax payable of Rs.73,12,456/-, and a provision for stamp duty of Rs.12,31,174/-. In the affidavit dated 3.4.2012 it is stated that Municipal Appeal No.1579 of 2010 is pending on the file of the Small Causes Court, Kalvadevi, Mumbai against the order passed by the Mumbai Municipal Corporation and, as such, this amount has not yet been paid, but has been shown under the head “sundry creditors” on a conservative accounting basis. With regards provision for payment of stamp duty it is stated that this provision has been made by the company on a conservative basis to take care of any future liability, and that they have not received any notice in this regard. With regards the bank overdraft of Rs.35,20,558/- it is stated by the Director, in his affidavit, that the same represents the cheques issued by the transferor against its obligations; the bank account is subsequently funded prior to the cheques being presented to the bank; for this short period of 3 to 4 days, as per the accepted accounting conventions, this facility is disclosed as bank overdraft; and the bank over-draft was subsequently cleared on 5.4.2011. With regards equity index/stock options premium of Rs.8,78,57,300/- it is stated, in the affidavit, that this amount represents the premium received by the company as at 31.3.2011 on the options sold on the National Stock Exchange of India Limited; as per accounting policy, the premium received by the Government on the sale of options can only be recognized as an income/loss after the

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contracts expire; till the expiry of the contract period, the premium received by the company is treated as a liability; as such the company had disclosed Rs.8,78,57,300/- as its liability as at 31.3.2011. With regards the interest accrued, but not due, of Rs.54,819/- the affidavit states that this represents the interest accrued on the unsecured loan as on 31.3.2011, but the said amount was not due to be paid as on 31.3.2011. With regards the other liabilities of Rs.7,10,69,331/- it is stated that this amount represents the tax deducted at source; and the said amount has since been deposited with the tax authorities within the prescribed time. In view of the explanation furnished in the affidavit dated 3.4.2012, it is evident that, except for the property tax liability and the provisions made on the basis of accounting standards, all other sundry creditors under the head “current liabilities”, including banks which had provided a bank overdraft for a short duration, have been repaid, and their dues cleared subsequent to 31.3.2011. Consequently the interests of the sundry creditors, under the head ‘current liabilities’, cannot be said to be, in any manner, adversely affected if the scheme of arrangement/amalgamation is sanctioned by the Court.

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In so far as the first transferee company is concerned, the order of this Court, in C.A. Nos.1982, 1983 and 1984 of 2011 dated 02.01.2012, required the first transferee company to place on record either the consent letters or the no dues certificates from HDFC and Kotak Mahindra Bank. The letter of no objection of HDFC Bank dated 04.01.2012 conveying their no objection to the proposed scheme of arrangement, as also a letter from Kotak Mahindra Prime dated 06.01.2012 conveying their no objection for the proposed scheme of arrangement, is filed.

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The Balance Sheet of transferee company No.1, as at 31.03.2011, shows that the unsecured loans of the company as at 31.03.2011 is Rs.6,78,23,82,879/-. This amount represents the amounts due to ten creditors out of which the amount due and payable to Zee Entertainment Enterprises Limited, Deutsche Mutual Fund, JM

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Financial Mutual fund and Lichen Metals Private Limited is stated, in the affidavit dated 10.04.2012, to have been subsequently re-paid. Letters of acknowledgment have been filed by these creditors. It is also explained, in the subsequent affidavit dated 12.04.2012, that the mutual funds are managed by asset management companies and, therefore, it is from the asset management companies that the letters of consent, for the proposed scheme of arrangement, were obtained for the outstanding dues to these creditors as on 31.10.2011. As the creditors, under the head “unsecured loans”, have either been repaid in their entirety, or have given their consent/no objection to the proposed composite scheme of arrangement-cum-amalgamation, the holding of a meeting of this class of sundry creditors is wholly unnecessary. The creditors under the head “current liabilities” do not, however, form part of the order of this Court dated 02.01.2012. A perusal of the Balance Sheet dated 31.03.2011 of the first transferee company shows that the total current liabilities as on 31.03.2011 was Rs.695,71,11,802/- the break up which is (a) Sundry creditors – Rs.686,33,04,148; and (b) Other liabilities for Rs.9,38,07,654.

