Gujarat High Court
Torrent Energy Limited vs Respondent(S) on 13 August, 2015
Author: Vipul M. Pancholi
Bench: Vipul M. Pancholi
O/COMP/216/2015 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
COMPANY PETITION NO. 216 of 2015
In COMPANY APPLICATION NO. 42 of 2015
With
COMPANY PETITION NO. 217 of 2015
In
COMPANY APPLICATION NO. 43 of 2015
TO
COMPANY PETITION NO. 218 of 2015
In
COMPANY APPLICATION NO. 44 of 2015
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE VIPUL M. PANCHOLI
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1 Whether Reporters of Local Papers may be allowed to see the
judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the judgment ?
4 Whether this case involves a substantial question of law as to the
interpretation of the Constitution of India or any order made
thereunder ?
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TORRENT ENERGY LIMITED....Petitioner(s)
Versus
......Respondent(s)
==========================================================
Appearance:
MRS SWATI SOPARKAR, ADVOCATE for the Petitioner(s) No. 1
MR DEVANG VYAS, ADVOCATE for the Respondent(s) No. 1
==========================================================
CORAM: HONOURABLE MR.JUSTICE VIPUL M. PANCHOLI
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Date : 13/08/2015
ORAL JUDGMENT
These are the petitions filed by three companies for the purpose of obtaining sanction of this court to a composite scheme of amalgamation of two transferor companies, i.e. Torrent Energy Limited and Torrent Cables Limited with Torrent Power Limited, the Transferee Company, proposed under section 391 to 394 of the Companies Act, 1956.
2. It has been submitted that all the companies in the proposed scheme belong to the same group of management, i.e. Torrent group. They are all engaged into the complimentary commercial activities, i.e. power generation, transmission and distribution activities. Hence, the Board of Directors of these Companies have decided to amalgamate these companies with the primary objective of consolidation of the activities. As contended by the petitioners, the proposed amalgamation is expected to result in the following benefits:
(i) Enhanced shareholders' value;
(ii) Alignment of various aspects of the power business of the Torrent
Group in a logical group and sequence;
(iii) Synergies of operations, inter alia, from consolidated fuel and spares procurement, optimization of logistics costs and more refined power generation / distribution models;
(iv) Integration of business thereby providing significant impetus to the growth;
(v) Concentrated management focus and improved organizational capability;
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(vi) Integrated, rationalized and streamlined management structure of the merged business;
(vii) Strengthening of financial position with wider capital base and increased leverage capacity of the merged entity;
(viii) Facilitate inter transfer of resources and optimum utilisation of assets;
(ix) Pooling of human talent in terms of manpower, management, administration and marketing to result in saving of costs.
(x) Avoiding duplication of administrative functions, reduction in multiplicity of legal and regulatory compliances;
(xi) Synchronizing of efforts to achieve uniform corporate policy;
(xii) Improved opportunities for new ancillary businesses, expansion and modernization of existing ancillary business;
(xiii) Addressing the emerging challenges due to enhanced competitive scenario.
3. It has been further pointed out that the two companies, i.e. Torrent Cables Limited and Torrent Power Limited are listed public limited companies, and the shares are listed on Bombay Stock Exchange Limited for both the companies, and National Stock Exchange of India Limited for the Transferee Company. In compliance with clause 24(f) of the listing agreement, the petitioner company had already approached the concerned stock exchanges, and the approvals/clearances obtained from the said exchanges had been placed on record.
4. It has been submitted that vide order dated 24th February 2015 passed in Company Application No. 42 of 2015, meetings of the equity shareholders of Torrent Energy Limited, the first transferor company was dispensed with. This being the wholly owned subsidiary of Torrent Power Page 3 of 15 HC-NIC Page 3 of 15 Created On Fri Aug 14 13:26:43 IST 2015 O/COMP/216/2015 JUDGMENT Limited, the transferee company, all the shareholders had granted approval to the scheme in form of written consents, and the same were placed on record. Separate meetings of the unsecured creditors and secured creditors of the company were directed to be convened for the purpose of obtaining their approval to the scheme. Pursuant to the directions, issued with regard to the conduct of the meetings, after service of due notices to all the unsecured creditors and secured creditors, as well as the public notice, the said meetings were duly convened respectively on 30th April 2015 and 1st May 2015. The scheme was considered at the said meetings, and it was approved unanimously by the unsecured creditors as well as secured creditors of the company, present and casting valid votes at the respective meetings. The Chairman's report along with affidavit dated 6th June 2015 has been placed on record, which provides the details of the result of the meeting.
