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2016 (2) TMI 317 - PUNJAB AND HARYANA HIGH COURT

2016 (2) TMI 317 - PUNJAB AND HARYANA HIGH COURT - TMI - Seeking approval of a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956 - learned Single Judge dismissed the petition - Held that:- It is on account of error that the learned Judge also observed that after implementation of the first part of the scheme, the shareholding pattern, the business and the profits etc. of the transferor and transferee companies will undergo change and that those figures and particulars ar .....

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rs and the Court upon implementation of each of the components. The consequence of each of the components is viewed by the stakeholders not independently but together with the other components while deciding whether or not to approve the scheme.

Company Appeal No. 52 of 2015 filed by the Demerged Companies and the Resulting Company respectively is allowed and the scheme is sanctioned as proposed. - Petitioners-appellants are directed to file a copy of this order along with a copy of t .....

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e Judge dismissing the appellants' petition seeking approval of a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956 (hereinafter referred to as 'the Act'). 2. The appellants are (i) Q.H.Talbros Ltd. (ii) Talwar Steering & Suspension Limited. (iii) Talbros International Ltd. (iv) AAB Enterprises Pvt. Ltd. and (v) Blaustern India Sales Pvt. Ltd. The scheme of arrangement was arrived at between the appellants and their respective shareholders and creditors. .....

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sanctioned by many courts under sections 391 and 394 of the Act. Our attention has not been invited to any authority to the contrary. 4. The preamble to the scheme states that it is in the interest of the shareholders, creditors and employees of each of the companies as it would result in enhancement of the shareholder's value enable re-organization of the business leading to operational efficiencies and synergies and facilitate the management of companies to vigorously pursue growth and exp .....

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to Demerged QHT. Demerger of auto component business would inter-alia result in the following benefits:- (a) The demerger will permit increased focus by QHT and TSSL on their respective businesses in order to better meet their respective customers' needs and priorities eliminating thereby any perceived conflict of interest among customers, develop their own network of alliances and talent models that are critical to their own success; and (b) TSSL with complete focus on auto component busine .....

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ase. (c) It would be advantageous to combine the activities and operations of Transferor Companies into a single Company for synergies, integration and the benefit of combined financial resources. This will be reflected in the profitability of the Transferee Company. (d) Amalgamation of the Transferor Companies with the Transferee Company will also provide an opportunity to leverage combined assets and build a stronger sustainable business. Specifically, the merger will enable optimal utilizatio .....

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irements and that the scheme has been approved by the shareholders and the creditors unanimously. By an order dated 05.12.2014, the Company Judge directed a meeting of the unsecured creditors of Appellant No.3 to be convened, dispensed with the meetings of the shareholders of the appellants, the unsecured creditors of appellant Nos. 3, 4 and 5 and of the secured creditors of appellant Nos. 1 and 3 and noted that there were no secured creditors of appellant Nos. 2, 4 and 5. The meeting as directe .....

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econd motion petition being Company Petition No. 29 of 2015 in which the Company Court by an order dated 03.03.2015 issued notices to the Regional Director and the Official Liquidator and directed publication of the notices of hearing in the newspapers and in the official gazette of the State of Haryana. It was also uploaded on the websites. The Regional Director and the Official Liquidator filed their affidavits/reports in which they did not raise any objection to the scheme and in fact support .....

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mpanies are involved in different arrangements as in the present case. Section 394 of the Act does not permit a part of the business of one company to be merged with another company and the merger of other companies with that company. Both the schemes, namely, for merger and demerger are independent and have no connection whatsoever with each other. The balance sheets, figures and the finances of the companies would be different. The shareholders may approve or disapprove anything but it is ulti .....

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t No.1 and that this first part is independent of the second part, namely, the merger of appellant Nos.3,4 and 5 with appellant No.1. If a composite scheme involving different companies with different objects is presented, it would not be possible for the Court to examine whether the object sought to be achieved by the first part in the scheme has, in fact, been achieved or not. After implementation of the first part of the scheme, the shareholding pattern, the business and the profits of the tr .....

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ree with the learned Judge. 8-9. Sections 391, 392 and 394 of the Companies Act, 1956 in so far as they are relevant read as under:- Section 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 .....

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on 643], 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: Provided that no order sanctioning any compromise or arrangement shall be made by the Court u .....

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ce compromises and arrangements. (1) Where a High Court makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company, it- (a) shall have power to supervise the carrying out of the compromise or arrangement; and (b) may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arr .....

