TMI Blog1980 (12) TMI 153X X X X Extracts X X X X X X X X Extracts X X X X ..... ded its assets, the accumulated losses exceeded the share capital and the capital reserves, the industrial activity of the company came to a halt and the company was unable to pay its creditors, which included, secured creditors, consisting of financial institutions and banks, unsecured creditors, such as, trade creditors, landlords and large number of depositors. In December, 1976, M. L. Sondhi carrying on business under the name and style of Laxmi Finance Exchange, for short, Sondhi, who claimed a sum of over Rs. 12 lakhs from the company, sought its winding-up by C.P. No. 90/76, inter alia , on the ground that the company was unable to pay its debts. The claim was contested on behalf of the company on the ground that Sondhi was not a creditor of the company, but it was not disputed that the company was otherwise in shambles and unable to meet its liabilities. The petition was admitted and this court appointed the official liquidator as the provisional liquidator by an order made on May 4, 1977, in C.A. No. 751 of 1976. The petition is still pending. Meanwhile, the Industrial Finance Corporation of India, for short, the Corporation, one of the secured creditors of the company, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... positors having interest bearing deposits would be paid 50 per cent, of the principal amount of deposit with full interest up to June 30, 1976. It was further provided that on the scheme being sanctioned, the transferee-company would meet the liabilities of the transferor-company in terms of and in the manner provided in the scheme of amalgamation whereby the transferor-company was proposed to be amalgamated with the transferee-company. The scheme refers to the preferential creditors, which includes employees, secured creditors and the landlords but provides that they would be paid in full and would, therefore, not be affected by the scheme. By C.A. 481/79, directions of this court were sought under section 391 to convene separate meetings of the equity and preference shareholders of the transferor-company to consider and, if thought fit, to approve with or without modifications, the scheme for the amalgamation of the transferor-company with the transferee-company. The scheme of amalgamation, inter alia , visualises that in consideration of the vesting of the undertaking of the transferor-company in the transferee-company in terms of the scheme, the transferee-company would issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erly instalments, the first instalment to commence within three months of the receipt of the first tax benefit. The concurrence of the transferee-company was assured by an affidavit filed on its behalf. The consideration of some of the other suggestions made to improve the schemes and to protect various interests was deferred till after the outcome of the meetings had become known. Pursuant to the directions made by this court, separate meetings of the secured and unsecured creditors, preferential and equity shareholders and a joint meeting of all the shareholders of the transferor-company were held and the schemes were approved by the shareholders, the secured creditors and the unsecured creditors subject, however, to the modification of the scheme of amalgamation that the amount of tax benefits actually received shall be utilised, firstly, for payment to the secured creditors pro rata and, thereafter, to the unsecured creditors pro rata and that such payments will be synchronised with and made out of the receipts of the actual tax benefits which will be available to the amalgamated company. This modification was proposed by the corporation and was adopted in all the meetings. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts satisfaction that the conditions referred to in sub-section (1) of that section would be fulfilled if the amalgamation is effected in accordance with the scheme and that after the amalgamation is effected in accordance with the schemes, it would make a recommendation to the Central Govt. under sub-section (1) of that section. A meeting of the members of the transferee-company was also convened pursuant to the directions made by the Madras High Court, within whose jurisdiction that company had its registered office, and the scheme of amalgamation and of compromise, have since been approved by the meeting as also by the board of directors of the transferee-company and the petition for sanction of the said High Court is said to be scheduled to come up for disposal later this month. I have heard learned counsel for the various parties at considerable length on the various facets of the schemes, the validity of the proceedings, leading to the approval at the meetings, the nature and effect of the amalgamation, its impact on the assets of the transferor-company, including its tenancy rights, the desirability of effecting improvement in certain features of the scheme of compromise wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised objections to the amalgamation on the ground that on amalgamation, he would be compelled to deal with a company, the transferee-company, of which the registered office is located outside the jurisdiction of this court. These objections were raised with a view to ensure that adequate safeguards are provided which may