Allowed

Sree Rayalaseema Hi-Strength Hypo Limited v. -

Telangana HC31 Aug 2012CP/89/2012

Case brief

AI extract

What is this about?

The Court sanctioned a scheme of amalgamation under the Companies Act, 1956, merging two transferor companies into a transferee company. It accepted reports from the Official Liquidator and Government, confirmed compliance with shareholder and creditor meeting procedures, and held the scheme was not against public interest.

What did the court decide?

The scheme of amalgamation between the three companies was sanctioned and approved.

Sree Rayalaseema Hi-Strength Hypo Limited Vs - — Company and Corporate | Telangana HC (2012)

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THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN COMPANY PETITION Nos.87, 88 AND 89 of 2012

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COMMON ORDER:

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Company Petition No.88 of 2012 is filed by SRHHL Industries Limited (hereinafter called ‘transferor company No.1’), Company Petition No.87 of 2012 is filed by TGV Pharma Private Limited (hereinafter called ‘transferor company No.2’) and Company Petition No.87 of 2012 is filed by Sree Rayalaseema HiStrength HYPO Limited (hereinafter called the ‘transferee company’), seeking sanction of this Court, under Section 394 read with Sections 391 to 393 of the Companies Act, 1956 (the Act), to the proposed scheme of arrangement, whereby the entire undertakings of both the transferor companies would be transferred to, and stand vested in, the transferee company.

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Transferor company No.1 is a Public Limited Company incorporated, under the provisions of the Companies Act, 1956 (the Act), on 24.10.1986. Its registered office is situated at Gondiparla, Kurnool. It is a listed company on the Bombay Stock Exchange Limited (BSE) and the National Stock Exchange of India Limited (NSE). The objects for which transferor company No.1 was incorporated is to manufacture, produce, import, export, deal in high strength hypo-chlorides, sulphuric acid, hydrochloric acid, and all other chemicals and chemical products; to carry on the business as manufacturers of and dealers in all kinds of plastic materials, poly styrene, poly vinyl chloride etc; to carry on the business of manufacturing, refining and processing all kinds of fertilizers; and to promote, establish, generate, operate, distribute, accumulate, maintain, transmit, supply and sell electricity/power by installing, maintaining and operating power plants etc. The authorised share capital of transferor company No.1, as at

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31.03.2011, was Rs.33,00,00,000/- divided into 3,30,00,000 equity shares of Rs.10/- each. Its issued, subscribed and paid-up capital was Rs.12,49,51,110/- divided into 1,24,95,111 equity shares of Rs.10/- each fully paid up. Calls in arrear as on that date was Rs.38,285. For the financial year ending 31.03.2011, transferor company No.1 earned a profit before tax of Rs.34,88,612/-. The net profit of Rs.28,51,638/-, along with the balance in the profit and loss account brought forward from the previous years of Rs.15,22,16,050/-, was carried over to the Balance Sheet.

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Transferor company No.2 is a Private Limited Company incorporated on 10.03.2008 under the provisions of the Act. Its registered office is also situated at Bhagyanagar, Kurnool. The authorized share capital of transferor company No.2, as at 31.03.2011, is Rs.2,00,00,000/- divided into 2,00,000 equity shares of Rs.100/- each. Its issued, subscribed and paid up capital is Rs.1,41,27,500/- divided into 1,41,275 equity shares of Rs.100/each fully paid up. The share application money as at 31.03.2011 is said to have been subsequently repaid. The objects of Transferee Company No.2 include to carry on the business of manufacturing, buying, selling, wholesale and retail dealings, importing and exporting of bio-chemicals; and to carry on the business of manufacturing, buying, selling, wholesale and retail dealings, importing and exporting of agro-chemicals, pesticides, bio-technology products etc. For the financial year ending 31.03.2011, transferor company No.2 earned a net profit of Rs.85,65,556/-.

