TMI Blog2015 (12) TMI 1085X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme with modification(s). - Company Pet. No.03/2013 - - - Dated:- 28-7-2015 - MR. UJJAL BHUYAN, J. For The Petitoner : Mr. R Banerjee, learned Senior Counsel For The Objector : Mr. J Saha, learned Senior Counsel This is an application under sections 391 (2) and 394 of the Companies Act, 1956, seeking sanction of the Court to the scheme of amalgamation of Buragohain Tea Company Ltd. (Transferor Company) with B A Ltd. (Transferee Company). Transferor Company was incorporated on 20.05.1927 under the provisions of the Indian Companies Act, 1913. It is an existing company under the Companies Act, 1956 (Act).The registered office of the Transferor Company is situated at Govindapur Tea Estate, Post Office-Latekujan, Dist-Golaghat. The authorized share capital of the Transferor Company is R.6,00,000.00 divided into 600 equity shares of ₹ 1,000.00 each. The issued, subscribed and paid up share capital of the Transferor Company is ₹ 5,30,000.00 divided into 530 equity shares of ₹ 1,000.00 each fully paid up. The Transferor Company is engaged in the business of cultivation and sale of tea. It is stated that Transferor Company has maintained proper Boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been set out in the company petition. Transferee Company is currently operating 7 tea gardens in Upper Assam, producing high quality black tea. It has three processing units with a combined annual capacity of 8 million kgs of black tea. With the Transferee Company having its own leaf production of 3.4 million kgs, there is surplus tea processing capacity of 4.6 million kgs, which is partly utilized at present by processing bought tea leaf. Transferee Company has been in the tea business for a long time and has considerable expertise and goodwill in such business. On the other hand, Transferor Company has a tea garden, namely, Govindapur Tea Estate in the district of Golaghat. The said tea estate was, however, shut down in the year 2005 following dispute with the workers. Rockland Realty Pvt. Ltd., a company having the same management as the Transferee Company, took over the Transferor Company in May, 2011 by acquiring the majority shares of the Transferor Company. A petition was pending in this Court for voluntary liquidation of the Transferor Company. The same was allowed to be withdrawn by this Court on 07.05.2011 whereafter, it was taken over by Rockland Realty Pvt. Ltd. Thus T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditions, which would not be less favourable to them than those subsisting with reference to the Transferor Company as on the said date. All proceedings pending by or against the Transferor Company as on the effective date, including contracts etc. would stand transferred to the Transferee Company and would be enforceable by or against the Transferee Company. The most important or rather controversial clause of the scheme is that on the scheme becoming effective, the Transferee Company shall issue and allot to the share holders of the Transferor Company 786 equity shares of ₹ 10.00 each in the Transferee Company for every one equity share of ₹ 1,000.00 each in the Transferor Company. Thus, the scheme envisages amalgamation of the Transferor Company with the Transferee Company in the above terms and conditions. Both the Transferor Company and the Transferee Company had earlier approached this Court by filing Company Petition No.2/2013 and this Court by order dated 11.02.2013 directed holding of separate meetings of the equity share holders of the Transferor Company and the Transferee Company on 23.03.2013 for the purpose of considering the said scheme of amalgamation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Objector is the daughter of Hemendra Prasad Barooah, the Chairman of the Board of Directors of the Transferee Company. With a view to divest the Objector from her claim to the said block of shares in the Transferee Company, TS No.41/2012 was filed by Hemendra Prasad Barooah in the Court of Civil Judge, Jorhat, wherein, it has been claimed that though the block of 8,61,918 shares are in the joint name of the plaintiff (Hemendra Prasad Barooah) and the Objector, for all intent and purpose, the plaintiff is the sole beneficial shareholder and the reason for introducing the Objector as the joint owner was for operational convenience and to ensure that after the death of the plaintiff, the demat account should not be frozen. Plaintiff has sought for a declaration that he is the sole and absolute owner of the said block of 8,61,918 shares of the Transferee Company along with other incidental reliefs. The civil suit was filed after the Company Law Board had rejected such a prayer made by the father. Misc. (J) Case No.27/2012 was filed by the plaintiff under Order 39 Rules 1 2 of the Code of Civil Procedure, 1908. Learned Civil Judge passed order dated 13.08.2012 directing the parties t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme. According to the affidavit filed on behalf of the Objector, there are sufficient reasons to belief that after the order of the Company Law Board, the management fabricated the minutes of the Board s meeting dated 25.05.2012 and notified the Bombay Stock Exchange on 26.09.2012. Rockland Realty Pvt. Ltd. owns 510 out of the 580 shares of the Transferor Company i.e. 87.93%. Directors of Rockland Realty Pvt. Ltd. are also the Directors and employees of the Transferee Company. All the share holders of