TMI Blog2010 (12) TMI 1068X X X X Extracts X X X X X X X X Extracts X X X X ..... n for Regional Director. A.K. Mylsamy for the Objector. JUDGMENT 1. This company petition is filed under sections 391 to 394 of the Companies Act, 1956 (for brevity, "the Act") for sanction of the scheme of arrangement. 2. The three transferor companies, viz., Flextronics Design Consumer Electronics (India) P. Ltd., Solectron India P. Ltd., and Coldwatt Indian P. Ltd., proposed to merge with the petitioner/transferee company, viz., Flextronics Technologies (India) P. Ltd., as per a scheme. 3. The petitioner/transferee company incorporated on January 12, 2001, with the Registrar of Companies, Delhi and Haryana, was subsequently shifted to Karnataka in the year 2002 after obtaining an order from the Company Law Board, New Delhi and obtaining a fresh certificate of registration from the Registrar of Companies, Karnataka on December 3, 2003. Thereafter, the registered office of the transferee company was shifted to Tamil Nadu in the year 2008 as per the order of the Company Law Board, Chennai and the certificate of registration issued by the Registrar of Companies, Tamil Nadu on February 10, 2009 and the registered office of the petitioner/transferee company is situated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviders, human resource recruitment and executive search service providers, accounts payable operations, including monitoring and follow up services, with reconciliation and record verifications and other kinds of business processes, including but not limited to finance, accounts, management, human resources and other area for customers within India or abroad. At present, the petitioner/transferee company is engaged in the business of providing technologically advanced electronics manufacturing services and information technology related services in the nature of human resource process outsourcing, pay roll management services, etc., and is also a developer of special economic zone. 9. It is stated that the board of directors of the petitioner/transferee company have approved in the resolution dated January 11, 2010, the proposal of the transferor companies to be merged with the petitioner/transferee company subject to the confirmation of this court. 10. The first transferor company, viz., Flextronics Design Consumer Electronics (India) P. Ltd., was incorporated on April 9, 2003 and registered in Karnataka in the name of Avnisoft Systems P. Ltd., which was changed to the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econd transferor company in the form of 2,00,00,000 equity shares of Rs. 10 each is Rs. 20,00,00,000 and the issued, subscribed and paid-up capital in the form of 65,97,391 equity shares of Rs. 10 each is Rs. 6,59,73,910. A certified copy of the audited annual account of the second transferor company as on March 31, 2009, has been annexed as annexure K. 19. As per the latest audited balance-sheet of the second transferor company up to March 31, 2009, the assets in the form of fixed assets at Rs. 4,77,447, net current assets at Rs. 59,31,245 and profit and loss account at Rs. 5,95,65,227 are in all amounting to Rs. 6,59,73,919 ; and liabilities in the form of share capital at Rs. 6,59,73,910 and share application at Rs. 9, are in all amounting to Rs. 6,59,73,919. 20. The object of the second transferor company is to carry on within and outside India all types of businesses in the information technology sector, including manufacture of electronic products and components, etc., and the second transferor company at present is engaged in the business of manufacturing of electronic products/components and providing related services in information technology sector. 21. The board of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the High Court of Karnataka. 28. It is stated that the board of directors of the transferor companies and the petitioner/transferee company have decided under the scheme of merger as follows : (i)the marketing facilities available with the petitioner/transferee company and the transferor companies could be pooled together and the petitioner/transferee company will be able to exploit the facilities available for the benefit of the petitioner/transferee company and penetrate into the new markets ; (ii)administration and operational costs would be considerably reduced and the petitioner/transferee company will be able to benefit from the same resulting in better turnover and profits ; (iii)there will be operational synergy in terms of procurement benefits, common licence, reduction of administration work and cost, etc., for the petitioner/transferee company ; (iv)the financial resources, managerial and technical expertise of all the companies could be better utilised by the petitioner/transferee company, which would be beneficial to it ; and (v)better financial structuring of the company could be ensured under the scheme. 29. As per the scheme, with effect from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted by learned counsel for the petitioner, in the light of the decision of this court in Cavin Plastics Chemicals (P.) Ltd., In re [2006] 129 Comp. Cas. 915/[2008] 86 SCL 233 , the objection is no longer res integra and hence, the objection of the Regional Director does not survive for consideration. 34. In fact, a Division Bench of this court in Regional Director, Ministry of Co. Affairs v. Cavin Plastics Chemicals (P.) Ltd. [2008] 141 Comp Cas 475 / 85 SCL 30 , while affirming the view of the single judge in Cavin Plastics Chemicals (P.) Ltd. (supra), has held as follows (page 480) : "In the case of Hotline Hol Celdings P. Ltd., In re [2005] 127 Comp. Cas. 165, the Delhi High Court followed the decision of the Andhra Pradesh High Court in Saboo Leasing P. Ltd., In re [2003] 117 Comp. Cas. 728, while considering an objection of the Regional Director to the effect that the authorised share capital of the merged company was being increased as a result of the scheme of amalgamation and this could only be carried out after following the procedure prescribed by the relevant provisions of the Companies Act and held that in the case of such merger no such payment of fee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation and as per annexure 2, the statutory auditors have qualified that non receipt of confirmation in respect of sundry creditors amounted to Rs. 39,77,14,308 and in the absence of such confirmation from the debtors and creditors, the auditors have relied on the representation of the petitioner/transferee company and that, according to the objector, shows that the petitioner/transferee company has not taken any steps to obtain confirmations from its creditors, which is sine qua non for a