Gujarat High Court
Grace Castings Limited vs Respondent(S) on 5 March, 2015
Author: Harsha Devani
Bench: Harsha Devani
O/COMP/264/2014 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
COMPANY PETITION NO. 264 of 2014
In COMPANY APPLICATION NO. 268 of 2014
With
COMPANY PETITION NO. 265 of 2014
In
COMPANY APPLICATION NO. 269 of 2014
FOR APPROVAL AND SIGNATURE:
HONOURABLE MS.JUSTICE HARSHA DEVANI
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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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GRACE CASTINGS LIMITED....Petitioner(s)
Versus
......Respondent(s)
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Appearance:
MR NAVIN PAHWA for MRS SANGEETA N PAHWA, ADVOCATE for the
Petitioners
MR PRIYANK LODHA FOR MR DEVANG VYAS, ADVOCATE for the
Respondent
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O/COMP/264/2014 JUDGMENT
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CORAM: HONOURABLE MS.JUSTICE HARSHA DEVANI
Date : 05/03/2015
ORAL JUDGMENT
1. These two petitions have been filed by the petitioner - Grace Castings Limited (hereinafter referred to as "the transferee company") and Rumoni Infosolutions Private Limited (hereinafter referred to as "the transferor company") for sanction of the Scheme of Amalgamation under sections 391 to 394 of the Companies Act, 1956 (hereinafter referred to as "the Act").
2. Mr. N. K. Pahwa, learned advocate for the petitioner companies invited the attention of the Court to the record of the case to point out that the Board of Directors had passed a resolution approving the Scheme of Amalgamation of the petitioner - transferor company with the petitioner - transferee company. By an order dated 12 th November, 2014 passed by this Court in Company Application No.268 of 2014, this Court had dispensed with the meeting of the equity shareholders in view of the written consents given by them to the proposed scheme. The Court had further noted that since the applicant company was the transferee company, the meeting of the creditors was not required to be held. By an order dated 12 th November, 2014 made in Company Application No.269 of 2014, this Court had dispensed with the meeting of the equity shareholders as well as unsecured creditors in view of the consents given by them to the proposed scheme. The Court had also recorded that there were no secured creditors.
Page 2 of 13O/COMP/264/2014 JUDGMENT Thereafter, the petitioner companies have moved these petitions seeking sanction of the Scheme of Amalgamation.
3. The petitions came to be admitted by separate orders dated 24th November, 2014 and the notice came to be issued to the Regional Director, North-Western Region, Ministry of Corporate Affairs. The notice was also issued to the Official Liquidator in the petition filed by the transferor company.
4. In response to the notice issued by the Court, the Regional Director has filed an affidavit dated 9 th January, 2015 and has confirmed that there are no objections, except (i) in clause 10.3 of the Scheme, the petitioner companies have not provided for the treatment about deficit, if any, of the value of the new shares issued by the transferee company. As per the requirements of Accounting Standard-14, the excess of assets over liabilities should be credited to the Amalgamation Reserve Account and the shortfall, if any, should be debited to the Goodwill Account. Therefore, the petitioner companies be directed to strictly comply with the requirements of Accounting Standard-14 and the deficit of the assets over the liabilities, if any, shall be credited to the Goodwill Account arising on amalgamation. Further, the petitioner companies be directed to give undertaking that the reserves so created, if any, shall not be available for distribution of dividend and the petitioner companies shall comply with Accounting Standard-14 and amend the relevant clause of the Scheme accordingly, and (ii) that the company should follow the procedure for reduction of capital as contemplated under section 101(2) of the Act.
