TMI Blog1965 (12) TMI 155X X X X Extracts X X X X X X X X Extracts X X X X ..... and/or directors be at liberty to retain such sums out of the assets to be transferred to Gungaram Tea Co., Ltd., under the said compromise or arrangement and other incidental reliefs. 2. On 2nd August, 1888 the Company was incorporated under the provisions of Indian Companies Act, 1882 and has been carrying on business as tea planters. The authorised capital of the company is ₹ 15 lakhs dividend into 15,000 ordinary shares of ₹ 100 each. The issued and subscribed capital of the company is ₹ 6 lakhs divided into 6,000 fully paid-up ordinary shares of ₹ 100 each. 3. On 27th September, 1888 the said Gangaram Tea Co., Ltd., was incorporated under the provisions of the Indian Companies Act. The authorised capital of Gungaram Tea Co., Ltd., is ₹ 20 lakhs divided into 20,000 ordinary shares of ₹ 100 each. The issued and subscribed capital of Gungaram Tea Co., Ltd., is ₹ 13,44,000 divided into 13,440 fully paid ordinary shares of ₹ 100 each. 4. In 1963 the Secretaries of the company with the approval of the directors proposed that the whole undertaking of the company be merged or amalgamated with that of Gungaram Tea Co., Ltd., and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition to the effect that Gungaram Tea Co., Ltd., duly approved the said scheme or arrangement of amalgamation and that there are no particulars of the, advantages of such scheme or arrangement. 8. Thereafter an application for amendment was made by the said company which was allowed on the 8th day of June, 1965. 9. Thereafter the said company asserted in its petition that at a general meeting of the shareholders of Gungaram Tea Co., Ltd., duly convened and held on 23rd November, 1964, resolutions were unanimously passed inter alia approving the said scheme of arrangement or amalgamation whereby the whole undertaking properties and liabilities of the company would be transferred to Gungaram Tea Co., Ltd., and it was further resolved that the subscribed capital of the Gungaram Tea Co.. Ltd., be increased in a particular manner to give effect to the said scheme. 10. Thereafter, it was further asserted generally that the amalgamation of the two similar tea producing units would be advantageous to the company for it would bring about greatest stability and economy of operation. Thereafter, several items of particulars regarding the advantages were stated. 11. This amended pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Association of the Company. 13. This brings us to merits of the controversies. 14. Mr. Rathin Deb, learned senior Counsel for the applicant in his opening generally submitted that in a meeting directed by the Court, the members of the company have unanimously approved the scheme recommended and/or approved by the Board of Directors. The ratio of exchange 4 : 5 was worked out by auditors of great repute Price, Waterhouse and Peat on the basis of net assets and income basis. They have not proceeded on market price for it is not a proper test. The shareholders and directors are expected to know best. The wisdom of the Directors in business matters should be trusted. Hence the scheme is prima facie reasonable. There is nothing to show that the scheme is so unreasonable that the Court should not permit it. In this connection he relied on the decision in Re : English Scottish and Australian Chartered Bank L.R. (1893) 3 Ch. 385 and In re Hindusthan General Electric Corporation Ltd. (1957-58) 62 C.W.N. 889 : (1959) 29 Comp. Cas. 144; A.I.R. 1959 Cal. 672. 15. In my opinion the Court should not sanction a scheme on the basis of businessman's wisdom or in other words the wisdom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Raja Vyricherla Narayana Gajapathi Raju v. The Revenue Divisional Officer L.R. (1939) A.C. 302 : (1939) 2 M.L.J. 45 : I.L.R. (1939) Mad. 532 : L.R. 66 I.A. 104., Vizagapatam Lord Romer again observed: Take as an example the case of an owner of vacant land that adjoins his factory. The land possessed the potentiality of being profitably used for an extension of the factory. But the owner is the only person who can turn that potentiality to account. In valuing the land, however, as between him and a willing purchaser, the value to him of the potentiality would necessarily have to be included. 21. In Australia where the Statute has not fettered the hands of the Court by imposing any particular mode of valuation for ascertaining the value of properties or property for the purpose of Estate Duty, the Courts have also introduced the concept of notional sale with certain modifications. 