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2016 (10) TMI 212 - RAJASTHAN HIGH COURT

2016 (10) TMI 212 - RAJASTHAN HIGH COURT - TMI - Scheme of arrangement between the Transferor company and the Transferee Company - shares swaping - Held that:- The recommendations of SR Batliboi & Co. LLP records that the share exchange ratio for the proposed equity share swap of Transferor company for the equity shares of the Transferee company could not be mathematically determined since the equity value of the Trasnferor company was NIL. Neither the valuation of the assets under transfer nor .....

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ransferor company to swap their shares for the shares of the Tranferor Company-a listed one-opens an exit to the minority shareholder of the Transferor Company who have been seeking an exit for about a decade. - There is also no allegation of the inadequacy of consideration for the transfer of the telecom assets of the transferor company constituted of each of ₹ 5/- face value being ₹ 27.65 crores shares and Indian Rupees equivalent of upto US $300 Million under the EOD subject t .....

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for transfer of business undertaking of the transferor company to the transferee company. The multiparty documents are confidential recording the rights and obligations of others alongwith the Transferor and Transferee companies. As such the transferor company is bound by the confidentiality obligations in the said agreements and they are even otherwise not required to be disclosed as part of the statutorily required disclosure of material facts under the proviso to Section 391(2) of the Act of .....

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uld consolidate the telecom wireless business of transferee company and with the transferor company as its shareholder to the extent it turns out after the Transferor Company's shareholders exercise their option to swap their shares in the transferor company for that of the transferee company, it would be to its benefits too. - The upshot of the aforesaid discussion is that the company petition for sanctioning the scheme of arrangement between the Transferor company and the Transferee Compan .....

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nd M/s. Aman Finvest Private Limited are rejected with costs of ₹ 1 lac payable to the Common Pool fund of the Official Liquidator within three months from today. - iv) The petition filed by the petitioner transferor company for sanctioning the scheme of arrangement being Exhibit-A is allowed and the scheme of arrangement is sanctioned. The scheme of arrangement shall be binding creditors and equity shareholders of both the Transferor and Transferee companies. - v) The petitioner t .....

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of licenses. - vii) The Official Liquidator shall be entitled to ₹ 50,000/- from the Transferor company towards miscellaneous expenses. - S.B. Company Petition No.13, 76/2016, S.B. Company Miscellaneous Application No.76, 124 /2016, , Miscellaneous Application No.17415/2016 (Inward), Miscellaneous Application No.16886/2016 (Inward), Miscellaneous Application No.16978/2016 (Inward) - Dated:- 30-9-2016 - Alok Sharma, J. Mr. P. Chidambram, Senior Advocate and Mr. Parag Tripathi, Senior A .....

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REPORTABLE This matter comes up on the second motion under Sections 391 to 394 of the Companies Act, 1956 (hereinafter the Act of 1956') read with Rule 57 of the Company (Court) Rules 1959 (hereinafter the Rules of 1959') seeking sanction of the scheme of arrangement between M/s. Sistema Shyam Teleservies Limited (hereinafter the Transferor Company') and M/s. Reliance Communication Limited (hereinafter the Transferee Company') and their respective shareholders and creditors for t .....

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tors for considering and approving the scheme of arrangement in issue. Vide order dated 29-1-2016 it was directed by this court that the meetings of shareholders and unsecured creditors be convened and held at its registered office on 18-3-2016 under the respective chairmen appointed therefor by the court. Meeting of the sole preference shareholders was dispensed with by the court on the basis of consent in writing filed before the court. Consequently the meetings as directed were held, the sche .....

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news papers Financial Express (English) Delhi Edition and Dainik Bhaskar (Hindi) Jaipur and Delhi Edition. Copies of notices published in news papers on 26-4-2016 have been placed before this court. The Transferor company was incorporated under the Act of 1956 on 20-4-1995 in the name of Telelink Network (India) Limited. The name was thereafter changed to Shyam Telelink Limited and amended certificate of Incorporation dated 3-4-1998 was issued by the Registrar of Company Delhi and Haryana. On 26 .....

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vice provider in the country. The scheme of arrangement approved by the shareholders and unsecured creditors of which sanction is sought provides for transfer and vesting of the "Transferred undertaking" defined therein (hereinafter the telecom business') from the Transferor Company to the Transferee Company on an ongoing concern basis subject to regulatory approvals. The consideration lies in the issue of 27.65 crors equity shares by the Transferee company to the Transferor Compan .....

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out by it with greater focus to encash the available opportunities in the said business areas. The rationale for the proposed scheme has been stated to be that the transfer of the telecom businesses will result in multiple benefits to the Transferor Company such as deleveraging its balance-sheet, reduction of debt and interest outgo thereon, creation of value for its shareholders aside of facilitating the telecom and wireless business of the Transferee Company in which the Transferee Company wou .....

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udent businessman point of view and not contrary to law (as the scheme is) it has been submitted that the scheme be sanctioned as prayed for. On notice, the Regional Director, North Western Region Ministry of corporate Affairs has filed two affidavits in opposition of the substance of the objections, the first on 17-5-2016 and the second on 14-7-2016 objecting to the sanction of the scheme. Interestingly the second affidavit in opposition has been filed subsequent to the reply filed by the Trans .....

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heme of arrangement is incomplete and should not be sanctioned for not having a fixed "appointed date" and instead providing that it would be the effective date. It was submitted that the effective date itself has been defined to mean opening of business hours of 7 th business day from the last date on which the pre- conditions specified in clause 18 of the scheme of arrangement are complied with. And resultantly with a fluid appointed date valuation of the telecom business of the tran .....