petition under section 17 of the Act ; (iv)while the balance-sheet that has been filed by the petitioner/ transferee company is as on March 31, 2009, the balance payable by the petitioner/transferee company has not been informed to this court ; (v)the petitioner/transferee company s affairs have been conducted against the public interest and there have been discrepancies pointed out by the statutory auditors every year ; (vi)apart from the petitioner/transferee company not giving any notice to the objector for shifting of the registered office, for a letter of the objector dated April 14, 2010, marked as annexure 3, asking for certain records to be made available, the petitioner/transferee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny as on March 31, 2009, have stated that there is substantial doubt about the said company s ability to continue as a going concern and therefore, the first transferor company has not been carrying on any business and the liabilities of the said company are intended to be mulcted upon the petitioner/transferee company under the scheme. 46. It is also stated that all the three transferor companies have accumulated losses as on March 31, 2009, of Rs. 81 lakhs, Rs. 595 lakhs and Rs. 82 lakhs, respectively, and it is also stated that the accumulated loss of the petitioner/transferee company is Rs. 213 crores and in spite of it, it is stated in the scheme that the scheme would benefit the petitioner/transferee company. 47. It is further stated that the proposed reduction of the share can be ordered under section 102 of the Act by this court only on satisfaction that in respect of every creditor of the company either consent has been obtained for reduction, or debt or claim has been discharged or has been secured and that the petitioner/transferee company should have filed a petition under section 101 of the Act and in not filing the same, the petitioner/transferee company has wanto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferor companies is only detrimental to the interest of the petitioner/transferee company as such and the objector being one of the unsecured creditors is affected by such scheme. 53. Therefore, in effect, it is the case of the objector that the petitioner/transferee company is not in the State of Tamil Nadu ; that the order passed in C.A. No. 460 of 2010 is improper ; that the meeting of the creditors has not been effected as per the scheme itself ; that no notice of hearing of the petition to the creditors was sent ; that the company has not dispensed with the creditors meeting and therefore, it is bound to hold a meeting of its creditors ; that the requirements of sections 100 to 102 have not been complied with ; and that the petitioner/transferee company is guilty of misrepresentation. On the said grounds, the objector seeks to reject the scheme. 54. Mr. Karthik Seshadri, learned counsel appearing for the petitioner/transferee company has submitted that by virtue of the scheme the petitioner/transferee company is going to be a continuing company and therefore, there is no necessity for any apprehension and it is his submission that there is no dilution of rights of cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to public interest or the larger interest of the company, etc. 61. It is further submitted that the qualified account of the auditor s statement cannot be a material fact and that the objector has never stated as to how it is affected by the merger and its interest is only to stall the merger one way or the other. 62. Per contra, Mr. A.K. Mylsamy, learned counsel appearing for the objector would submit that the very fact that the company petition for winding up has been admitted shows that prima facie there is a case. He would refer to e-mail correspondence to show that there has been an amount due to the objector and it is his submission that the objector, like the unsecured creditor, is primarily affected by such merger and more so, in cases where the transferor companies are in a bad shape financially. It is his submission that when the transferor and transferee companies are loss making companies, the creditors in particular are having no security. He would also refer to various annexures filed by the petitioner/transferee company itself to show as to how the transferor companies are in a financially bad position. 63. He would also bring to the notice of this court the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioner/transferee company and the same is pending before this court. The ground on which the winding up petition has been filed against the petitioner/transferee company is that the company is unable to pay its debts. Under section 447 of the Act, an order of winding up is to operate in favour of all the creditors and of all the contributories of the company as if it has been made as a joint petition of a creditor and of a contributory. Such winding up order shall have effect from the date of filing of petition for winding up. 70. On the factual matrix of the case on hand, when by the merger of the transferor companies, the transferee company is going to continue its operations, it cannot be said that the right of the objector to proceed with the winding up will be frustrated if the scheme of amalgamation is approved. Such a situation may arise in cases where the petitioner/transferee company merges with some other company thereby losing its corporate entity, which is not the case on hand. 71. It is also relevant to point out that the objector s case appears to be not with the interest of claiming or making recoveries of the amounts due to protect its interest, but the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a)extinguish or reduce the liability on any of its shares in respect of share capital not paid-up ; (b)either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available assets ; or (c)either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company ; and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly. (2) A special resolution under this section is in this Act referred to as a resolution for reducing share capital ." no doubt enables the company limited by shares, etc., by a special resolution to reduce its share capital. But by going through the terms of the scheme, there is nothing to conclude that the petitioner/transferee company is going to reduce its share capital by virtue of the amalgamation, thereby requiring a special resolution to be passed under section 100 of the Act. It is only when the company passes a resolution for the purpose of reduction of share capital, the question of objectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised objection about the proposal. 