TMI Blog1999 (12) TMI 764X X X X Extracts X X X X X X X X Extracts X X X X ..... r Private Limited, the name of the Petitioner Company was once again changed to BSL which was duly approved by the Assistant Registrar of Companies, Bombay vide certifi-cate of change of name dated 28-6-1969. BSL has its registered office at Kasturi Building, Mohan T. Advani Chowk, Jamshedji Tata Road, Mumbai- 400 070. BSL is, inter alia, engaged in the business of manufacture, sale, marketing and distribution of air conditioners and refrigerators , the objects for which BSL was incorporated are set out in its memorandum of association. The relevant objects are clauses 39, 40 and 41 which are as under : "39. To sell or dispose of the undertaking of the company or part thereof for such consideration as the company may think fit and in particular for shares, debentures or securities of any other company having objects altogether or in part similar to those of this company. 40. To amalgamate, enter into partnership, or any arrangement of sharing profits, union of interests, co-operation, joint venture, reciprocal concession or otherwise with any person, firm or company carrying on or engaged in or about to carry on or engage in any business or transaction capable of being con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Net worth (Share Capital 10,746.44 Reserves Surplus) Less : Miscellaneous Expenditure (to the extent not written off or adjusted) 340.97 10,405.47 2. Secured Loans 2,589.10 3. Unsecured Loans 3,454.87 16,449.44 4. Fixed Assets and Investments 9,704.68 5. Current Assets, loans and advances 21,063.44 6. Less : Current Liabilities and provisions (excluding trade creditors) 9,651.14 Less : Trade Creditors 4,667.54 7. Net Current Assets (after adjusting Trade Creditors) 6,744.76 8. Carry forward losses Nil 16,449.14 The Sundry Creditors of BSL as on 30-9-1998 amounted to Rs. 28,80,63,329. 4. Since 1984 BSL has also been carrying on the business of software. This is a separate division of BSL, known as International Software Division (I.S.D.). 5. The BSL was incorp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lways, defence, medical, engineering, industries, construction, mining, powers, traffics, offices, police, communications, trade, commerce, weather, satellite, research, hospitals, hotels, advertising, educations, decoration, automobiles, geographical, recreational, domestic and other allied purposes such as computers, mini computers, super computers, pocket computers, personal computers, micro computers, engineering computers, general purpose and process control computers, information and word processing equipments. ( b )Subject to the provisions of the Companies Act, 1956, to amalgamate, or to enter into partnership or, into any agreement for share profits, union of interest, co-operation, joint-venture, of reciprocal concession or for limiting competition with any person or persons or company or companies carrying on or engage in or about to carry on or engage in any business transaction on or engaging in which this company is authorised to carry or engage in or which can be carried on in conjunction therewith." The authorised share capital of transferee Company as on 31-8-1998 is as under : Share Capital : Authorised. 1,00,00,000 Equity Shares of Rs. 10 eachRs. 10,00,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appointed date means 1-10-1998 or such other date as may be fixed by the Court. The effective date means the date on which the certified copy of the order sanctioning the scheme are filed with the Registrar of Companies, Maharashtra. Clause 2 deals with the share capital. Clause 2.1 gives the authorised and issued, subscribed and paid up capital of BSL. Clause 2.2, relates to the share capital of BSIL as of 30-6-1998, which is as under : " Authorised Capital 10,000 Equity Shares of Rs. 10 each Rs. 1,00,000 Issued, Subscribed Paid-up Capital 20 Equity Shares of Rs. 10 each 200 BSL has subscribed to 29,25,725 Equity Shares of Rs. 10 each at par and a welfare trust of the employees of BSIL formed to implement a stock option scheme has subscribed to 3,00,000 Equity Shares of Rs. 10 each at par. These shares have not yet been allotted." Clause 3 of the scheme provides for transfer of ISD of BSL to BSIL. Clause 3.1 provides for transfer of the entire assets of ISD of BSL to BSIL together with the liabilities. Thereafter procedure is prescribed for transferring the assets and liabilities. It also provides tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be allotted by the Board of Directors of BSL at its discretion to any of its two nominees upon trust to sell the shares so allotted and distribute the net sale proceeds to those shareholders of BSL who are entitled to such fractions in the proportion to which they are so entitled. 4.2 Accordingly, on this scheme becoming effective the Authorised, Issued and Subscribed Share Capital of BSL shall be as under : Authorised CapitalAmount in Rs. 10,000 7.5% Cumulative Preference10,00,000 Shares of Rs. 100 each. 2,29,65,725 Equity Shares of Rs. 10 each22,96,57,520 16,000 Unclassified Shares of Rs. 100 each16,00,000 Issued Subscribed paid up capital 2,03,22,827 Equity Shares of Rs. 10 each.20,32,28,270." Clause 5 provides for issue of shares by BSIL, Relevant clause 5.1 reads as under :- "BSIL shall issue and allot for cash approximately 67,74,275 equity shares of Rs. 10 each to the shareholders of BSL at par, the shares to be allotted being determined in the ratio of 1 (One) Equity Share of Rs. 10 each fully paid up for every 4 (Four) Equity Shares of Rs. 10 each of BSL held by them on the Record Date. The shares to be issued and allotted pursuant to this cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also stated that the scheme will not have any adverse implications on the shareholders or the creditors. 