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equity by the Transferee Company to the Transferor Company. It would also have relevance to the share swap ratio for the equity shareholders of the transferor company who have an option under the scheme proferred to seek exit from the transferor company by opting for shares of transferee company, a listed entity. Mr. Rastogi further submitted that aside of the aforesaid, as the proposed swap ratio of the equity shares in the transferred company for the equity shares in the transferee company as .....

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e telecom assets is without requisite details of calculation on which valuation of telecom business assets of transferred company was made and therefore the entire scheme approved by the equity shareholders in the absence of the above "material facts" deserves to be rejected. Mr. Rastogi further submitted that the rights shares issued by the transferor company in the year 2011 were in contravention of the provisions of Section 67(3) of the Act of 1956. It was submitted that the office .....

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cie appears to have not complied with SEBI Regulations 2009" and hence the scheme ought to be examined by the SEBI and not be sanctioned prior thereto. Mr. Rastogi also emphatically pointed out that in clause 19.2 of the scheme it has been provided that in the event the scheme were not to be approved on or before 30-6-2016 it would become null and void, albeit subject to further Extension by the Board of Directors or their authorized representatives. In that context he submitted that the le .....

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and no valid steps required in law for extension of the term having taken, sanction of the scheme of arrangement ought not be granted by this court. Mr. Rastogi further submitted that the scheme of arrangement is also deserving of rejection for reason of suppression of material facts and documents as mandated under the proviso to Section 391(2) of the Act of 1956. It was submitted that "Earn Out Deed" (hereinafter the EOD') referred to in the scheme as the deed entered into betwee .....

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pany with the transferee company and its contents are thus material facts mandatorily required to be disclosed. It was pointed out that the importance of EOD is manifest from the fact that the Indian Rupees equivalent of upto approximately ₹ 1950 crores receivable thereunder constitutes the major portion of the consideration as the valuation of 276,5553,305 shares also to be allotted to the transferor company by the transferee company as other part of consideration at the face value of  .....

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tanding of the nature of the transfer of the telecom assets and position the aforesaid stake holders in the transferor company to negotiate a better share swap ratio of 11.5:1 than as offered in the scheme. The transferor company has therefore not approached the court with clean hands not having disclosed a material fact and hence the petition for sanction of the scheme be dismissed and as mandated by law-notwithstanding the fig leaf defence of the transferor company for the non disclosure of th .....

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the statutory prohibition of the sanction of the scheme obtains. It was submitted that the merger agreement "appears" to be a "relevant document" absence of which raises reasonable doubts over the bonafides of the Transferor Company. Mr. R.D. Rastogi, ASG relied on the judgment in case of Spice Communication Limited [(2011)165 Company Cases 334 (Delhi)] wherein the Delhi High court held that the words "material facts" in the proviso to Section 391(2) of the Act of .....

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all terms of the arrangement were conveyed to the shareholders and creditors of the company explaining this effect enable them to arrive at a proper decision for approving or rejecting the scheme. It was submitted that non furnishing of the terms of the EOD and MA to the shareholders and unsecured creditors of the transferor company vitiates the scheme, hence the scheme be rejected this petition on second motion be dismissed. Mr. R.D. Rastogi further submitted that in fact the approving resolut .....

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her submitted that the scheme of agreement provides for receipt of Indian Rupees equivalent of upto US $300 Million under the EOD directly to the General Reserve account of the transferor company, whereas as per generally accepted accounting principles such amount of profit accruing from the sale/ transfer of the telecom assets of the transferor company should go and reflect in the "profit and loss account" of transferor company. It was submitted that clause 11.1.2 of the scheme provid .....

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rce on the effective date of the scheme. Mr. R.D. Rastogi submitted that the question of securities premium account does not arise in the instant case as no part of the scheme talks about issuance of shares at a premium. He submitted that as the income accruing to the transferor company under the scheme of arrangement from the transfer of its telecom business undertaking is surplus, it has to be credited in the profit and loss account of General Reserve Account, as per standard 26 of the Account .....

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er to escape/ circumvent tax liability under cover of the court's sanction as would otherwise accrue to the Transferor Company in the event of excess of funds received by the transferor company pursuant to payments under the terms of the EOD were to be credited to its profit and loss account. It was submitted that as monies under the EOD to be received by the transferor company can be upto Indian Rupees equivalent of US $300 Million (1950 crores) in the ordinary course, on appropriation bein .....

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ion of a Chartered Accountant S.R. Goyal & Company, Ahmadabad buttressing the contention raised in the objection of the Regisional Director filed on 17-5-2016 and 14-7-2016. A further affidavit was then also filed, as directed by the court, by the Regional Director, North Western Region to justify the need of the opinion of the Chartered Accountant being filed at the stage of final hearing. Mr. Rastogi submitted that in the circumstances and reasons of objections set up the sanction of schem .....

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y to public interest. He submitted that this scheme should be rejected. Mr. P. Chidambram, and Mr. Parag Tripathi, Senior counsel appeared for the transferor company through the hearing of the petition, on different dates. Mr. P. Chidambram submitted that the objection to the sanction of the scheme for reason of a fixed appointed date not having been provided is misconceived and devoid of merit, inasmuch as no law so mandates. It was submitted that the scheme in issue in its definition clause st .....

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asised that there is nothing sacrosanct about a fixed appointed date or any legal necessity therefore for it to be spelt out definitively at a pre-condition for a valid scheme. An appointed date is only a date for identification of assets and liabilities that would be transferred and it can be any date-even an uncertain one in the future. The Sections 391 to 394 of the Act of 1956 which give to the company court is not limited except on the issue of statutory compliances, public interest and the .....