Rockland Realty Pvt. Ltd. are Directors of the Transferee Company and sister-concern; therefore, the whole deception becomes apparent. Allegation as regard non-receipt of notice of the meeting of the Transferee Company held on 23.03.2013 has been made. It is alleged that notice was sent to the address not currently occupied by the Objector and was received after the meeting. Finally, it has been contended that the scheme is devoid of any justification and the exchange ratio of shares is wholly prejudicial to the interest of the Transferee Company in which the public is interested. The scheme has not been placed before the Court in terms of the circular of the Security Exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012. Regarding the SEBI circular dated 14.02.2013, it is stated that the scheme was filed in this Court on 21.01.2013. As such question of the SEBI circular dated 14.02.2013 being applicable does not arise. It is reiterated that the scheme will advance the business of the Transferor Company and the Transferee Company and would be to the benefit and advantage of both the company, their shareholders, employees and all concerned. Contending that the objections raised by the Objector are vague and frivolous being devoid of merit, petitioners seek dismissal of the objection and pray for sanction of the scheme. Regional Director, Eastern Region, Ministry of Corporate Affairs, Govt. of India, Kolkata has filed affidavit. In his affidavit, he has stated that as per the balance sheet of both the companies, there are secured creditors. However, no meeting of the creditors has been held and consent obtained. According to him, the accounting standard applied in the scheme does not conform to the requirement of Accounting Standard 14 read with section 211 (3A) of the Act. However, the basic objection raised by the Regional Director is regarding the exchange ratio of shares between the Trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny jointly with her father Hemendra Prasad Barooah in a demat account with HDFC Bank. Father has since expired. By operation of law, the said share jointly held by her alongwith her father has now devolved upon her. The said block of 8,61,918 equity shares represent 27.8% of the issued and paid up capital of the Transferee Company. Thus she claims to hold 38% of the shares in the Transferee Company. A malafide attempt has been made to deplete her share holding in the Transferee Company. The scheme has been devised as part of such a move. It is a ploy to deprive the Objector of her control over the company. According to the Objector, the Transferee Company has been traditionally a concern of the Barooah family. Her elder sister has been living abroad permanently alongwith her family since the last four decades. Her only brother Amit Barooah died in the year 2007. His widow has since remarried and is living abroad permanently. It is stated that because of the aforesaid developments, her father became mentally very weak and vulnerable. Moreover, because of old age, he was suffering from various diseases and ailments. Taking advantage of the situation, some employees of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of hearing. After hearing the parties and on due consideration, this Court passed order dated 20-03-2014 opining that having regard to the facts and circumstances of the case, the supplementary affidavit filed by the Objector on 19-03-2014 was required to be taken on record except the averments made in paragraphs 3, 4 and 8 of the said affidavit. It was ordered accordingly. Petitioners have filed rejoinder affidavit to the supplementary affidavit filed by the Objector. It is stated that the allegations made by the Objector in the supplementary affidavit are wholly irrelevant for the purpose of consideration of sanction of the scheme as proposed by the petitioners. It is denied that the Objector is the largest share holder of the Transferee Company. It is contended that the Objector has no right to 2, 21, 230 and 8, 61, 918 equity shares of the Transferee Company which are subject matters of pending litigation in the Civil Court. By reason of Article 45 of the Articles of Association of the Transferee Company, the block of 8, 61, 918 equity shares would have to be recorded in the name of the executor of the estate of Hemendra Prasad Barooah and the Transferee Company has recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herself. Such disputes are not at all relevant in a proceeding for sanction of scheme u/s 391 and 394 of the Act. No meeting of the creditors is required to be held to approve the scheme, he submits. In support of his submissions, learned Senior Counsel for the petitioners has placed reliance on a number of decisions which will be referred to and discussed in the succeeding part of the judgment. He finally submits that the objection raised by the Objector may be rejected and the scheme as proposed may be sanctioned by the Court. Per-contra, Mr. J. Saha, learned Senior Counsel for the Objector submits that the Objector is battling mismanagement and oppression in the Transferee Company. Referring to the share holding of the Objector in the Transferee Company, he submits that it is most unfortunate that taking advantage of a family dispute between father and daughter, Objector is being targetted and sought to be made irrelevant in the affairs of the Transferee Company. He submits that initially a company petition was filed u/s 111A of the Act to divest the