TMI Blog1979 (12) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... a public limited company in the year 1975 by virtue of the provisions of section 43A(1A) of the Companies Act, 1956. The present subscribed and paid up capital is Rs. 61,00,000 divided into 61,000 equity shares of Rs. 100 each. The objects of the company according to its memorandum of association were to do business in ginning, pressing and baling of cotton, and dealing in fibres like cotton, hemp, jute, etc, extracting of oils from oil seeds like cotton seeds, groundnuts, sun flower seeds, etc., and extracting oil from oil cakes and bran and utilising their by-products for feeds and fertilizers. The said company was originally doing cotton ginning and pressing business. In 1975, it constructed an oil mill along with solvent extraction plant and the products of the solvent extraction units are exclusively for exports, and the industry has been recognised as export oriented. The exports of the company of de-oiled cakes and bran were Rs. 3.56 lakhs in 1975, Rs. 20.12 lakhs in 1976 and Rs. 27.94 lakhs in 1977. The petitioner in C.P. No. 10/78, Nava Bharat Enterprises Private Ltd., was incorporated in 1957, under the Companies Act, 1956, as a private limited company with Nava Bharat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 30, 1977 (appointed day), and with effect from the said day, the NBE P. Ltd. shall be deemed to have been carrying on all business activities, if any, for and on account of VDCT Ltd. The members of VDCT Ltd. will be allotted 15,250 shares of NBE P. Ltd.; i.e. , one share of NBE P. Ltd. for every 4 shares of the VDCT Ltd. and the new equity shares to be allotted shall rank for voting and all other rights Pari passu with the existing equity shares of the NBE P. Ltd. It is alleged that the scheme of amalgamation will not affect the rights of creditors of either of the companies. The various benefits that would accrue to the companies by the proposed merger have also been set out in the petitions. Pursuant to the aforesaid proposal to merge, VDCT Ltd. filed C.A. No. 86/78 under section 391(1) of the Companies Act for convening a meeting of its members for the purpose of considering the arrangement by way of the said scheme. Similarly, NBE P. Ltd. filed C. A. No. 85/78 under section 391 of the Companies Act for convening a meeting of its members for the purpose of considering and approving the scheme. By order dated July 7, 1978, the said applications were ordered by this court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BE P. Ltd.; ( d )for an order under section 394 of the Act that subject to the approval of the Central Government under section 72A of the Income-tax Act, 1961, all proceedings now pending by or against the VDCT Ltd. do continue by or against NBE P. Ltd. ; ( e )for an order under section 394 of the Act that VDCT Ltd. do within 30 days after the date of the order cause a certified copy to be delivered to the Registrar of Companies, Hyderabad, for registration and that subject to the approval of the Central Government under section 72A of the Income-tax Act, 1961, on such certified copy being delivered or such other date as may deem fit, the VDCT Ltd. be dissolved without winding up and that upon such dissolution the Registrar of Companies, Hyderabad, shall take all necessary consequential action by way of alterations in the registers and files maintained by him in respect of the VDCT Ltd. and NBE P. Ltd.; ( f )that the parties to the scheme for amalgamation or other persons interested shall be at liberty to apply to this court for any directions that may be necessary in regard to the carrying out of the arrangements by way of a scheme ; ( g )that such further and other order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age expected profits as per the revival scheme. The valuation on the basis of assets revaluation is not justified as this procedure was adopted only in respect of the assets of VDCT Ltd., where exchange of shares is involved. Either the assets of both the companies should be revalued or there should not be any revaluation of assets at all. Revaluation of assets of only one particular company leaving aside the assets of the other company will not give the fair value of the shares. The valuation of the shares of VDCT Ltd. at Rs. 50 per share of Rs. 100 was not arrived at properly and the fair value of the share of VDCT Ltd. is Re. 1 per share of the nominal value of Rs. 100. The fair value of the shares of NBE P. Ltd. works out to Rs. 320 per share with a nominal value of Rs. 100. On the basis of the above valuation an exchange of one share of the value of Rs. 320 is to be given to the shareholders of VDCT Ltd. since the value of the shares of VDCT Ltd. is only Re. 1 per share with a nominal value of Rs. 100. An exchange ratio of 1 : 320 appears to be reasonable, and, accordingly, the shareholders of VDCT Ltd. will get one share of NBE P. Ltd. for every 320 shares held by them in VDC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company and because of the profits made by the business of VDCT Ltd., which is taken over by NBE Ltd. under a scheme for revival of the sick unit. It is also stated that general notice with regard to the scheme was published in the dailies and no objection was received from any quarter. Further, it is stated that under the scheme of merger and revival, NBE Ltd. proposed to increase its capital base by issue of 22,250 equity shares of Rs. 100 at Rs. 200 each as fully paid up to certain categories of shareholders and creditors and outsiders, and thus, the share capital of NBE Ltd. would increase from Rs. 33,35,000 to Rs. 55,60,000. With regard to the objection raised against the equation of shares of VDCT Ltd. and NBE Ltd. at 4 : 1, the petitioners had filed an auditors' report setting out the reasons given in justification of the valuation and equation of shares. With regard to the objection raised that the NBE Ltd., which is a private limited company, would become a public limited company as the number of shareholders would go beyond 50, it is stated that both the members of the companies have approved the scheme and it is only after amalgamation NBE Ltd. will become a public limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... secured