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23/2005 is quite irrelevant as all matters in respect thereto have came to a rest with the passing of the order dated 7-8-2015 in DB Special Appeal (Civil) No.9/2015 by the Division Bench of this court which has attained finality. A set of shareholders different from the appellants in DB Special (Civil) Appeal No.9/2015 did indeed file proceedings under Section 397- 398 of the Act of 1956 before the Company Law Board, New Delhi, but the said petition was withdrawn on 6-2-2016. In any event non l .....

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eme of arrangement or otherwise. The Transferor is the transferor company in its corporate capacity not its shareholders. It has been submitted that in any event upon the sanction of the scheme and upon the listing of new equity shares (defined in the scheme) allotted to the Transferor company by the Transferee company the "swap shareholders" will have the option to exchange their equity shares in the transferor company for shares of the transferee company in accordance with the approv .....

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according to ratio is unwarranted as it is a situation can arise only subsequent to sanction of the scheme and the exercise of options by the shareholders of the transferor company. It is only then the number of fractional entitlement would be available. The issue would then be addressed by the sub committee formed by the Board of Directors of the transferor company, which shall consolidate all fractional entitlements and distribute the proceeds thereof amongst the shareholders on a proportionat .....

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in any event undertakes before this court that any payments to the extent received under the EOD shall be in accordance with law and subject to all extant laws and compliant with all regulations. It was then submitted that the concerns of the Regional Director for the only preference equity shareholder is patronising as on the preference shareholders' own consent in writing, the scheme does not provide for any consideration to him. On the Regional Director's concerns with regard to thos .....

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of the provisions of the Act of 1956 submitted that the scheme does not seek to annul any alleged non compliance with the provisions of the Act of 1956 and as the transferor company, post sanction of the scheme, would be continuing in its corporate existence it and its directors if found responsible for the alleged contravention would accordingly be subject to any proceeding, if initiated in accordance with law by the ROC or any other statutory authority. It was also pointed out that the object .....

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on 6(1) of the Act of 1956, as also the notification dated 31-3-2014 issued by the Central Government in exercise of powers conferred under Section 4(1) of the Act of 1956. On the issue of the provisional balance sheet as on 31-3-2016 not being filed, it was submitted that company application No.13/2016 on the first motion was filed in January, 2016 for convening the meetings of the equity shareholders and unsecured creditors of the transferor company to approve with or without modification the .....

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herefrom in the scheme Mr. Chidambram submitted that the scheme of arrangement clearly provides for the transfer of the telecom business undertaking of the Transferor company which includes the assets set out in Part-I of Schedule-I of the scheme. The excluded assets have clearly been defined in the scheme in Part-3 of Schedule-I of the scheme. The undertaking being the "transferred undertaking" (telecom business) shall be transferred and vested in the transferee company along with int .....

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e Registrar of Companies with regard to reduction of share capital, Mr. Chidambram submitted that the objections are wholly unwarranted, as subsequent to exercise of the swap options by the equity shareholders of the Transferor Company as provided in clause 9.7 of the scheme the paid up equity share capital of the transferor company would be reduced by number of shares which stand exchanged for the equity shares of the transferor company. The resultant reduction in capital of the transferor comp .....

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of the transferor company shall continue in accordance with their existing plans, subject to any change or revision of such plans subsequent to the scheme becoming effective. All changes would be compliant with law and requisite statutory reportage would be done by the transferee company to the Telecommunication Regulatory Authority of India. Mr. P. Chidambram emphatically submitted that the share exchange ratio of eleven and half shares of the Transferor Company for one share of the Trasnferee .....

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to the shareholders of the Transferor company is unquestionably reasonable, just and fair. Further the said share swap ratio has been arrived at by an independent expert Chartered Accountant company and duly approved by an overwhelming majority of 99.88% of equity shareholders who and are in any event deemed to be vigilant businessmen will informed and capable of protecting their rights and interests. It was submitted that 99.88% equity shareholders were present with 99.99% in value at the cour .....

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ich warrants no interference by this court in the exercise of its supervisory powers under Section 391-394 of the Act of 1956. Mr. P. Chidambram further submitted that the Income Tax Department pursuant to communication of the scheme to it by the Regional Director has not furnished any comment on the scheme and thus in terms of Circular No.1/2014 dated 15-1-2014 under the hand of Deputy Director, Ministry of Corporate Affairs, Government of India, there is a presumption that the Income Tax Depar .....

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he scheme sanctioned and take proceedings qua any income tax liability arising therefrom, vis- a-vis the Transferor company which in turn would be free to respond as advised. It was submitted that this aspect should not therefore engage the court's attention while sanctioning the scheme. Besides, it was submitted that the objection of the Regional Director on this court is much do about nothing as clause 9.7 of the scheme categorically records that "such swap or exchange is not mandator .....

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er undefined) whose concerns have been articulated by the Regional Director, it was submitted that the scheme in issue is in fact beneficial specially to minority shareholders of the Transferor Company who could earlier not exit the Transferor company for lack of an exit option for reason of the shares of the Transferor Company not being listed on the Stock Exchange but can now do so opting for the swap of their shares in the transferor company, a listed company, with that of the transferee comp .....

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se of hearing. It was submitted that the telecom business undertaking is an asset of transferor company, for the transfer and vesting thereof in the Transferee company by way of a scheme of arrangement it is entitled to seek sanction of this court on fulfilling the statutorily prescribed procedure and conditions and satisfying the court that the scheme is fair, just and reasonable from the point of view of a prudent businessman. Material facts set out in the proviso to Section 391(2) of the Act .....

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ts are matters of pure contract inter-parties of Section 391(2) does not require nor can require disclosure of. The shareholders were aware both fo the EOD and the Merger Agreement which could well detailed in the explanatory statement to the notice under Section 391(b) but did not require disclosure thereof. It was understood that the EOD was a part of consideration for transfer of the telecom assets of the Transferor Company with contingent future, payments of Indian Rupees equivalent of US $3 .....