5. Mr. Navin Pahwa, learned advocate for the petitioner Page 3 of 13 O/COMP/264/2014 JUDGMENT companies drew the attention of the Court to the decision of this Court in the case of Milestone Tradelinks P. Ltd., in re, [2013] 176 Comp Cas 337 (Guj), wherein Court has considered the decision of the Bombay High Court in the case of Hindalco Industries Ltd., In re, [2009] 151 Comp Cas 446 (Bom), wherein it has been held that on a conjoint reading of sub- sections (3A) and (3B) of section 211, it necessarily follows that deviation from the Accounting Standards is permissible subject, however, to compliance of the requirement of disclosure in the profit and loss account and balance sheet of such deviation and the reasons for such deviation and financial effects thereof. In other words, deviation of the Accounting Standards is not wholly prohibited, but is regulated by the provisions of section 211 of the Act. The petitioner assures to abide by the said regime. So long as such disclosure is made, the company cannot be faulted with regard to the profit and loss account and balance sheet being in deviation from the Accounting Standards. The Court has also placed reliance upon the decision of the Rajasthan High Court in the case of Sutlej Industries Ltd., In re, [2007] 135 Comp Cas 394 (Raj) as well as the decision of this Court in the case of Adishree Tradelinks P. Ltd., In re, [2013] 176 Comp Cas 67 (Guj), and held that taking into consideration the law laid down in the above judgments and the fact that the shareholders have unanimously approved the scheme and the aspect that it has been stated in the affidavit filed by Milestone Tradelinks P. Ltd., the petitioner transferee company, that it shall make all necessary disclosures in its financial statements as enumerated under section 211(3B) of the Act, after the scheme is sanctioned by this Court, there does not appear to be any legally justifiable reason for withholding sanction to the Page 4 of 13 O/COMP/264/2014 JUDGMENT scheme.
6. A perusal of the affidavit in response to the common report of the Regional Director reveals that clause 10 of the Scheme, as a whole, is in accordance with Accounting Standard-14. However, without prejudice to the said contention, it had been reiterated that the petitioner transferee company will comply with the requirements of Accounting Standard-14. It is further stated that so far as utilization of the reserves for the purpose of distribution of dividend is concerned, the issue is no longer res integra in view of the decision of this Court in the case of Milestone Tradelinks P. Ltd., in re (supra).
7. In the light of the fact that it is the case of the petitioner companies that Accounting Standard-14 has been duly complied with in clause 10 of the Scheme and in view of the statement made on behalf of the petitioner - transferee company that the requirements of Accounting Standard-14 shall be complied with, having regard to the law laid down in the decisions cited hereinabove, the observation made by the Regional Director is not sustainable.
8. Insofar as the second observation made by the Regional Director is concerned, the learned counsel placed reliance upon the following decisions :
(i) The decision of the Bombay High Court in the case of EOC Tailor Made Polymers India (P) Ltd., In re, [2005] 59 SCL 199 (Bom.),
(ii) The decision of the Madras High Court in the case of Page 5 of 13 O/COMP/264/2014 JUDGMENT Asian Investments Ltd., In re, [1992] 73 Comp Cas 517 (Mad.),
(iii) The decision of this Court in the case of Patels Airtemp (India) Ltd., In re, [2004] 49 SCL 340.
9. Since, the Bombay High Court in EOC Tailor Made Polymers India (P) Ltd. (supra) has also made reference to the above mentioned decision of the Madras High Court, it is not necessary to refer to the same individually. In, the above decision, the Bombay High Court has, in the context of a similar submission, held thus :
"10. Before I deal with the rival submissions of the parties it is necessary that the provisions of section 101 which requires an interpretation must be analysed. The said sub-section (1) of section 101 inter-alia provides for a passing of a resolution by the company for reducing the share capital and after passing of such a resolution the company is required to obtain an order from the court granting confirmation of such a resolution. Sub-section (2) of section 101 inter-alia provides for three eventualities for which a special procedure prescribed thereunder is required to be followed. In a case where a proposed reduction of share capital involves such a diminution of liability in respect of unpaid share capital or the payment of any shareholder of any paid-up share capital then in that event the provision prescribed in sub- section (2) thereof is required to be complied with. The third eventuality contemplated is wide enough to cover all cases since the words used are 'in any other cases'. In so far as the third eventuality is concerned the court is Page 6 of 13 O/COMP/264/2014 JUDGMENT vested with a discretion whether to direct a party to follow the provisions of sub-section (2) sub-clause (a), (b) and (c) or not to direct the compliance thereof. In the present case admittedly there is no question of diminution of any liability in respect of unpaid share capital nor there is a situation where the payment is made to any shareholder out of any paid-up share capital. However the learned counsel appearing for the Regional Director has contended before me that reduction of share capital even if by virtue of automatic operation of law results in