Allowed

M/s Ybrant Digital Limited, v. -

Telangana HC11 Apr 2012CP/33/2012

Case brief

AI extract

What is this about?

This common order sanctions a scheme of amalgamation between the transferor and transferee companies under Sections 391 and 394 of the Companies Act, 1956. The Court held that holding meetings of creditors was unnecessary for the majority as consent or repayment was obtained. Finding the scheme fair and in public interest, the Court ordered its sanction subject to payment of stamp duty.

What did the court decide?

Scheme of amalgamation sanctioned subject to payment of stamp duty and filing of order with the Registrar.

M/s Ybrant Digital Limited, Vs - — Specific Performance | Telangana HC (2012)

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THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN

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COMPANY PETITION NO.33 OF 2012 AND COMPANY PETITION NO.34 OF 2012

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COMMON ORDER:

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These two Company Petitions are filed by the transferor and transferee companies, under Sections 391 and 394 of the Companies Act, 1956 (the Act), for sanction of the scheme of amalgamation.

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The petitioner in Company Petition No.33 of 2012 is the transferor company. It was originally incorporated, in the State of Andhra Pradesh on 28.03.2000, under the name and style of M/s. USA Greetings (India) Private Limited. Consequent on its change of name to M/s. Ybrant Technologies (India) Private Limited, a fresh certificate of incorporation was issued by the Registrar of Companies, Andhra Pradesh, Hyderabad on 07.11.2000. The petitioner converted itself into a public limited company, and was issued a fresh certificate of incorporation on 23.08.2005. The petitioner later changed its name to M/s. Ybrant Technologies Limited, and a fresh certificate of incorporation was issued by the Registrar of Companies, Andhra Pradesh, Hyderabad on 21.02.2006. The petitioner once again changed its name to M/s. Ybrant Digital Limited, and was issued a fresh certificate of incorporation by the Registrar of Companies, Hyderabad on 15.04.2008. The registered office of the transferor company is situated at Hyderabad. Its authorized capital is Rs.135.00 crores divided into 12,00,00,000/- equity shares of Rs.10/- for Rs.120.00 crores and 1,50,00,000 preference shares of Rs.10/each for Rs.15.00 crores. As on 01.08.2011, the outstanding securities of the

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petitioner-company were as under:

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Sl.No.	Outstanding securities of transferor company	No. of equity shares upon conversion
1.	1,20,76,810 compulsorily c o n v e r t i b l e preference shares of Rs.10/- each	1,19,02,712 of Rs.10/- each
2.	10,00,000 convertible warrants	30,00,000 of Rs.10/- each

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3.	15,00,000	Employees	15,00,000 of Rs.10/- each
	Stock	Option Scheme
	(ESOS)

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These convertible securities were converted into equity shares on 02.09.2011, 09.09.2011 and 23.12.2011, as a result of which the paid-up share capital of the transferor company, as on the date filing of this company petition, was Rs.75,13,79,720/- divided into 7,51,37,972 equity shares of Rs.10/- each fully paid-up.

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The main objects of the transferor company is (i) to develop software for computer systems, data processing, data acquisition, data transmission, tele-data entry, industrial instrumentation, process control, to act as computer and electronic data processing consultants and agents; (ii) to provide comprehensive end-to-end digital marketing services to direct marketers, brand advertisers and marketing agencies in India and abroad and also internet and mobile marketing services, support services and software tools for online markets; and to carry on the business of and to establish, develop, formulate, structure, offer service and or otherwise deal in all types of information and communication, telephone, telex, fax, radio, television, computers, satellite communication etc. For the financial year ending 31.03.2011, the transferor company made a profit before tax of Rs.4,46,25,955/-, and its profit after tax in the said year was Rs.3,02,80,581/-.

