TMI Blog1987 (8) TMI 450X X X X Extracts X X X X X X X X Extracts X X X X ..... ed products. 2. Presently the appellant no. 1 is engaged in the business of cultivating, manufacturing and processing tea and manufacturing textiles. 3. Bengal Tea Fabrics Limited, the appellant no. 2 was incorporated on the 16th July 1983 under the Companies Act, 1956. The authorised share capital of the appellant no. 2 is ₹ 50 lakhs divided into 5,00,000 equity shares of ₹ 10/- each. The issued, subscribed and paid up capital of the appellant no. 2 is ₹ 20,00,000/- divided into 2,00,000 fully paid up equity shares of ₹ 10/- each. 4. The objects for which the appellant no. 2 was incorporated as appearing in its Memorandum of Association are, inter alia, (a) To carry on the business as traders, dealers, wholesalers , retailers, makers, designers, combers, scorers, scourers, spinners, weavers, finishers dyers and manufacturers of ready made garments, yarns and fabrics of wool, cotton jute, silk, rayon, nylon terylene and other natural, synthetic fabrics. (b) To own, purchase, take on lease, hire or exchange or otherwise acquire any estate, land, tea garden, orchards groves, plantations and farms and to carry on business as cultivators, grower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant No. 2 to establish itself in tea business. (d) The appellant No. 2 had surplus funds which could be profitably utilized. (e) The appellants Nos. 1 and 2 were under common management and control. The registered office of both appellants Nos. 1 and 2 were situate at the same premises. (f) The amalgamation will result in economics of a centralised and a larger concern including reduction in over-heads, better and more productive utilisation of labour and other resources and a reduction in procedural and administrative work. (g) The scheme would enable the establishment of a larger company with larger resources and a larger capital base enabling further expansion and development. 8. An order was made on the 25th September 1985 in the said application whereby separate meetings of the equity shareholders of the appellants Nos.1 and 2 were directed to be convened and held for the purpose as aforesaid. 9. Notices of the said meetings were sent individually to each equity shareholder of the appellants as directed by the said order enclosing copies of the said scheme, as statement as required under section 393 of the Companies Act, 1956 and a form of proxy. Notices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alia, that the exchange ratio proposed in the said scheme was highly unfavourable to the members of the appellant No.1. It was contended that the break up value of the equity shares of the appellant No. 1 computed from its audited books of accounts would be ₹ 976/-per share of the face value of ₹ 100/-. the break up value of the equity shares of the appellant No. 2 computed similarly would be ₹ 10.12 per share of the face value of ₹ 10/-. On amalgamation, if shares of the appellant no. 1 in the proposed exchange ratio, the value per share of the appellant No.1 would come down to ₹ 791/- per share. 16. It was further contended, that it appeared from records that the appellant No. 2 had not carried on any business in tea or textile in the year ending on the 31st March 1985 and had earned only ₹ 2.11 lakhs by way of interest. The appellant No.2 came within the mischief of section 434(c) of the Companies Act, 1956. 17. It was contended further that the appellant no. 1 was a highly profitable and prosperous company whereas the appellant No.2 was not a viable concern, not carrying on any business and, therefore, the proposed scheme of amalgamati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets transferred would be subject to all charges, liens, mortgages and encumbrances, if any, affecting the same. The scheme, in fact, provided for a total merger of the appellant No. 1 with the appellant no. 2. 25. The appellant no. 1, it was submitted had not made any default in meeting the claims of the' respondent no. 2. The securities of the respondent no. 2 were not alleged to be in jeopardy. The respondent no. 2 would be benefited by the amalgamation as the assets of the appellant no. 2 would also be available to meet the claims of the former. 26. It was submitted that as the scheme did not contemplate any arrangement with the creditors nor adversely affected the interest of such creditors, calling of any meeting of the creditors was not required in law. 27. On the objections raised by the Central Government in the affidavit filed on its behalf and also during the hearing of this appeal it was submitted that in the statement under section 393 of the Companies Act annexed to the notices issued to the shareholders of the appellants sufficient particulars of the scheme had been furnished including the proposed ratio of exchange. Over 90% of the shareholders of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heme specifically provided that all the workers of the appellant no. 1 would become the workers of the appellant no. 2 without any interruption in their services and on the same terms and conditions. The interest of the workmen was, therefore, fully protected. Their existing rights and future employment on the same terms and conditions were guaranteed. The scheme had been publicized widely and there was no opposition from the workmen. 