9. Mr. Tulzapurkar, the learned Counsel appearing in support of the scheme, has submitted that the procedure prescribed under the Act has been followed. The scheme has been approved by an overwhelming majority of shareholders in value as well as in number. The consideration price to be paid in cash has been worked out on book value as on 30-9-1998. On that date the book value has been worked out to Rs. 7,66,66,065. Out of that Rs. 6,11,42,750 is to be paid by issuance of shares to the shareholders of BSL. Therefore, a sum of Rs. 89,23,315 is the cash component of the consideration, 67 per cent of the share capital of BSIL will be held by BSL i.e., the very same shareholders, 29 per cent of the shares would be held by the transferor-Company and 3 per cent will be held by outsiders who are the employees of the transferee-company. Thus effectively the majority will continue with BSL. 10. The objectors to the scheme are employees shareholders/employed creditors of the company. List of creditors was settled by this Court in its order dated 20-4-1999. Ultimately the cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the future. This, according to the learned counsel, is not relevant. If anything happens in the future, law will take its own course. Employees have been given an option to become employees of the transferee company. Their conditions of service have been protected. Future possibilities of adverse events cannot be taken into consideration whilst sanctioning the scheme. On this proposition the learned counsel has relied upon the judgment of the Supreme Court in the case of Hindustan Lever Employees Union v. Hindustan Lever Ltd. [1994] 2 SC 157. The learned counsel has also submitted that it is not the function of the Court to examine the Scheme from the point of view as to whether or not a better scheme can be formed. For this proposition the learned counsel has relied upon the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 10 SCL 70 . Relying on the aforesaid judgment, the learned counsel has submitted that the Court cannot sit as an appellate authority to minutely scrutinise the scheme and to arrive at an independent conclusion whether the scheme should be permitted to go through or not when the majority of the creditors or members or their respective cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sons (P.) Ltd. v. Kalawati [1986] 60 Comp. Cas. 94 . In this case the Delhi High Court dismissed the petition as having been delayed. It was also dismissed on the ground that the Company had failed to give the upto date financial position which had to be done upto the stage when the petition became due for sanction. This decision is not contrary to the judgment of the Gujarat High Court. It lays down that the latest financial position has to be given as on the date of the sanction by the Court. But the observation has to be seen in the light of the facts of each case. In that case the meetings of the creditors and shareholders were held on 25-4-1978, approving the scheme of arrangement, and the report of the Chairman submitted on 25-5-1978. Instead of filing the petition within seven days of the filing of the report by the Chairman as required under rule 79 of the Rules, the petition was moved on 15-11-1978. The learned judge rejected the reason given for the delay and dismissed the petition. While dealing with section 391(2) it was observed that the Company has chosen to file balance-sheet upto March, 1980 and has not cared to submit the latest balance-sheet. The Company had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time when the petition is filed and must be available when the Court proceeds to examine the scheme to find out whether sanction should be accorded to the scheme, comes up before the Court for sanctioning the scheme. This judgment and the earlier judgment of the Gujarat High Court in Navjivan Mills Co. Ltd. s case ( supra ) are both given by the same learned Judge viz., D.A. Desai, J. Reading all the judgments together, one can say that the relevant point of time for disclosing the latest financial position would be at the time of filing of the petition. It is only as in the case of Bhagwan Singh Sons (P.) Ltd. (supra) when there is a long gap between the filing of the latest balance sheet etc. and the time when Court considers the Scheme for sanction that the Court may require the latest financial position, otherwise it has been clearly laid down that the latest financial position should be disclosed at the time of moving/filing of the petition. Mr. Grover thereafter relied upon the judgment of the Allahabad High Court in the case of Premier Motors (P.) Ltd. v. Ashok Tandon [1971] 41 Comp.Cas. 656 (All.). This judgment merely reiterates that all material particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either BSL or BSIL. Mr. Grover has thereafter submitted that there has been non-disclosure of information at the Shareholders meeting. He submitted that the uninformed consent of the shareholders is void ab initio. No disclosure has been made about the assets and liabilities of ISD on the basis of which book value is calculated. Value of ISD has not been disclosed in the balance sheet or in the profit and loss account. No details are given of the subsidiaries of USA and U.K. There are also assets at Santacruz and Bangalore. No disclosure is made about the cash consideration to be paid to the shareholders of BSL. Nature of the employees stock option scheme is not given. This scheme will be controlled by the trustees who are directors of BSL. Valuation report is not disclosed to the shareholders. In fact the valuation report has been made only to satisfy