Karnataka High Court
Shankaranarayana Hotels Pvt. Ltd. And ... vs Official Liquidator, Government Of ... on 31 October, 1990
Equivalent citations: [1992]74COMPCAS290(KAR)
JUDGMENT K.J. Shetty, J.
1. Petition No. 10 of 1990 by Shankaranarayana Steel and Polymer Concrete Ltd. (hereinafter referred to as the "transferor company") is for sanctioning a scheme of amalgamation and merger with Shankaranarayana Hotels Pvt. Ltd. (hereinafter referred to as the "transferee-company"). Petition No. 9 of 1990 is by the transferee-company for sanctioning the scheme of the aforesaid amalgamation and merger.
2. Since common questions of law and fact arise in these two petitions, they have been taken together and heard and are being disposed of by a common order.
3. Shankaranarayana Hotels (Pvt.) Ltd., the transferee-company, was incorporated on April 19, 1973, under the provisions of the Companies Act, 1956, as a company limited by shares, its accounting year being April 1, to March 31, following. The latest balance-sheet and profit and loss account for the year ending March 31, 1989, has shown huge profits. The object of the transferee-company is mainly to carry on the business of hotel as enumerated in the memorandum of association, viz., hotel, restaurant, cafe, tourism, refreshment room, beer house, lodging house keepers and licensed victuallers in the city of Bangalore and elsewhere in India and the incidental objects are to purchase, erect or otherwise acquire and equip any hotels in India and to purchase or otherwise acquire landed property. It did not have either the main or incidental objects of the transferor-company. The transferee-company, to have similar objects as the transferor-company, got its memorandum of association amended by passing a resolution in its general meeting of the members held on July 17, 1989, and got the same approved by the Company Law Board by its order dated March 13, 1990, passed in Petition No. 41/17 SRB/90 by which order the objects clause of the transferee-company's memorandum of association has been amended including the objects :
(1) to manufacture iron, steel, brass, bronze and aluminium and other metal products, machinery, tools, accessories, implements and machinery of all kinds and to manufacture cement and allied products and to manufacture polymer concrete products.
(2) to buy, acquire, purchase, manufacture, construct, sell, deal in and otherwise dispose of parts, accessories, instruments, machineries, devices, attachments and equipment made from steel, zinc, bronze, brass and all other metals and all other articles, devices, parts, supplies, attachments and accessories connected therewith both at wholesale and retail.
(3) to carry on the business of all or any kind of iron and steel founders, steel melters, steel makers, steel shapers and manufacturers, mechanical, chemical, heat treatment, civil, electrical and general engineers and fabricators, contractors, tool makers, brass founders, metal workers, manufacturers of steel, metal and malleable grey castings including ferrous, non-ferrous, special and alloy steel, spring steel, forging quality steel manufacturers, processors of all types of forged components, nuts, bolts, steel rounds, nails tools, all types of hardware items, plate makers, wire drawers, tube manufacturers, galvanisers, japaners, enamellers and electroplaters, manufacturers of cement and allied products and manufacturers of polymer concrete products.
4. The transferor-company, viz., Shankaranarayana Steel and Polymer Concrete Ltd., was incorporated under the Companies Act, 1956, on March 22, 1981, with the main objects mentioned supra, which have been subsequently included by way of an amendment to the memorandum of association of the transferee-company. The objects clause in its memorandum of association did not contain the objects, either main or ancillary of the transferee-company. The transferor-company, vide its extra-ordinary general meeting of the members held on July 17, 1989, passed a resolution amending the objects clause including the objects, viz., carry on the business of hotel, restaurant, cafe, beer house, tavern, refreshment room, lodging house; and acquire all kinds of property either absolutely or on lease. The said amendment was approved by the Company Law Board, by its order dated March 13, 1990. By the said order the objects clause of the transferor-company's memorandum of association has been amended including the above-said objects.
5. By virtue of their respective memoranda of association and articles of association, both the transferor-company and the transferee-company are entitled to carry on the business of manufacture of iron, steel, brass, bronze, aluminium and other metal products, machinery of all kinds, and to manufacture cement and allied products, and to manufacture polymer concrete products.
6. It is not in dispute that their manufacture and their business activities are analogous and can be combined effectively and economically.