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65 crore shares with the face value of ₹ 5 in the transferee company and Indian Rupees equivalent of upto US $300 Million subject to the terms of EOD to be received by the transferor company, is inadequate. The share swap ratio for the swap of equity shares of Transferor company for transferee company shares could not be mathematically determined since the equity value of shares of the transferor company was estimated to be nil. The receipt of Indian Rupees equivalent of US $300 Million ha .....

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pany, long seeking to exit it, if now desirous, can convert their shareholding in the transferor company to that of the transferee company a listed company on BSE/ NSE on the share exchange ratio of 11.5:1. Mr. Tripathi further submitted that bonafides of transferor company are also apparent from the fact that while it could have implemented transaction embodied in the scheme in issue under Section 180 of the Companies Act, 2013 without the resort to the provision of sections 391-394 of the Act .....

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the court. It was submitted that the payment of Indian Rupees equivalent of upto US $300 Million under the EOD is subject to approval of DoT for contiguity and combined use of spectrum. This fact has been clearly set out in the valuation report prepared by S.R. Batliboi & Co. LLP part of the explanatory statement with the notice for the court convened meeting of the equity shareholders and unsecured creditors. The EOD and Merger Agreement (MA) have been disclosed in the scheme of arrangement .....

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pt confidential for commercial reasons. It was submitted that in any event payment of Indian Rupees equivalent of upto US $300 Million in terms of the EOD if at all affects only the shareholders of the transferee company who in fact have approved the scheme which would come for sanction before the Mumbai High Court, within whose jurisdiction the transferee company is situate. It was submitted that no question of diversion of Indian Rupees equivalent upto US $300 Million under the EOD can even re .....

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ted that there is thus no failure to disclose any relevant fact as required under the proviso to Section 391(2) of the Act of 1956. All statutorily mandated documents have been placed on record with the notices for the court convened meetings before the Regional Director, the ROC and the court by way of explanatory statement as required both under in accordance with Section 393(1)(a) and the proviso to Section 391(2) of the Act of 1956. With regard to the objection of the Regional Director to th .....

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finally made out, it would be adequately discharged by the Transferor company. As regards the objection of the Regional Director with regard to amount of CENVAT credit set out in the scheme not being reflected in the financial statements of the transferor company, it was submitted that CENVAT has been defined in the clause 1.1 of the scheme. This amount has also been set out as "balance with customs, excise and other authorities" in the annual account of the transferred company for the .....

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rred and vested in the transferee company. Only after such approvals the scheme shall become effective on filing the orders of the High Court, before the jurisdictional Registrar of Companies. With regard to allegation of the Regional Director that the transferor company has violated the provisions of Section 67(3) of the Act of 1956 with respect to rights issue made in the year 2011, it was submitted that the rights issue was pursuant to the letter of offer dated 3-2-2011 and allotment thereon .....

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prospectus or form of application relating to shares in the company whether the existing shareholders will or will not have the right to renounce in favour of other persons. Referring to Section 64 of the Act of 1956 it was submitted that the aforesaid provision inter alia provides that where a company allots or agrees to allot any shares in the company, with a view to all or any of those shares being offered for sale to the public, any document by which the offer is made, shall, for all purpos .....

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56 were not applicable to the rights issue. It was submitted that in this view of the matter there is no violation of any provision of the Act of 1956 as alleged by the Regional Director. Without prejudice to the above contention, it was submitted that in the event of a violation of a provision of the Act of 1956, the Regional Director could have inovked and still can, law permitting, proceed thereunder against the Transferor Company and its directors subject to their all possible defences ther .....

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encapsulated in the arguments urged by Mr. R.D. Rastogi, ASG can be categorised in three parts. Part-I is broadly with regard to (i) no specific appointed date being given out, (ii) alleged incomplete valuation report, (iii) failure of the scheme to provide for treatment of fractional shares,(iv) alleged illegality in the issue of rights shares by the Transferor Company in the year 2011, (v) the Board of Directors at its meeting of 30-10-2015 could not have considered the EOD and the Merger Agre .....

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tailing a statutorily mandated rejection of the scheme in terms of proviso to Section 391(2) of the Act of 1956, and Part-III of the objections to the scheme pertains to the alleged evasion of tax and public detriment in view of the provisions in the scheme with regard to the treatment of the amount upto Indian Rupees equivalent of US $300 Million receivable under the EOD being lodged in the general reserve account of the Transferor company when as per the alleged extant generally accepted accou .....

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y which in fact necessitates it. The Madras High Court in the case of Equitas Finance Limited [Company Petition No.119/2016] decided on 6-6-2016 has held that where, in the nature of arrangement encapsulated in the scheme approved by the statutory majority of equity shareholders and creditors of the company, it is not feasible to provide for a fixed appointed date, but equate it with the effective date itself dependent on requisite regulatory approvals mandated in law for the business of the pos .....

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s of the Transferor company would be only transferred and vested in the Transferee company as an ongoing concern subsequent to the sanction by the court followed by multiple regulatory approvals which have been set out in clause 18 of the scheme. In the circumstances, it is quite obvious that the scheme has not provided for a fixed appointed date but for one equated to the effective date as defined in the scheme. Hence, the objection of the Regional Director to the sanction of the scheme on this .....

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Transferor company choosing if at all to exercise their option after being duly notified within the time set out the scheme by the transferor company subsequent to allotment of 27.65 crore new equity shares being issued by the transferee company as part of the consideration for transfer of the telecom business to it. Mr. P. Chidambram further submitted on instructions that his statement may also be recorded that at that the Board of Directors of the Transferor company will constitute a Committee .....