5. It has been further submitted out that vide order dated 24th February 2015 passed in Company Application No. 43 of 2015, separate meetings of the equity shareholders, unsecured creditors and secured creditors of Torrent Cables Limited, the second transferor company were directed to be convened for the purpose of obtaining their approval to the scheme. Pursuant to the directions, issued with regard to the conduct of the meetings, after due notices to all the equity shareholders, unsecured creditors and secured creditors as well as the public notice, the said meetings were duly convened respectively on 30th April 2015 and 1st May 2015. The scheme was considered at the said meetings, and it was approved by the requisite statutory majority of 98.59% in number, and 99.99% in value, by the equity shareholders present and casting valid votes at the said meeting. Further, in compliance of clause 5.16 (a) of the Securities and Exchange Board of India Circulars (CIR/CFD/DIL/5/2013 Page 4 of 15 HC-NIC Page 4 of 15 Created On Fri Aug 14 13:26:43 IST 2015 O/COMP/216/2015 JUDGMENT dated February 4, 2013 and CIR/CFD/DIL/8/ 2013 dated May 21, 2013), the said company had sought the approval from its public shareholders through postal ballot and e-voting. The scheme was approved by requisite majority of 99.92% of the public shareholders through the said procedure. The scheme was duly approved unanimously by the unsecured creditors and secured creditors of the company at the respective meetings. The chairman's report along with affidavit dated 8th June 2015 has been placed on record which provides the details of the result of the meetings as well as Postal ballot and e-voting.
6. It has been further submitted that vide order dated 24th February 2015 passed in Company Application No. 44 of 2015, meetings of the equity shareholders of Torrent Power Limited, the transferee company was directed to be convened for the purpose of obtaining their approval to the scheme. Pursuant to the directions, issued with regard to the conduct of the meeting, after due notices served to all the equity shareholders as well as the public notice, the said meeting was duly convened on 30th April 2015. The scheme was considered at the said meeting, and it was approved by requisite statutory majority of 98.94% in number, and 99.99% in value by the equity shareholders present and casting valid votes at the said meeting. Further in compliance of clause 5.16(a) of the Securities and Exchange Board of India Circulars (CIR/CFD/DIL/5/2013 dated February 4, 2013 and CIR/CFD/DIL/8/ 2013 dated May 21, 2013), the said company had sought the approval from its public shareholders through postal ballot and e-voting. The scheme was approved by requisite majority of 99.967% of the public shareholders through the said procedure. The chairman's report along with affidavit dated 6th June 2015 has been placed on record, which provides the details of the result of the meeting.
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7. It has been further submitted that vide order dated 24th February 2015 passed in Company Application No. 44 of 2015, the meetings of the secured and unsecured creditors of the transferee company were dispensed with by accepting the contention of the company that the scheme does not envisage any compromise with the creditors of the transferee company. Further, in light of substantial positive net worth of the transferee company in post scheme scenario, the rights and interest of these creditors are not likely to be adversely affected. However, in compliance with the terms of the respective loan agreements with its secured creditors, the transferee company had undertaken to obtain the approvals from its secured creditors. Attention of the Court is drawn to the additional affidavit dated 10th August 2015. It has been submitted that all the secured lenders, except one, have given their no-objection to the amalgamation, and the same are placed on record. It has been further submitted that two of the lenders sought repayment of the loans given to the transferee company. One of them, Kotak Mahindra Bank Limited, has been prepaid the total outstanding amount, and No Dues Certificate has been obtained from the said lender, a copy of which has also been placed on record. It has been further submitted that the other lender is a foreign bank viz. KFW, which represents around 5% of total secured debt of the transferee company. The transferee company has made all arrangements to prepay the outstanding to the said lender. However, the actual payment can be effected only after the approval is granted by the Reserve Bank of India. The Reserve Bank of India has granted the permission for the full prepayment of outstanding amount along with the consequent prepayment charges with a ceiling on the latter. The petitioner company is in the process of requesting the modification in the permission for ceiling on such prepayment charges. It has been submitted that the Page 6 of 15 HC-NIC Page 6 of 15 Created On Fri Aug 14 13:26:43 IST 2015 O/COMP/216/2015 JUDGMENT petitioner company is presently unable to complete the process of prepayment for the reasons beyond its control. The petitioner company has undertaken to prepay the full amount due to that creditor on receipt of the modified approval of the Reserve Bank of India, and if it is so desired, it is agreeable to deposit the amount payable to that creditor in a separate bank account with an undertaking to this Court to the effect that the said account shall not be used for any purpose other than the prepayment to the said lender.