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A detailed break up of these sundry creditors is furnished in the affidavit filed by the Director of the Company dated 10.04.2012. It is stated therein that sundry creditors for Rs.670,45,06,490, details of which are furnished in Annexure II thereof, have since been repaid. The provision for expenses of Rs.11,98,62,290/- is stated in the affidavit as having been provided in respect of certain expenses for which bills were not received; such a provision was required to be made as these expenses related to the financial year 2010-2011; these provisions were made on the basis of estimates which, in turn, were based on past experience. They included communication charges, electricity, administrative expenses, legal and professional fees, rates and taxes etc., and these expenses have been re-paid after 31.03.2011 as and when bills were received; and the excess amount, no longer payable, has also been reversed. It is further stated, in the

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said affidavit, that nine creditors for Rs.1,17,24,24,212/- are still to be paid their dues, and their consent letters have been enclosed to the affidavit. These letters show that these creditors have given their consent to the proposed scheme of amalgamation. It is necessary to note that, while the balance sheet of the first transferee company as at 31.03.2011 shows (1) Edelweiss Financial Products and Solutions; (2) Edelweiss Commodities Limited and (3) Edel Value Partners as among the said nine creditors to whom dues were still outstanding, letters of consent have been furnished by Edelweiss Growth Management Limited, Edelweiss Trading and Holdings Limited, and Edelweiss Trading and Holdings Limited as a partner of Edel Value Partners respectively. An additional affidavit dated 12.04.2012 is filed wherein it is stated that the name of Edelweiss Financial Products and Solutions Limited was changed to Edelweiss Global Health Management Limited, and a fresh certificate of incorporation was issued by the Registrar of Companies, Maharashtra at Mumbai on 13.07.2011. Likewise the name of Edelweiss Commodities Limited is said to have been changed to Edelweiss Trading and Holdings Limited and a fresh certificate of incorporation, consequent upon the change of name, was issued by the Registrar of Companies, Andhra Pradesh on 31.03.2011. It is stated in the said affidavit that Edel Value Partners, a partnership firm registered under the Partnership Act, has the following five partners i.e., (1). Edelweiss Trading & Holdings Limited; (2). Edelcap Securities Limited; (3) Ecap Equities Limited; (4) Dahlia Financial Services Private Limited; and (5) Magnolia Financial Services Private Limited. Enclosed to the said affidavit is a letter addressed by each of these five partners to the first transferee company conveying their no objection to the proposed composite scheme of arrangement. The provision for Stamp Duty, under the head “current liabilities”, is for Rs.2,32,76,312/- which has been explained in the affidavit dated 10.04.2012 as a provision made for payment of Stamp Duty in respect of certain transactions on a

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conservative basis to take care of future liabilities, if any. While the “current liabilities” include a sum of Rs.39,34,844/-, shown as due to Chinubhai Chimanial Dalal Security Private Limited, the affidavit dated 10.04.2012 explains that the said company is a sub-broker of the transferee, and had introduced a client by name Sunil Purushottam Bagaria who had defaulted in payment of Rs.39,34,844/- to the first transferee company; the dispute was referred to the National Stock Exchange for Arbitration, and an award dated 28.03.2007 was made in favour of transferee company No.1; the award was challenged by Sri Bagaria before the Bombay High Court in Arbitration Case No.292 of 2007, and he agreed to pay the amount due to the company in instalments; as he defaulted in payment of instalments E.A. No.163 of 2008 was filed by the company before the High Court; Sri Bagaria’s house at Vile Parle, Mumbai was attached, but the amount has not been realised till date. It is further stated that, as the amount is due from Sri Bagaria, a like amount of Rs.39,34,844/- has not been paid to the sub-broker and is, therefore, shown under the head “current liabilities”. The current liabilities of transferee company No.1 also includes a sum of Rs.9,38,07,654/-. This amount is explained, in the affidavit dated 10.04.2012, as representing the amount of tax deducted at source, service tax, professional fees, provident fund etc. It is stated that transferee company No.1 had deposited the said amounts with the Government authorities within the prescribed time. As the sundry creditors, shown under the head “current liabilities”, have either been subsequently paid or have given their letters of no objection to the proposed composite scheme, the holding of a meeting of this class of creditors is wholly unnecessary.

