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2016 (5) TMI 594 - GUJARAT HIGH COURT

2016 (5) TMI 594 - GUJARAT HIGH COURT - TMI - Scheme of Arrangement in the nature of Demerger - Held that:- The observations made by the Regional Director, Ministry of Corporate Affairs do not survive. In fact, most of the observations are frivolous and unwarranted. This Court, therefore, arrives at the conclusion that the present Scheme of Arrangement is in the interest of its Shareholders and Creditors as well as in the public interest and the same deserves to be sanctioned. The Scheme is, acc .....

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n Paragraph 15(a) of the Company Petition No. 341 of 2015 for the Resulting Company viz. Zenitex Mill Private Limited are granted.The petitions are disposed, of accordingly. So far as the costs to be paid to the Central Government Standing Counsel are concerned, they are quantified at ₹ 7,500/per petition. The same may be paid to Mr.Devang Vyas, learned Assistant Solicitor General of India.

The Petitioner Companies are further directed to lodge a copy of this Order, the Schedule .....

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cally, along with INC–28 in addition to physical copy as per relevant provisions of the Act. - COMPANY PETITION NO. 340, 341 of 2015, COMPANY APPLICATION NO. 287, 288 of 2015 - Dated:- 3-5-2016 - SMT. ABHILASHA KUMARI, J. FOR THE PETITIONER : MR TUSHAR P HEMANI, ADVOCATE, MS VAIBHAVI K PARIKH, ADVOCATE FOR THE RESPONDENT : MR KSHITIJ AMIN FOR MR DEVANG VYAS, ADVOCATE COMMON ORAL ORDER 1. The above petitions have been filed by two Companies viz. Zenith Silk Mills Private Limited and Zenitex Mill .....

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learned advocate for the petitioner companies submitted that Zenith Silk Mills Private Limited, the Demerged Company, is a private limited company and is engaged in four different activities, namely, Knitting, Processing, Investment activities and Generation of Power using windmill. Zenitex Mill Private Limited, the Resulting Company is a newly incorporated company with an objective of processing of cloth on job work basis and generation of power using windmill. Since it is newly incorporated c .....

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eneration of Power by windmill. In order to grow beyond the obvious, Zenith Silk Mills Private Limited is aggressively pursuing a policy of expansion and diversification. It has proposed the present demerger of its Processing and Windmill Divisions into Zenitex Mill Private Limited. In order to achieve efficiency of operations and management and with the intent of realigning the business operations undertaken by the Demerged Company, the Demerged Company has determined to concentrate on and stre .....

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gether with the nature of risk and competition inherent in the different parts of the industry. Different management skills are required for each of the businesses in order to run them efficiently and successfully. The demerger will facilitate the Company with adequate liquidity, which will help in repayment of its liabilities and provide additional working capital for its core business activities. The demerger will facilitate more transparent benchmarking of the Companies with their peers in th .....

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the Demerged Company, the meetings of the Equity Shareholders, Secured Creditors and Unsecured Creditors were dispensed with, in view of the written consent letters from all its shareholders and creditors, approving the proposed Scheme and confirmation of the same by a certified Chartered Accountant, being placed on record. 5. In respect of the Resulting Company, it has been pointed out that vide the order dated 28th September, 2015, passed in Company Application No. 288 of 2015, filed by Zenite .....

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cture of Equity Share Capital of the Demerged Company is proposed. The proposed reduction is essentially consequential and is proposed as an integral part of the Scheme. The interests of the creditors of the Demerged Company are not in any way affected by such reduction. It has been submitted that the reduction of the Equity Share Capital does not involve either diminution of liability in respect of unpaid share capital or payment to any shareholder of any paidup share capital. Further it is als .....

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ubstantive petitions for the sanction of the Scheme were filed by both the Companies, which were admitted on 7th October, 2015. The notices for the hearing of the petitions were duly advertised in the newspapers being The Indian Express - Vadodara Edition on 20th October, 2015 and Gujarat Mitra - Surat Edition on 23rd October, 2015. The publication in the Government gazette was dispensed with, as directed in the said orders. Pursuant to the said publication in the newspapers, no objections were .....

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r Agarwal, the Regional Director, Ministry of Corporate Affairs, NorthWestern Region, whereby several observations are made. 9. The attention of this Court is drawn to the Additional Affidavit dated 21st April, 2016, filed by Shri Nirav Pareshbhai Jariwala, Director of the Demerged Company and the affidavit filed by Shri Rajesh Vasantlal Jariwala, Director of the Resulting Company, whereby all the above issues have been dealt with. This Court has heard submissions advanced by learned counsel app .....

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thus there is noncompliance of Rule 12(2) of the Companies (Registration Offices and Fees) Rules, 2014. In response to the said observation, it has been submitted that both the Companies have filed the relevant eform GNL-1 and the Acknowledgment for the same dated 18th March 2016 has been annexed as Annexure-I to the additional affidavit dated 21st April, 2016, filed by the respective Companies. This clarifies the position with regard to the compliance made by the Petitioner Companies. In view .....