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proportionate basis. I am also of the considered view that the belated objections qua that valuation report relating to the transfer allegedly being incomplete and hence in the teeth of Section 393(1)(a) of the Act of 1956 is without merit. The scheme of arrangement as approved by the shareholders and unsecured creditors is supported by a detailed valuation report prepared by a reputed Chartered Accountant firm S.R. Batliboi & Co. LLP valuing the transferred undertaking/ telecom business of .....

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ned meetings. The valuation report on which the consideration for the transfer of the telecom business has been arrived at has been approved by 99.88 % shareholders and 99.618% unsecured creditors at the court convened meetings. There is thus no force in the aforesaid objection. It is rejected. As far as the objection to sanction of the scheme for reason it having expired by afflux of time under clause 19.2 thereto, (on 30- 6-2016), I am of the considered view that the objection is vacuous, over .....

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thorised signatory of the transferee company, whereunder with reference to clause 19.2 of the scheme the validity of the scheme has been extended upto 30-9- 2016. Besides, I am of the considered view that clause 19.2 of the scheme between two corporate entities duly approved by their shareholders is purely contractual. Thereunder the contracting parties to the scheme of arrangement have an inexhaustible mutual right to extend the currency/ validity of the date of the scheme before the expiry of .....

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meeting on 30-10-2015 is absolutely misplaced and based on an apparent misreading of the said resolution. The Board resolution dated 30-10-2015 does not state that a signed copy of the EOD and the Merger Agreement was before it. It merely approved the merger agreement and EOD amongst other documents/ deeds and authorised Mr. Sergey Savchenko, whole time director (designated as CEO of the Transferor company) to inter alia sign the documents referred to in the resolution including the EOD and the .....

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equirement) Regulations, 2009 (hereinafter 'the Regulations 2009'). I am of the considered view that contention is of little relevance for the consideration of sanction of the scheme by this Court. For one, the transferor company would continue in its corporate existence in the event of sanction of the scheme and if a purported violation of statute obtains against it open to action by the statutory authority, the said authority is always free to take legally permissible proceeding agains .....

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ion which they fancying to be "fair" (the two minority shareholders have also filed objections to the sanction of the scheme which would be addressed later in this judgment). It has been stated as a fact by Mr. P. Chidambram without being contradicted, that the rights issue of Transferor company was pursuant to letter of offer dated 3-2-2011 and allotment made on 25-3-2011 on which date itself reports of allotment report was filed with the the Ministry of Corporate Affairs on 25-3-2011 .....

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us or a form of application relating to shares in the company, whether an applicant for shares will or will not have the right to renounce in favour of any person. Section 64 of the Act of 1956 provides that where a company inter alia allots or agrees to allot any shares of the company with a view to all or any of those shares being offered for sale to the public, any document by which the offer for sale is made shall, for all purposes, be deemed to be a prospectus issued by the company. Thus Mr .....

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e considered view that in any event for considering the sanction of the scheme of arrangement within the supervisory jurisdiction of this Court, it is not required that the objection with regard to alleged non-compliance with Section 67(3) of the Act of 1956 in 2011 needs to be adjudicated for the reason that the ROC would be free to pursue the Transferor company on this count if so advised with the transferee company having all rights to set up its defences thereto. Objections Part II With rega .....

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of 1956 to which an attempt was also made to relate. The two sections reads as under:- SECTION 391(2)-PROVISO "Provided that no order sanctioning any compromise or arrangement shall be made by the Tribunal unless the Tribunal is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the Tribunal by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the .....

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also a statement setting forth the terms of the compromise or arrangement and explaining its effect, and in particular, stating any material interests of the Directors, Managing Director, or manager of the company, whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on those interests, of the compromise or arrangement, if, and in so far as, it is different from the effect on the like interests of other persons; and What would constitute mater .....

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of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under Section 235 to 251. "And thereafter" the said words are again immediately followed by the words "and the like". No doubt the words "such as" have been interpreted by the Apex Court in several decided cases as being illustrative in nature and so does the legal position obtain. However a situation where the word .....

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ort of the accounts of the company and the pendency of any investigation proceedings under Section 235 to 251 of the Act of 1956. I am of the considered view that the immutable obligation to disclose the material facts relating to the affairs of the company is not at large, being limited to issue of the integrity of the Transferor company as would reflect from its finances and accounts being statutorily compliant and the absence of any investigations actual, incipient or even possible in regard .....

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etation of statutes. In the case of Royal Hatcheries (P) Limited Vs. State of A.P. [(1994) Supp. (1) SCC 429] the Apex Court has construed the words "livestock, that is to say all domestic animals such oxen, buffaloes, goats, sheeps, horses etc." in clause (xvi) of the Rule 5(2) of the Andhrapradesh General Sales Tax Rules. It was held equating words "that is to say" to "such as" that such words were meant to be illustrative and not exhaustive, yet when followed by .....

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eferrring illustratively to domestic animals construed as a term of limitation as warranted by the context. In coming to the aforesaid conclusion the Apex Court also invoked the rule of construction that no construction of a provision of law should be adopted which would render some words therein nugatory and superfluous. The consideration of the proviso to Section 391 (2) of the Act of 1956 did in some measure come up before the Apex Court in the case of Sesa Industries Ltd. Vs. Kirshna Bajaj [ .....

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ould have been the foundation for an investigation under Section 235 and 231 of the Act of 1956. Two aspects are thus apparent from the Court's holding i.e. (i) Statutory proceedings, such as an inspection, underway with potential to entail investigation under Section 235 to 251 of the Act of 1956 should be disclosed when a scheme of arrangement under Section 391 to 394 of the Act of 1956 is entered into between the concerned stake holders of the company in question and the sanction of the c .....

