THE SANCTIONING COURT HAS INHERENT POWERS TO SANCTION THE SCHEME OF AMALGAMATION IF IT IN CONSONANCE WITH THE PROVISIONS OF THE COMPANIES ACT, 1956.

[Mr. M. GOVINDARAJAN]

                        In respect of a scheme of amalgamation, the transferor company and the transferee company have to apply to the court and they have to comply with the provisions of Sections 391, 392, 393, & 394 of the Companies Act.  In sanctioning a scheme of amalgamation the sanctioning court has inherent powers to sanction the scheme of amalgamation if the scheme is in consonance with the provisions contained in under Sections 391, 392, 393, & 394 and other required provisions in the Companies Act.

                        In  re ‘Solidcore Techsoft Systems India (P) Limited’ – (2012 (8) TMI 502 - HIGH COURT OF KARNATAKA) the transferor company ‘Reconnex India P Limited’ and the transferee company ‘McAfee Software (India) P Limited’ filed petitions under Sections 391, 392, 393, & 394 of the Companies Act for approval of the scheme of arrangement entered into between the two companies.  The two companies are engaged in a similar business.  The Registered Offices of the two companies are located within the jurisdiction of Registrar of Companies, Karnataka.  The petition discloses the authorized share capital and paid up capital of the respective companies.  The Board of Directors of both the companies have approved the scheme of amalgamation.  The Court made orders for the transferor company dispensing with the conduct of the meeting of the equity share holders and also unsecured creditors and also declared that there is no secured creditor in this case.  The trade creditors have also given their approval for the scheme.

                        The Court issued notices to the Official Liquidator and Regional Director for giving their report in respect of this scheme.   The Official Liquidator has filed a report stating that the affairs of transferor companies are not conducted in any manner prejudicial to the interests of the shareholders or to the public.   The Regional Director, through Registrar of Companies, has raised some objections as detailed below:

Clause 8 of the scheme provides for dissolution of the transferor companies without winding up.   However the petitions pertaining to both the transferor companies do not have a specific prayer for their dissolution;

The Memorandum of Association of the transferor companies have the enabling provision for amalgamation.   However, the Memorandum of association of the transferee company does not have a specific object providing for amalgamation.   The transferee company has to amend the objects suitably;

Since the paid up capital of both the transferor companies are held by their respective foreign holding companies, the transferee company is required to comply with the applicable provisions of the Foreign Exchange Management Act, 1999 and the Foreign Exchange Management Regulations while issuing shares to the shareholders of the transferor company as per scheme.   The transferee company has to file necessary undertaking/affidavit before the High Court;

As the entire authorized capital of the transferee company is already issued, subscribed and paid up, the transferee company has to invariably increased the authorized capital to the extent required to meet the requirements of issue of shares to the shareholders of the transferor companies in terms of schemes as per the provisions of Sections 94 and 97 of the Companies Act, 1956.

In response to the objections raised by Regional Director, through Registrar of Companies both the companies filed the reply affidavit.   The counters given to the objections are as follows:

There is a specific prayer in the petitioners for dissolution of the companies without winding up;

There is no enabling provision for amalgamation in the Memorandum of Association of the transferee company for which a case law is relied.  The Karnataka High Court in the case of ‘Sun Micro Systems India (P) Limited’ in CP No. 27 of 2008 and CP No. 28 of 2008 held such observation would not be a relevant factor for not sanctioning the scheme.  Even otherwise the power of the High Court under Sections 391, 392, 393, & 394 is not circumscribed by a clause in the articles of association and the Court has got inherent powers to sanction the scheme of amalgamation with the transferor companies if it is in consonance with statutory provisions of the Act;

The Supreme Court in ‘Saraswati Industrial Syndicate Limited V. Commissioner of Income Tax’ – 1990 (9) TMI 1 – (SUPREME COURT) held that Section 17 of the Act is an aid to companies which seek amalgamation and has further held that legislature in its wisdom has provided for such wide range for powers to be exercised by the Court in the matters of amalgamation conductive to the interest of the shareholders;

The transferee company is carrying on business permitted under the automatic route of the Foreign Exchange Management regulations and the companies undertook to make the necessary reporting in compliance with the applicable provisions of the FEMA and the FEM regulations while issuing shares to the shareholders of the transferor company.

Clause 10 of the scheme provides for consolidation of authorized capital of the transferor company with the authorized capital of the transferee company.   Accordingly, the authorized capital post consolidation will be sufficient to issue shares to the shareholders of the transferor companies.  Further the transferee company undertakes to make the necessary reporting in compliance with applicable provisions of the Companies Act, 1956.

The High Court held that from the material on record it is clear that the scheme of arrangement being fair and reasonable and all statutory provisions have been complied with and it is not adverse to public policy and pursuant to the orders passed by the Court, public notice has been taken out by the petitioners in the newspapers and none have appeared to oppose the scheme of amalgamation, the same is required to be approved.   The Court thus overruled the objections raised by the Regional Director through its Registrar of Companies that the memorandum of association does not have a specific object for providing for amalgamation.