the shares of the transferor company being extinguished by virtue of amalgamation and thus the provisions of sub-section (2) of section 101 are attracted by virtue of the third category, i.e., 'any other case'. The learned counsel has further contended that though there is a discretion for the court in the third category of the case still the court cannot grant dispensation of the provisions of sub-section (2) of section 101 of the Companies Act. On the other hand as far as of the provisions of sub-section (2) of section 101 are concerned I am of the opinion that the words appearing 'in any other cases' must necessarily be read ejusedem generis with the words preceding in other cases. It is because only if the reduction in share capital is likely to affect the interest of the creditors adversely to him then the provisions which are provided in sub-section (2) of section 101 that either his consent can be obtained or his objections can be heard and considered by the court. The object for which the provision is inserted would be defeated if cases of reduction of share capital is taken in to account by virtue of the word 'any other case' Page 7 of 13 O/COMP/264/2014 JUDGMENT appearing in sub-section (2) of section 101. Thus the power of the court to direct compliance of the procedure particularly in the case like the present one where by virtue of operation of law there is a necessity to reduce the share capital is not necessary. The shares held by the transferor company in the transferee company cannot continue to exist by virtue of the amalgamation and extinguishment of a transferor company. In my view to hold that even in such cases the provision of sub-section (2) of section 101 must be necessarily followed would be inappropriate and would amount to stretching the word 'any other case' beyond the intent and object of the provisions of sub-section (2) of section 101 of the Act. There is one more angle which should be taken into consideration while interpreting the provisions of sub- section (2) i.e. if the word 'any other case' is wide enough to cover all kinds of reduction in share capital including the reduction which necessarily arises due to amalgamation of the company then in my opinion the earlier part of the sub-section (2) of section 101 would be redundant as the word 'any other case' would also include the cases where there is a diminution of the liabilities in respect of the unpaid share capital or where the payment is made to any shareholder of any paid-up share capital. Thus before exercising the discretion in the third category of the cases which falls in 'any other case', the court must take into consideration and account whether the procedure should be directed to be complied with or not and while doing so it should take into consideration whether in that particular case interest of the creditors is affected or not. the aforesaid view which I Page 8 of 13 O/COMP/264/2014 JUDGMENT have taken is also fortified by the judgement of the Madras High court as under :
This clause has become necessary in view of the statutory prohibitions contained in section 42 and section 77 of the Act. The object of section 42 is to maintain the separate operational identity of a holding company and its subsidiaries and thereby preserve the respective shareholder's control on them section 77 imposes a restriction on purchase by a company of its own shares.
It is not necessary that extinguishment of shares in all cases should necessarily result in reduction of share capital. Section 100 will not come into play where the scheme of amalgamation contemplate the transfer of assets and liabilities of the transferor company to the transferee company. In such a case, in my view, there is no release of assets. the assets of the transferor company, on amalgamation stand transferred to and vested to the transferee company, on amalgamation, stand transferred to and vested in the transferee- company. Further, rule 85 of the Companies (court) Rules, 1959 which is part of the scheme of section 101 and section 102 of the Act, provides that where a proposed compromise or arrangement involves reduction of capital of the company, the procedure prescribed by the Act and the rules relation to reduction of capital shall be complied with before the compromise or arrangement as far as it relates to reduction of capital is concerned. It is therefore, evident that section 101 and section 102 and rule 85 would stand attracted only to cases of compromise or arrangement involving reduction of capital and not to cases of amalgamation simpliciter when the entirety of the assets and liabilities are transferred and when there is n o release of any assets. The object of asking for confirmation by the court of reduction of capital is to safeguard the interest of the creditors of the company. In the instant case, the resolution approving the scheme of amalgamation was unanimous. There was no voice of protest from any quarter, The scheme is a comprehensive and consolidated scheme. It is peculiar case of amalgamation where a holding company is amalgamated with a subsidiary company. Therefore, I am clear in my mind that the contention raised by Mr. Venkathalamoorthy is Page 9 of 13 O/COMP/264/2014 JUDGMENT not well founded. As already mentioned, this case on hand is not a case where there is reduction in capital. Further, the procedure prescribed under sections 101 and 102 read with rule 85 do not stand attracted to a case of scheme of amalgamation, where there is no release of assets but which involves transfer of all the assets and liabilities.
