TMI Blog1968 (9) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 3,00,000 divided into 3,000 ordinary shares of ₹ 100 each and the entire amount of its authorised capital is subscribed and paid up. East India was incorporated in May, 1948 with an authorised capital of ₹ 3,00,00,000 divided into 1,00,000 9.5% Cumulative preference shares of ₹ 100 each, 25,000 9.5% Redeemable Cumulative Preference shares of ₹ 100 each and 17,50,000 Equity shares of ₹ 10 each and its subscribed and paid up capital is ₹ 1,40,19,900 divided into 15,350 9.5% Cumulative preference shares of ₹ 100 each, 3,950 9.5% Redeemable Cumulative Preference shares of ₹ 100 each and 12,08,990 Equity shares of ₹ 10 each. All the three companies were incorporated with the principal object of carrying on business as hoteliers. Associated owns and operates, inter alia, the Grand Hotel in Calcutta, Maidens Swiss in Delhia, Mount Everest in Darjeeling, Palm Beach in Gopalpur on sea and several hotels in Simla. Hotels is the lessee of the land and buildings of the Grand Hotel, Calcutta which it has let out to Associated. It also holds the entire block of shares of Mercury Travels (India), Pvt. Ltd., which operates as Trave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the accounts of Associated Hotels on the transfer date would be treated as share premium. 2. The Scheme further provides that all the properties, rights, powers etc., of Associated and Hotels would stand transferred to East India without further act or deed and vest in East India in terms of section 394 (2) of the Companies Act and similarly all the liabilities and duties of Associated Hotels would be transferred on the said date and become the liabilities and duties of East India under the said section. In support of the aforesaid scheme the following reasons are advanced: (1) As a result of the amalgamation, East India would take over the assets as appearing in the balance-sheet of the first two companies as at 20th June, 1967 and 31st March, 1967 respectively of the aggregate value of ₹ 7,05,15,022 and also total liabilities of ₹ 3,88,09,582 the details of which have been given in Annexure E to the petition, and would issue preference shares to the value of ₹ 18,81,000 and ordinary shares to the value of ₹ 3,63,440; (2) as a result, the business in New Delhi will be better organized and rationalised; (3) the gross profit of East India wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s would also assist in the promotion of the objects of the amalgamation as Mercury Travels have extensive contacts with tourist agencies throughout the world; (11) the benefits of the companies existing arrangements for technical know-how and foreign collaboration would be available to all the hotels controlled by East India and the foreign exchange earning is expected to go up. It is further pointed out that in considering the exchange ratio of the shares, the assets of the Associated in Pakistan had not been taken into consideration. 3. By an order of this Court, dated the 10th June, 1968 the petition was admitted and directions were given for publication of the notice in certain newspapers under section 391 in Form No. 35 of the Companies (Court) Rules, 1959 and also for giving notice to the Central Government under section 394-A. Previously by an order in Company Petition No. 111 of 1968 the Court has directed the holding of the meetings of the ordinary and preference shareholders of the three companies and had appointed the Chairmen for the said meetings. In accordance with the aforesaid order, on the 31st May, 1968 separate meetings of the ordinary and preference shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g appreciation was made by similar revaluation of East India's Oberoi Inter-Continental and other assets, (2) The ratio of exchange of shares appears unduly favourable to the shareholders of the two transferor companies, namely, Associated Hotels and consequently prejudicial to the interests of the shareholders of East India. It is pointed out that the Oberoi Group was holding 784,064 shares of ₹ 10 each in East India while the bulk of the shares in this Company was held by Hotels and Associated, whose holdings amounted to ₹ 62.68 lacs and ₹ 10.33 lacs respectively. The Oberoi group thus acquired the controlling interest of East India through their control over the other two companies. It is pointed out that there are other shareholders besides the Oberoi group in East India. (3) It is alleged that the Associated and Hotels are overtrading on creditors' equity and making imprudent use of short-term deposits in long terms fixed assets by way of Hotel construction as, for instance, the amount of ₹ 36,00,000 utilised for the Bombay project. The liquidity position of the two transferor companies was far from satisfactory as these companies have failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h reserves and not out of its current profits. The valuation of the properties in Pakistan cannot be taken into account for determining the value of the shares of this Company as the said properties are now vested in the Custodian of Enemy Properties in Pakistan. (c) On the other hand, the working of the Oberoi Inter-Continental owned by East India shows that it is a very flourishing business and earns foreign exchange on the average of ₹ 6,00,000 a month. If there is re-valuation of assets of this Company, it is probable that the value of the shares of East India would also rise. 5. Finally it is submitted that having regard to the above considerations it is necessary that a fair exchange ratio should be arrived at before the Scheme is sanctioned and the Court may consider the desirability of appointing an independent auditor or valuer for that purpose. 6. In reply two affidavits have been filed on behalf of the petitioners. The first affidavit is by Girindra Mohan Saha, the senior partner of Messrs. Ray Ray who are the auditors of Hotels East India. The affidavit states that M/s. Ray Ray was informed in April 1968 that Associated Hotels were considering amalga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the shares. It is further stated that the cost of the land for the said hotel was shown in the account as at 31st March, 1956 at ₹ 11,00,786 but the present market value, as certified by the valuers, is ₹ 1,22,32,120 and such value had been taken into account in fixing the ratio of exchange of the shares. As the other assets, namely buildings, plant and machinery etc. were shown in the accounts at their cost in 1965 it was not considered necessary to re-value such assets. It is also pointed out that the other unit of East India, namely, the Oberoi Palace Hotel, Srinagar is held on a five years' lease basis and as such no fresh valuation of the same was called for. It is accordingly denied that the ratio of exchange of shares was favourable to the shareholders of Associated Hotels and would cause any prejudice to the interests of the shareholders of East India. It is further pointed out that as a result of the amalgamation the Oberois and their associates would control only sixty per cent. of the shares of East India as against 80 per cent. of such shares held by them prior to amalgamation. Figures are quoted to show that prior to the amalgamation the total val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this country. 