enable him to have his claim against the company appropriately adjudicated without unnecessary delay and to keep the amalgamated company within the reach of the direction-jurisdiction of this court under section 392 of the Companies Act. While the secured creditors and the unsecured creditors, other than the depositors, were fully satisfied with the schemes approved by them unanimously, a minor point was raised on behalf of the Haryana Financial Corporation, with regard to interest and an attempt was made on behalf of some depositors to improve the scheme so as to eliminate and at least soften down, the obvious inequity in the scheme between the treatment of the secured creditors and the unsecured creditors as also between the preferential creditors, who are outside the scheme, and the unsecured creditors. There was, however, no representation on behalf of the uns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally result in the amalgamation of the company by its absorption in the other or by merger of the two to create the third. There is no provision of notice to the creditors of any such proceedings 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, although the creditors of a company, which is sought to be merged in any other, and completely absorbed in the transferee-company would, by the process of amalgamation, be compelled to deal with and become the creditors of another company, whether the existing company or a new company,' that may come into existence, even though the creditors or some of them may have had no dealings with such new entity and may have, therefore, no confidence in its management. I still hold that view. What is true of the creditors of the transferor-company is equally true of others who may be interested in the transferor-company or in its assets in various ways. These interests, however, have not been given any right to vote on the proposed amalgamation, even though there are ample provisions in section 392, as indeed, in section 394 and rules 82/83 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the transferor-company and various other interests affected by amalgamation and as to the best way in which their interests could be protected, even while sanctioning the scheme of amalgamation. The scheme of amalgamation was sought to be voided on the ground that the proposed transferee-company was outside the expression "company", as denned in section 390( a ) of the Act, in that it was admittedly a flourishing company and could not, therefore, be said to be " liable to be wound up under this Act". This contention, which is inspired by the decision of the Lahore High Court in the case of Traders' Bank, AIR 1949 Lah 48, and of the Bombay High Court in the case of Seksaria Cotton Mills Ltd. v. A. E. Naick [1967] 37 Comp. Cas. 656, is, however, based on a misconstruction of the expression " liable to be wound up under this Act" in section 390 of the Act, which defines the expression "company" for the purpose of sections 391 and 393. The expression "company" as defined by section 3 means a company formed and registered under the Act or an existing company, i.e. , a company formed and registered under any of the previous Companies Acts. If the expression "company" for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion was designed to enlarge the scope of sections 391 and 393 and was not intended to restrict the provisions to companies which faced financial difficulties. It is significant to point out that in defining the, expression "company" in section 390( a ), there was a deliberate departure from the phraseology of the provisions regarding winding-up, such as, sections 397(2)( b ) and 433 of the Act. Section 397(2)( b ) uses the expression "the facts would justify the making of a winding-up order." Section 433, which deals with the cases in which the company may be wound up by a court, provides that "a company may be wound up". Section 390( a ), on the other hand, advisedly uses the expression "liable to be wound up". It is interesting to notice in this context that section 72A of the I.T. Act, 1961, is a legislative recognition of the scope of sections 391 and 393 of the Companies Act, when it provides that on amalgamation the amalgamated company would be entitled to take advantage of the accumulated losses of the transferor-company to reduce its tax liability. If both the companies sought to be amalgamated must be sick, who would take advantage of the accumulated losses ? The defini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person involving succession to the estate and the effect of such succession on the statutory tenancy? These are some of the subsidiary questions that arise for consideration. Amalgamation of a company with another or an amalgamation of two companies to form a third is brought about by two parallel schemes of arrangements entered into between one company and its members and the other company and its members and the two separate arrangements bind all the members of the companies and the companies when sanctioned by the court. Amalgamation is, therefore, an absorption of one company into another or merger of both to form a third, which is not a mere act of the two companies or their members but is brought about by virtue of a statutory instrument and to that extent has statutory genesis and character, and to that extent it is