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As noted hereinabove this Court, by its order dated 02.01.2012 in C.A.Nos.1982 and 1983 and 1984 of 2011, dispensed with the holding of the meeting of the shareholders, secured and unsecured creditors of transferee company No.2 without prescribing any

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conditions. The transferee company No.2 does not have any secured loans. Its unsecured loans, as at 31.03.2011, is for Rs.4,11,05,03,755/. In the affidavit dated 10.04.2012, it is stated that the unsecured loans were taken from M/s.Edelweiss Trading & Holdings Limited, (transferor company and the holding company of transferee company No.2), and from Muthooth Finance Corporation for Rs.30.00 crores. The amount borrowed from Muthooth Finance Corporation is said to have been repaid on 11.04.2011. A letter of consent has been obtained from the transferor company, and has been made part of the record. As the class of creditors representing “unsecured loans” have either been subsequently re-paid or have given their consent to the proposed composite scheme of arrangement-cum-amalgamation, failure to hold a meeting of the creditors under the head “unsecured loans” is of no consequence.

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Under the head “current liabilities” the total amount shown as due, as at 31.03.2011, is for Rs.5,54,06,918/-, the break up of which is (i) sundry creditors - Rs. 3,33,65,358/-; (ii) book overdraft - Rs. 52,62,387/-; and (iii) other liabilities - Rs.1,67,79,173/-. In the affidavit dated 10.04.2012, the status of payment of the amounts due to the sundry creditors for

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Rs. 3,33,65,358/- is explained. It is stated therein that sundry creditors for Rs.1,18,21,738/- have been subsequently repaid. A sum of Rs.4,08,478/- is the provision for expenses for the financial year 20102011 which has been provided for on the basis of estimates based on past experience; such provision includes communication charges, electricity, administrative expenses, legal and professional fees, rates and taxes etc; the balance in this account has been paid after 31.03.2011 as and when bills were received and the excess, no longer payable, has been reversed; letters of consent have been obtained from three sundry creditors whose debt is for Rs.90,00,000/-; these three creditors are Sri Arvind Desai for Rs.45,00,000/-; Sri Manish V.Parekh for Rs.22,50,000/and Sri Nayan S.Parekh for

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Rs.22,50,000/-. While letters of consent are enclosed to the said affidavit dated 10.04.2011, this Court noticed that the letter of consent of Sri Manish V. Parekh was not signed by him but was, instead, signed by Sri Nayan S.Parekh on his behalf. An additional affidavit dated 12.04.2012 has been filed enclosing thereto the letter of consent of Sri Manish V.Parekh. The outstanding sundry creditors, representing retention money of Rs.1,13,76,528/-, is from ten creditors with whom purchase/work orders/agreements had been entered into. The consent letters of all these ten creditors, to the proposed scheme of amalgamation, have been enclosed to the affidavit dated 10.04.2012. With regards the sum of Rs.7,58,614/-, allegedly due to a sundry creditor shown under the head “current liabilities”, it is stated in the affidavit dated 10.04.2012 that transferee company No.2 had received a notice from BBR India Private Limited with respect to the works carried on by them at the premises of transferee company No.2; and, in view of the delay in execution of the work and the damage caused by them, the amount has still not been paid; and, in accordance with the agreement, the matter is being referred to arbitration. The book overdraft for Rs.52,62,387/- is explained, in the affidavit dated 10.04.2012, as representing the cheques issued by the company against its obligations; the bank account was subsequently funded prior to the cheques being presented to the bank; for this short period of time (usually six to seven days) the amount is treated and disclosed as book overdraft; and this book overdraft shown under the head “current liabilities”, as at 31.03.2011, has been subsequently cleared on 08.04.2011. With regards other liabilities of Rs.1,67,79,173/-, it is stated that these liabilities represent the tax deducted at source, service tax, professional fees etc as at 31.03.2011; and transferee company No.2 has since deposited the amount with the government authorities within the prescribed time. In view of the explanation in the affidavit, and as this class of sundry creditors have either been paid, or their letters of consent obtained, except for the