22. In the case of Spencer v. Commonwealth of Australia Griffith, C.J., expressed the concept in these words: What would a man desiring to buy had to pay for it on that day to a vendor willing to sell it for a fair price but not anxious to sell. 23. In Abraham v. Federal C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd v. Jameson (1905) 2 I.R. 218 and Salvesen's Trustees, v. Commissioners of Inland Revenue (1930) S.L.T. 387, approved. Decision of the majority of the Court of Appeal, (1935) 1 K.B. 26, reversed. There was evidence that the value of the shares in the open market to be enhanced if trust companies were to be included among possible competitors in the open market Held, that the values of the shares should not be appreciated by reason of the special value of the share to such companies. 26. The House of Lords rejected the opinion of Farwell, J., expressed in Borlands Trust v. Steel Brothers Co., Ltd. L.R. (1901) 1 Ch. 279., that: These shares can have no value ascertainable by any ordinary rules, because having held, as I do, that the restrictive clauses are good, it is impossible to find a market value. There is no quotation. It is impossible therefore, for anyone to arrive at any actual figure, as to which it may be said it is clear that that is the value, or something within a few pounds of the value. 27. The House of Lords again was not impressed by the observation of Finlay, J., in Crossman's case (152) L.T. 98 : (1935) 152 L.T. 101 where his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t cannot likely be disregarded and it must be accepted that the current quotations of least stock is not necessarily the real value. Particularly when it is realised that the investing public may be in possession of only such facts as has been disclosed by company's accounts. However, the quotations indicate what investors will pay and accept on the facts that are known, and it is held that a reservation can be made that underlying, within extremes can and do formula guide to the value based on expected yield. 30. Spicer Pegler in their book on Book-Keeping Accounts 15th Edn., while dealing with the amalgamation of companies observed at page 313 that: where the shares of the original companies are quoted on the Stock Exchange such quotation would generally offer a reliable guide as to the values at which they should be cleared unless the shares are peculiarly subject to the speculative influence. 31. In estimation on the proposed amalgamation looks out the quotation may of course case to be relative as speculative dealings almost sure to unsure. This view receives support from Pennington's Principle of Company Law, page 180 and Pickles and Dunkerlay on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s method however in course of time has undergone considerable changes and all the changes have not been universally accepted. 41. Spicer Pegler in Book-Keeping Accounts, 15th Edn., page 312, dealt with the assets basis in this manner;-- For the purpose of the amalgamation the amount of the consideration for the acquisition of a business may be arrived at either by valuing its individual assets and goodwill or by valuing the business as a whole by reference to its earning capacity. If this method is employed, the fixed assets of all the amalgamating companies should preferably be valued by the sale professional valuer on a growing concern basis. The terms growing concern means that a business is being operated at not less than normal or reasonable profit and valuer will assume that the business is earning reasonable profits when appraising the assets. If it is found when all the assets of the business, both fixed and current have been valued that the profits represent more than a fair commercial return upon the capital employed in the business as shown by such valuation the capitalised value of the excess (or super profits) will be the value of the goodwill, which must b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e i.e.. Carron ₹ 203 and Guarigarpn ₹ 304.50. On the net asset basis, therefore, the fair rate of exchange is 2 Gungaram shares for 3 Carron shares. 47. The auditors formed their ultimate opinion on the information's and materials supplied to them by the Secretaries and Treasurers of the Company. Hence, it is hardly their independent valuation. 48. The book value of Carron Tea Company was reduced by the said sum of ₹ 4,50,000 for arriving at the ratio of exchange. In 1947 the re-valuation was made by the management in order to issue bonus shares. There is nothing to show that it was justified. There is again hardly any reason why the same amount was deducted after all these years in 1964 except simplicity. 49. The book values are ordinarily costs less depreciation. They do not represent the market values of the assets. In re Press Caps Ltd. (1949) 1 All.E.R. 1013 at 1018. Hence the assets should have been revalued. 