34. Learned Advocate for the Central Government reiterated the contentions raised in the affidavit filed on behalf of the respondent No. 1. He submitted further that the appellants have violated mandatory provisions of sections 391, 392, 393 and also section. 173 of the Companies Act, 1956 by failing and neglecting to disclose material facts relating to the affairs of the appellants and by not preparing or disclosing any valuation report by an independent chartered accountant at any stage showing the basis of the valuation of the shares of the appellants and to establish the fairness and reasonableness of the proposed exchange ratio. Material facts and a valuation report, if produced before the shareholders, might have influenced their mind in not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 434(c) of the Companies Act. 1956. It was also not in the public interest that the appellant No. 2 should be allowed to take over the assets of the appellant No. I. It was submitted further that the appellant no. 2 could not carry on its existing business of money lending without complying with the mandatory provisions of sections 370 and 372 of the Companies Act, 1956 and its activities in such business had been illegal, arbitrary and void. 40. It was submitted last that in view of the objection raised by the respondent No. 2 a secured creditor, to the proposed scheme, the views of the creditors of the appellants should be ascertained before the proposed scheme was sanctioned. 41. Learned Advocate for the respondent no. 2 adopted the contentions raised on behalf of the respondent no. 1 and submitted further that the terest of the respondent no. 2 should be protected before any scheme was sanctioned. 42. In support of the respective contentions of the parties a large number of decisions were cited at the Bar which are considered hereafter as follows : (a) Bengal Bank Ltd. v. Suresh Chakravarty Ors., reported in AIR 1952 Cal. 133. In this case, a scheme of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r was set aside. It was also found that other provisions of the scheme were improper, unreasonable and arbitrary. The High Court set aside the order sanctioning the scheme and observed as follows : On a review of these authorities and from the provisions in section 153(2) of the Indian Companies Act, 1913, it seems to us clear that the consent of the majority of creditors or shareholders to a scheme does not conclude the issue whether the scheme should be sanctioned. The jurisdiction of the Court which is called upon to sanction a scheme transcends the mere consideration that a majority of those affected by the scheme is willing to submit to the scheme. The creditors of a company may agree to accept a fraction of the amount due to them from the company and yet, on considerations of more lasting importance, like public or commercial morality, the Court may refuse to accept the verdict of the majority. It may also refuse to accept, the scheme on the ground that it is not reasonable or that it is not feasible or that there is no chance that it will yield to a smooth and satisfactory execution . By 'reasonable' is generally meant that the arrangement cannot reasonably b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Division bench of this Court was whether a right to sue for damages for breach of contract appertaining to the business of the transferor company was transferred to the transferee company by vesting order passed under section 153A of the Indian Companies Act, 1913. Prior to the said order of vesting, a suit had been filed by the transferor company against a third party where damages were claimed for breach of a contract of carriage. Subsequent to the passing of the vesting order, the transferee company applied for an order that its name should be brought on record as the plaintiff in the pending suit in place and stead of the transferor company. The said application was dismissed on the ground that what was transferred under the said order of vesting was a mere right to sue for damages for breach of contract and the same was ineffective under section 6(c) of the Transfer of Property Act. The decision of the House of Lords in Nokes (supra) was applied. On an appeal, it was held by a Division Bench of this Court that the transfer having been made by an order of Court of competent jurisdiction, section 6(c) of the Transfer of Property Act had no application. The order of vesting r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited v. Commercial Tax Officer, reported in AIR 1986 SC 649. This decision was cited for the following rervations in the judgment of Chinnappa Reddy, j. : In our view, the proper way to construe a taxing statute while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, whether the transaction is such that the judicial process may accord its approval to it. * * * * It is neither fair not desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation, It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of 'emerging' technique of interpretation to expose the devices for what they realty are and :o refuse to give judicial benediction. (g) In re Sussex Brike Co. Ltd. reported in (1961)1 Ch. 239. In this case in a scheme of amalgamation of two English ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of the ratio which was filed in the proceedings. After examining the same, the learned Judge of the Gujarat High Court was pleased to sanction the scheme, It was held that the ratio of exchange provided in the scheme was neither unfair nor