the financial institutions. The valuation was not disclosed to the shareholders at the meeting. He submits that the only object of the arrangement is to enable the promoters to take control of the new Company BSIL without compensating the shareholders of BSL. It is for this reason that the valuation report was only made available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the loss to shareholders comes to something like Rs. 27 crores. If the losses worked out on the basis of the share value in September, 1999, then the loss to the shareholder comes to 54.19 crores. There is, according to the learned counsel, no justification for reduction of the share capital as there is no over capitalisation in BSL. He further submitted that the benefit of the scheme is going only to the promoters as is evident from the fact that 67.77 per cent shareholders in the BSIL would be the shareholders of BSL. The promoters hold 38.42 per cent is BSL. Therefore, they would be the majority shareholders in BSIL. Only 3 per cent of the shares are going to the employees of the transferee Company. In fact, even the trustees of the employees stock option scheme has not been disclosed. Interest of the directors i.e., Advani Brothers has also not been disclosed. 12. Reiterating the point about there being no over capitalisation, Mr. Grover pointed out that there are huge amounts of money locked up in inventories and sundry debts. Thus the company would require at least 150 crores to service the capital. The company has a negative cash flow and has actually borrowed money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Authorisations given by the financial institutions were not in conformity with rule 70 of the Rules. The resolutions of the financial institutions are obsolete. They were not current. Thus it is submitted that the meeting has not been conducted in accordance with the rules. According to Mr. Grover, there were other irregularities in the voting pattern also. Combined ballot papers were given for voting on the scheme as well as the amendment. The report does not mention the number of persons voting and the value of the votes. Under section 391(2) it is necessary to mention the number of persons present and voting. This has not been mentioned in the report and, therefore rule 18 is violated. It is further submitted that after the amendment had been proposed by the financial institutions it ought to have been separately voted upon. Although there is no decided case on this point but according to Mr. Grover the position has been set out in Commentaries on the procedure. He has referred to the Conduct of Meetings 23rd Edition by Mandy Burton. In this commentary it is stated that when an amendment has been put to the meeting and carried, it must be put a second time, embodied in a su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of retrenchment of the SBL employees in the future. In view of the above, the learned counsel submits that the scheme does not deserve to be sanctioned. Counsel relies on a judgment of this Court in the case of Tata Oil Mills Co. Ltd., In re [ ] 81 Comp. Cas. 754 ( sic ). In this judgment it is clearly held that the Court must also take into consideration the public interest and the interest of the employees of the two Companies to ensure that they are not adversely affected by the Scheme and that adequate provision is made for them. But, then justification is given in the judgment to the effect that this class of persons affected by the scheme has no locus standi in the meetings and the judgment of the majority in their regard need not necessarily be of a great value of a safe guide. In the present case all the objectors are also shareholders as well as creditors. From the manner in which the proposed scheme has been objected to at various stages it is not possible to hold that the interest of the employees have not been adequately represented. Mr. Grover has thereafter referred to another judgment of the Supreme Court in the case of National Textile Workers Union v. P.R. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the High Court by few rather nominal shareholders of TOMCO, Federation of Employees Union of both the TOMCO and HLL, Consumer Action Group and Consumer Education and Research Centre. The attack varied from statutory violation, procedural irregularities of provisions of the Act to ignoring effect of the provisions of Monopolies and Restrictive Trade Practices Act, 1969, undervaluation of shares, its preferential allotment on less than the market price to the multinational, failure to protect the interest of employees of both the companies and above all being violative of public interest. The High Court was not satisfied that either the merger was against public interest or that the valuation of the shares was prejudicial to the interest of the shareholders of TOMCO or that the interest of the employees was not adequately protected. It was held that there was no violation of section 391(1)( a ) of the Act and the claim that the disclosures in the explanatory statement were not as required was without basis as it was not established that the statement did not disclose correct financial position of TOMCO. Nor there was anything to show that the material was not disclosed. The court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to show that the determination of valuation was vitiated as the chartered accountant to whom the duty was entrusted did not perform its functions objectively and in accordance with settled financial norms and practice, and its action was vitiated as he was one of the directors of the TOMCO. Comparative figures of the shares of the two companies, their market value, their holding in the market, etc., were placed to demonstrate that the calculation was vitiated. 