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The Transferee company was originally incorporated as a public limited company, in the State of Andhra Pradesh on 28.01.1999, under the name and style of M/s. Lanco Global Systems Limited. It changed its name to M/s. LGS Global Limited, and a fresh certificate of incorporation was issued by the Registrar of Companies, Andhra Pradesh, Hyderabad on 05.11.2008. Its registered office is situated at Hyderabad. Its authorized capital as at 01.08.2011 was Rs.60,00,00,000/- divided into 6,00,00,000 equity shares of Rs.10/- each. Its paid-up share capital is Rs.25,42,36,670/- divided into 2,54,23,667 equity shares of Rs.10/- each. The main objects of the transferee company is (i) to design, develop, acquire, accept, arrange, assemble,

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manufacture, produce, fabricate, generate, equip, obtain, provide, erect, construct, install, set up, supervise, implement, support, assign, undertake turn-key projects, to conduct operation research, to provide management information processing applications in the fields of software development, micro processors, electromagnetic and mechanical, electrical and electronic equipments, digital equipments/imaging, engineering work systems, electronic circuits etc; (ii) to carry on the business and to undertake consultancy, research, designing, conducting test, implementation, supervising and to give support services for the development of software systems and programming either for own use or for other users for sale in India or export outside India; and to send staff and students within and outside India for implementation of projects, for doing research and advanced studies, to set up information management services like data processing, data entry works, desktop publishing, word processing etc. and (iii) to carry on business to render higher education consultancy within and outside India, to provide computer education, teaching and training in software, hardware, networking and all other related fields in Information Technology by setting up training centers or through franchising, publish books, journals, bulletins, study material, magazines, brochures, pamphlets, periodicals etc. For the financial year ending 31.03.2011, the audited financial statement of the transferee company shows that it made a profit before tax of Rs.25,02,95,663/-, and its profit after tax was Rs.22,50,48,389/-.

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Before sanctioning a scheme of arrangement, the Court must be satisfied that the statutory provisions are complied with; in case a meeting of the members or a class of members or of the creditors or a class of creditors is called for, the class is fairly well represented; and the scheme of arrangement is such as a man of business would 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

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expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and the members of the company who have ratified the scheme by the requisite majority. The company court’s jurisdiction to that extent is peripheral and supervisory and not appellate. The supervisor cannot ever be treated as the author or the policy-maker. The propriety and the merits of the compromise or arrangement has to be judged by the parties who, as sui juris with their eyes open and fully informed about the pros and cons of the scheme, arrive at their own reasoned judgment and agree to be bound by such a compromise or arrangement. The Court cannot scrutinise the scheme to find out whether a better scheme could have been adopted by the parties. (Miheer H. Mafatlal Vs. Mafatlal Industries Ltd^[1] ) .

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The scheme of amalgamation is an arrangement between the company and its members. 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.

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Pursuant to the order of this Court, in C.A. No.1687 of 2011 dated 17.11.2011, the meeting of the shareholders of the transferor company was convened on 24.12.2011, and the chairperson filed his report on 06.01.2012. The report of the chairperson would show that notices were issued to all the shareholders, and also by advertisement in newspapers; the meeting was attended by members in person holding shares valued at Rs.27,02,15,600/and 13 members by proxies holding shares valued at Rs.12,64,04,070/-

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aggregating to Rs.39,66,19,670/-. It is evident from the report of the chairperson that a unanimous resolution was passed in the said meeting approving the scheme of amalgamation.

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Pursuant to the order of this Court, in C.A. No.1688 of 2011 dated 17.11.2011, the meeting of the shareholders of the transferee company was convened on 24.12.2011, and the chairperson submitted his report to this Court on 06.01.2012. The report of the chairperson would show that notices were issued to all the shareholders individually, and also by advertisement in newspapers. The report records that the meeting was attended by 117 members in person, and 55 by proxies; among the members present, persons holding shares valued at Rs.17,44,98,950/-, and members voting by proxies holding shares of Rs.1,07,27,240/-, aggregating to Rs.18,52,26,190/-, had unanimously resolved that the scheme of amalgamation be approved.