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been observed that the Authorized Share Capital of the Demerged Company cannot be transferred to the Resulting Company in such a manner. This is the case of demerger and not amalgamation and hence there is only transfer of undertaking of the Demerged Company and that the Authorized Share Capital of the Demerged Company cannot be transferred under this Scheme. Therefore, according to the Regional Director, the Demerged Company does not have intention to comply with the provisions of Section 61, .....

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clearly reflects that there is transfer of two divisions of the Demerged Company to the Resulting Company. It was never the intention of the Demerged Company to transfer the entire Authorized Share Capital to the Resulting Company. As a matter of fact, as two divisions of the Demerged Company are getting transferred to the Resulting Company, which is mentioned in Clause 7 of the Scheme, there is consequential reduction in the Authorized Share Capital of the Demerged Company which has been speci .....

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with. It is submitted that in Clause 17.1(a) of the Scheme, it is clearly stated that the share capital of the Demerged Company shall get reduced to the extent of ₹ 58,50,000/pursuant to Sections 16, 31, 94 and 394 and other applicable provisions of the Act. It is explicit from the said Clause 17.1(a) of the Scheme that the Authorized Share Capital of the Demerged Company shall get reduced only to the extent of two Divisions that are getting demerged and being transferred to the Resulting .....

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at an inadvertent error has crept in the Clause 17.2(b) of the Scheme at Annexure C to the petition. Both the Companies undertake that the same shall be corrected and the said Clause 17.2(b) shall be amended and read as below: 17.2 AUTHORISED SHARE CAPITAL OF THE RESULTING COMPANY VIZ. ZMPL. (a) ….... (b) Consequently, upon Scheme being effective, Clause V of the Memorandum of Association of the Resulting Company viz. ZMPL (relating to authorized share capital) shall, without any further .....

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2(e) pertains to obtaining licenses, approvals and other permissions from the regulatory authority for the business of power generation. In response to the said observation, learned counsel for the Petitioner Companies submitted that the Demerged Company had obtained the requisite permissions and licenses to carry on the said activity. It is further submitted that Clause 4.6(ii) of the Scheme has defined Undertakings elaborately and has specifically included the transfer of all the existing perm .....

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rned authorities for implementation of the Scheme. It is further clarified that the Resulting Company shall undertake all the requisite procedures to obtain such licenses and permissions from the concerned regulatory authorities, therefore no directions are required in this regard. (vii) The next observation made by the Regional Director vide paragraph no.2(f) of the affidavit pertains to the address of the Registered Office of the Resulting Company. It has been observed by the Regional Director .....

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arified that the address of the Registered Office of the Resulting Company has been mentioned in the Scheme as well as in the petition which has been submitted to the Regional Director. It is further clarified that as the Resulting Company has not changed its Registered Office, therefore, the compliance of the provisions of Section 12(3) of the Companies Act, 2013 is not required. Hence, there is no violation of the same. As the Resulting Company has not changed the address of its Registered Off .....

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f the Registered Office of the Resulting Company. As the Resulting Company has not changed its Registered Office, compliance under Section 12(3) of the Companies Act, 2013 is not required and in view of the above, no directions are required to be issued. (viii) The next observation made by the Regional Director vide paragraph no. 2(g)(A) of the affidavit pertains to the noncompliance of various Accounting Standards by the Demerged Company as required under various Sections of the Companies Act, .....

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D Act, 2006. In response to the said observation, it has been submitted that this observation of the Regional Director does not have any bearing on the Scheme of Demerger and its implementation. The learned Counsel for the Petitioner Demerged Company has drawn this Court s attention to Paragraph 9 of the additional affidavit filed by the Demerged Company dated 21st April, 2016 in which a Chart has been inserted. Perusal of the said Chart makes it clear that the Petitioner Demerged Company has co .....

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rds, therefore, no directions are required to be issued. (ix) As per the next observation made by the Regional Director vide paragraph no. 2(g)(B) of the affidavit, the Petitioner Resulting Company has not stated rights, preferences and restrictions attached to shares issue by the company which leads to noncompliance of Section 211(1)/129(1) read with Schedule VI / III respectively of the Companies Act, 1956 / 2013 and part - I of the schedules. In response to the said observation, it has been s .....

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ing Company has prepared its Balance Sheet as prescribed under Schedule VI to the Companies Act, 1956, with specific and categorical disclosure as to Authorised, Issued, Subscribed and Paid up Capital, Face Value and Issue price. Having disclosed these details and having no other class of share capital, the Petitioner Resulting Company has duly complied with the provisions of the relevant Act and Rules read with Schedules. Though this information has clearly been stated in the Balance Sheet, it .....

