2012 (12) TMI 1248 - HC - Companies Law

Summary

Issues Involved:

1. Approval and sanction of the Scheme of Arrangement involving de-merger and transfer of undertakings.
2. Dispensation of meetings for equity shareholders and creditors.
3. Objections raised by the Regional Director regarding assets, liabilities, and accounting treatment.
4. Legal precedents and compliance with the Companies Act, 1956, particularly Section 205.

Issue-wise Detailed Analysis:

1. Approval and Sanction of the Scheme of Arrangement:

The petitions were filed by four group companies for sanctioning a Scheme of Arrangement involving de-merger and transfer of different undertakings. The companies involved are part of the same management group and are engaged in interconnected activities related to engineering products. The proposed scheme aims to segregate activities based on product lines to enhance operational efficiency and the ability to raise funds. The court was satisfied that the scheme was in the interest of shareholders, creditors, and public interest, thus deserving sanction.

2. Dispensation of Meetings for Equity Shareholders and Creditors:

The court dispensed with the meetings of equity shareholders for Prayas Engineering Limited and EMTICI Engineering Limited due to written consent from all shareholders. However, meetings for secured and unsecured creditors were convened and the scheme was unanimously approved. For Elecon Engineering Company Limited, a listed public company, meetings for equity shareholders, secured creditors, and unsecured creditors were held, with the scheme receiving requisite statutory majority approval. Elecon EPC Project Limited, being a wholly-owned subsidiary, had its equity shareholders' meeting dispensed with due to written consent.

3. Objections Raised by the Regional Director:

The Regional Director raised concerns regarding the details of assets and liabilities of the de-merged undertakings and the proposed accounting treatment under the scheme. The petitioner companies addressed these concerns by providing a broad picture of assets and liabilities and committing to furnish a schedule of fixed assets upon sanction. Regarding accounting treatment, the petitioner companies argued that the treatment of reserves as general reserves was authorized and not contradictory to Section 205 of the Companies Act. The court noted that similar objections had been settled in previous judgments, supporting the petitioners' stance.

4. Legal Precedents and Compliance with the Companies Act, 1956:

The court considered various judgments, including those from the Supreme Court and different High Courts, which supported the utilization of reserves arising from revaluation or amalgamation for issuing fully paid-up bonus shares. The court referenced decisions like Bhagwati Developers v. Peerless General Finance, which allowed capitalization of profits for issuing shares. The court concluded that the petitioners' proposed accounting treatment was compliant with legal standards and previous judicial decisions, thereby negating the Regional Director's objections.

Conclusion:

The court, after considering all affidavits, legal precedents, and submissions, concluded that the objections raised by the Regional Director did not hold. The scheme was found to be beneficial for the companies, their shareholders, and creditors, and was sanctioned. The petitions were disposed of, and costs were awarded to the Central Government's Standing Counsel.