TMI Blog2001 (2) TMI 967X X X X Extracts X X X X X X X X Extracts X X X X ..... dealing in ion exchange resins, organic solvents, wetting agents, textile processing compounds and agents, fibre glass, heavy and other chemicals, petro-chemicals, electro-chemicals and of designing, fabricating, manufacturing and dealing in water treatment machinery. 3. The first transferor-company, Ion Exchange Speciality Chemicals Ltd. was incorporated on 29-9-1994, and subsequently became a deemed public company. The first transferor-company is presently engaged in the business of marketing speciality chemicals. The second transferor-company, Ion Exchange Environmental Services Limited, was incorporated on 19-1-1998, as a private limited company and immediately became a deemed public company. The second transferor-company is presently engaged in the business of waste water treatment and sewage and solid waste manage-ment. 4. The grounds on which the merger has been sought are specified thus, in para. 17 of Company Petition No. 980 of 2000. "17. All the companies are under the same management. The management is of the opinion that the merger will lead to synergies of operations and more particularly the following benefits : ( a )It will make available to the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Journal and Navshakti on 30-8-2000. A copy of the notice was furnished for publication in the Maharashtra Government Gazette on 28-8-2000. On 27-9-2000, a meeting of the equity shareholders of the transferee-company was convened which was attended by 41 equity shareholders in person or through representatives or by proxies. The chairman s report dated 7-10-2000, is annexed at exhibit I to the petition. In para 23 of the petition, it has been averred that on scrutiny, it was noted that all the 41 equity shareholders, who were present in person or through proxies cast their votes and 101 ballots representing 29,85,334 equity shares validly voted for the scheme. The scheme is thus, stated to have been passed unanimously. On behalf of the transferee-company, it has also been stated before the court that all the secured creditors consisting of the banks and financial institutions have given their letters of no objection to the scheme of amalgamation. The dues of the banks are stated to be approximately to the extent of Rs. 45 crores. 8. The Regional Director has expressed that he has no objection to the scheme of amalgamation. The official liquidator has filed his report dated 8-1-2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive date shall become the employees of the transferee-company without any break or interruption in their services, on the same terms and conditions on which they are engaged as on the effective date. The effective date under clause 1.5 means the date on which the certified copy of the order of this court sanctioning the scheme is filed with the Registrar of Companies, Maharashtra. Clause 5 of the scheme provides that the entire equity share capital of the transferor-companies is held by the transferee-company and the transferors are wholly owned subsidiaries of the transferee-company. Pursuant to the merger of the transferor-companies with the transferee-company, the investments in the shares of the transferor-companies appearing in the books of account of the transferee-company as on the appointed date will stand cancelled. On the scheme becoming effective, the transferor-companies are, under clause 7 of the scheme, to be dissolved and wound up. These are the material provisions of the scheme, at least in so far as the present petitions are concerned. 10. In opposition to the proposed scheme of amalgamation, an intervention in these proceedings has been made on behalf of Param ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsferee-company has laid a considerable degree of emphasis on the fact that in the meeting of the shareholders an unanimous approval came to be granted by all the shareholders who were present at the voting. Reliance has also been placed on the fact that all the secured creditors consisting of the banks which have lent their moneys, have expressed that they have no objection to the scheme of amalgamation. It has been stated that none of the 1,265 unsecured creditors to whom there is a total liability of approximately Rs. 35 crores, has opposed the scheme and it is only the interveners, who have sought to object (apart from two other claims to which reference shall be made hereinafter) and that even the claim of the interveners at the highest is to receive a payment of Rs. 35 lakhs, representing 1 per cent of the total liability towards unsecured creditors. It must be noted here that an effort was made on the suggestion of the court to attempt a resolution of the dispute between the interveners and the transferee-company by enquiring whether the interveners were ready and willing to submit their claim against the transferee-company to arbitration in pursuance of the arbitration clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er value is incorrect. The admitted position according to the interveners is that the transferee is taking over liabilities which completely outweigh the assets. The deleterious effect of the taking over of the liabilities has not been adverted to in the company petition. The negative aspect of the financial position of the two transferor-companies ought to have been placed before the court by the petitioners which has not been done. Even if the financial position of the two transferor-companies was to be considered by the court, it would be apparent that there is no benefit to be gained by the transferee-company from the scheme of amalgamation. 