8. The substantive petitions for the sanction of the scheme were filed by all the petitioner companies, which were admitted on 19th June 2015. The notice for the hearing of the petitions were duly advertised in the all India editions of English daily 'The Times of India' , English daily and Gujarati dailies 'Gujarat Samachar' and 'Sandesh' as well as additionally 'Divya Bhaskar' dated 20th July 2015, and the publication in the Government gazette was dispensed with as directed in the said orders. Pursuant to the said publication in the newspapers, no objections were received by the petitioner or its advocate. The said fact has been confirmed vide the common additional affidavit dated 10th August 2015.
9. Notice of the petitions have been served upon the Office of the Official Liquidator for the two Transferor companies. The respective reports dated 30th July 2015 have been filed by the Official Liquidator after taking into account the respective reports of the Chartered Accountant appointed by him out of the panel. It has been observed by the Official Liquidator that the affairs of the respective transferor companies have been conducted within their respective object clauses, and they have not been conducted in any manner prejudicial to the interest of their members or public interest, hence, the petitioner Page 7 of 15 HC-NIC Page 7 of 15 Created On Fri Aug 14 13:26:43 IST 2015 O/COMP/216/2015 JUDGMENT transferor companies may be dissolved without following the process of winding up. However, the Official Liquidator has sought directions to be issued to preserve the books of accounts, papers and records and not to dispose of the same without prior permission of the Central Government as per the provisions of Section 396(A) of the Companies Act, 1956. Accordingly, the transferee company is hereby directed to preserve the books of accounts, papers and records of all the transferor companies and not to dispose of the same without prior permission of the Central Government. It is hereby further directed that even after the scheme is sanctioned, the transferor companies shall comply with all the applicable provisions of law and shall not be absolved from any of its statutory liability.
10. Notice of the petitions have been served upon the Central Government and Shri Devang Vyas, learned Assistant Solicitor General appear for the Central Government A common affidavit dt. 29th July 2015 has been filed by Mr. Shambhu Kumar Agarwal, the Regional Director, North-Western Region, Ministry of Corporate Affairs, whereby several observations are made.
11. The attention of this court is drawn to the common additional affidavit dated 10th August 2015 filed by Mr. T. P. Vijayasarathy, the Executive Director (Corporate Affairs) and Chief Financial Officer of the petitioner transferee company whereby all the above issues have been dealt with. I have further heard submissions made by the learned counsel appearing for the Central Government, and Mrs. Swati Soparkar, learned advocate appearing for the petitioners on the said observations.
(i) The observations made vide 2 (a), 2 (b) and 2 (c) of the affidavit of
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the Regional Director refer to the factual position and require no response.
(ii) The observation made vide para 2 (d), pertains to the accounting treatment as proposed vide clause 11 (c) of the scheme. It has been observed by the Regional Director that the said clause is not in consonance with the Accounting Standard-14. In this regard, it has been submitted by the petitioner company that perusal of clause 11 (a), makes it clear that the Transferee Company shall account for the amalgamation under the 'Pooling of Interest Method' as prescribed under Accounting Standard 14. The transfer of assets and liabilities of the Transferor Companies are proposed at their book values. It has been further submitted that a company is entitled to prescribe under the Scheme itself, a specific treatment to be given to its reserves. Further, Section 211 (3B) of the Companies Act, 1956 and corresponding section 129 (5) of the Companies Act, 2013, also provides that if the practice adopted for such accounting entry, varies from the said standard, necessary disclosure should be made in the first financial statements of the transferee company. The said issue is already settled by several decisions of various High Courts, including the Gujarat High Court. The petitioner has undertaken that in case of deviation from the aforesaid accounting standard or practice, the transferee company shall make necessary disclosures in its first financial statements after the scheme is made effective. Further, the Regional Director has sought an undertaking that reserves so created, if any, shall not be available for distribution of dividend. In this regard, it has been pointed out that the decision of the Hon'ble Division Bench of the Gujarat High Court has concluded the said issue vide order passed in O.J. Appeal No. 33 of 2012 in the matter of Adishree Tradelinks Private Limited (176 Company Cases 67 Guj.).