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ect of which an order has been made before the commencement of this Act under section 153 of the Indian Companies Act, 1913, (7 of 1913) sanctioning a compromise or an arrangement. SECTION 394: Provisions for facilitating reconstruction and amalgamation of companies. (1) Where an application is made to the Court under section 391 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Court- (a) t .....

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e company"); the Court may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters:- (i) the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company; (ii) the allotment or appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which, under the compromise or arrangement, .....

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essary to secure that the reconstruction or amalgamation shall be fully and effectively carried out: Provided that no compromise or arrangement proposed for the purposes of, or in connection with, a scheme for the 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 Company Law Board, or the Registrar that the affairs of the company have not been conducted in a manner prejudicial .....

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roperty or liabilities, then, by virtue of the order, that property shall be transferred to and vest in, and those liabilities shall be transferred to and become the liabilities of, the transferee company; and in the case of any property, if the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect. (3) Within thirty days after the making of an order under this section every company in relation to which the order is made shall cause .....

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other than a company within the meaning of this Act; but" transferor company" includes any body corporate, whether a company within the meaning of this Act or not. Notice to be given to Central Government for applications under sections 391 and 394.' 10. The learned Judge with respect approached the matter on an erroneous basis. These were not independent schemes. The appellants have not proposed two independent schemes, one for de-merger of the 'Auto Component Division' of .....

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sible scheme. It is no body's case that the creditors or the shareholders thought otherwise. It is not as if they would have approved any one or more of the components independently. That was not the intention. 11. There is nothing illegal or unusual about a composite scheme. In fact, in most cases, the creditors and/or the shareholders agree only to the various elements in the scheme taken together and not independently. They may have come to a decision that the business interest of the tra .....

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for the financial health of the company. The same may also benefit the company on account of operational efficiencies. On the other hand in some cases, the share holders and the creditors may well be of the opinion that it would be in the interest of the company to have a multiple line of activities to safeguard itself against any adverse consequences in respect of one of them. These, however, are business decisions which must be left to the stakeholders of each of the companies. It is not for t .....

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into consideration the economies of scale and the viability or otherwise of continuing with two commercial/industrial activities. If they are of the opinion that the business prospects of company 'A' are better by restricting its line of business to manufacturing watches alone, this would involve a case of merger and demerger as is the case before us. The shareholders and the creditors of company 'B' may not agree to the merger unless and until company 'A' agrees to hive .....

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holders of the transferor company to be desirable being in the business interest of the transferee company/appellant No.1. They also apparently considered it necessary in the interest of the transferee company that the 'Auto Component Division' be demerged. Having opted for the composite scheme, it is obvious they considered it necessary that both the components operate simultaneously as a single arrangement. The agreement with the shareholders of the transferor company to the merger bei .....

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those relating to policy matters, management and financial aspects and legal issues. The schemes often require a consideration of various enactments and the adherence to various legal provisions not only under the Companies Act but also under other enactments. Financial aspects are not limited in their nature or in scope. Each component is studied and the resultant arrangement is arrived at after taking all of them into consideration. There are consequential acts to be performed as an integral p .....

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and restrict the choice of its members, creditors, debenture holders and other stakeholders. 15. Ms. Gandhi's reliance on a judgment of a learned Single Judge of Bombay High Court in Larsen & Toubro Ltd., In re [2004] 54 SCL 461 (Bom.) is well founded. The learned Judge held that the word 'arrangement' in Section 390(b) of the Act is an inclusive definition and contemplates all arrangements and not only reorganization of the share capital. This it was held is clear from the word .....

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cheme involved the amalgamation of PMP Auto Industries Ltd. in S.S.Miranda Ltd. and immediately thereafter S.S.Miranda Ltd. in Morarjee Goculdas Spinning and Weaving Co. Ltd. The objection was that the memorandum of association of the transferee company i.e. Morarjee Goculdas Spinning and Weaving Co. Ltd. did not permit it to carry on the business activities as carried out by the two transferor companies, namely, PMP Auto Industries Ltd. and S.S.Miranda Ltd. However, the scheme itself apart from .....

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he Memorandum of Association usurped the power of the Company Law Board. The learned Judge accepted the contention on behalf of the companies that sections 391 to 394 of the Act constitutes a complete code, the object of which was to eliminate frequent applications being made to the Court effectively in order to implement a scheme of amalgamation which the Court sanctions in the exercise of its powers under Section 394 of the Act. The learned Judge held as under:- In Maneckchowk and Ahmedabad Mf .....