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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 Creditors in a Scheme of arrangement between the Company and its Creditors, then should the expression “as the case may be” in Section 391(2) not be read as to bind only the members where a meeting of the members is held, and the creditors where a meeting of the creditors is held? The safeguard in the provision, of 3/4^th 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

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

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On these questions one view is that the creditors are not 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 Vs. Asia Udyog Pvt. Ltd^[2] ) , and that the legislature has cast a duty on the Court to ascertain whether the Scheme affects the interests of the creditors to such an extent that holding of their meeting is essential and, if the Court were of the view that the interest of the creditors were adversely affected, it could refuse to sanction the scheme unless their consent has been obtained. (Ansal Properties and Industries Ltd., In re^[3] ) .

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Another facet of this view is that, under Section 391 of the Act, a compromise or arrangement is either between a company and its creditors or

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between a company and its members. An arrangement, in the nature of amalgamation, is the result of an agreement between the amalgamating company and its members, as well as a corresponding agreement between the transferee company and its members, and there is, therefore, no provision for the participation of persons other than the members of the two companies to vote on an arrangement of amalgamation proposed between a company and its members. (Nava Bharat Ferro Alloys In re^[4] ; Mafatlal Industries Ltd., In re^[5] ; Coimbatore Cotton Mills Ltd and Lakshmi Mills Co. Ltd., In re^[6] ; and Telesound India Ltd., In re^[7] ) .

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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 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.

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A perusal of the Balance Sheet of the transferor company would show that its secured loans as at 31.3.2011 was for Rs.30.00 Crores. The secured loans, in its entirety, is a term loan given by ICICI Bank Limited which has, by its letter dated 01.01.2012, given its consent to the proposed scheme of amalgamation subject to the conditions (i) the debts, liabilities including

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contingent liabilities and obligations of the Transferor Company with respect to the Foreign Currency Term Loan sanctioned to Ybrant Media Acquisition Inc, and the term loan of Rs.3.00 Crores sanctioned to the Transferor by ICICI Bank should be transferred to and vested in the transferee company on the same terms and conditions as were applicable to the transferor company before the implementation of the scheme; (ii) the existing securities, contractual comfort, mortgages and charges created/provided by the transferor company and other security/comfort provider in favour of ICICI Bank for the above facilities shall remain unaffected, and shall continue to attach to such assets over which such security was created by the transferor company and other security providers; and (iii) under no circumstances should the rights of ICICI Bank as a secured lender to the transferor company be adversely affected by the scheme.

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Sri V.S. Raju, Learned Counsel for the petitioner, would draw attention of this Court to the scheme of amalgamation which provides, under clause 5.4, for all debts, liabilities, contingent liabilities, duties and obligations of the transferor company, with effect from the appointed date and pursuant to the orders of the High Court under Section 394 and other applicable provisions of the Act and without further act or deed, to be transferred or deemed to be transferred to and vested in the transferee company so as to become, as from the appointed date, the debts, liabilities, contingent liabilities, duties and obligations of the transferee company on the terms and conditions as were applicable to the transferor company. It is evident, therefore, that the proposed scheme of amalgamation stipulates that all the debts and liabilities of the transferor shall be transferred to and vest in the transferee company as has been stipulated by ICICI Bank while giving its consent to the proposed scheme of amalgamation.

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The audited Balance Sheet dated 31.03.2011 shows the “unsecured loans” of the transferor company of Rs.114,07,93,799/- to be the loan from subsidiaries. In the affidavit dated 04.04.2012 a break up of the unsecured loans as at 31.03.2011 is furnished as under:

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Particulars Amount Rs.