Objector from her joint share holding over the block of 8, 61, 918 shares. When the said company petition was dismissed, civil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise or arrangement is proposed between a company and its creditors or any class of them or between a company and its members or any class of them, the Court may, on the application of the company or 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 as the case may be, to be called, held and conducted in such manner as the Court directs. Sub-section (2) provides that if a majority in number representing three-fourth in value of the creditors, or class of creditors, or members, or class of members, as the case may be, present and voting either in person or, where proxies are allowed, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the Liquidator and contributories of the company. However, as per proviso to sub-section (2) of section 391, no order sanctionin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ither by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for matters enumerated therein, including allotment or appropriation by the Transferee Company of any shares etc. in that company, under the compromise or arrangement are to be allotted or appropriated by that company to or for any person. As per the first proviso, no compromise or arrangement proposed for the purpose of or in connection with a scheme for amalgamation of a company which is being wound up with any other company or companies shall be sanctioned by the Court, unless the Court has received a report from the Registrar of Companies that the affairs of the company have not been conducted in a manner prejudicial to the interest of its members or to public interest. Under section 394-A, when applications are filed under sections 391 and 394, the Court is required to give notice to the Central Govt. and shall take into consideration the representations, if any, made to it by the Central Govt. before passing any order under the said sections. In Hindustan Lever Employees Union Vs. Hindustan Lever Ltd. Ors., reported in 1995 Supp. (1) SCC 499, the Hon ble Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... By the aforesaid decision, the appeal was dismissed by the Apex Court. While deciding the aforesaid issue, the Apex Court examined the scope of interference by the Company Court in sanction proceeding. The Apex Court held that such a compromise as visualized in section 391 would also take in its sweep any scheme of amalgamation/merger of one company with another company. After thorough examination of the aforesaid provisions, the Apex Court held that on a conjoint reading of the relevant provisions of sections 391 and 393 of the Act, it becomes clear that the company Court which is called upon to sanction a scheme of amalgamation/merger has not merely to go by the ipse dixit of the majority of the shareholders or the creditors, who might have voted in favour of the scheme by requisite majority, but the Court has to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and that it does not violate any public policy. The Apex Court held as follows: - 28. This is implicit in the very concept of compromise or arrangement which is required to receive the imprimatur of a Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. 2. That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391, sub-section (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, sub-section (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 aspec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uoted market value. In the said judgment, it was observed that the Court will decline to sanction a scheme of merger if any tax fraud or any other illegality is involved. In Meehir H. Mafatlal (Supra), the Apex Court held that valuation of shares is a technical and complex problem which can be appropriately left to the consideration of experts in the field of accountancy. In Bengal Tea Industries Ltd. Ors. Vs. Union of India (Company Appeal No.418/1986 decided on 25.08.1987), a Division Bench of the Calcutta High Court held that in a scheme of amalgamation of two companies, it is not necessary in law to call for a meeting of the creditors and obtain their views on the scheme. Regarding objection raised by the Regional Director, Govt. of India that the exchange ratio of the shares between the Transferor Company and Transferee Company as provided in the scheme was unfair to the shareholders of the Transferor Company, the Calcutta High Court held that when no complaint was raised on behalf of the shareholders, Regional Director was not entitled to raise objection as to fairness or unfairness of a proposed exchange ratio of shares in an amalgamation of two companies which is a mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., reported in (2007) 7 SCC 753, the Hon ble Supreme Court referred to the decision in Miheer H. Mafatlal (Supra) and held that while the Court will not sit in appeal over the commercial wisdom of the shareholders of a company, it will certainly consider whether there is a genuine attempt to revive the company that has gone into liquidation and whether such revival is in public interest and conforms to commercial morality. It was clarified that the decision in Miheer H. Mafatlal (Supra), cannot be understood as standing in the way of the aforesaid interpretation of the jurisdiction of the Company Court in the above manner. In Chembra Orchard Produce Ltd. Ors. Vs. Regional Director of Company