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the court to sanction a scheme involving reduction and increase of share capital while exercising its powers under section 394 of the Act. The Gujarat High Court rejected this contention by holding that section 391 of the Companies Act was a complete code which provided for a scheme of reconstruction and amalgamation of companies which could conceivably include a reorganisation of the share capital of the company by consolidation of shares of different classes or by division of shares or by both .....

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rom this rule, the Gujarat High Court deduced (at page 854) : If section 391 were not to be treated as a complete code and if it is intended that various things that can be done by way of a scheme of compromise and arrangement, if they were to fall under different provisions of the Companies Act which prescribe certain procedure for doing the same and that procedure has to be gone through, it was not necessary to provide specifically that if the scheme of compromise and arrangement includes redu .....

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alteration of memorandum of association of a company is concerned. In fact, the reason why section 391 of the Act is to be treated as a complete code is postulated by the Gujarat High Court thus (at page 855) : If section 391 was subject to other provisions of the Act, every time the scheme of compromise and arrangement is put forth for the sanction of the Court, if it includes things for which specific provisions are made and that will have to be gone through before the scheme is sanctioned, i .....

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sanctioning of the scheme of compromise and arrangement. Therefore, it appears that the provisions contained in section 391 is a complete code. (emphasis supplied) 15. The decision of the Gujarat High Court in Manechchowh's case, [1970] 40 Comp Cas 819 was followed by this court in Vasant Investment Corporation Ltd. v. Official Liquidator, Colaba Land and Mill Co. Ltd. [1981] 51 Comp Cas 20. In this case the company was authorised by its memorandum to do business in buying and selling of lan .....

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f association. This contention was negatived by this court (per Mrs. Manohar J.) by pointing out that the scheme itself contemplated that the memorandum of association would be altered, if found necessary, by taking steps for amendment thereof. After referring with approval to the judgment of the Gujarat High Court in Maneckchowk's case, [1970] 40 Comp Cas 819 the learned judge went on to observe (at page 34 of 51 Comp Cas) : "Basically, the court is given wide powers under section 391 .....

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les of association of a company prescribed under other provisions of the Companies Act is not required to be followed before sanctioning a scheme involving such alterations. The whole purpose of section 391 is to reconstitute the company without the company being required to make a number of applications under the Companies Act for various alterations which may be required in its memorandum and articles of association for functioning as a reconstituted company under the scheme." (emphasis* .....

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panies Act or to follow other procedures prescribed for bringing about the changes requisite for effectively implementing the scheme which is sanctioned by the court. Not only is section 391 a complete code as held by the courts, but, in my view, it is intended to be in the nature of a "single window clearance" system to ensure that the parties are not put to avoidable, unnecessary and cumbersome procedure of making repeated applications to the court for various other alterations or ch .....

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ce of the scheme of amalgamation and that the judgment, therefore, cannot apply to cases involving two arrangements such as in the case before us of a merger and a demerger. The attempt to distinguish the judgment on this ground must fail. The judgment infact must apply with greater force to the case before us for the demerger and the mergers are part of one indivisible scheme and are not merely incidental to but are also connected with each other. None of them subsists without the other. On the .....

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section 394 of the Act does not permit a part of the business of the one company to be merged with another company and the merger of the other companies with that company. As we explained earlier the mergers and the demerger in the case before us are not independent schemes. They are part of a composite scheme of arrangement which falls within the ambit of Sections 391 and 394 of the Act. 20. As observed by the learned Judge, the balance sheets, figures and finances of the companies would indee .....

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t to be merged and demerged will not be available before the Court as well as for presentation before the members and the creditors of the companies in the meetings is incorrect. They are and in any event can be made available. None of the creditors or the shareholders has alleged that this information was not available. 22. The learned Judge observed that it would not be possible for the members or the creditors to know the status of the company after implementing the first part i.e. demerger o .....

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s knowing the status of the company after implementing only one of the components of this composite scheme namely demerger of 'Auto Component Division' cannot and does not arise. 23. It is on account of this error that the learned Judge also observed that after implementation of the first part of the scheme, the shareholding pattern, the business and the profits etc. of the transferor and transferee companies will undergo change and that those figures and particulars are required to be p .....

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ntation of each of the components. The consequence of each of the components is viewed by the stakeholders not independently but together with the other components while deciding whether or not to approve the scheme. 24. For the same reason we are also unable to agree with the observation that if a composite scheme involving different companies with different objects is presented, it would not be possible for the Court to examine whether the object sought to be achieved by the first part has inf .....

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