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paragraph no. 2(h) of the affidavit that the statement of the Demerged Company in its Financial Statement as on 201213, 201314 and 201415 with respect to nonapplicability of the Accounting Standard- 17 regarding Segment reporting is a false statement, as the Demerged Company has stated in Paragraph 2 of the Scheme that it is engaged in four different activities namely Knitting, Processing, Investment Activities and Generation of Power using Windmill. Thus the same being contradictory to the sta .....

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fide belief that it is not subject to segment reporting. It has been further submitted that the Demerged Company has already shown various kind of source of income separately in its profit and loss account. Whereas the present petition is specifically for demerging the business of Processing of cloth on job work basis and Generation of Power using Windmill and hence the same is specifically mentioned in the Scheme at Paragraph Nos. 2 and 3. It has been further submitted that no false and mislead .....

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raph no. 2(i) of the affidavit, the figures mentioned in the Statement showing the details of assets and liabilities submitted by the Demerged Company to the Regional Director vide letter dated 16th February, 2016, and the Valuation Report are different and thus either of the two statements furnished regarding assets and liabilities to be transferred to the Resulting Company is a false statement. In response to the said observation, the learned counsel for the Demerged Company has drawn this Cou .....

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re the same and there is no contradiction in the said statements. It has been further clarified that there is no misstatement and the figures stated in both the financial statements are tallying with each other. In fact the Statement placed on record at Annexure B to the Affidavit filed by the Regional Director is incomplete and therefore the figures are not tallying. It is further clarified that the Statement in the Valuation Report at Annexure1 is the unit wise entire balance sheet as on 31/03 .....

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equired to be issued. (xii) Further, vide paragraph no. 2(j) of the affidavit it has been observed by the Regional Director that the working of the Share Exchange Ratio is grossly incorrect. In this respect, it has been submitted that the entire Valuation Report has been placed before the Regional Director. Had the said Valuation Report been perused properly, the objection would not have been raised. The Regional Director has, for the reasons best known to him, presumed that per share value of D .....

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jection is complete absurd, the relevant extract of the Valuation Report is reproduced herein below for the ready reference: 7.0 COMPUTATION OF ENTITLEMENT RATIO: On the basis of the Divisionwise certified balance sheet of ZSM as of 31.03.2013 submitted to us and on the basis of such other information/explanation and documents submitted to us, we have computed the divisionwise net asset values of ZSM as on 31.03.2013 as per the details given in Annexure - II. It will be observed that the ratio o .....

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nerating Units as shown in Annexure - I shall be transferred to resultant Company and the paid up value of ZSM s share capital shall be reduced by ₹ 42.95 (Rupees Forty Two Lacs Ninety Five Thousand only). The difference of ₹ 121.12 lakh (Rupees One Hundred and TwentyOne Lakhs and Twelve Thousand only) arising consequent to demerger has been adjusted in the Reserves of division of ZSM. In our opinion, in view of the above rationale and discussions, the entitlement ratio of 9 (Nine) e .....

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ement Ratio Bifurcating Value Per Share of Each Unit SAY 9 1 As can be seen from the above, the exchange ratio has been worked out properly. The Regional Director has compared the highlighted figures from the table which are absolutely incomparable. Net Assets Value of the Resulting Company cannot be divided by Shares of the Demerged Company to arrive at per share value. Moreover, the presumption that the per share value of Demerged Company is ₹ 10/is also not supported from the figures as .....

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has been further submitted that once the Directors and majority Shareholders have consented to the Share Exchange Ratio which has been worked out by a firm of Chartered Accountants who are experts in in the field of valuation then the observation by the Regional Director with respect to reasonableness of the Share Exchange Ratio deserves to be rejected. In any case, nothing has been placed on record to indicate that the Share Exchange Ratio suggested by the firm of Chartered Accountants and adop .....

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by this Court in the case of Arcoy Overseas (P.) Limited, In re. reported in [2006] 129 Company Cases 332 (Guj.). Reliance is also placed on the judgment dated 8th January, 2016 passed by this Court in the case of Olympic Laminates Private Limited in Company Petition No. 368 of 2015. (xiii) Considering the above facts and circumstances, this Court does not find that the Share Exchange Ratio is grossly incorrect, unjustified, arbitrary, unfair and against the interest of minority of the sharehold .....

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partment, inviting their objections, if any. Since the statutory period of 15 days, as envisaged by the relevant circular of the Ministry of Corporate Affairs, is over, it can be presumed that the Income Tax Department has no objection to the proposed Scheme of Arrangement. The Petitioner Companies have agreed to comply with the applicable provisions of the Income Tax Act, 1961 and Income Tax Rules, 1962. In view of the same, no further directions are required to be issued to the Petitioner Comp .....

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is Court and the submissions advanced during the course of hearing, this Court is satisfied that the observations made by the Regional Director, Ministry of Corporate Affairs do not survive. In fact, most of the observations are frivolous and unwarranted. This Court, therefore, arrives at the conclusion that the present Scheme of Arrangement is in the interest of its Shareholders and Creditors as well as in the public interest and the same deserves to be sanctioned. The Scheme is, accordingly, s .....

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