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ly was not taken for the unarticulated reason of the words "and the like" bearing connotation of limitation as also for the potential of all manner of objections otherwise being maintainable to oppose sanction of scheme of arrangement etc. commercial decisions approved by the statutory majority of stake holders in the company at the court convened meetings. I am of the considered view that the prohibition on the sanctioning of the scheme of arrangement, etc. by the court would arise on .....

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he affairs of the company particularly commercial matters with multiplicity of parties unrelated to the scheme and confidentiality issues cannot entail the rejection of the scheme. The question that remains is whether in the instant case the Transferor company is in contravention of its obligation to disclose the material facts, as has been alleged. To answer the question what is required to be ascertained is whether the non disclosure of the contents of the EOD and Merger agreement both dated 2 .....

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by an overwhelming majaority of equity shareholders and creditors and debenture holders of the financial institution have supported the scheme and had not complained of any lack of notice of the scheme it would not be right to hold that the explanatory statement was not proper or that the resolutions at the court convened meetings not legally passed. Indeed either the EOD and MA were not put before the shareholders and unsecured creditors, this court and even the Regional Director, despite his .....

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anies. Defence of confidentiality of the two agreements has been set up by the Transferor company as the reason for non disclosure, aside of contending that contents of the two agreements do not constitute "material facts" within the words as occurring in the proviso to Section 391(2) of the Act of 1956 for the reason that they do not relate either to financial position of the company, to the latest auditor's report of its accounts or have even a remote bearing on the issue of pend .....

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telecom business of Transferor company to Transferee company. The said agreements are stated to include commercial aspects relating to the intricacies of the manner of doing telecom business by the Transferor company and the Transferee company post the vesting and transfer of the telecom business visualised under the scheme. Aside of the aforesaid, there is substance in the submission of Mr. P. Chidambram that the Transferor company has not filed the petition for sanction of the EOD/ Merger agre .....

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the above reasons disclosure of the EOD and Merger agreement both dated 2-11-2015 was not "material facts" within the scope of the proviso to Section 391(2) of the Act of 1956. The objections of the Regional Director in this regard as emphatically advanced by Mr. Rastogi ASG are therefore liable to be rejected. They are so. Part-III- Objections of Regional Director With regard to the allegation of the Regional Director that the scheme is a misuse of the process of the company court un .....

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lities which have been transferred pursuant to the scheme) over the value of consideration received by transferor company would be appropriated, to begin with the securities premium account and then the general reserves and only subsequent to appropriations aforesaid it would be further adjusted against the statement of profit and loss of the transferor company. But immediately following the proposed treatment of money received as consideration for the transfer of the telecom business, clause 11 .....

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d by Mr. P. Chidambram that the sanction of the scheme by the court does not visualise any determination on the manner of appropriation of the amounts to be received by the transferor company to the extent of Indian Rupees equivalent upto US $300 Million. Mr. P. Chidambram categorically submitted that the amounts received by the transferor company under the EOD would be subject to the provisions of the Income Tax Act then obtaining and the Company would be liable to pay due tax determined/ asses .....

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ded that while responding, to the notice on the second motion under sections 391 to 394 of the Act of 1956 for sanction of the scheme, on behalf of the Central Government, the Regional Director concerned shall invite specific comments from the Income Tax Department before filing his response to the court and in the event of no response emanating from the Income Tax Department it may be presumed that the Income Tax Department has no objection to the sanction of the scheme proposed under sections .....

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n dispute in the instant case that despite information of the petition on the second motion having been sent to the Income Tax Department, no response was forthcoming therefrom and this should have in the ordinary course led to the presumption that the Income Tax Department had no objection to the scheme of arrangement of which sanction is sought. Yet oddly the Regional Director has vociferously pressed the objection to the scheme being sanctioned alleging that evasion of tax of upto ₹ 690 .....

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generally accepted accounting principles, be rejected. That objection based on alleged evasion of tax in the manner alleged however is a non sequitur in view of clause 9.7 of the scheme itself providing that in the alternative moneys received from the Transfer of the telecom business to the Transferee company would be subject to all extant laws at the relevant time. And inevitably that would also include extant Income Tax Laws. Mr. P. Chidambram, Senior Advocate, appearing for the Transferor Com .....

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eme sanctioned by the court could affect the income tax liabilities of the company on any income generated from the transaction under the scheme sanctioned by the court. It was held that the jurisdiction of all statutory authorities remains operable in respect of transaction under a sanctioned scheme. For clarification in the facts of the case at hand I would thus direct that in respect of all consideration including under the EOD or otherwise in the hands of the transferor company against the t .....

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thorities under the Income Tax Act, 1961. Consequently, I am of the view that the objection in issue raised by the Regional Director is liable to be rejected with the caveat that the scheme sanctioned by the court would not foreclose the jurisdiction of the Income Tax Authorities qua the money received by the Transferor company under the EOD or otherwise and the Income Tax Department at the relevant time would be free to invoke its jurisdiction and take steps permissible in law to assess due tax .....

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port on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251 and the like" in the proviso to Section 391(2) of the Act of 1956 would entail redundancy to the words "and the like". Beside of the above, it is indeed true that in terms of the judgments in the case of Integrated finance Company Ltd. (supra) and Mihir H. Mafatlal (supra) relied upon by Mr. R.D. Rastogi the court does not act as a rubber stamp wh .....