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amount which is said to be under dispute and is said to be in the process of being referred to arbitration, a meeting of this class of creditors, shown as “sundry creditors” under the head “current liabilities” in the Balance Sheet, is wholly unnecessary.

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The proviso to Section 391(2) of the Act requires the Court to be satisfied that the Company, which has made an application under subsection (1), has disclosed to the Court, by affidavit or otherwise, all material facts relating to the Company, such as the latest financial position of the Company, the latest auditors report on the accounts of the Company, or pendency of any investigation proceedings in relation to the Company under Sections 235 to 251 and the like. The audited Balance Sheet and Profit and Loss account of all the three companies for the year ending 31.03.2011 has been filed along with the auditors report thereon. This is the latest audited financial accounts of these companies which is available, since the subsequent financial year ending 31.03.2012 has ended less than a fortnight ago. The requirement of the proviso to Section 391(2), with regards the latest financial position of the company and the latest auditors report and the accounts of the company being furnished must, therefore, be held to have been complied with. In the proposed composite scheme of arrangement, between the transferor and transferee companies, it is stated, at clause 22 thereof, that there are no proceedings pending under Sections 235 to 251 of the Act against the transferor and the transferee companies. As such this requirement, under the proviso under Section 391(2), is also satisfied.

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The second proviso to Section 394(1), and Section 394A, of the Companies Act require the report of the Official Liquidator and the Central Government to be obtained. In his report No.71/12 the Official Liquidator would state that he had called for the statutory books and other relevant information from the transferor company vide letter dated 15.2.2012; and the transferor company had furnished information/documents called for on 23.2.2012. The Official Liquidator

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notes various clauses of the proposed scheme. He would further submit that the scheme envisages an increase in the authorized share capital of the transferee company from Rs.4.75 crores to Rs.31.75 Crores; and that transferee Company No.2 is required to comply with the provisions of the Companies Act with regards increase of the authorized capital. The Official Liquidator also submits that details of the property tax dispute of the transferor company has not been sufficiently explained. A reply affidavit is filed thereto by the transferor company dated 26.3.2012 enclosing a challan as proof of payment of fees of Rs.13,72,500/- for increase of the authorized capital of transferee company No.2. Also enclosed is Form No.5 wherein the revised authorized share capital is detailed. This objection of the Official Liquidator does not survive. With regards the property tax dispute, as has been noted hereinabove, the transferor company has preferred an appeal before the Small Causes Court at Mumbai and, in the light of the explanation furnished in the affidavit filed on behalf of the transferor company, this objection also does not survive. The Official Liquidator states that the affairs of the company appear to have not been conducted in a manner prejudicial to the interests of the members/public interest.

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In his affidavit filed on behalf of the Central Government, the Regional Directly merely details the various clauses of the proposed composite scheme. It is also stated therein that, in consideration of the demerger, transferee company No.2 should be issued and allotted 15,49,310 equity shares in transferee Company No.1 at the rate of 558 per share and Rs.100/- in cash to the members of the transferor company; similarly Transferee No.2 should issue and allot 2,97,75,368 equity shares at the rate of Rs.44/- per share to the members of the transferor company; and the holders of the preference shares in the transferor company should also be issued and allotted the same number of preference shares by transferee company No.2. As there is a specific provision in this regard, in the proposed composite scheme

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of arrangement and amalgamation, the requirement of issuance of shares by both the transferee companies to members of the transferor company must also be held to have been complied with.