3. But what was lost sight of (was) that the jurisdiction of the Court in sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical test. A company court does not exercise an appellate jurisdiction. It exercises a jurisdiction founded on fairness. It is not required to interfere only because the figure arrived at by the valuer was not as better as it would have been if another method would have been adopted. What is imperative is that such determination should not have been contrary to law and that it was not unfair for the shareholders of the company which was being merged. The courts obligation is to be satisfied that valuation was in accordance with law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the terms and conditions of such employees shall not be less favourable and all benefits such as PF, etc., shall stand transferred to the HLL. The grievance of the employees that no safeguard has been provided for Hindustan Lever Employees Union appears to be off the mark as it is the interest of the employees of TOMCO which had to be protected. Even the submission that the merger will create unemployment or that it may result in many employees of the TOMCO being rendered surplus does not carry much weight as these are matters which can be taken care of by the labour court if the contingency arises. The learned counsel for the petitioner time and again took strong exception to the observation made by the High Court that any dispute about retrenchment, etc., could be adjudicated by the labour court. He vehemently submitted that the availability of remedy after retrenchment should not have coloured the vision of the court to adjudicate upon the reasonableness of the scheme. The submission overlooks the primary duties and functions of the company court in matters of merger. When the court found that service conditions of the merged company shall not be to their prejudice, it was ful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsure that the share of UL which stood diluted continued to remain at 51% was not found to have any merit as the valuation was determined by renewed and authorised valuers. It was held that sale by open public auction or inviting tenders from general public may have fetched more price due to competition, but that could not result in vitiating the determination of the valuation. The amalgamation cannot be faulted for this reason. 12. Even assuming that the assets are being transferred for a very meagre sum, but that by itself would not render the agreement bad or against public policy. Once FERA was amended and assets of the Indian company could be transferred to foreign company, then the amalga-mation cannot be withheld when the shareholders themselves did not raise any objection nor was it raised by financial institutions or statutory bodies. The challenge, therefore, founded on transfer of assets at lower price cannot be upheld as violative of public interest. ****** 31. We are unable to uphold any of the above contentions released by Mr. Dholkia. The overwhelming majority of the shareholders had approved the scheme at the meeting called for this purpose and had approved th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt against approval of amalgamation would include a mere future possibility of merger resulting in a situation where the interests of the consumer might be adversely affected. If, however, in future, the working of the company turns out to be against the interest of the consumers or the employees, suitable corrective steps may be taken by appropriate authorities in accordance with law. As has been said in the case of Fertilizer Corpn. Kamgar Union v. Union of India [1981] 2 SCR 52 at page 77 : . . . it is not a part of the judicial process to examine entrepreneurial activities to ferret out flaws. The court is least equipped for such oversights. Nor, indeed, it is the function of the judges in our constitutional scheme. Now, merely because the scheme envisages allotment of 51% equity shares to Unilever, the scheme cannot be held to be against public interest. 78. Next, it was argued on behalf of the employees of TOMCO that the scheme will adversely affect them. This argument is not understandable. The scheme has fully safeguarded the interest of the employees by providing that the terms and conditions of their service will be continuous and uninterrupted and their servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or classes were fully represented and the arrangement was such as a man of business would reasonably approve between two private Companies. With regard to valuation of shares, again it is held in this judgment that transfer of shares to a foreign company on undervaluation is of course a matter of concern. Thereafter, it is held It is true that the transfer of shares by one company to another company is primarily to be determined by the shareholders and therefore, if the 99 per cent of them are of the view that the valuation of the shares was reasonable and fair, then the court should be slow to interfere with it. Keeping the aforesaid ratio in view it would not be possible to agree with Mr. Grover to the effect that the shares have been unnecessarily undervalued or that the Advances have been unduly benefited from the scheme. Similarly with regard to the submission on the assets being undervalued it is again noticed in the judgment that Even assuming that the assets are being transferred for a very meagre sum, but that by itself would not render the agreement bad or against public policy . It is specifically held : the challenge, therefore, founded on transfer of assets at lo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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