distinguishable from a mere bilateral arrangement to merge or join in a common endeavour, an undertaking or enterprise J.K. ( Bombay ) P. Ltd. v. New Kaiser-i-Hind Spg. Wvg. Co. Ltd. [1970] 40 Comp. Cas. 689 (SC). Once the court sanctions the amalgamation, the amalgamation is made effective and binding by virtue of statutory power, inter alia , by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding-up under sub-section (1) of section 394. It is not wound up because it has merged into another. Winding-up is unnecessary. It is dissolved not because it has died, or ceased to exist, but because for all practical purposes, it has merged into another forming part of one corporate shell. The dissolution is the death of its independent corporate shell, because a company cannot have two shells. It is, therefore, dissolved because the independent shell or corporate name is superfluous. The company in its essence means its members, who compose it, the assets, property and rights that it had, its liabilities, its undertaking, business or other activity. It is not synonymous with the shell or name. On amalgamation and consequential dissolution all these attributes continue to live as part of a larger entity. The only part that dies is the shell and the name. It is unlike the death of a natural person and yet in a larger and deeper sense the same. It is unlike it, because a natural person, as ordinarily understood, does not survive the death in any physical form. The transferor-company, however, does survive, in that there is a continuity even after dissolution of its members, its ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, a question of assignment could only arise in the eventuality in which the transferee-company seeks to make an assignment of the property. If the transfer or vesting on amalgamation is neither an assignment nor an assignment by the transferor-company, no further question as to the transferability of any tenancy rights or permission of the landlord or of the impact on it of section 14 or any other section of the Rent Control Act could possibly arise. In the case of Nokes v. Doncaster Amalgamated Collieries Ltd. [1941] 11 Comp. Cas. 83; [1940] 3 All ER 549 (HL), which was the sheet-anchor of the case set up on behalf of the landlord, the question was whether the right of the amalgamating company in a contract of service between it and an employee was on amalgamation transferred to the transferee-company as part of its property. The House of Lords answered the question in the negative, Lord Romer dissenting. It is, however, clear from the majority opinion of the Lord Chancellor that it was a case of application of well settled principles in amalgamation to an unusual and difficult situation involving compulsion for an employee, who had entered into a contract of personal servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tever be the position of the transfer or vesting on amalgamation, the rights of the company were still its rights and could be transferred. The transferability of the rights in the tenancy would be unaffected by the mere fact that contractual tenancy had been determined and the right of assignment was subject to the consent of the landlord. Contractual tenancy has always been held to be a heritable estate on the death of a tenant. Some doubt had arisen in India, following the principles of English law, if the protection provided by rent legislation in India, subsequent to the determination of the contractual tenancy, or what is sometimes described as statutory tenancy, was also heritable or not. In the case of Anand Niwas P. Ltd. v. Anandji Kalyanji's Pedhi, AIR 1965 SC 414, it was held, following the principles laid down in English law, that on the determination of a contractual tenancy, the so-called statutory tenant, who had the protection of the Rent Act, did not on his death leave any heritable estate in relation to the tenancy and that the statutory protection available to him during his life, as if it were, died with him. In the confusion that arose in the law followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eritable without any limitation in spite of the amendment of the Delhi Act. If, therefore, one treats the case of dissolution without a winding-up of the company as analogous to the death of a tenant and succession of the estate by the heirs, the position would be no different in the case of commercial tenancies for they would come to the hands of the heirs or successors by a succession without being hit by the constraint of assignment; The Full Bench decision of this court in Haji Mohd. Din, AIR 1979 Delhi 186 would not, therefore, be of any avail to the landlord, assuming the analogy to be correct, even though the true position seems to be that the dissolution of a company without being wound up consequent on amalgamation is not analogous to the death of a tenant because of certain continuity referred to above, which is not there in the case of a natural person. It is, however, unnecessary for the present purpose to carry the matter any further. Prima facie, the rights of the transferor-company in the tenancy, contractual or statutory, are transferable on an amalgamation by virtue of the vesting order to be made by the court while sanctioning the scheme of amalgamation or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions that follow is a