11. However, the learned counsel for the Regional Director has brought to my attention the judgement of this court reported in PMP Auto Industries (1994) Vol-80 289 and particularly the following para which reads as under :
"Thus the position in law appears to be clear. Section 391 invests the court with powers to approve or sanction a scheme of amalgamation/arrangement which is for the benefit of the company. In doing so, if there are any other things which, for effectuation, require a special procedure to be followed-except reduction of capital-then the court has powers to sanction them while sanctioning the scheme itself. It would not be necessary for the company to resort to other provisions of the Companies Act or to follow other procedures prescribed for bringing about the changes requisite for effectively implementing the scheme which is sanctioned by the court. Not only is section 391 a complete code as held by the courts."
12. According to me the provisions under section 101 would not apply in case where there is a reduction in the share capital of the company by virtue of amalgamation of two companies and in case where the transferor company held the shares in the transferee company. In view of the aforesaid position in law, I find that there is no merit in the objection raised by the Regional Director in the present case. I accordingly make both the petitions absolute in terms of prayer clause (c) to (f)."
10. This court is in complete agreement with the aforesaid view of the Bombay High Court. Accordingly, it is held that the provisions of section 101 of the Act would not apply where there is reduction in the shares of the company by virtue of amalgamation of two companies and in case where the Page 10 of 13 O/COMP/264/2014 JUDGMENT transferor company held the shares in the transferee company. In view of the aforesaid position of law, the objection raised by the Regional Director does not merit acceptance.
11. In Official Liquidator Report No.265 of 2014, the Official Liquidator has filed a report. Along with the said report, a report of the Chartered Accountants has also been annexed. The Official Liquidator has stated that in view of the report of the Chartered Accountants, the affairs of the petitioner companies have not been conducted in a manner prejudicial to the interest of its members or to the public interest in terms of second proviso to section 394(1) of the Companies Act, 1956. Therefore, M/s Rumoni Infosolutions Private Limited i.e. the Transferor Company may be dissolved without winding up.
12. The Official Liquidator, however, has sought a direction to the petitioner - Transferor Company to preserve its books of accounts, papers and records, and not to dispose of the records without prior permission of the Central Government.
13. In the light of the fact that two objections raised by the Regional Director stand addressed and the Official Liquidator has not raised any objection to the Scheme, there does not appear to be any impediment to the sanctioning of the Scheme.
14. The petitions are, accordingly, allowed. The Scheme of Amalgamation as annexed at Annexure "C" to the petitions, is hereby sanctioned so as to make it binding on all the shareholders and creditors of the transferor company and the transferee company. It is, however, directed that the petitioner Page 11 of 13 O/COMP/264/2014 JUDGMENT
- Transferor Company shall preserve its books of accounts, papers and records, and not to dispose of the records without prior permission of the Central Government.
15. The cost of the petitions is determined at Rs.7,500/- per petition, which shall be paid by both the petitioners respectively, by drawing a Pay Order in favour of the learned Assistant Solicitor General. The cost of the office of the Official Liquidator is quantified at Rs.7,500/- in respect of the transferor company.
16. The petitioner companies shall lodge a copy of this order, the schedules of immovable assets of all the transferor company 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.
17. 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 E-Form 21 in addition to physical copy as per relevant provisions of the Act.
18. Filing and issuance of drawn up order is hereby dispensed with. All the 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 Schedule as expeditiously as possible.
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19. Both the petitions stand disposed of, accordingly.
(HARSHA DEVANI, J.) parmar* Page 13 of 13