unreasonable and particularly as the same had been approved by substantial majority of the shareholders. (i) In re Wood Polymer Ltd. reported in 47 Comp. Cas. 597. In this case, the Court refused to sanction an arrangement whereby properties were sought to be transferred through a company set up for the purpose, which was found to be a paper company, with the object of evading capital gains tax. (j) Kumarapura Gopal Krishna Ananthakrishnan v. Burdwan-Cutwa Railway Co. Ltd. reported in 48 Comp. Cas. 611. In this case, the respondent Company was incorporated with the object of constructing and running a railway between Burdwan and Cutwa. The entire business undertaking of the company with all its assets were taken over by the Government of India on and from the 1st April, 1966 on payment of compensation. The company, therefore, made loans and advances out of the amounts of compensation received. The Registrar of Companies made an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undervalued in determining the ratio of exchange. The transferor company contended that the valuation adopted by the Regional Director was incorrect and that fundamental principles had been ignored in such valuation. It was held by a learned Judge of the Bombay High Court that the valuation of shares of a company was a technical matter requiring considerable skill and expertise. There were bound to be differences of opinion as to the correct value of the shares of a company and simply because it may be possible to value the shares of the transferor company in a manner different from one which has been adopted, it could not be said that the valuation adopted was unfair. What was important that the shareholders had unanimously accepted the adopted valuation and there has been no complaint from the shareholders. It was held further that the Court should not examine the question of fairness or unfairness of valuation of shares at the instance of the regional Director of the Company Law Board. Under section 394A of the Companies Act, notice was given to the Regional Director so that while sanctioning a scheme public interest may be safeguarded. in the facts of this case it was held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es had been held for approval of the scheme. It vas held by a learned Judge of the Andhra Pradesh High Court that on the facts the principal creditors of the transferor company had consented to the proposed scheme and that the creditors of the transferee Company would not be in any way prejudicially affected by the amalgamation which amply protected their interest. The learned Judge held that in a scheme proposed between the company and its members, it was not mandatory to direct 'the holding of the meeting of the creditors and in the facts holding of meeting of the creditors of the two companies were not Called for.The learned Judge further held that the shareholders of both the companies had unanimously agreed to the ratio of exchange and that no public interest was involved. The learned Judge quoted with approval the observation of the Gujarat High court In re Sidhpur Mills Co. Ltd. reported in AIR 1962 Guj 305 and In re Maneckchowk and Ahmedabad Mfg. Co. Ltd. reported in 40 Comp. Cas. 819, where it was laid down that a scheme should not be scrutinised by the Court too critically and with a view to find faults and the same had to be looked at in its entirety and if it is fou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company. On this ground, a learned Judge of this Court refused to sanction the scheme. It was observed in the judgment that the approval of the shareholders to the scheme recorded at the meeting of the shareholders as directed might be often illusory as only few shareholders take active interest in the affairs of the company and some shareholders who considered themselves to be in a minority might not attend such a meeting as they may feel that the majority of the shareholders would control the meeting. Other shareholders might think that Court will look after their interest. Therefore, it was the duty of the Court to probe and find out whether the scheme was reasonable or not. (p) In re Associated Hotels of India Ltd., reported in 1968(2) Comp. Law Journal, 292. In this case a scheme for amalgamation of two companies was sanctioned subject to the filing of an affidavit by a senior partner of the firm of chartered accountants who were the auditors indicating the basis of valuation. (q) Union of India Ors. v. Ambalal Sarabhai Enterprises Ltd., reported in 55 Camp. Cas. 623. This decision of a Division bench of the Gujarat High Court was cited for the proposition that where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 46 Comp. Cas. 706. (c) In re Bhavnagar Vegetable Products Ltd. (In liquidation) reported in 55 Comp. Cas, 107. (d) In re Auto Steering Ltd. reported in 47 Comp. Cas. 247. The principles laid down in the said decisions do not advance the case of the parties any further and the said decisions need not be considered in detail. 44. We first take up for consideration the objections raised by the respondent No. 2, the secured creditor. It is contended that in the scheme, provision had not been made for transfer of cash balances. reserve funds, investment and other rights and interests in the assets and properties of the respondent No. 1. The scheme further did not provide that on transfer of the undertaking of the transferor company, the liabilities of the transferor company would become the liabilities and obligations of the transferee. company. Lastly, it was contended that the scheme did not provide for liquidation and discharge of the dues of the respondent No.2. The respondent No.2 submitted that its interest should be protected by the Court before the scheme was sanctioned. 