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Unsecured Funds
Online Media Solutions Limited, Israel	65,385,560
Frontier Data Management Inc, USA	58,708,407
International Expressions Inc, USA	47,474,460
Ybrant Media Acquisitions Inc, USA	902,759,329
Max Interactive Pte Ltd., Australia	35,057,043
Dream Ad, Chile	17,948,000
Dream Ad, Panama	13,461,000

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As letters of consent has been obtained from all the abovementioned creditors under the class of “unsecured loans”, holding of the meeting of such creditors of the transferor is wholly unnecessary.

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Under the head “current liabilities and provisions” in the Balance Sheet of the transferor company as at 31.03.2011, include sundry creditors. In the affidavit dated 04.04.2012, the break up of these current liabilities is shown in the form of a tabular statement. A perusal thereof would show that, from out of the total current liabilities of Rs.82,648,855/-, more than 90.36% thereof have either been paid their dues after 31.03.2011, or their letters of consent to the proposed scheme of amalgamation obtained. Among the letters of consent obtained from the sundry creditors under the head current liabilities are from Monster Com for Rs.58,500, from Andres Laniado for Rs.4,46,50,000/- and from Domnic Elfer for Rs.3,72,08,363/-. Likewise, from out of the total provisions for Rs.1,34,82,823/-, the provision for outstanding expenses for Rs.88,94,176/- was also paid in instalments on 15^th June, 2010, 15^th March, 2011, 30^th March, 2011 and 29^th September, 2011. It is evident, therefore, that more than 90% of the creditors under the head “current liabilities” have either been paid their dues after 31.03.2011, or their letters of consent obtained. Even in a Scheme of arrangement between a company and its creditors all that Section 391 (2) requires is for a majority in number representing 3/4^th in the value of the class of creditors agree to the compromise or arrangement. Since more than 90% of the sundry creditors under the head “current liabilities” have either been paid their dues, or have

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consented to the proposed Scheme of amalgamation, it cannot be said that Section 391(2) of the Companies Act (even if it is held to be applicable) has been violated.

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A perusal of the Balance Sheet of the transferee company would show that its “secured loans” as at 31.03.2011 was for Rs.93,29,93,772/-. The break up of the “secured loans” is as under:

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Particulars	Amount as on 31.3.2011 – Rs.
Secured Loans
Axis Bank – working capital	455,409,347
SBI Global Factors Ltd – working capital	122,028,851
State Bank of India – working capital	302,808,714
Axis Bank – term loan	16,600,839
State Bank of India – term loan	36,056,107
Axis Bank – car loan	89,914
Tota(A)	932,993,772

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Letters of consent have been obtained for the term loan and working capital loan from Axis Bank Limited, and the term loan and working capital loan from SBI Global Factors Ltd. In the affidavit dated 04.04.2012 the Managing Director of the Transferee company has stated that the working capital loan from SBI Global Factors Limited for Rs.12,20,28,851/- was subsequently repaid by them. While consent letters of M/s. Axis Bank is only for the working capital loan, and the term loan given by it, a sum of Rs.89,914/- is shown as due towards the car loan obtained from the Axis Bank Limited. Sri V.S. Raju, Learned Counsel for the petitioner, would state that this loan was not included by M/s Axis Bank in their letter of consent by oversight, and the very fact that they have referred to the term loan and working capital loan which together exceed Rs.46.00 Crores would itself show that they could not have had any objection to the proposed scheme of amalgamation for an insignificant loan of Rs.89,914/-. I see no reason to delve on this aspect any further since the car loan of Rs.89,914/- forms less than 1% of the total secured loan of the transferee company; and since either

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letters of consent have been obtained or the secured loan repaid for a substantial part of the “secured loans”, failure to obtain a letter of consent for the car loan of Rs.89,914/- is of little significance. The creditors, under the head “unsecured loan” of the transferee company as at 30.03.2011, is for Rs.19,74,82,348/-. The break up of the unsecured loans, as given in the affidavit filed by the Managing Director of the transferee company dated 04.04.2012, is as under:

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Particulars	Amount as on 31.03.2011 – Rs.
Unsecured Loans
Apnaghar Housing Development and Finanf4	5,000,000
Classic Labour advisory Services Pvt Ltd	2,500,000
Rama Pulp & Paper Ltd	5,000,000
Do
Do
Do
Do
Do
Do
S.E. Investments Ltd	45,451,348
Infinite India Pvt Ltd	1,1116,000
Venkateswara Rao Kadiyala	80,370,000
K.Venkata Subba Rao	58,045,000
TOTAL(A)	197,482,348

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While the unsecured loans from Apnaghar Housing Development, Classing Advisory Services Pvt Ltd, and Rama Pulp & Paper Ltd were paid in the month of May, 2011, letters of consent, to the proposed scheme of amalgamation, have been obtained from M/s. S.E. Investments Ltd, Infinite India Pvt. Ltd, Venkateswara Rao Kadiyala and Sri K. Venkata Subba Rao. It is, therefore, evident that all the creditors under the head “unsecured loans” have either been repaid, or have given their consent to the proposed scheme of amalgamation. As such holding of the meeting of this class of creditors of the transferee company is wholly unnecessary. The Balance sheet of the transferee company as at 31.03.2011 also discloses that the creditors, under the head “current liabilities and provisions”, are for

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Rs.141,66,24,648/-. In the affidavit dated 4.4.2011, a tabular statement is furnished giving a break of all these sundry creditors and provisions. The petitioner has either obtained letters of consent, or has re-paid the debt, of these sundry creditors under the head “current liabilities” to an extent of 88.63% of the total sundry creditors under this head. The provision for dividend, gratuity, leave encashment and other provisions are also stated, in the affidavit dated 04.04.2012, to have been repaid. Since more than 88.63% of the sundry creditors, under the head “current liabilities”, have either been repaid or have given their consent to the proposed scheme of amalgamation, holding of the meeting of this class of sundry creditors is wholly unnecessary.

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Under the first proviso to Section 391(2), no order sanctioning any compromise or arrangement shall be made by the Court unless it 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 auditors report on the accounts of the company, pendency of any investigation proceedings in relation to the company under Sections 235 to 251 and the like.

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The Balance Sheet and Profit and Loss account of both the transferor and transferee companies as at 31.03.2011 is filed along with the auditor’s report thereon. As the financial year ending 31.03.2012 has just been completed, the latest financial position of both the transferor and the transferee companies can only be the audited Balance Sheet and Profit and Loss account as at 31.03.2011. In the petition filed before this Court, both the transferor and transferee companies assert that no investigation or proceedings are pending under Section 235, 237 or other provisions of the Companies Act or under any Act against transferor company or the transferee company. The requirement of the proviso to Section 391(2) of the Companies Act is, therefore, satisfied.

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The second proviso to Section 394(1), and Section 394-A, of the Companies Act require the Official Liquidator and the Central Government to be put on notice to enable them to submit their report/representation with

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regards the proposed scheme of amalgamation. In his report dated 26.03.2012, the Official Liquidator states that he had, vide letter dated 02.03.2012, called for the statutory books and other relevant information from the transferor; and the petitioner had furnished the information/documents called for on 19.03.2012. After referring to various provisions of the scheme of amalgamation, the Official Liquidator would submit that the transferor company has not furnished letters of consent in respect of the unsecured loans; and there was a deferred tax liability of Rs.66,07,838/-. Since letters of consent have been obtained from all the creditors under the head “unsecured loans” for around Rs.114 crores, this objection raised by the Official Liquidator would no longer survive. With regards the deferred tax liability, a perusal of the notes forming part of the accounts, annexed as Schedule 13 to the Balance Sheet, would show that the deferred tax liability is dealt with at para 21 and 28 thereof. Under para 21, it is stated that, as per accounting standard -22 issued by the Institute of Chartered Accounts of India, the transferor company has deferred the income tax during the year towards depreciation and gratuity which arises on account of timing differences in depreciation and gratuity for the year ending 31.03.2011. A statement is furnished giving particulars of the deferred tax liability as per which the opening balance of deferred tax as on 01.04.2010 was Rs.15,43,90,870/-; to this opening balance was added the deferred tax liability during the year of Rs.54,51,198/-; and the deferred tax prior period adjustment of Rs.15,32,34,230/- was deducted therefrom; resulting in the balance, as at 31.03.2011, of Rs.66,07,838/-. It is evident, therefore, that the deferred tax liability amount of Rs.60,07,838/- has been satisfactorily explained and cannot, therefore, result in its being treated as a ground not to accord sanction to the proposed scheme of amalgamation.