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The transferee company is a Public Limited Company incorporated on 28.03.2005 under the provisions of the Act. Its shares are listed both on the Bombay Stock Exchange Limited, and the National Stock Exchange of India Limited. The registered

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office of the transferee company is situated at Gondiparla, Kurnool. The authorised share capital of the transferee company is Rs.12,00,00,000/- divided into 1,20,00,000 equity shares of Rs.10/- each. Its issued, subscribed and paid-up capital is Rs.10,94,74,610/- divided into 1,09,47,461 equity shares of Rs.10/- each. The transferee company increased its authorized share capital from Rs.12,00,00,000/- to Rs.14,00,00,000/- after obtaining approval of its shareholders in the meeting held on 26.09.2011; thereafter, it allotted 5,47,370 equity shares of Rs.10/each; and, as a result, its issued, subscribed and paid-up capital increased to Rs.11,49,48,310/- divided into 1,14,94,831 equity shares of Rs.10/- each. The objects for which the transferee company was incorporated is to manufacture, produce, process, refine, buy, sell, trade, export, import, deal in stable bleaching powder, high strength hypo-chloride (Hypo), and all other organic and inorganic chemicals, gases etc; to carry on the business as manufacturers of and dealers in all kinds of plastic materials, poly styrene, poly vinyl chloride etc; and to carry on the business of manufacturing, refining and processing all kinds of fertilizers etc. For the financial year ending 31.03.2011, the transferee company earned a profit of Rs.20,76,14,937/-. The Board of Directors, of both the transferor companies and the transferee company, by their resolution dated 28.12.2011, approved the scheme of arrangement, cum amalgamation.

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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

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wisdom of the parties to the scheme, who have taken an informed decision about the usefulness and propriety of the scheme supporting it by the requisite majority vote, that has to be kept in view by the Court. The Court would not act as a court of appeal and sit in judgment over the informed view of the parties to the compromise as it has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the scheme by the requisite majority. The Company Court’s jurisdiction to that extent is peripheral and supervisory and not appellate. The supervisor cannot ever be treated as the author or the policy-maker. The propriety and the merits of the compromise or arrangement has to be judged by the parties who as sui juris, with their eyes open and fully informed about the pros and cons of the scheme, arrive at their own reasoned judgment and agree to be bound by such a compromise or arrangement. The Court cannot scrutinise the scheme to find out whether a better scheme could have been adopted by the parties. (Miheer H. Mafatlal v. Mafatlal Industries Lt d^[1] ) .

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When a scheme of amalgamation/merger of a company is placed before the Court for its sanction, the Court should, in the first instance, direct holding of the meetings in the manner stipulated in Section 391 of the Act. This Court, by order in Company Application No.437 of 2012 dated 18.04.2012, directed that the meeting of the shareholders of transferor company No.1 be convened on 28.05.2012 at 3.00 P.M. at its registered office. In his affidavit dated 29.08.2012, the Director of transferor company No.1 would state that notices for convening the meeting, as also a statement under Section 393 of the Act, were sent to all the shareholders (59384 in number). In her report dated

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28.05.2012, the Chairperson of the meeting would state that the meeting was attended either personally or by proxy by 40 equity shareholders holding 30,81,093 equity shares of Rs.10/- each for Rs.3,08,10,930/, and all the shareholders had unanimously approved the scheme of arrangement. This Court, by order in Company Application No.435 of 2012 dated 18.04.2012, noted that the entire paid up share capital of transferor company No.2 was held by four shareholders; all of them had given their consent to the proposed scheme of arrangement/amalgamation; as such, the holding of the meeting of the shareholders was wholly unnecessary; and, therefore, holding of the meeting of the shareholders of transferor company No.2 was dispensed with. This Court, by order in Company Application No.438 of 2012 dated 18.04.2012, directed that the meeting of the shareholders of the transferee company be convened on 28.05.2012 at 10.30 A.M. at its registered office. In her affidavit dated 30.08.2012, the Company Secretary of the transferee company would state that the notices for convening the meeting of the shareholders, as also a statement under Section 393 of the Act, were sent to all the shareholders (58106 in number) The Chairperson of the meeting, in her report dated 28.05.2012, stated that the meeting of the equity shareholders was attended either personally or by proxy by 40 equity shareholders holding 59,95,963 equity shares of Rs.10/each for Rs.5,99,59,630/-; and all the said shareholders had unanimously approved the scheme of arrangement. As notices of convening of the meeting were sent to all the shareholders and, as all the shareholders, who attended the meeting had unanimously approved the scheme of arrangement, the requirement of 3/4^th in number of the shareholders of the Transferor Company No.1 and the Transferee Company approving the scheme in the meeting