13. In considering the tenability of the objections, which have been raised on behalf of the interveners in these proceedings, it would be necessary to note at the outset those aspects of the financial condition of the transferor-companies and the transferee-company in the present case on which a considerable degree of emphasis has been placed at the hearing of the petitions. First and foremost, the position of the transferee-company may be considered. For the financial year 1998-99, the transferee-company made an operating loss of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of Rs. 1.31 crores for the year 1998-99. For the year 1999-2000, the loss after taxation stood at Rs. 82.68 lakhs. In the year 1998-99, the company had no turnover at all, the networth of the second transferor-company is Rs. 35.85 lakhs as at 31-3-2000. 15. The petitioners to the company petitions have not denied that the transferee-company had incurred an operating loss of Rs. 2.15 crores for the year 1998-99 and of Rs. 3.95 crores for the year 1999-2000. What the petitioners seek to emphasise is that the figure of operating losses has the depreciation of assets built into it as a component thereof. If this item of depreciation is removed, it is sought to be contended, the company would in fact make a cash profit. In so far as the first transferor-company is concerned, what is sought to be emphasised is that the statement of the auditors reflects their views that certain claims against third parties were irrecoverable. The petitioners seek to highlight that the first transferor-company has fixed assets of Rs. 1.07 crores. Similarly, in so far as the second transferor-company is concerned, the petitioners emphasise that even according to the interveners, the networth of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets of the transferee on 31-3-2000, would be to the tune of Rs. 127.93 crores. The net current assets of the transferee-company as on 1-4-2000, are Rs. 130 crores. If the net current assets of the two transferor-companies which are negative to the tune of Rs. 2.46 crores and Rs. 1.86 lakhs are deducted, the transferee-company after amalgamation would possess net current assets of Rs. 127 crores. In the premises, what is sought to be emphasised is that even after amalgamation, the transferee-company would be able to meet all the claims of its creditors and that the intervener can have absolutely no apprehension that its claim would not be protected upon the implementation of the scheme of amalgamation. 16. Before dealing with the factual aspects of the present case, it would be necessary to consider the scope of the jurisdiction of the High Court, when the sanction of the court is sought to a scheme for amalgamation under sections 391, 392 and 394. The scope and nature of the powers which the High Court exercises in these cases have been the subject-matter of several judicial decisions, both of the High Court and the Supreme Court. The legal principles which would govern the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholders and creditors. In these circumstances, the court has to be alive to the duty which sections 391, 392 and 394 cast upon it, before the court grants the seal of its approval upon the proposed amalgamation. 17. A Division Bench of this court had occasion to consider the question in J.S. Davar v. Dr. Shankar Vishnu Marathe, AIR 1967 Bom. 456. The Division Bench of this court held that the will of the majority which may have approved the scheme, does not conclude the issue for the court as to whether the scheme should be sanctioned. The considerations which must guide the court were enunciated thus by the Division Bench (page 461) : "The jurisdiction of the court which is called upon to sanction a scheme transcends the mere consideration that a majority of those affected by the scheme is willing to submit to the scheme. The creditors of a company may agree to accept a fraction of the amount due to them from the company and yet, on considerations of more lasting importance, like public or commercial morality, the court may refuse to accept the verdict of the majority. It may also refuse to accept the scheme on the ground that it is not reasonable or that it is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The exercise of discretion by the court on an application under section 391, has been elaborately dealt with in a judgment of a learned Single Judge, D.A. Desai J. (as he then was) of the Gujarat High Court in Maneckchowk Ahmedabad Mfg. Co. Ltd., In re [1970] 40 Comp. Cas. 819 . The learned Single Judge emphasised that the effort of the court is to consider whether the scheme is reasonable and while doing so, the court will have due regard to a large majority vote and to the reason, if any, which actuated the contesting creditors in opposing the scheme. Though the scheme has to be fair and equitable, it is not for the court to judge upon the commercial merits of the scheme. The court does not in that sense usurp the business discretion of the creditors and members of the company. The court will sanction the scheme unless it was conceived, designed or calculated to cause injury to others. Similarly, if the court comes to the conclusion that the scheme is a cloak to cover the misdeeds of the company or is put forth with a view to shield the directors against an investigation into their mismanagement, the scheme cannot be accepted only on the ground that it has been approved by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a court of appeal over the informed view of the parties to the scheme or enter into the realm of the corporate and commercial wisdom of the parties. The jurisdiction of the company court was held to be supervisory and not appellate and as a supervisor, the court cannot assume the role of an author or a policy maker. The court would, therefore, not