50. The assets were not valued through valuers. The Auditors of the company even did not re-value the assets of the two companies. The auditors did not take into account the goodwill or bad will as on that date. Hence in my opinion, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e growth prospect of the two companies, (4) the cover for the present dividends of the two companies, (5) in the case of equity shares the gearing of the shares of the two companies. The word gearing of an ordinary share is the ratio of the amount of issued preference capital and debenture stock to the amount of issued ordinary capital. (6) The values of the net assets of the two companies, (7) the voting strength in the amalgamated enterprise of the shareholders of the two companies. 57. In Abraham v. The Federal Commissioner of Taxation (1945) 70 C.L.R. 23., the question of valuation of shares in five different companies under the Estate Duty Assessment Act, 1914-1928 which does not prescribe, any particular mode of valuation arose. The problem in that case was complicated by the abnormal amounts standing to the credit of the profit and loss accounts of four of the companies and the large debts owed by the directors to three of the companies. The conventional manner of estimating the probable future profits from those of the past also complicated by the facts that these debts have not been interest bearing and that abnormally large cash balance have been lying idle in the acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares, may be considered reasonable but, we shall be grateful for your views'. 60. On the 5th August, 1964 the auditors Price Waterhouse Peat Co. wrote to Duncan Brothers Co., Ltd. inter alia as follows:-- Based on these profits it appears that 18.1 Gungaram shares will be equal to 25.6 Carron shares or 7 Gungaram shares to 10 Carron shares approximately. We understand that the year 1963 was a particularly bad one for Carron due to damage done to the crop by hailstorms and therefore the loss incurred last year was exceptional. If last year's results are excluded for the purpose of calculating average annual profits after taxation as shown in the above paragraph then 9 Gungaram shares will be equal to 10 Carron shares on an earning basis as shown in our letter of 28th February, 1964. 61. The auditors have not taken the responsibility of their opinion by filing an affidavit in support of their conclusions. 62. The auditors acted on inter alia materials prepared and supplied by the Company and verbal instructions given by the Secretaries and Treasurers of the Company. 63. The auditors moreover considered only five years' income including the un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is method has been condemned by the London Stock Exchange Association itself and by well-known authors such as Weinberg and Adamson. Hence, the omission to value the shares on the basis of Stock Exchange quotations does not make it, defective or unfair and un-reasonable. 70. In my opinion, for reasons already given this contention cannot be accepted. 71. Mr. Ghosh next submitted that Weinberg in his book Take-over and Amalgamations has advocated that the preferable basis for valuation for the purpose of amalgamation is the assets basis or underlying assets basis. This is supported by Adam-son in his book of Valuation on Company's Shares Business. Hence, according to him, the auditors were justified in calculating the valuation on the basis of assets basis. 72. In my opinion, the preferable basis in the facts of this case was the Stock Exchange quotations. 73. In this case, the auditors have not even adopted the proper basis for arriving at a value on assets basis for reasons already given. 74. Mr. Ghosh further submitted that there has been departure from the ordinary rules followed in valuation of shares on the assets basis because of the special featur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been excluded. The taking of 'four years' again according to the authorities are not sufficient. In England, ordinarily 'ten years', are taken, in the United States of America 'ordinarily fifteen years' are taken into account. The number of years again may vary in each country with the industry concerned. It again depends on the right choice of the years. 79. In my opinion for reasons already given the auditors were not right in proceeding on the basis of 5 years including the hailstorm year of 1963. 80. Mr. Ghosh further submitted that assuming that 15 years' stock exchange quotations should have taken into account in finding the ratio of exchange, it is clear that on the basis of last 15 years' quotation the ratio of 4 to 5 is fair and reasonable. 81. In this case, the Carron Tea Co., Ltd. declared considerably more dividend than Gungaram Tea Co., Ltd. from 1926 to 1947 when the Black Duncan replaced the White Duncan . In 1947 there was this revaluation to the extent of ₹ 4,50,000 by the management and issue of three bonus shares for each share. It appears from the figures from the year 1948 to 1951 that the dividend declared by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Brothers, (2) evasion of the statute which limits the number of managed companies, (3) acquisition of shares of Carron Tea Co., Ltd. at an under-valuation, (4) to make the troublesome minority in Carron ineffective. 