¶45

Clause 24(f) of the listing agreement stipulates that the company, which has listed its shares on the stock exchange, agrees that it shall file, the scheme of amalgamation proposed to be filed before any Court under Sections 391 and 394 of the Companies Act, with the stock exchange for its

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approval atleast a month before it is presented to the Court. In compliance with the requirement of clause 24(f), letters of consent from both the Madras Stock Exchange, and the Bombay Stock Exchange, have been obtained and filed by the transferee company whose shares are said to be listed in the said stock exchanges. It is stated by Sri V.S. Raju, Learned Counsel for the petitioner, that the shares of the transferee are listed only in these two stock exchanges alone, and that letters of consent from the said stock exchanges are sufficient compliance with the requirement of clause 24(f) of the listing agreement.

¶47

A report has been filed, on behalf of the Central Government, by the Regional Director, Ministry of Company Affairs wherein the only objection taken, to the proposed scheme of amalgamation, is that the transferor and the transferee companies have to furnish no objection certificates from the secured creditors and they should pay stamp duty in accordance with the provisions of the Indian Stamp Act, 1899 upon sanction of the scheme of amalgamation. In so far as the secured creditors of both these companies are concerned, as has been stated hereinabove, either the amounts due to them have been repaid or their letters of consent, to proposed scheme of amalgamation, has been obtained. With regards the objection that stamp duty is to be paid, Sri V.S. Raju, Learned Counsel for the petitioner, would submit that, once a scheme is sanctioned, the Registrar of Companies would only accept the certified copy of the order of this Court if it is accompanied by proof of payment of stamp duty as consideration for the said scheme. It would suffice if this Court were to prescribe payment of stamp duty as a condition for grant of sanction, and this objection need not result in rejection of the proposed Scheme of amalgamation.

¶48

The only question which remains to be examined is whether the Scheme of amalgamation is in public interest. The Court cannot abdicate its duty simply because the statutory majority has approved it and there is no opposition to the Scheme of amalgamation in Court. It must scrutinize the scheme to find out whether it is an arrangement which can, by reasonable people conversant with the subject, be regarded as beneficial to those who

¶49

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. v. Mahindra Ugine Steel Co. Ltd .^[9] ) . Sections 391 to 396 constitute a complete code and the provisions are in a way derogatory to the law of contract. 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. (Bank of Baroda Ltd.⁹

¶50

and Bengal Hotels P. Ltd. In re^[10] ) . 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. Ambalal

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Sarabhai Enterprises Ltd^[11] ) . 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

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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.”

¶54

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 the 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' Union v. Hindustan Lever Ltd. ,^[12] ) . No court of law would ever countenance any Scheme of compromise or arrangement if it finds that it is an illegal Scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. The fairness of the Scheme, qua the disputing minority shareholders or creditors, also has to be kept in view by the High Court while putting its seal of approval on the Scheme.

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The High Court should examine whether the proposed Scheme of compromise and arrangement is violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the Scheme with a view to be satisfied on this aspect the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously x-ray the same. The High Court has also to satisfy itself that the members or class of members or the creditors or class of creditors, as the case may be, were acting bonafide and in good faith and were not coercing the minority in order to promote any interest adverse to them. It must also ensure that the Scheme as a whole is also just, fair and reasonable from the point of view of prudent men of business taking a commercial decision

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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 re^[13] ) .