scrutinise the scheme with a view to investigate into whether a better scheme could be formulated. In Miheer H. Mafatlal s case ( supra ), the Supreme Court cited with approval, the observations of the court in the earlier judgment of the court in Hindustan Lever Employees Union v. Hindustan Lever Ltd. [1995] 83 Comp. Cas. 30. There, the court held that in matters relating to the amalgamation of companies, the courts have evolved the principle of the prudent business management test and that the scheme should not be a device to evade law. In Miheer H. Mafatlal s case ( supra ) the Supreme Court has formulated the following propositions to guide the courts in the exercise of their jurisdiction of whether or not to sanction the scheme of amalgamation : "1. The sanctioning court has to see to it that all the requisite statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there would be a better scheme for the company and its members or creditors for whom the scheme is framed. The court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction." (p. 819) 24. In Palmer s Company Law (24th edition, C.M. Schmitthoff 79-15) the position has been summarized as being that before the court sanctions a scheme, it will normally need to be satisfied on four matters : ( i )The statutory provisions must have been complied with; ( ii )The class must have been fairly represented; ( iii )The arrangement must be such as a man of business would reasonably approve; and ( iv )The arrangement in England must be compatible with section 428 of the English Companies Act. 25. In so far as the third of the aforesaid principles is concerned, it has been stated thus : "In exercising its discretion whether or not to sanction a scheme, the court, as we have seen, treats it as cardinal that its function does not extend to usurping the view of the members or creditors. This does not mean that, provided that the resolutions are duly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approved, it would in my view, be necessary to have regard to the fact that the transferor-companies are wholly owned subsidiaries of the transferee-company. Consequent upon the scheme of amalgamation, the investments appearing in the books of the transferee-company in the shares of the two transferor-companies will stand cancelled. The two transferor-companies shall be dissolved without being wound up. No new share capital is thus, proposed to be issued by the transferee-company consequent upon the scheme of amalgamation being sanctioned. The scheme of the amalgamation in so far as it is material, provides that on and from the appointed date, the entire business and undertakings of the transferor-companies including their debts, liabilities, duties, obligations and assets would stand transferred to and vest in the transferee-company. All contracts and agreements to which the transferor-companies were parties and which were subsisting or having effect immediately before the amalgamation shall be in full force and effect as against the transferee-company. The employees of the transferor-companies are to become the employees of the transferee-company on and from the effective date wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n fixed assets of Rs. 52.57 crores, the transferee-company will have the benefit of the fixed assets of the first transferor-company which stand at Rs. 1.07 crores and of the second transferor-company to a lesser extent of Rs. 37.71 lakhs. In other words, having perused the balance-sheets which are annexed to the petition and the summary thereof which is annexed in the chart to the rejoinder, it is not possible to accede to the submission of the interveners that the amalgamation would have serious consequences for the transferee-company. There is no doubt about the fact that the two transferor-companies have sustained a loss and that the net worth of the first transferor-company has been, to use the words of the auditors, completely eroded. The auditors have also emphasised that though the accounts of the first transferor-company have been prepared on the basis of it being a going concern, the validity of this assump- tion would depend upon the continuance of the existing funding by the transferee-company. In note 5 to Schedule II of the auditors report, it has been stated that the accounts were prepared on a going concern basis on the assurance of the transferee-company which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm of competition and an open interface with market forces. The fortunes of corporate enterprise are liable to fluctuate with recessionary cycles. Changes in economic policy and economic changes affect the fortunes of business as assumptions and conditions in which corporate enterprises function are altered. Corporate enterprise must be armed with the ability to be efficient and to meet the requirements of the rapidly evolving business reality. Corporate restructuring is one of the means that can be employed to meet the challenges and problems which confront business. The law should be slow to retard or impede the discretion of corporate enterprise to adapt itself to the needs of changing times and to meet the demands of increasing competition. The law as it has evolved in the area of mergers and amalgamations has recognised the importance of the court not sitting as an appellate authority over the commercial wisdom of those who seek to restructure business. The need for this restatement is all the greater today where the interplay of competition and the forces of the market demand efficiency; cost effectiveness and high levels of productivity. Viewed in the context of this busine ..... X X X X Extracts X X X X X X X X Extracts X X X X
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