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ctive and found it to be fully compliant with the mandatory requirements of law and the enunctiations of Apex Court, on the subject as also founded on the best interests of the shareholders and unsecured creditors acting a la prudent businessmen who have approved the scheme. In respect of the reliance placed by Mr. R.D. Rastogi on the case of Uma Enterprises (supra) it would suffice to state that the rejection of the scheme in the said case was based on a finding of fact from the record of the c .....

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ent of upto US $ 300 Million under the EOD being provided for being lodged in the general reserve fund of the company and not the profit and loss account. The ground agitated on the basis of clause 11.1.2 overlooks the later part thereof which provides that the "the treatment will be given as per the applicable law in force on the Effective Date of the Scheme". That would indisputably include the Income Tax Laws. Further this order has made the monies to the extent received under the E .....

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commonality of directors i.e. Anil Jindal and Monika Jindal. The fundamental grouse of the aforesaid shareholders against the scheme lies in the transferor company having allegedly failed to adhere to the directions of this court under its order dated 8-5-2006 in SB Company Petition No.23/2005 that an exit option be provided to the minority shareholders in terms of clause 3.7 of the scheme of merger between Shyam Telecom Limited and the Transferor company as approved by the court. It is alleged .....

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inority shareholders by offering an abysmally poor share swap ratio for the shares in the transferee company. The objectors aforesaid pray that the transferor company therefore be directed to acquire the shareholding of applicant minority shareholders in terms of Section 395 of the Act of 1956 on a "fair price" in the context of the valuations of the shares of the transferor company at the time the exit option ought to have been granted and appropriate directions be issued that the sha .....

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ourt convened meeting of equity shareholders with a value of 99.99% of the shareholding have approved the scheme. It was submitted that vide order dated 8-5-2006 in SB company petition No.23/2005 a scheme of arrangement inter alia between the transferor company and one Shyam Telecom company was sanctioned with a provision relating to the listing of the shares of the transferor company. The condition was not in mandatory form nor it could be as listing of shares is subject to regulatory provision .....

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in appeal was affirmed by the Division Bench of this Court in DB Special Appeal (civil) No.9/2015 vide order dated 7-8-2015. The entire dispute relating to the listing of shares of the transferor company and for otherwise giving an exit option to minority shareholders at the price of their choosing stood concluded and the same cannot be resuscitated in the present petition by a sleight of hand. It was submitted that the scheme in issue, for transfer of the telecom business of the transferor com .....

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eror Company provides the very exit option the minority shareholders such as the applicants before this court seek, only that removed from the nil value of the equity shares in the Transferor Company, its shareholders are being offered shares of the Transferee Company listed on various Stock Exchanges. The disappointment, with the share swap ratio, removed from the reality of the condition of the Transferor Company reflected in the valuation report of the expert Chartered Accountant S.R. Batlibo .....

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t has been falsely stated that the Company's representatives attended the court convened meeting and objected to the scheme or to the share swap ratio. Further the judgment of this court on 9-1- 2015 in SB Company Application No.45/2012 and 7-8-2015 in DB Special Appeal (civil) No.9/2015 were concealed evidencing that the application has not been moved bonafide and with clean hands. With regard to the objections of M/s. Aman Finvest Private Limited, it was pointed out that in fact its direct .....

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Jindal Securities Private Limited and Aman Finvest Private Limited are not bonafide but only searching and seeking to arm twist the transferor company after having failed in the earlier round of litigation on the same issue as agitated herein by the minority shareholders ending with the judgment of the Division Bench of this Court on 7-8-2015 in DB Special Appeal (civil) No.9/2015. I am of the considered view that the purported right of the minority shareholders to be offered an exit option at .....

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ebt of the applicant therein to an extent of ₹ 1,84,65,459/- with interest @ 6% p.a. under the judgment and decree dated 10-2-2016 in Suit (No.44/2013 passed by Civil Judge (Junior Division) Gurgaon district court Haryana) for damages and recovery against the transferor company for the applicant's unlawful removal from service, Mr. Gunjan Pathak submitted that as a decree holder the applicant was a creditor of the transferor company within the meaning of Section 390(c) of the Act of 19 .....

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at SB Company Petition No.13/2016 was filed on the first motion by the Transferor company on 20-1-2016 and list of unsecured creditor as of 31-12-2015 annexed thereto, if time antecedent to the judgment and decree dated 10-2-2016. And in any event the applicant claiming to be an unsecured creditor could have attended the court convened meeting of the unsecured creditors pursuant to the court directed public notice dated 18-2- 2016. That was not done. Further even if the decreetal amount of ͅ .....

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seek adjudication of his claim in the present proceedings. In the case of Vikrant Tyres Limited [ILR 2003 Karnataka 3885] the Karnataka High court has held that even non issue of notice to a creditor whose debt is disputed for one or the other reason would not vitiate the creditors meeting convened by the court particularly where the omission would be of no consequence in the context of the overall extent of the debt of the company in proportion to the debt of such creditor and where the requis .....

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t was held in the aforesaid judgment, relying on the judgment of Bombay High Court in the case of Mayfair Limited, in re and Zodiac clothing Co. Ltd. [(2004)122 Company Cases 748] that objections in a petition for sanction of scheme under Sections 391 to 394 of the Act of 1956 cannot be used as a tool in the hands of creditor to recover the debt disputed by the company or coerce it into paying the said amount. It was further submitted by Mr. Tripathi that even with the scheme being sanctioned, t .....

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sidered view that on arguments advanced by counsel for the parties on the objection to the sanction of the scheme, the objections of Shrinivasraghvan Seshadri are liable to be rejected. They are so rejected. Similarly another set of objections has been filed by Manisha Tele Sanchar Private Limited seeking to bring to the notice of the court the alleged false declaration made by the petitioner transferor company as to pendency of legal proceedings. It was submitted that under clause 8.1 of the sc .....