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convened for the said purpose is satisfied. As all the shareholders of Transferor Company No.2 have given their consent to the scheme of amalgamation, the requirement of Section 391 is satisfied in the case of Transferor Company No.2 also.

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On the question whether, in a scheme of arrangement between the company and its members, a meeting of the creditors or a class of creditors must be held, it is necessary to note that the expression “as the case may be” finds place both in subsections (1) and (2) of Section 391. If the words “as the case may be” in Section 391(1) is construed as requiring the Court to order the meeting of only the members, in a Scheme of arrangement between the Company and its members, and only a meeting of the creditors in a Scheme of arrangement between the Company and its creditors, then should the expression “as the case may be” in Section 391(2) not be read as to bind only the members where a meeting of the members is held and the creditors where a meeting of the creditors is held? The safeguard in the provision, of ¾ of the members or creditors in value voting in the meeting to approve the scheme, is that the wishes of a majority of the class should prevail, and the dissenting minority of 1/4^{t h} or less of the class should not be permitted to derail the scheme of arrangement unless, of course, the Court, on examining the scheme, finds that the objection of the minority is justified. If no meeting of the creditors is required to be held, in a Scheme of arrangement between the Company and its members, then, in the absence of ascertaining whether 3/4^th in value of the creditors approve the scheme or not, would the Court be justified in statutorily imposing such a Scheme of arrangement on the creditors, even though their consent has not been obtained or their wishes ascertained? If it were held that not holding the meeting,

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and ascertaining the wishes of the creditors, would result in the Scheme of arrangement not to bind them, would the very purpose of sanctioning the Scheme by the Court not be defeated, and approval of the Scheme not be an exercise in futility? If, on the other hand, the view, that a meeting of the creditors/members must necessarily be held in all cases irrespective of whether the Scheme of arrangement is between the Company and its members or the creditors, is accepted would that not render the words “as the case may be” in Section 391(1) mere surplusage?

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On this question, one view is that the creditors are not entitled, as of right, to participate in the process of consideration of sanction of the Scheme, as the Companies Act does not contain a specific provision for notice being given to the creditors at any stage either prior to the making of the order or subsequent thereto, except in so far as the creditors may have notice of it by public advertisement, (Union of India v. Asia Udyog Pvt. Lt d^[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 r e^[3] ) .

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Another facet of this view is that, under Section 391 of the Act, a compromise or arrangement is either between a company and its creditors or between a company and its members. An arrangement, in the nature of amalgamation, is the result of an agreement between the amalgamating company and its members, as well as a corresponding agreement between the transferee

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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 r e^[4] ; Mafatlal Industries Ltd., In r e^[5] ; Coimbatore Cotton Mills Ltd and Lakshmi Mills Co. Ltd., In r e^[6] ; and Telesound India Ltd., In r e^[7] ) . However a different view was taken by the Bombay High Court, In Re ICICI Bank Limite d^[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 its discretion as a matter of course to convene a meeting of the creditors of the Company under subsection (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 transferor company No.1 as at 31.03.2011 would show that, except the deferred tax liability of Rs.17,71,600/-, it does not have any secured or unsecured loans. However, under the head “current liabilities”,

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Rs.1,91,194/- is shown as due to the sundry creditors, and Rs.45.00 lakhs towards “other liabilities”. In his affidavit dated 29.08.2012, the Director of transferor company No.1 would state that they had no secured or unsecured creditors as at 31.12.2011; and the total outstanding amount due to the sundry creditors of Rs.1,91,194/-, and other liabilities of Rs.45.00 lakhs as at 31.03.2011, were not outstanding as at 31.12.2011. As required under the listing agreement, transferor company No.1 has also obtained ‘No Objection Certificate’ both from the Bombay Stock Exchange and National Stock Exchange of India Limited.