77. By referring to the statement of Lindley L.J. in Alabama, New Orleans, Texas Pacific Junction Railway Co., In re [1891] 1 Ch.D. 213 (CA) at 238, wherein the following observation was made : ". . . what the court has to do is to see, first of all, that the provisions of that statute have been complied with ; and, secondly, that the majority has been acting bona fide. The court also has to see that the minority is not being overridden by a majority having interests of its own clashing with those of the minority whom they seek to coerce. Further than that, the court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing the scheme laid before them in the interests of those whom they represent, take a view which can be reasonably taken by businessmen." 78. Padmanabhan J., as his Lordship then was, in Coimbatore Cotton Mills Ltd. Lakshmi Mills Co. Ltd. (supra ), has considered that the following conditions are to be satisfied before the court approves the scheme for amalgamation (page 630) : "(1)The court should be satisfied that the resolutions are passed by the statutory majority in value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entire issue into consideration and while doing so, the decision of the creditors and shareholders may play a vital role for the court to decide. It is also no doubt true that while making an application under section 391(2) of the Act for the purpose of sanctioning of the arrangement or compromise all material facts are to be disclosed, including the latest financial status of the company and auditor s report. 80. As held by the Supreme Court in S.K. Gupta v. K.P. Jain [1979] 49 Comp. Cas. 342, as per the reading of section 391(1) of the Act, which is as follows : "391. Power to compromise or make arrangements with creditors and members. (1) Where a compromise or arrangement is proposed (a)between a company and its creditors or any class of them ; or (b)between a company and its members or any class of them ; the court may, on the application of the company or of any creditor or member of the company, or, in the case of a company, which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the court directs." which use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guage employed in section 392(2) in that the court can wind up the company under section 392(2) if and only if it is satisfied that the compromise and/or arrangement sanctioned by it cannot be satisfactorily worked with or without modifications. The court has to reach an affirmative conclusion before acting under section 392(2) that the compromise and/or arrangement cannot be worked satisfactorily with or without modification (see J.K. (Bombay) P. Ltd. v. New Kaiser-I-Hind Spg. and Wvg. Co. Ltd. [1970] 40 Comp. Cas. 689 ; AIR 1970 SC 1041). It follows as a corollary that if the compromise or arrangement can be worked as it is or by making modifications, the court will have no power to wind up the company under section 392(2). Now, if the arrangement or compromise can be worked with or without modification, the court must undertake the exercise to find out what modifications are necessary to make the compromise or arrangement workable and that it can do so on its own motion or on the application of any person interested in the affairs of the company. If such be the power conferred on the court, it is difficult to entertain the submission that an application for directions or modific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for sanction of the court is backed up by the requisite majority vote as required by section 391(2). (3)That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. (4)That all necessary material indicated by section 393(1)(a) is placed before the voters at the concerned meetings as contemplated by section 391(1). (5)That all the requisite material contemplated by the proviso to sub-section (2) of section 391 of the Act is placed before the court by the concerned applicant seeking sanction for such a scheme and the court gets satisfied about the same. (6)That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the court, if necessary, can pierce the veil of apparent corporate purpose und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the cash and bank balances as at March 31, 2009 was Rs. 70,09,62,136 as against the one at March 31, 2008 as Rs. 29,22,57,899. The auditor s report also shows about the cash flow from the financial activities in the form of share capital which has been increased from Rs. 24,29,08,724 as on March 31, 2008 to Rs. 71,62,87,500 as at March 31, 2009. The cash flow statement cannot be said to be either alarming, depicting the financial instability of the petitioner/transferee company, as it is focused by the objector. There is no question of any suppression. 84. The scheme of arrangement on the "accounting treatment" in clause 13 does not oblige the petitioner/transferee company to separately call for the meeting of the shareholders or creditors. Clause 13.9 of the scheme, which is relevant, is as follows : "13.9 The necessary approvals to be obtained by FTIPL from its shareholders and creditors, as required, for the scheme shall always deemed to include the approval/consents required to be obtained under section 100 and FTIPL shall not nor shall be obliged to call for a separate meeting of its shareholders and creditors for obtaining their approval sanctioning the reduction of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... draw attention to company s plan for discontinuation of all business operations and consequently severance package were offered to all the employees by the company wherein all the employees were laid off by the company. The company has no plan to carry out any other business activities. These factors raise substantial doubt about the company s ability to continue as a going concern in the foreseeable future." in the annexure referred to in the auditor s report in various paragraphs, there is no whisper about the same. It is relevant to point out at this stage that the said information regarding the alleged discontinuance is not relating to the petitioner/transferee company, but relating to the first transferor company, in respect of which also the other statutory statements are not against its financial status. In fact, in one of the clauses, especially clause 10, it is stated as follows : "(x) According to the information and explanations given to us and on overall examination of the balance-sheet, the company has not incurred cash losses in the current and previous year and the accumulated losses of the company as at March 31, 2009, does not exceeded 50 per cent of capital an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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