84. These points were not taken in the affidavit-in-opposition. The suggested points savour of fraud, mala fide, improper conduct and conspiracy. They lack particulars. Hence, these questions cannot be gone into. 85. Mr. Sen suggested in the alternative that the amalgamation cannot bring about any economy in the garden in view of the fact that two gardens are situate 80 miles apart and there is hardly any scope for economy in the head office establishment; 86. In my opinion, on the material before me which are general the amalgamation will not lead to appreciable economy for Duncan Brothers will get 7 1/2 per cent. commission after amalgamation, whereas they are now getting 7 1/2 per cent. for Gungaram and 5 1/2 per cent. for Carron Tea Co., Ltd. 87. Mr. Sen further submitted that the additional grounds shown in the amended petition of hailstorm in Carron Tea Co., Ltd. the stabilization in the trading results and the feasibility of C.T.T. method are found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrangement between a company and its members or any class of them and if approved at the meeting, have it sanctioned by the Court. 95. A compromise has not been defined in' the Companies Act. Therefore, it should ordinarily bear the dictionary meaning unless the context otherwise suggests. The word compromise suggests that there is some existing or future dispute which requires settlement. This word 'compromise' came for judicial construction in the case of Mercantile Investment Co. v. International Company L.R. (1893) 1 Ch. 484. N. and Mercantile Investment Co. v. River Plate Trust, Loan and Agency Co. L.R. (1894) 1 Ch. 578. The effect of these decisions, has been summarised in Buckley's Company Law in these words A power to compromise 'rights' presupposes some dispute or difficulty in enforcing them . 96. The word' arrangement' has not been defined in the Act but its nature has been indicated in section 390 of the Companies Act. Clause (b) of section 390 provides that the expression 'arrangement' includes a reorganisation of the share capital of the company by consolidation of the shares of different classes, or by the division of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L.R. (1935) 1 Ch. 567. it has been indicated that amalgamation contemplates a state of things under which two companies are so joined as to form a third entity or one company is absolved into and blended with another company . This is also the view expressed by Buckley in his Companies Act, 11th Edition, page 387. Buckley, J., in South African Supply and Cold Storage Co. L.R. (1904) 2 Ch. 268 at p. 287 observed that: You may have a continuance of one of the companies upon the terms that the undertakings of both the corporation or substantially be merged in one corporation only. 105. In Wall v. London and N. Assets. Corporation L.R. (1892) 2 Ch. 464. Lindley, M.R. observed inter alia that: Amalgamation does not involve the formation of a new company to carry on the business of an old company. It includes that but is not confined to that.............................. I do not see how the company as a business transaction can practically amalgamate.............. with companies carrying on business unless the company in some way or other sells its assets as whole not for money for that would be a simple sale but for shares in the purchasing company. 106. The view e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-clauses of clause (b) as to the transferor-company only, then some of the orders of the Court may be set at naught by the transferee-company. This would be an intolerable situation. 111. Hence, in my opinion, the various sub-clause of clause (b) of section 394(J) confirms the view that both the transferor-company and the transferee-company should make application under section 391 before an amalgamation can be sanctioned. 112. It seems from the reported decisions of this Court that the Court has proceeded on the basis of an application by the transferor-company only. In this connection reference may be made to In re Calcutta Industrial Bank, Ltd. I.L.R. (1948) 2 Cal. 404 : 52 C.W.N. 425. In re H.G.E. Companies, Ltd. (1957-58) 62 C.W.N. 889 : (1959) 29 Comp. Cas. 144 : A.I.R. 1959 Cal. 672 and In re Katrni Cement Industrial Co., Ltd. (1937) 39 Bom.L.R. 675 : A.I.R. 1937 Bom. 423. In these cases however the question was not raised pointedly and there is no decision on the point, Hence in my opinion, they do not bind me. 113. In England the proper procedure is to obtain an order under section 206 (equivalent to section 391) sanctioning the scheme with liberty to appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., Ltd., without recourse to sections 391 and 394. 