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C.A.No.436 of 2012 was filed by transferor company No.2 seeking a direction from this Court to convene the meeting of its unsecured creditors (both under the heads “unsecured loans” and “current liabilities”). This Court, by order dated 18.04.2012, directed that the meeting of the unsecured creditors of transferor company No.2 be convened on 29.05.2012 at 11.00 A.M. at its registered office. In the affidavit dated 29.08.2012, filed on behalf of transferor company No.2, it is stated that the unsecured creditors as at 31.12.2011 were 67 in number; the outstanding amount payable to them was Rs.3,53,97,649/-; and notices convening the meeting, as also a statement under Section 393 of the Act, were sent to all the unsecured creditors. The Chairperson of the meeting, in his report dated 29.05.2012, stated that the meeting was attended either personally or by proxy by 15 unsecured creditors, to whom a sum of Rs.3,25,64,231/- was due. It is evident that, more than 75% of the total unsecured creditors had attended the meeting, and all of them had given their consent to the proposed scheme of arrangement.

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A perusal of the Balance Sheet of transferor company No.2 as at 31.03.2011 would show that its secured loans as on that date

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was Rs.7,28,87,862/-, all of which were from State Bank of Hyderabad who, by their letter dated 04.04.2012, conveyed their no objection to the proposed scheme of arrangement. The unsecured loans of transferor company No.2 as at 31.03.2011 was Rs.50,00,000/- which was a loan received by it from transferor company No.1 who had also conveyed their consent to the proposed scheme of arrangement. Under the head “notes forming part of accounts” at Clause (I) (iii), it is stated that transferor company No.2 had accounted for deferred tax in accordance with Accounting Standard 22 “Accounting for taxes on Income” issued by the Institute of Chartered Accountants of India; and, accordingly, timing difference resulting in deferred tax liabilities arose. Under sub-clause (6) thereof, it is stated that, in accordance with Accounting Standard 22, the Company had charged the net profit with the deferred tax liability of Rs.22,74,515/-; and, as a result, the profit for the year was lower by Rs.8,01,174/-. The meeting of the unsecured creditors of the transferee company was directed to be convened on 28.05.2012 at its registered office. In her affidavit dated 30.8.2012, the Company Secretary of the Transferee Company would submit that the notices convening of the meeting of the unsecured creditors, as also a statement under Section 393 of the Act, were sent to the unsecured creditors 405 in number for a value of Rs.11,55,44,598/- as at 31.12.2011; the notice convening the meeting of the unsecured creditors was also sent to the Government of Andhra Pradesh in respect of the deferred sales tax loan. In his report dated 28.05.2012, the Chairman of the meeting would state that the meeting of the unsecured creditors was attended either personally or by proxy by 30 unsecured

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creditors entitled to a debt of Rs.81,49,383/-; and all the unsecured creditors had unanimously approved the scheme of arrangement. A perusal of the Balance Sheet of the transferee company as at 31.03.2011 would show that its secured loans was Rs.73,86,41,649/-, and its unsecured loans was Rs.3,83,26,379/-. In the affidavit dated 30.08.2012 filed by the Company Secretary of the transferee company, it is stated that State Bank of Hyderabad was the only secured creditor; the statutory auditors of the transferee company had so certified by their certificate dated 09.04.2012; and, enclosed to Company Petition No.89 of 2012, was a copy of the letter dated 04.04.2012 received from the Chief Manager, State Bank of Hyderabad conveying their consent to the proposed scheme of arrangement. In so far as the unsecured loans, as reflected in the Balance Sheet, and the sundry creditors shown under the head “current liabilities”, are concerned, it is stated that a meeting of such class of creditors had also been convened, and as all the unsecured creditors who attended the meeting had approved the scheme of arrangement, this requirement of obtaining the consent of the unsecured creditors is also satisfied.