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fringement of its purported trade mark, passing off, damages and rendition of account and a counter claim thereagainst by the applicant objector for grant of permanent injunction and restraining the transferor company from directly or indirectly dealing in any manner with look alike telecommunication products of the applicant objector has been suppressed and not disclosed. It was submitted that the applicant objector has also written to the Government of India, Ministry of Communication and IT d .....

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t to national security. Similar complaint has been made to the Ministry of Home Affairs, Internal Security Division-I under letter dated 24-8-2015 and 23- 2-2016. It was submitted that in the context of the false declaration qua clause 8 of the scheme of arrangement and complaints against the transferor company, the scheme not be sanctioned but be rejected. Replying to the objections aforesaid, Mr. Parag Tripathi, submitted that the application is wholly misconceived, based on a blatant and misc .....

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he scheme. The said clause does not provide for disclosure of any legal proceeding against the transferor company with reference to which the entire objection has been premised. Clause 8.1 of the scheme does not state in any manner or form that there are no legal proceedings pending against the transferor company. No false declaration with reference to clause 8 of the scheme has thus been made. It was submitted that the applicant/ objector has all of a ₹ 25 lacs claim for damages in the al .....

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the objections filed by Manisha Tele Sanchar Limited are untenable as they are on a patent misreading of clause 8.1 of the scheme on which they are premised. It is not the case of the applicant objector that any legal proceedings are pending with regard to the telecom business of the Transferor company which is to be transferred and vested in the Transferee company under the scheme. Legal proceeding for whatever their worth against the Transferor company in a matter other than telecom business t .....

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notice of the court convened meeting of unsecured creditors but was deliberately left out, entailing a vitiation of the direction of this court to convene a meeting of all secured creditors and vitiating the approval of the scheme by the unsecured creditors at the court convened meeting. For his far fetched contention, Mr. Gunjan Pathak invoked section 390(c) of the Act of 1956, which only provides that filing of a suit for recovery of money by an unsecured creditor leading to a decree in his fa .....

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to one who holds a demand which is certain and liquidated. In the context of Sections 391 of the Act of 1956, I am inclined to ascribe to the restricted meaning to the word creditor and exclude therefrom claims disputed, unadjudicated and uncertain or unliquidated. Such a construction of the word "creditor" in Section 391 of the Act of 1956 is necessary to advance the object of Sections 391 to 394 to promote business through restructuring and arrangements dictated by dynamic market for .....

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f a scheme cannot be an impediment by itself to the sanction. For the multiple reasons aforesaid each of which suffices for the rejection of the objections of Manisha Tele Sanchar Limited, its objections are dismissed. This court in the case of Uma Enterprises Limited, SB Company Petition No.14/2012 and other connected matters, vide order dated 12-2-2016 held as under:- "The jurisdiction of a company court in sanctioning a scheme of arrangement by way of amalgamation or de- merger is well d .....

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at however is not the end of the matter or the complete statement of law. For it is equally well settled that the sanction of the court under sections 391(2) 394 of the Act of 1956 is not to be mechanically granted on the mere askance as if the court were a mere rubber stamp. The company court has to wisely exercise its discretionary jurisdiction vested in it to sanction the scheme, having regard to various aspects such as considering the background and material facts of the case, determining th .....

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meters that the objections to the sanction of scheme by the Regional Director have to be considered." In the case of Hindustan Lever Employees Union Vs. Hindustan Lever Limited [(1995)S SCC 499], a three judge bench of the Apex court held that a company court does not exercise appellate jurisdiction over a scheme, and its jurisdiction is limited to ascertaining fairness, justness and reasonableness of the scheme and to ensuring that neither any law has been violated or public interest compr .....

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ng the scheme, of which sanction is sought under sections 391 to 394 of the Act of 1956 will not ordinarily interfere with the corporate decision of a company approved by its shareholders and creditors in court convened meetings unless it can be shown that the scheme is not fair, just and reasonable or that it is in contravention of statutory provisions and/ or public interest. From the facts on record it is evident that the scheme of transfer of which sanction is sought entails transfer and ves .....

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of such undertaking, of the whole or substantially the whole of any such undertaking. Yet that was not done in the instant case and instead the scheme of arrangement was prepared and proceedings taken under Sections 391 to 394 of the Act of 1956 for the transfer and vesting of the telecom business undertaking of the Transferor Company, whereunder the views and observations of the equity shareholders, unsecured creditors and statutory authorities i.e. Regional Director, ROC and Income Tax Departm .....

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e. The recommendations of SR Batliboi & Co. LLP records that the share exchange ratio for the proposed equity share swap of Transferor company for the equity shares of the Transferee company could not be mathematically determined since the equity value of the Trasnferor company was NIL. Neither the valuation of the assets under transfer nor the share swap ratio was doubted by the shareholders and unsecured creditors or any question raised inter alia about the EOD and MA both disclosed in the .....

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ompany who have been seeking an exit for about a decade. There is also no allegation of the inadequacy of consideration for the transfer of the telecom assets of the transferor company constituted of each of ₹ 5/- face value being ₹ 27.65 crores shares and Indian Rupees equivalent of upto US $300 Million under the EOD subject to its terms. The payment of Indian Rupees equivalent of upto US $300 Million under the EOD is subject to approval of DoT for contiguity and combined use of spe .....

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nd obligations of others alongwith the Transferor and Transferee companies. As such the transferor company is bound by the confidentiality obligations in the said agreements and they are even otherwise not required to be disclosed as part of the statutorily required disclosure of material facts under the proviso to Section 391(2) of the Act of 1956 as held hereinabove. It is important to note that the bonafides of the scheme of arrangement in issue have not at all been questioned and it has not .....

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