creditors by VDCT Ltd. But the principal creditors of VDCT Ltd. are the A.P. State Financial Corporation and the Vijaya Bank. They have sent letters filed as annexs. I and II, that they are consenting to the proposed amalgamation of VDCT Ltd. with NBE Ltd. The other major creditor of VDCT Ltd. is NBE Ltd. itself. The two other creditors of VDCT Ltd. are Sri A. Venkateswara Rao and his firm, M/s. Sri Durga Tobacco Co., to whom an amount of Rs. 4 lakhs is due, who had agreed to the adjustment of the said amount by the allotment of 2,000 shares of Rs. 100 each. It is stated by Sri S. Parvatha Rao that the creditors of NBE Ltd. were not approached for their consent. But it is stated in the reply affidavit that the profit position of NBE Ltd. after the merger is expected to be substantially better than before merger because of the benefits accruing to the NBE Ltd. under section 72A of the Income-tax Act and also because of the reduced rate of income-tax as NBE Ltd. will be treated as an industrial company. It is further stated that though a general notice with regard to the scheme of amalgamation was published in the dailies, no objection has been received from any quarter. Unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is unanimously passed by the shareholders. If the court is of the view that the interests of the creditors are adversely affected by the merger, it can insist on refusing to sanction the scheme unless the consent of the creditors has also been obtained. For this purpose, the legislature has obviously cast a duty on the court to find out whether the scheme affects the interests of the creditors to such an extent that their meeting is essential. In In re W.A. Beardsell Co. (P.) Ltd. and Mettur Industries Ltd. [1968] 38 Comp. Cas. 197 (Mad.), an application was filed under sections 391(2) and 394 of the Companies Act, 1956, for merger of the two companies. Separate meetings of the ordinary shareholders of the companies were convened and held on the direction of the court under section 391(1). The chairman of the meeting submitted a report stating that the members who were present at the meetings unanimously approved the scheme of amalgamation. An objection was raised that notice of the scheme should have been given to one of the creditors of the transferor-company. Ramaprasada Rao J., as he then was, held that it was not necessary to issue notice to every creditor of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led report of the auditors, M/s. Brahmaiah Company, has been filed in justification of the valuation and equation of the shares of both the companies. It is stated in the report of the auditors that the valuation and equation of the said shares was reasonable and based on the asset and profitability position of the two companies and detailed reasons have been set out in the auditors' report as to how the valuation and equation have been arrived at. It is stated that the method of valuation of shares by averaging the yield value and the asset value is preferred where there is substantial difference between the calculated value of the tangible assets on the one hand and the capitalisation of the earning capacity on the other and that viewing the stability of the company along with its revenue potentialities this method of valuation has the effect of correcting distortion which the two methods of valuation on comparison are likely to show. It is further stated that the shares of the transferor-company are valued after revaluing the assets because this method is to be adopted in the case of a company having a strong capital asset backing (productive assets like plant and machinery) b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, a meticulous accountant or a fastidious counsel would do it, each trying to find out from his professional point of view what loopholes are present in the scheme, what technical mistakes have been committed, what accounting errors have crept in or what legal rights of one or the other sides have or have not been protected. It must be tested from the point of view of an ordinary reasonable shareholder, acting in a businesslike manner, taking within his comprehension and bearing in mind all the circumstances prevailing at the time when the meeting was called upon to consider the scheme in question." In In re Maneckchowk and Ahmedabad Manufacturing Co. Ltd. [1970] 40 Comp. Cas. 819 (Guj.), Justice D. A. Desai has observed thus (heatnote) : "The court in exercising its discretion in sanctioning a scheme of compromise with members and creditors under section 391(2) of the Companies Act, 1956, must treat it as cardinal that its function does not extend to usurping the view of the members or creditors. It must look at the scheme to see that it is a reasonable one and, while so doing, the court will be strongly influenced by a big majority vote and the reasons which actuated the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... converts itself into a public limited company, the transfer of shares in the ratio proposed in the scheme of amalgamation can be effected, and it is only thereafter that VDCT Ltd. will stand dissolved. Therefore, this objection raised by the Central Government is not an insurmountable difficulty and the scheme can be sanctioned by the court subject to NBE P. Ltd. getting itself converted into a public limited company by alteration of the articles of association in accordance with the relevant provisions of the Companies Act, and the scheme will come into effect with effect from the date on which the said company converts itself into a public limited company. It is next contended on behalf of the Central Government that the objects in the memorandum of association of NBE P. Ltd. do not contain a provision for carrying on the business of extraction of oil. But the learned counsel for the petitioners relied upon clauses 49 and 76 and of the memorandum of association of NBE P. Ltd., which read as follows : "49. To buy, sell (both to persons residing on the company's premises and to non-residents), import, produce, manufacture or otherwise deal in food products, meat, groceries, fru ..... X X X X Extracts X X X X X X X X Extracts X X X X
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