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Under the proviso to Section 391(2), no order sanctioning any compromise or arrangement shall be made unless the Court is satisfied that the company has disclosed to the Court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under Sections 235 to 251, and the like.

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In their respective Company Petitions, all the three companies had specifically stated that no investigation or

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proceeding is pending under Sections 235 to 237 or any other provisions of the Companies Act, or under any Act against them. All the three companies (transferor company No.1, transferor company No.2 and the transferee company) have filed the annual reports (including Balance Sheets as at 31.03.2011, as also the auditors reports as on that date). In the affidavits filed on behalf of the respective companies, it is stated that the latest audited financial position, and the latest auditors reports on the accounts of the companies, is only for the financial year ending 31.03.2011; and the accounts for the subsequent financial year ending 31.03.2012 are under preparation. The proceedings dated 21.08.2012, whereby extension of time to hold the annual general meeting had been obtained from the Registrar of Companies, are also enclosed to the said affidavits.

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A combined reading of the first and second provisos of Section 394(1), with Section 394-A of the Act, shows that the scheme of amalgamation would not be sanctioned unless the Court has considered the report of the Official Liquidator or the representation of the Central Government, as the case may be. (Sumani Pvt. Ltd's cas e^[9] ) . The second proviso to Section 394 provides that no order for the dissolution of any transferor company under clause (iv) of sub-section (1) of Section 394 of the Act shall be made unless the official liquidator has, on scrutiny of the books and papers of the company, made a report to the Court that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest. Thus, Section 394 of the Act casts an obligation on the Court to be satisfied that the scheme of amalgamation or merger is not prejudicial to the interest of its members or to public

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interest. (Sesa Industries Limited v. Krishna H. Bajaj^[10] )

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An Official Liquidator acts as a watchdog of the Company Court reposed with the duty of satisfying the Court that the affairs of the company, being dissolved, have not been carried out in a manner prejudicial to the interests of its members and the interest of the public at large. In essence, the Official Liquidator assists the Court in appreciating the other side of the picture before it, and it is only upon consideration of the amalgamation scheme, together with the report of the Official Liquidator, that the Court can arrive at a final conclusion that the scheme is in keeping with the mandate of the Act, and that of public interest in general. For examining the questions as to why the transferor-company came into existence; for what purpose it was set up; who were its promoters; who were controlling it; what object was sought to be achieved by dissolving it and merging it with another company, by way of a scheme of amalgamation, the report of an official liquidator is of seminal importance and, in fact, facilitates the Company Judge to record his satisfaction as to whether or not the affairs of the transferor company had been carried on in a manner prejudicial to the interest of the minority, and to the public interest. (Sesa Industries Limite d² ) .

¶31

In his two separate report Nos.132 and 133 of 2012 dated 30.07.2012 filed in respect of both the transferor companies, the Official Liquidator would state that he had, vide letter dated 22.06.2012, called for the statutory books and other relevant information from the transferor companies; and the information/documents called for were furnished on 02.07.2012. The Official Liquidator would refer to the capital structure and the objects of both the transferor companies, and the orders of this Court in these Company Petitions. He would also refer to several

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clauses of the proposed scheme of arrangement and amalgamation and would conclude that, basing on the information made available, he was of the opinion that the affairs of the transferor companies appeared to have not been conducted in a manner prejudicial to the interests of the members or to public interest.

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In his report dated 06.07.2012 filed on behalf of the Central Government, the Regional Director (South Eastern Region), Corporate Affairs, Hyderabad would submit that under para 9.2 of the proposed scheme of arrangement, upon the scheme being sanctioned by the Court, the authorized capital of transferor company Nos.1 and 2 shall stand transferred to and added to the authorized share capital of the transferee company; the transferee company was required to comply with the provisions of Sections 95 and 97 of the Act; as per the report dated 02.07.2012 of the Registrar of Companies, Andhra Pradesh, Hyderabad both the transferor companies and the transferee company were regular in filing statutory returns; and no investigation or proceeding was pending against the three companies.