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Reliance has been placed on the said decision and considering the ratio of the said decision, this court does not think it necessary to issue any such direction or condition on the petitioner company to restrict distribution of dividend out of such reserves.
(iii) Vide para 2 (e), it has been observed by the Regional Director that the transferor company-2, viz. Torrent Cables Limited and the Transferee Company, viz. Torrent Power Limited, being the listed companies had approached the concerned stock exchanges, viz. BSE Limited and National Stock Exchange of India Limited, and obtained the requisite observation letters from the said exchanges. However, under the SEBI circulars dated 4th February 2013 and 21st May 2013, the approval from SEBI has to be obtained. In this regard, it has been submitted that the said petitioner companies were required to obtain SEBI approval through the stock exchanges only and the said exchanges have actually granted the observation letters only after obtaining clearance from SEBI, which is clearly evident from the observation letters.
(iv) Further, it has been pointed out that the petitioner transferor company-2 as well as the petitioner transferee company, being the listed companies in the proposed scheme; had obtained the approval of the public shareholders through postal ballot and e-voting, as envisaged under clause 5.16(a) of the above referred SEBI circulars and the result of the votes cast by postal ballot and e-voting has been presented to the court along with the respective Chairman's reports. This clarifies the complete factual position with regard to the compliances made by the petitioner company with regard to SEBI circulars and in view of this, no further directions are required to be issued in this regard.
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(v) The next observation made vide para 2 (f) of the affidavit, pertains to the compliance with the provisions of FEMA and RBI guidelines. It has been clarified, that under the said Acts, no prior approval is required to be obtained for the proposed scheme of amalgamation. As the petitioner companies have confirmed, the transferee company is directed to take all necessary actions to comply with the applicable provisions of the said acts in form of intimation to the concerned authorities at the time of actual issue and allotment of shares to the said NRI/ foreign individuals pursuant to the scheme.
(vi) The next observation made vide para 2(g) pertains to the licences, approvals and other permissions from the concerned regulatory authorities. In this regard, it has been submitted that the scheme has defined the 'Undertakings' elaborately and has specifically included the transfer of all the existing licences, approvals and permissions from the concerned regulatory authorities existing with the transferor companies to be transferred to the transferee company. Further, clause 17.1.7 and 17.1.8 of the scheme has specific reference to the requisite approval from Central Electricity Regulatory Commission under Section 17 of the Electricity Act, 2003; as well as from Gujarat Electricity Regulatory Commission under Section 17 of the Electricity Act, 2003 and Regulation 27 of Gujarat Electricity Regulatory Commission (Licensing of Distribution of Electricity) Regulations, 2005 and section 25 of Gujarat Electricity Industry (Reorganisation and Regulation) Act, 2003 to the extent they are not inconsistent with the provisions of Electricity Act, 2003 for the implementation of the scheme. It has been submitted that the petitioner company had approached the said authorities before initiating the proceedings before the High Court and that the Central Electricity Regulatory Commission vide the order dated 7th January, 2015 has Page 11 of 15 HC-NIC Page 11 of 15 Created On Fri Aug 14 13:26:43 IST 2015 O/COMP/216/2015 JUDGMENT approved the amalgamation of first transferor company with the transferee company as required under section 17 of the Electricity Act, 2003. Similarly, Gujarat Electricity Regulatory Commission vide the order dated 1st April, 2015 has approved the amalgamation of Transferor Company - 1 with the transferee company. Taking note of the same, no further directions are required in this regard.
(vii) The next observation of the Regional Director vide para 2(h) pertains to the letter dated 2nd July 2015 sent to the Income Tax Dept. to invite their objections, if any. The response received from the Income Tax dept. dated 22nd July 2015 provides information about the assessments and outstanding demands for assessment years 2010-11, 2011-12 and 2012-13. In this regard, it has been submitted that the outstanding demands, being disputed, have been challenged by the petitioner companies and the same are pending before the appellate authorities. The petitioner companies have undertaken that, subject to the final adjudications of the tax liabilities, the petitioner companies shall fulfill their tax liabilities.