45. The objections raised by the respondent No. 2,in our view, are of little substance. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not provide for any arrangement with the creditors of the appellants. It has not been shown that the scheme adversely affects the interest of the creditors of the appellants in any manner. In that view, we hold that it is not necessary in Law to call a meeting of the creditors and obtain their views on the scheme. Our view is supported by the decisions, In re Coimbatore Cotton Mills Ltd. (supra); Vijay Durga Cotton Trading Co. Ltd. (supra) and Ambalal Sarabhai Enterprises Ltd. (supra). 49. we next consider whether sanction to the proposed scheme should be refused as the transferee company has not carried on any significant business for the past one year and is liable to be wound up under section 434 of the Companies Act, 1956 and also on the ground that the transferee company had carried on business in money lending in violation of the provisions of sections 370 and 372 of the Companies Act, 1956. We. note that these allegations were not made in the affidavit filed on behalf of the Central Government but were made from the Bar by the learned Advocate appearing for the Central Government. It is nobody's case that any proceeding for winding' up of the transferee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is no scope for retrenchment of any workmen under the said scheme and on the other hand the economies which were expected to be effected through the amalgamation with more productive utilisation of labour ensure that the workmen would have nothing to lose and would have a better chance of participation in a more efficiently run concern. 53. It is the usual practice and procedure that a scheme for amalgamation of companies require that the members of the companies should consider and approve the scheme at a meeting. Where a scheme of arrangement is sought to be made with the creditors it is also required that the creditors also hold a meeting and' express their views on the proposed arrangement. It is not a legal requirement that prior to the sanction of the scheme of amalgamation, the workers of the concern involved should also hold a meeting and express their views of the scheme. No case was cited on behalf of the Central Government nor are we aware of any instance where the Court directed a meeting of the workers of the companies to record the views on a proposed scheme. No doubt before a company is wound up, it is open to the workmen of the company to appear and par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme is a mere device which has been adopted to facilitate such evasion. There is no allegation in the affidavit filed on behalf of the Regional Director, Company Law Board that the scheme has been mooted for the purpose of evasion of any tax. Further, it has not been brought to our notice that any particular tax is being sought to be evaded by any particular provision in the scheme. The decisions cited on behalf of the Regional Director in this connection viz. In re Wood Polymer Ltd. (supra) and Mc Dowell Co. Ltd. (supra) have no application in the facts and circumstances of the instant case. In every case of amalgamation of two companies, transfer of all assets and liabilities of one to the other is involved and unless it is specifically established that the scheme was a device for evasion of payment of any tax it can not be rejected on this ground. 56. Last, we come to the objection raised by the Regional Director that the ratio of exchange of the shares between the transferor company and the transferee company as provided in the scheme was unfair to the shareholders of the transferor company. We note that at the meeting of the members of the transferor company 93.8% of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. If the contention of the regional Director is accepted, the shareholders of the transferor company would no doubt get a little more on. the basis of a more favourable ratio. Valuation is ultimately a matter of expert opinion. There are more than one method of valuation and a valuation would vary if different methods are adopted. The shares are the properties of the shareholders and they are the ultimate and the-best judge of the value which they would put on their shares. There is no requirement in the Companies Act in such' a case. The ratio of exchange has to be determined on a valuation made by a chartered accountant or an auditor though we feel that in the best interest of all concerned and to prevent controversy a proper basis of valuation should be recorded. 59. We make it clear that in the event any shareholder of the transferor company had. appeared before us and objected to the valuation on the basis of the ratio of exchange, the matter would have taken an entirely different complexion and we would have been inclined to probe further into the question of ratio of exchange to satisfy ourselves that the shareholders of the transferor company have not been treated u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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