Affairs Anr., reported in AIR 2009 SC 1278, the Hon ble Supreme Court held that section 391 (1) is not a sign-post but a check-post whereat it is the duty of the Court to examine the genuineness and the bonafides of the scheme for itself. While conceding that a scheme sanctioned by majority will remain binding on a dissenting minority, even though they had not consented to such a scheme and to that extent absence of their consent will have no effect on the scheme, nonetheless, the Apex C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med to have become the staff and employees of the Transferee Company without any break or interruption in their service and on the terms and conditions of their employment not less favourable than those subsisting with reference to the Transferor Company as on the said date. The scheme has been made conditional upon consent of the Central Government as may be necessary under the law, approval by the requisite majority of the members/creditors of both the Companies and sanction of the High Court under sections 391 and 394 of the Act. The scheme, as presented before the Court, appears to be based on business/commercial conditions of the two Companies. The Transferee Company which is already an established company having substantial goodwill in the market seeks to consolidate its area of business by accretion of one more tea estate to its production base. The Transferor Company would also stand to benefit substantially by virtue of the amalgamation as it will have sufficient safeguard by virtue of economy of scale and would stand benefitted by an established management. Till this stage, the Court sees no hindrance or impediment in the sanction of the scheme. The only jarring cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any is ₹ 10,00,00,000.00 with 50,00,000 equity shares of ₹ 10.00 each. The issued, subscribed and paid up capital of the Transferor Company is ₹ 5,30,000.00 with 530 equity shares of ₹ 1,000.00 each fully paid up. On the other hand, the issued, subscribed and paid up capital of the Transferee Company is ₹ 3,10,00,000.00 with 31,00,000 equity share of ₹ 10.00 each fully paid up. As per statement made in the company petition, the excess of assets over liabilities in so far the Transferor Company is concerned is ₹ 13,27,60,585.00. On the other hand, the excess of assets over liabilities in respect of the Transferee Company is ₹ 49,80,70,597.00. As per the Auditors Report of the Transferor Company dated 11.08.2012, the accumulated loss of the company was more than 50% of its net worth though the Company had earned cash profit during the financial year under audit. As per the Directors Report also dated 11.08.2012 that was the first year of operation after it was taken over by the present management. Due to poor condition of the plant, the management had to sell all its produce of green tea leaf in the market. The present management h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the confidence of the Court. Nothing has been placed on record beyond what has been stated above. No material has been disclosed either in the petition or in the affidavits as to how the particular exchange ratio has been worked out. While from the stand point of the commercial strength of the two companies, the exchange ratio does not appear to be sound, the same can also be examined in the light of the recent litigation history of the Transferee Company, vis-a-vs the Objector. Before dwelling further on this aspect, it will be useful to keep in mind that both the Transferor Company and the Transferee Company are now under the same management with whom the Objector is locked in a series of legal battles. As per the pleaded case of the petitioners themselves, 87% of the shares of the Transferor Company are now owned by persons who are connected with the Transferee Company one way or the other with whom the Objector is at loggerheads. From the pleadings and the large volume of documents placed before the Court, the following facts could be culled out. At one point of time, Objector was a whole time Director of the Transferee Company. It appears that disputes, and differences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be maintained without any prejudice to the outcome of the two civil suits. In addition to the above cases, the parties are also involved in several other incidental litigations. It is in the backdrop of the above litigation history between the parties on the one hand and the financial condition of the Transferor Company vis-a-vis the Transferee Company on the other hand that the exchange ratio presented before the Court does not appear to be just and fair. A conjoint and careful reading of sections 391 and 394A of the Act would indicate that the Registrar of Companies as well as the Central Govt. have a role to play in the case of amalgamation or merger of two companies, more so when one of the companies to the amalgamation or merger had earlier sought for voluntary liquidation. Since it is a case of valuation of the shares of the two companies and the determination of the exchange ratio, keeping in mind that the Transferee Company is a public limited company and a listed company before the Bombay Stock Exchange, there cannot be any doubt that substantial public interest is involved in the above exercise. Since the Court has agreed in principle to sanction the scheme, b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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