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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 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 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 Limited v. Krishna H. Baja j^[8] ; Hindustan Lever Employees' Union v Hindustan Lever Ltd. ,^[9] ; Central Inland Water Transport Corporation Limited. Vs. Brojo Nath Ganguly^[10] ) . 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 Limited⁸ )

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In examining whether the scheme of amalgamation is in public

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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, 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 .^[11] ) . 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.¹¹ and Bengal Hotels P. Ltd. In re^[12] ) .

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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

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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^[13] ) . The Indian law, a departure from the English law, enjoins a duty on the Court to examine objectively whether the merger is, or is not, violative of public interest. What would be in public interest cannot be put in a strait-jacket. It is a dynamic concept which keeps on changing. It has been explained in Black’s Law Dictionary as:-

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

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It is an expression of wide amplitude. A scheme, valid and good, may yet be bad if it is against public interest. The basic principle of the satisfaction, that the scheme is not contrary to public interest, is none other than the broad and general principles inherent in any compromise or settlement entered into between the parties that it should not be unfair or contrary to public policy or is 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' Union⁹ ). 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

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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

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Section 391. (Zee Interactive Multimedia Ltd., In re^[14] ) .

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The scheme of arrangement provides for the transfer and vesting of the securities business division of the transferor company in favour of transferee No.1 company, and for the vesting of the remaining business (commodities- mainly materials) of the transferor company in transferee company No.2. The scheme provides that all assets, estates, rights, title, interest and charges acquired by the transferor company, after the appointed date and prior to the effective date for operation of the transferor company or pertaining to the remaining business of the transferor company, shall also stand transferred to and vested in transferee company No.2. The scheme also provides for the fixed deposit holders of the transferor company becoming the fixed deposit holders of transferee company No.2. Likewise the subsidiaries of the transferor company are to become, and be deemed to become, the subsidiaries of transferee company No.2; under Clause 7 of the scheme, upon the scheme becoming effective, the employees, if any, of the transferor company pertaining to the securities business

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division, shall become the employees of transferee company No.1, on terms and conditions not less favourable than those on which they were engaged by the transferor company without any break in their service, and on the basis of continuity of service; Clause 10 deals with issuance of shares and the share exchange ratio; like-wise clause 12 provides that the employees of the transferor company, pertaining to the remaining business as on the effective date, shall become, and be deemed to have become, the employees of transferee company No.2 on terms and conditions not less favourable than those on which they were engaged by the transferor company without any break in their service, and on the basis of continuity of service.

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The effects and benefits of the proposed scheme of arrangement is said to be (i) the business of the transferor company has grown significantly over the past two years; there are two distinct businesses being carried on in the transferor company, and the oversight into the these businesses are different; the business parameters and the performance measurement and benchmarking yardsticks are different; further the commodities business is under the supervision and regulation of the Forward Market Commission (FMC) while the other business primarily relate to financial services; hence in order to bring about the right attention and focus, a need is felt that these businesses should be separated and looked at separately; (ii) the proposed arrangement of transferring the securities business to transferee company No.1, and the remaining business comprising of the commodities business with transferee company No.2, would ensure alignment of the business activity that is actually getting carried on with the entities in the group that otherwise carry out these activities; (iii) it is also envisaged that the proposed segregation would create enhanced value for all stakeholders, and allow a focused strategy in operations, which would be in the best interest of the transferor company, all its stakeholders, creditors and all persons connected with the transferor company; (iv) this move would facilitate the growth of

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each of the transferee companies since they would be able to develop capabilities to raise further capital on their own for their business, and also forge partnerships on their business strengths; the employees and the managerial oversight can also be specific to the industry; and (v) approaching banks and financial institutions for additional capital would be improved since the institutions appreciate a singular line of business. In view of the effects/benefits, arising out of the composite scheme of arrangement mentioned hereinabove, it cannot be said that the composite scheme of arrangement /amalgamation, if approved, would be against public interest.

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I consider it appropriate, therefore, to sanction the composite scheme of arrangement cum amalgamation. As required under Section 394(3) of the Companies Act, read with Rule 81 of the Companies (Court) Rules, 1959, the petitioners in C.P.Nos.26 and 27 of 2012 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: 13.04.2012 ASP/MRKR/USD

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