court having jurisdiction and that is denned in section 10 as having relation to the place where the registered office of the company is situated with the result that if the two amalgamating companies are under two different jurisdictions, they have to go to the two different High Courts and the amalgamation becomes effective only after the schemes have been sanctioned by both the High Courts, even though material may and should be placed before each High Court on the steps that have been taken with reference to the other company. There is, however, no requirement that both the companies must go to the same High Court even though one of them is outside its jurisdiction. This contention does point to a defect existing in the law and it certainly would be desirable that in cases of amalgamation appropriate changes are made with regard to the jurisdiction of a court so that all matters relating to amalgamation are dealt with by any one of the two High Courts within whose jurisdiction the registered office is situated. Such an amendment would also eliminate the anomaly that may be created on amalgamation with regard to exercise of the directory power of the High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Govt. under sub-section (1) of that section in relation to the said scheme. Moreover, on the scheme of amalgamation becoming effective, all the three requirements of section 2(1A) of the I.T. Act, which defines the expression "amalgamation" would be satisfied. This is how the expression "amalgamation" is defined : "2(1A). 'amalgamation', in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that ( i )all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; ( ii )all the liabilities of the amalgamating company or companies immediately before the amalgamation becomes the liabilities of the amalgamated company by virtue of the amalgamation; ( iii )shareholders holding not less than nine-tenths in value of the shares in the amalgamating company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they merely look to the assets of the company with the obvious threat of secured creditors alone to eat up virtually the entire assets of the company. A comparative study of the balance-sheets of the two companies during the last three years leaves no manner of doubt that as against the bankrupt-company the creditors could look to a healthy company with a share capital of Rs. 318.12 lakhs, reserves and surplus at Rs. 455.19 lakhs. As against the accumulated losses of the transferor-company, the profit of the transferee-company after tax have varied from Rs. 63 lakhs in 1979 to 92 lakhs in 1978 and Rs. 114 lakhs in 1977. The fixed assets of the transferee-company gross to 990.42 lakhs in 1979. The unsecured creditors, the preferential creditors and the secured creditors are, therefore, definite gainers by the scheme of amalgamation. There has been some controversy as to the true worth of the assets of the transferor-company but whichever way one looks at the value of its assets, there is little scope for the unsecured creditors, including preferential creditors, getting a substantial amount out of the assets on a winding-up even after a lapse of more than a decade of the commencemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and compromise are not in public interest or that they are so unreasonable as not to deserve a sanction, even though there is scope to improve the scheme of compromise with the creditors so as to remove certain inequities and to give a better deal to the depositors among unsecured creditors of the company, a subject to which I would presently advert. If it is possible to modify the scheme of compromise with that object in view, it would be unfair to withhold sanction. What then are the inequities or unfavourable features of the scheme of compromise and what modifications, if any, are necessary to remove these and to ensure a better deal to the weakest class of unsecured creditors, are the further questions that have to be dealt with. In the first instance, the preferential creditors, who are referred to in the scheme, but by its terms are outside it, would be entitled to be paid the claims without any scaling down and that no limitation of time of payment or restriction as to the source of funds out of which they are to be paid, but the secured and unsecured creditors, including depositors, have been subjected to the two-fold limitation that they would be paid only out of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, a matter of concern for the depositors. They have no doubt approved the scheme with near unanimity but that is because they are in a very weak bargaining position and, therefore, out of sheer desperation. It is significant to point out in this context that as against the total liability of the company to the various creditors of the order of Rs. 209 lakhs, the liability of the company to the depositors is only Rs. 21 lakhs. Most of these are small depositors. 