¶34

Section 97 of the Act provides for notice of increase of share capital. Under sub-section (1) thereof, where a company increases its share capital beyond the authorised capital, it is required to file with the Registrar a notice of the increase of capital within thirty days after passing of the resolution authorising the increase; and the Registrar is required to record the increase, and make alterations as may be necessary, in the company's memorandum or articles, or both.

¶35

The objection raised by the Regional Director, (South Eastern Region), Corporate Affairs, Hyderabad regarding noncompliance with the provisions of Sections 95 and 97 of the Act is

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only to be noted to be rejected. In Re: Magnaquest Solutions Private Limite d¹¹ , after placing reliance on Saparna Infotech Ltd. v. Relinfo Limited (Judgment in C.P. Nos. 149 and 150 of 2001 dated 04.01.2002); Krishnan Products Pvt. Ltd. v. Krishna Poly Packs Pvt. Ltd. (Judgment in C.P. Nos. 68 and 69 of 2005 dated 13.8.2007); R.K.S. Motors (P) Ltd., In R e¹² ; and In Re Kemira Laboratories Limited (Judgment in O.S.A. Nos. 24, 44 and 46 of 2005 and C.P. Nos. 144, 145 and 146 of 2003 dated 25.01.2007), this Court held:

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“On the scheme of amalgamation being sanctioned by the Court, the rights, property and liabilities of the transferor become the rights, property and liability of the transferee company and, as a consequence thereof, the right which the transferor has to issue share capital and the existing liability in the form of its authorized capital stand transferred to and are vested in the transferee company. Since the authorised capital of the transferor, which is transferred to and stands vested in the transferee, has already been subjected to payment of the prescribed fee, absence of a specific provision either in the Companies Act, 1956, or the Rules made thereunder, requiring the transferor to again seek approval of the Registrar of Companies or to pay fees on such authorized capital, the contention, that approval of the Registrar must again be sought and fees paid all over again, must necessarily be rejected.”

¶38

In Re Kemira Laboratories Limited, a Division Bench of this Court observed:-

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“No good reason has been shown why the two merged companies should be required to pay fees again, on the same authorized capital on which the prescribed fee has already been paid by the transferor Company (Jaypee Cement Ltd .¹³ ) . An order can be passed, under Section 391 of the Companies Act itself, regarding increase of the authorized share capital by merger of the authorized capitals of the two companies, (Vasant Investment 14 Corporation Limited v. Official Liquidator and Jaypee Cement Ltd.).”

¶40

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

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wisdom of the parties concerned, it is clear that the Court, before whom the scheme is placed, is not expected to put its seal of approval on the Scheme merely because the majority of the shareholders have voted in favour of the scheme. Since the Scheme, which gets sanctioned by the Court, would be binding on the dissenting minority shareholders or creditors, the Court is obliged to examine the scheme in its proper perspective together with its various manifestations and ramifications to find out whether the scheme is fair, just and reasonable to the concerned members, and is not contrary to any law or public policy. The expression “public policy”, though incapable of precise definition, connotes some matter which concerns the public good and the public interest. (Sesa Industries Limited² ; Hindustan Lever Employees' Union v Hindustan Lever Ltd.,¹⁵ ; Central Inland Water Transport Corporation Limited. v. Brojo Nath Gangul y¹⁶ ) . 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 Limited² ).

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

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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 straitjacket 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.¹⁷ ) . 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.¹⁶ and Bengal Hotels P. Ltd. In r e¹⁸ ) .

¶44

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

¶45

used. (Union of India v. Ambalal Sarabhai Enterprises Lt d¹⁹ ) . 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:-

¶46

“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.”

¶47

It is an expression of wide amplitude. A scheme, valid and good, may yet be bad if it is against public interest. The basic principle of the satisfaction, that the scheme is not contrary to public interest, is none other than the broad and general principles inherent in any compromise or settlement entered into between the parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, Courts have evolved the principle of “prudent business management test” or that the scheme should not be a device to evade the law. (Hindustan Lever Employees' Union¹⁵ ). 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.