119. The shares cannot be issued for cash for under the scheme no cash will move from the Carron Tea Co., Ltd. or from the shareholders or the Carron. Tea Co., Ltd., to Gungaram Tea Co., Ltd. 120. The shares may however be issued in consideration of the transfer of all business, properties and liabilities of Carron Tea Co., Ltd. to Gungaram Tea Co., Ltd. to Carron Tea Co., Ltd. or its shareholders as its nominees. Then the Carron Tea Co., Ltd. will be denuded of all business and properties but possessed of the shares in Gungaram Tea Co., Ltd. The purchase of the business, properties and assets by Gungaram Tea Co., Ltd. will not however absolve or free Carron Tea Co., Ltd. of its own liabilities and the creditors of the company may object to the transfer of assets and properties. The sale of the whole of the business including assets and properties of Carron Tea Co., Ltd. will require the consent of Canon Tea Co., Ltd. in a general meeting under section 293. The acquisition or purchase by Gungaram Tea Co., Ltd., will not by itself vest the properties of Carron in Gungaram Tea Co., Ltd.. without due registration. This purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proper proportion as against the' Central Bank's original shareholders, their interest in the Tata Bank assets they brought in, but would acquire in the-like proportion an interest in the original assets of the Central Bank. 128. This was a case under section 213 which now corresponds with section 494. 129. Section 494 enables the Liquidator of the transferor-company if he is armed with power to transfer or sell the whole or any part of the business. Hence, in such a case where the transferor-company can transfer or sell its assets to the transferee-company, the transferee-company can buy the same. 130. Therefore, under section 494 where the whole of the business or property, of the transferor-company is transferred to the transferee-company for shares in the transferee-company, there may be fusion of assets of either company but not of the liabilities of the companies. 131. The amalgamation under the present scheme purports to be under section 394 and not under section 494. In fact it does not attract section 494 for the Company is not proposed to be or is not in the course of winding up. 132. Hence, the case of Parshuram v. Tata Bank L.R. 55 I.A. 274 : 55 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence I reject the contention. 138. Mr. Sen, learned Counsel appearing for the respondent Seal at one stage submitted that section 173 is the only one section which governs the explanatory state-ment annexed to the notice of a meeting under section 391. 139. Clause (1) of section 393 commences with the word where a meeting of the creditors or any class of creditors or of members or any class members is called under section 391. 140. This is followed inter alia by clause (a) which deals with the contents of the statement annexed to the notice required to be sent to the creditors or members of a meeting under section 391. 141. They make it abundantly clear that there must be an explanatory statement in terms of clause (a) of section 393 of a notice required under section 391. 142. Hence, the contention advanced on behalf of the respondent is rejected. 143. Mr. Ghosh, learned Counsel appearing for the applicant company on the other hand submitted that in the case of a meeting held under section 391 there need not be any explanatory statement under section 173 but it is sufficient if there is a statement in terms of section 393. 144. Chapter vis under the headin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statement. 151. The requisite contents of the statement under clause (2) of section 173 are all material facts concerning each such item of business including in particular the nature and extent of the interest, if any, of (a) every director, (b) the managing agent, if any, (c) secretaries and treasurers, if any, and the manager, if any. 152. Therefore, section 173(2) subject to certain exception is a general provision for all meetings for management of the normal business of the company. 153. Hence, section 173 and section 391 lie in different fields. Consequently, the application of section 173 is excluded to meetings under section 391. 154. Section 173 regulates meeting of the companies. Section 391 does not. Hence, section 173 is applicable. 155. Section 173 is a general rule for all meetings subject to certain exceptions. Section 391 is a special provision for one class of meeting. Hence, section 173 is inapplicable. 