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A perusal of the proposed Scheme of amalgamation would show that it provides for the transfer of assets and liabilities of the transferor, and its vesting in the transferee under clause 5 thereof. The consideration for the scheme is stipulated in clause 6. Clause 7 prescribes the accounting treatment. Clause 8, which relates to staff, workmen & employees of the transferor company including its subsidiary companies in service on the effective date, provides that they shall be deemed to have become the staff, workmen and employees of the transferee company with effect from the appointed date without any break in their service and on the basis of continuity of service, and the terms and conditions of their employment with the transferee company shall not be less favourable than those applicable to them in the transferor company on the effective date; under clause 8.2, the equitable interest in accounts/funds of the employees, staff and workmen whose services are transferred to the transferee company, relating to superannuation, provident fund and gratuity fund shall be identified, determined and transferred to the respective trusts/funds of the transferee company, and such employees shall be deemed to have become members of such trusts/funds of transferee company. Clause 14, in part IV of the Scheme, relates to reorganisation of equity share capital of LGS and provides for cancellation of Rs.8/- of every equity share of Rs.10/- fully paid up, and the equity shares to be treated as Rs.2/- each fully paid up, and the difference of Rs.8/- per equity share to be credited to the share premium amount of the transferee company. The share exchange ratio, as prescribed in the scheme, is six equity shares of Rs.10/- each of the transferor company

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to be issued for every one equity share of Rs.10/- held by the shareholders of the transferee company to be issued and allotted to the equity shareholders of the transferor company in the same proportion as to their holding in the transferor company. Clause 17 makes the scheme conditional on approvals/sanctions subject to the requisite orders of the High Court being obtained and the certified copy of the High Court order, sanctioning the Scheme, being filed before the Registrar of Companies, A.P. Hyderabad, and such other sanctions and approvals as may be required by law in respect of the scheme being obtained.

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The rationale of the Scheme as is evident from para 12 of the petition, is that the transferor company is in the business of providing digital marketing solutions to business, agencies, and on-line publishers worldwide; it connects advertisers with their audience across any form of digital media, using its massive local presence to deliver appropriate messages to the right audience, through the most relevant digital channels; the transferee company is engaged in the business of providing IT service and solutions to diverse enterprises through its onsite consulting expertise and offshore development experience; the transferor and the transferee companies business and facilities are complementary to each other; this will enable the amalgamated entity to derive benefits of vertical and horizontal integration and benefits of synergy which would ultimately contribute to the future of the business, and profitability of the amalgamated company; the proposed Scheme of amalgamation was in line with the global trends to achieve size, integration and greater financial strength with a view to enhancing customer relationships, and thereby shareholders wealth; the Scheme of amalgamation would have the following benefits (i) it would help in creation of a highly competitive Digital Marketing Solutions Company; the combination of the operations will create a unique level of integration and will enable substantial savings in cost and will enhance the value to the customers; (ii) It would also enhance the scale of operations thereby providing significant impetus to the growth of both the companies, since they are engaged in lines of business that could draw upon synergies of both the

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companies; and (iii) further the amalgamation would also result in improved shareholders value for both the companies by way of improved financial structure, cash flows, increased assets base, consolidated revenues and profitability; and the proposed amalgamation would not only benefit both the companies but also its shareholders, employees and their creditors. It cannot, therefore, be said that the Scheme of amalgamation, if approved, would be against public interest.

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I consider it appropriate, therefore, to sanction the Scheme of amalgamation on condition that the prescribed stamp duty is paid, and proof of payment furnished, along with a certified copy of the order of this Court, which shall be filed with the Registrar of Companies, A.P. Hyderabad for its registration within thirty days from the date of the order.

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_______________________________ Date: 11.04.2012 RAMESH RANGANATHAN, J

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MRKR/ASP

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