7. The transferee-company has come into existence much earlier to the transferor-company. The directors of both the companies are more or less the same and belong to the same family. Over a period of years, the transferee-company has made large profits. By all standards, it has been and is an affluent company with large profit-making potentialities. The transferor-company appears not to have been able to run through its big scheme of putting its products into effective commercial sale. It has been stated that the transferor-company has installed capacity to manufacture 4,500 metric tons per annum of polymer concrete. Its factory is situated in a notified industrially backward area near Bangalore and is entitled to several concessions and benefits offered by the Government of Karnataka. The total cost of the project for setting up the factory is in the order of Rs. 124.50 lakhs and the company has commenced its production and will be in a position to market its products without any difficulty and the polymer concrete is a substitute for natural marble and granite which has diverse uses in the construction of houses, commercial office buildings and for manufacturing sanitary fittings. It is stated that the cost when compared to the natural marble granite and aluminium is much cheaper. The country's demand for polymer concrete is estimated to be two lakhs metric tons per annum. The present production is only of 0.15 lakh metric tons in the country.
8. The breakeven level is not very high and, barring unforeseen circumstances, the board of directors is confident of crossing the said level in the first full year of operation. It is further stated that the erection of the plant and machinery at the factory is complete and a substantial part of its funds has come from the promoters, friends and relatives. The Karnataka State Industrial Investment and Development Corporation Ltd. and the Canara Bank were secured creditors. The secured creditors have no objection to the implementation of the scheme of amalgamation. The transferee-company stated that the transferor-company has sufficient technology to implement the project and market the goods. Though they have already invested large sums of money in the business, still the company is in need of further funds for the launching of marketing of the manufactured goods. As it has been facing liquidity problem, the Karnataka State Industrial Investment and Development Corporation has disbursed the entire term loan sanctioned, but the company is still in need of additional funds to launch and promote its products. Thus, the transferor-company has not made any profit and appears to be financially in strained circumstances.
9. The promoters of the transferor-company also control the transferee-company. In so far as the transferee-company is concerned, it is financially sound and has sufficient liquid resources and capacity to raise funds. It has no major liabilities except deposits received from the tenants and wealth-tax arrears which it has been permitted to pay in instalments over a period of time. It is in a sound position and has the capacity to raise funds and make it available to launch its products and to meet the working capital requirements. It was thus contemplated by the respective board of directors of the two companies that an amalgamation/merger of the transferor-company with the transferee-company would be beneficial to both. On such merger, the transferee-company could effectively execute the project of the transferor-company which had come to a standstill for want of funds. By an amalgamation, it is averred that the transferee-company could certainly be able to raise funds from banks and financial institutions, having regard to its increased capital and fixed assets.
10. It is averred that the tax structure of the transferee-company would benefit considerably by the scheme of amalgamation. Further, it is stated that the transferee-company would carry out its proposed manufacturing activities profitably. It is stated that the ratio of exchange of shares is based upon the valuation of shares of both the companies made by V. M. Shetty and Co., chartered accountants, who are also the statutory auditors of both the companies. The board of directors of both the companies have accepted the exchange ratio as fair and reasonable.
11. The transferee-company filed Company Application No. 75 of 1990 requesting the court to give a direction to convene the meetings of the equity shareholders and unsecured creditors of the transferee-company. The court, by its order dated January 19, 1990, directed the transferee-company to hold separate meetings of equity shareholders and unsecured creditors of the transferee-company on February 15, 1990, for considering and, if thought fit, to approve the proposed scheme of amalgamation. The meeting of the secured creditors of the company was dispensed with as not being necessary and in view of the affidavit of concurrence filed by the secured creditors, viz., Canara Bank. The transferor-company moved Application No. 96 of 1990 before the court seeking dispensation of the holding of the meeting of the equity shareholders and secured and unsecured creditors, as all the secured, unsecured and equity shareholders holding 98.5 per cent. of the paid-up share capital had filed individual affidavits approving the scheme of amalgamation. This court has allowed the said application by its order dated February 2, 1990, and permitted the said company to file a petition seeking confirmation of the scheme of amalgamation within ninety days from the date of the order.
12. It may be seen that the overwhelming majority of the equity shareholders (sic) of the transferor-company shall be transferred to and vested in the transferee-company with effect from April 1, 1989. It is averred that in the sanction of the said scheme of amalgamation will be for the benefit of the two companies and their respective equity shareholders and secured and unsecured creditors.