¶48

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

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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 bona fide 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 bona fide scheme under Section 391. (Zee Interactive Multimedia Ltd., In rei n²⁰ ) .

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Part II of the scheme of arrangement relates to amalgamation. Under clause 3.1 (a) thereof, upon the scheme becoming effective, the entire undertaking of transferor companies No.1 and 2 would, without any further act or deed, stand transferred and be vested in the transferee company. Clause 3.1(b) provides for transfer of rights and licences by the transferor companies to the transferee company. Clause 3.1(c) stipulates that all existing charges, hypothecation, mortgages in respect of all the assets of both the transferor companies shall stand transferred to the transferee company. Clause 3.2 relates to transfer of liabilities. Clause 6 relates to employees. Under subclause (a) thereof, all permanent employees of transferor

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companies Nos.1 and 2, upon the scheme becoming effective, shall become the employees of the transferee company in such position, rank and designation as may be determined by the transferee company with the benefit of continuity of service and the terms and conditions of their employment with the transferee company not being less favourable than those applicable to them as employees of the respective transferor companies; the provident fund, gratuity fund, superannuation fund or any other special funds shall also stand transferred to the respective trusts and the trustees of the transferee company. Clause 8 relates to issue of shares by the transferee company. Under clause 8.1 thereof, the transferee company is required to issue 23 equity shares of Rs.10/- each fully paid up for every 200 equity shares of Rs.10/- each held by the members of transferor company No.1; and 790 equity shares of Rs.10/- each fully paid up for every 100 equity shares of Rs.100/- each fully paid up held by the members of transferor company No.2. Under clause 8.2 thereof, the equity shares to be issued and allotted by the transferee company, in terms of clause 8.1, are to rank pari passu in all respects with the existing equity shares of the transferee company, and are to be listed on the stock exchanges where the existing shares of the transferee company are currently listed. Clause 10 provides that, with effect from the effective date, both transferor company Nos.1 and 2 shall stand dissolved without being wound up. Clause 9.0 relates to clubbing of the authorized capital of transferor companies Nos.1 and 2 and, upon the scheme becoming effective, the authorized capital of both the transferor companies shall stand added to and clubbed with the authorized capital of the transferee company without payment of any fees and without any further act or deed, and the resultant authorized capital of the transferee

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company shall, after the effective date, be Rs.49,00,00,000/divided into 4,90,00,000 equity shares of Rs.10/- each.

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The rationale and reasons for the proposed scheme of arrangement is summarized in Clause D of the Scheme. It is stated thereunder that as, both the transferor companies and the transferee company are in the same business of manufacture and sale of chemicals and wind energy; it would help the transferee company to increase the manufacturing capability due to the enhanced capacity; it would enable focused strategic leadership and management attention to be bestowed on the undertakings of both the transferor companies so as to integrate the business synergies and reap the benefits of consolidation; it would channelise synergies, enable optimum utilization of the available resources, broadening the customer base and boost the morale of employees thereby improving their productivity besides enabling a focused business approach for the optimization; it would enable achieving higher long-term financial returns and inculcation of greater financial strength and flexibility which could not be achieved by the companies individually; it would also result in pooling of financial, managerial and technical resources, personnel capabilities, skills, expertise and technologies of the merging companies leading to increased competitive strength, cost reduction, productivity gains and logistic advantages; it would make it possible to meet the required funding and take the benefit of the emerging opportunities; and it would create enhanced value for the shareholders of all the three companies and allow a focused strategy in operations. In view of the aforesaid objects of the scheme, it cannot be said that the scheme of amalgamation, if approved, would be against public interest.

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I consider it appropriate, therefore, to sanction the scheme

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of amalgamation. As required under Section 394 (3) of the Act, read with Rule 81 of the Company (Court) Rules, 1959, the transferor companies Nos.1 and 2, and the transferee company, shall file a certified copy of the order of this Court, with the Registrar of Companies for its registration within thirty days from the date of the order.

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RAMESH RANGANATHAN, J

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Date:31.08.2012 USD

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