156. There is another way of looking at it. 157. The words setting forth the terms of compromise or arrangement' and the material interests of the directors, etc., are only adaptation of the all material facts in section 173 to a specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n exchange of Five ordinary shares of ₹ 100 each in the company. Paragraph 2 of the said statement states that Duncan Bros. Co., Ltd., Secretaries and Treasurers of Carron Tea Co., Ltd., and Managing Agents of Gungaram Tea Co., Ltd. hold the following shares in the two companies 167. Paragraph 3 states that none of the directors of the company is a director of Gungaram Tea Co., Ltd., paragraph 4 gives the name of four directors of Carron Tea Co., Ltd., and their respective holdings, if any, in Gungaram Tea Co., Ltd. Paragraph 5 mentions that directors of Gungaram Tea Co., Ltd., has the following share holdings:-- 168. Thereafter, it is mentioned that Secretaries and Treasurers or the company are accordingly interested in the arrangement to the extent indicated above and also to the extent that they being Managing Agents of Gungaram Tea Co., Ltd., may receive increased remuneration resulting from the increase in the combined profits of the two companies resulting from the amalgamation. 169. In an amalgamation one of the most important factors which deserves the attention of the shareholders is the ratio of change of the shares. This ratio affects the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure in terms of the words explaining its effect in the section. 172. It is now necessary to turn to the judicial decisions on this point so as to find out whether this view receives support therefrom. In this connection, it may be noticed that even before these provisions were incorporated in the Act in England the procedure or practice was to annex a statement to the notice convening the meeting. In the case of Dorman Long L.R. (1934) Ch. 635 this matter was discussed at length. The effect of the decision is that the company or the management should disclose all material facts which may affect the mind of the shareholders and the omission to mention any of them whether deliberately or otherwise vitiates the notice and consequently the proceedings. It is also said in different words that the notice should not be tricky. This is however, a case which was decided before the codification of the law on the subject both in England and in India. Therefore, its applicability may now be questioned. 173. There are similar provisions similar to sub-clause (a) of clause 1 of section 393 in the English Act. In fact, sub-clause (a) clause 1 is borrowed from the same Act. Sub-clause (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or less blindly a proposal of a board whose members might have a material interest in having its scheme approved.................... 175. Moreover, I would stress that the section would not be satisfied by a disclosure limited to shares or other interests registered or held in the directors' own name but extends to shares and other interests registered in the names of banks or nominees, companies or otherwise concealed the essence of the matter being that any kind of personal interest which is material in the sense of not being insignificant must be revealed. Therefore the view expressed by me earlier receives support from these decisions. The requirement of particulars under section 173 was again considered in East India' Commercial Company (P.), Ltd. by S.P. Mitra, J. His decision was taken to the Appellate Court. The Appellate Court affirmed his decision by its judgment delivered on 22nd April, 1965. There, however, it was not a question of amalgamation but a case of increase in the capital. Section 173 which has some common features with section 393 was discussed. In that case decisions of the English Courts in Henderson v. Bank of Australia L.R. (1890) 41 Ch.D. 33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the advocate for the company above named within three day's from this date file in Court the form of the advertisement, the notice and the statement to accompany the notice and the same shall be settled by the Registrar of this Court. 179. Hence the relevant portion of the section read with the Rule and the form clearly indicates that the Solicitors should file in Court the form of the advertisement the notice and the statement to accompany to the notice and the same shall be settled by the Registrar of this Court. This was obviously done by the Solicitors for the Company and in my opinion, no exception can be taken to the same. The signature of the Court's officer clearly indicates that he had approved the same in toto or had settled the same. In the absence of any other evidence in my opinion, it would not be proper to infer that the Registrar of this Court did not apply his mind and do his duty. Hence this contention must be rejected. 180. In the result, however, the application should be dismissed and is hereby dis-missed. The applicant will pay-one set of costs of this application as of hearing of a suit to the respondents who will share it equally. Certified f ..... 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