658 out of these claim less than Rs. 1,000 each and the scheme provided that they would be paid in full. A bulk of the rest of the claim is between Rs. 1,000 and Rs. 5,000 and if all of the depositors are required to be paid in full, whether or not the benefit under section 72A has been received, it should not make any material difference to the transferee-company. It is, however, reasonable that in case section 72A benefit is not received by the company in laying down the schedule as well as the manner of payment due regard may be had not only to the value of the assets sought to be transferred but also the projected income of the Telesound unit of the transferee-company. According to the figures made available on behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the jurisdiction of this court would continue to have a' nucleus of establishment within the jurisdiction of this court as an office of the implementation committee or otherwise which may facilitate the making of directions by this court from time to time with a view to proper implementation of the scheme. As far as the right of the landlord to be paid as a preferential creditor, it is not affected either by the scheme of amalgamation or the scheme of compromise. The landlord is clearly outside the scheme of compromise and his claim for arrears of rent remains unaffected by the scheme by its very terms. As a preferential creditor, the landlord is entitled to be paid on demand and default in the payment of rent would naturally render the company liable to be evicted in accordance with law. The landlord has not yet filed any action for eviction on ground of non-payment of rent. The stay granted by this court earlier against any such proceedings was subsequently made conditional and the time for satisfying the condition was extended. The company has since deposited the amount representing the arrears of rent due until the date of the order and the condition of the order of stay has, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management. He has had a very long association with the company and has been managing its deposits over a period of time. There have been misunderstanding of late between him and the management of the company, but there has been no lack of understanding of the important role that he played in generating funds for the company during its worst phase of financial crises. If he is to seek a winding-up of the transferee-company after his claim has been adjudicated, he would obviously be at a disadvantage in having to invoke the jurisdiction of the Madras High Court, if it is eventually held that this court has no such jurisdiction, even though this court is one of the courts which sanctioned the scheme of amalgamation and compromise. Fortunately, the transferee-company has not been averse to the entire process of adjudication of his claim taking place in Delhi, if possible, in appropriate proceedings under the Companies Act itself, either under rule 83 under the general directory jurisdiction of this court under section 392 of the Act, as the court which sanctioned the scheme. On account of this helpful attitude of the transferee-company, much of the hardship that is envisaged on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the aforesaid assets, property or rights except in the ordinary course of business without the prior permission of this court. 3.Liberty to the amalgamated company to enter into such further instruments or deeds with regard to the aforesaid assets, property or rights in favour of the financial institutions, as may be necessary to give effect to the scheme of amalgamation. 4.An Implementation Committee composed of a representative of the amalgamated company and Shri P.V.S. Murty, Advocate, a representative of the unsecured creditors, with Dr. J.D. Sethi, eminent economist and former Member of the Planning Commission, as its Chairman, would supervise the implementation of the scheme by the amalgamated company and take all steps that may be necessary to protect the interests of the unsecured creditors. The Committee would be entitled to call for such information and particulars with regard to the Telesound project of the amalgamated company and any matter affecting the progress of the project as well as touching the implementation of the scheme from time to time, as the Committee may consider necessary. The Chairman of the Implementation Committee would be entitled to attend a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e schedule of payment, in case the benefit under section 72A of the I.T. Act is not received by the amalgamated company and the projection of the profit of the Telesound unit is for other reasons disturbed. 9.The account of the transferor-company were made out up to December 31, 1978, for the purpose of convening the meeting of the creditors. That date would be the effective date of the scheme of compromise. 10.Directions for convening the meeting of the creditors and the members were sought in September, 1979. The meetings were convened by an order of March 4, 1980. The schemes were approved on May 31, 1980. The transfer date, i.e. , the effective date of amalgamation, would be January 1, 1980. 11.Possession of the factory has already been ordered to be delivered by the Receiver appointed by this court to the management of the amalgamated company, subject to the undertaking with regard to further instruments and deeds to be executed by the amalgamated company in favour of the financial institutions. The receiver would deliver possession of the remaining assets and property of the company to the management of the amalgamated company, subject to the aforesaid undertaking. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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