(viii) It has been further observed by the Regional Director that all the petitioner companies have filed returns for the Assessment year 2014-15 claiming current losses. The petitioners have pointed out the factual errors and further submitted that the scheme is proposed for the commercial benefits of achieving operational synergy by consolidation of activities of all the three companies. The resultant adjustments in the books of accounts and consequentially in the tax liabilities are permissible under the existing provisions of the Income Tax Act. The petitioner companies have undertaken to comply with applicable provisions of Income Tax Act and Rules. At the time of hearing, attention of the court is drawn to the Page 12 of 15 HC-NIC Page 12 of 15 Created On Fri Aug 14 13:26:43 IST 2015 O/COMP/216/2015 JUDGMENT observations of the Apex Court in the matter of Vodafone Essar Gujarat Limited on the plea of the Income Tax Dept. relating to the Scheme of Arrangement, whereby the Apex Court, while dismissing the special leave petition no. 29819/2012 filed by the Income Tax Department against the Division Bench judgment of this Court in the case of Vodafone Essar Gujarat Ltd. V. Department of Income Tax reported at 353 ITR 222 observed that 'the Department is entitled to take out appropriate proceedings for recovery of any tax statutorily due from the transferor or transferee company or any other person who is liable for payment of such tax due.' In light of the same, subject to the direction in the above terms viz. 'the Department is entitled to take out appropriate proceedings for recovery of any tax statutorily due from the transferor or transferee company or any other person who is liable for payment of such tax due" , it is not necessary for this court to issue any further directions.
(ix) The petitioner companies have further undertaken to address the complaints, if any received from any shareholders in respect of the unpaid dividend.
12. Considering all the facts and circumstances and taking into account all the contentions raised by the affidavits and reply affidavits, the reliance placed on the judgments of this High Court and Apex court, and the submissions during the course of hearing, I am satisfied that the observations made by the Regional Director, Ministry of Corporate Affairs, do not survive. I have come to the conclusion that the present scheme of amalgamation is in the interest of the shareholders and creditors of all the companies as well as in the public interest and the same deserves to be sanctioned. As regards the observations made in Page 13 of 15 HC-NIC Page 13 of 15 Created On Fri Aug 14 13:26:43 IST 2015 O/COMP/216/2015 JUDGMENT paragraph 7 above as to non payment to one of the creditors of the Transferee Company, in view of the judgment of the division bench of this Court in the case of Union of India V. Ambalal Sarabhai Enterprise Ltd. (1984) 55 Company Cases 623 at page 660, strictly it may not be necessary to obtain its consent at all. Therefore, the transferee company is hereby directed to deposit the amount payable to that creditor in a separate bank account with an undertaking to this court to the effect that the said account shall not be used for any purpose other than the prepayment to the said lender. The aforesaid direction shall be complied within four weeks from the date of this order.
13. In the facts and circumstances of the case and having heard the learned advocates for the petitioners, the prayer in terms of paragraph 21
(a) of the Co. Petition No. 216 of 2015, paragraph No. 23 (a) of Company Petition No. 217 of 2015, and Company Petition No. 218 of 2015 are hereby granted.
14. The petitions are disposed of accordingly. So far as the costs to be paid to the Central Government Standing Counsel is concerned, I quantify the same at Rs. 10,000/-per petition for the second Transferor Company, and the Transferee Company being listed company, and at Rs. 7,500/- per petition for the first Transferor company. The same may be paid to the learned Standing Counsel appearing for the Central Government. Costs to be paid to the Office of the Official Liquidator is quantified at Rs. 7,500/- per petition payable only by the transferor companies. The same may be paid to the Office of the Official Liquidator.
15. The petitioner companies are further directed to lodge a copy of Page 14 of 15 HC-NIC Page 14 of 15 Created On Fri Aug 14 13:26:43 IST 2015 O/COMP/216/2015 JUDGMENT this order, the schedule of immovable assets of all the transferor companies as on the date of this order and the Scheme duly authenticated by the Registrar, High Court of Gujarat, with the concerned Superintendent of Stamps, for the purpose of adjudication of stamp duty, if any, on the same within 60 days from the date of the order.
16. The Petitioner companies are directed to file a copy of this order along with a copy of the scheme with the concerned Registrar of Companies, electronically, along with INC-28 in addition to physical copy as per relevant provisions of the Act.
17. Filing and issuance of drawn up order is hereby dispensed with.
18. All concerned authorities to act on a copy of this order along with the scheme duly authenticated by the Registrar, High Court of Gujarat. The Registrar, High Court of Gujarat shall issue the authenticated copy of this order along with Scheme as expeditiously as possible.
(VIPUL M. PANCHOLI, J.) sndevu Page 15 of 15 HC-NIC Page 15 of 15 Created On Fri Aug 14 13:26:43 IST 2015