8. The Metropolitan Industrial Corporation Ltd. holding 4,500 equity shares in East India Hotels Ltd. gave notice of opposing the sanction of the aforesaid Scheme and Mr. S.B. Chakrabarty, the learned Advocate appeared for the said objector but withdrew the objection at the hearing and supported the prayer for amalgamation. No other share holders or creditors of any of the three companies appeared in response to the notices or the advertisements to oppose the sanction of the proposed Scheme. 9. Mr. S.C. Sen, learned Counsel for the petitioners, placed before the Court the particulars of the Scheme, the respective authorised and paid-up share capital of the three petitioner companies, the holdings of the Oberoi group and/or the managing agent's in these companies and submitted that the reason for the proposed merger are (a) that the two units Associated Hotels are financially very solidly based but with a rather slow turnover ratio. In other words the capital locked up is not yielding a satisfactory return while East India, which owned the Inter-Continental is earning a much larger return for its capital. The Inter-Continental has been a very successful ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvations of Denning, L.J., in Dean v. Prince Ors. L.R. (1954) 1 Ch. 409 : (1954) 2 W.L.R. 538 : (1954) 1 All.E.R. 749. In that case the auditor, in making the valuation of the shares of a company, certified that for the purpose of his valuation he had not regarded the company as a going concern, but that he had valued on a 'break-up' basis, because, in his opinion, the shares have no value on any other being having regard to the losses made by the Company. Harman, J., held that the valuation was invalid as the auditor had failed to take into consideration the various factors necessary for that purpose. The Court of Appeal unanimously reversed the decision of the lower Court. Denning, L.J., observed: The task of the auditor here was to act as an expert and not as an arbitrator, and as an expert, he was to certify what in his opinion was the fair value of the shares........... The reason is because it is so much a matter of opinion that it is very difficult to say it was wrong. But difficult as it is nevertheless if the Courts are satisfied that the valuation was made under a mistake, they will hold it not to be binding on the parties..........For instance, if the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment and in the absence of such a statement it is not possible for this Court to decide whether the scheme was explained properly to shareholders. I do not think there is any substance in this objection. As pointed out by Mr. S.C. Sen under the Rules the form of the statement is settled by the Court and it is only the statement as settled that is sent along with the notices to the shareholders. 13. The next objection to the Scheme by Mr. D.K. Sen was that as neither in the case of Associated nor in the case of East India was any power given under the respective Memorandum to amalgamate and only Hotels had such power, neither Associated nor East India could amalgamate with any other company without altering its Memorandum and taking power to amalgamate. Reliance was placed on an observation of Datta, J. In the matter of Carton Tea Company Ltd. (1966) 2 Comp.L.J., 278. The passage Mr. D.K. Sen is relying on is at page 296 where after observing that though the Articles of the transferor-company entitled it to purchase or otherwise acquire and undertake all or any part of the business, property and liabilities of any business, his Lordship observed that the company was not compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of the representation made in the affidavit of Mr. Mehta that in the report of the auditors or in the affidavit of Mr. Saha no mention has been made of the facts or materials considered in making the valuation of the shares of the three companies and in determining the ratio of exchange therefore. Mr. Sen pointed out that no affidavit was filed by the auditor till the affidavit of Mr. Mehta and it was only in the affidavit-in-reply filed on behalf of the three petitioners that it was mentioned that the appreciation in the value of the assets of East India has also been taken into consideration in valuing the shares. Even at that late stage the affidavit of Mr. Saha did not disclose what materials he had taken into consideration in making the valuation. All that he says is that he has taken into account all relevant facts and circumstances without disclosing what these facts and circumstances were. 17. Mr. Sen found support for his contention in the observation of Datta, J., in Canon Tea Co.'s case (1966) 2 Comp.L.J., 278, that the auditors did not go into the matter themselves but relied at every step on the materials supplied by the Secretaries and Treasurers in arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een at a price which has no relation to the financial position of the companies concerned. 20. Mr. S.C. Sen finally submitted that section 394-A was introduced in the Companies Act in 1965, in order to enable the Central Government to show that the interests of the investing public are protected. As in this case there in no proposal to issue fresh shares to the public, no question of protecting public interests is involved. Mr. D.K. Sen, on the other hand, submitted that since the introduction of section 394-A the position in law has changed and the Courts now have to consider not only the wishes of the shareholders and creditors of the companies concerned, but also the representations of the Central Government before sanctioning the scheme of amalgamation. I am mindful of the fact that the major shares in all the three companies are held by M.S. Oberoi and their associates. I cannot also ignore that the scheme was sanctioned by an overwhelming majority of the holders of both the ordinary and the preference shares of the three companies and not a single shareholder or creditor of any of these companies is opposing the application in this Court. I am however troubled with the omi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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