13. In pursuance of the direction given by this court in Company Application No. 75 of 1990, notices of the said meetings were duly sent to the persons concerned on January 23, 1990, by the chairman along with a copy of the proposed scheme of amalgamation and a statement under section 393 of the Companies Act also in the form of proxy. The notice of the meeting was duly advertised in accordance with the order of the court in the Times of India, Bangalore edition and Kannada Prabha, Bangalore edition. The chairman, Shri Narayana Shetty, has also filed his affidavit of service on January 31, 1990, before this court.
14. As per the order, separate meetings of the equity shareholders and unsecured creditors of the transferee-company were duly held on February 15, 1990, under the chairmanship of Narayana Shetty. In both the meetings of equity shareholders and unsecured creditors, the scheme of amalgamation was unanimously approved and the following resolution was passed.
"Resolved that the scheme of amalgamation of Shankaranarayana Steel and Polymer Concrete Ltd., its members and creditors with Shankaranarayana Hotels Private Ltd., a copy whereof was placed before the meeting and initialled by the chairman for the purpose of identification, be and is hereby approved, that the board of directors of the company be and is hereby authorised to take all necessary steps to do all such acts, matters, deeds and things as it may consider necessary or as may be required for carrying the said scheme into effect and further agree to any modifications, conditions or directions as may be imposed by the High Court of Karnataka while sanctioning the said scheme."
15. The salient features of the scheme of amalgamation of the transferor-company with the transferee-company may be seen. The scheme provides for amalgamation of the transferor-company with the transferee-company and resulting in the dissolution of the transferor-company without being wound up. All the assets, properties and liabilities of the transferor-company are being taken over and are vested with the transferee-company with effect from April 1, 1989. In consideration of the vesting of the properties and assets and debts, liabilities and obligations of the transferor-company in the transferee-company and on such extinguishment of the transferor-company, the transferee-company shall issue and allot to the shareholders of the transferor-company standing on its register of members one equity shares of Rs. 1,000 each credited as fully paid against every 100 equity shares of Rs. 10 each fully paid and held by such member in the transferor-company; and such members shall be entitled to be issued one equity share in the transferee-company for every one hundred equity shares held in the transferor-company and paid for every share in excess of the multiple of one hundred held in the transferor company a sum of Rs. 10 by the transferee-company (sic).
16. Further, it is provided that the new equity shares in the capital of the transferee-company to be allotted pursuant to clause 9 shall, in all respects, rank pari passu with the existing equity shares of the transferee-company, save and except that such equity shares shall be entitled to share on a pro rata basis, from the appointed day, in dividend, if any, declared in respect of the accounting year of the transferee-company ending on March 31, 1990.
17. Notices of admission of both the petitions have been served on the Central Government, as required under section 394A of the Companies Act. On behalf of the Central Government, the Central Government Pleader appeared, but he did not make any remark either in favour of or against the amalgamation. The Central Government Pleader has submitted that the Central Government did not propose to file any representation with regard to the petitions for amalgamation and further submitted that the court may, therefore, decide the petitions on merits.
18. In so far as the official liquidator's report is concerned, a chartered accountant was appointed to assist him who, after going through the account books of both the companies, submitted a detailed report. In pursuance of section 394 of the Companies Act, the official liquidator submitted a statement wherein he has stated that the auditors have indicated that the proposed scheme of amalgamation would result in future reduction in the income-tax liability of the transferee-company and it would amount to tax avoidance in the light of the observations made in the judgments of the Supreme Court and High Courts. Further, he has stated that, as regards the observation relating to tax avoidance made by the auditors, the official liquidator is not in a position to express any view. Further, it has averred that except the irregularities pointed out by the chartered accountant, the affairs of the company have not been conducted in a manner prejudicial to the interests of the members or to the public interest. However, the official liquidator is in full agreement with the views expressed by the chartered accountant in the reports dated May 28, 1990, and August 17, 1990, that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to the public interest. However, he has submitted that, taking into consideration the report of the auditor, it is clear that the proposed scheme of amalgamation would result in future reduction in the income-tax liability of the transferee-company and that there would be likelihood of further tax avoidance.
19. It is seen that the second report dated August 17, 1990, is submitted, confined to the transferor-company, in view of the proviso to section 394(1) of the Act. In that report, it is stated, that paragraphs 4, 11, in pages 25 and 37, and paragraphs 5 to 7, in pages 41 and 42, in the first report dated May 28, 1990, are to be deleted as that refers only to the transferee-company. That the amended report dated August 17, 1990, is confined to the transferor-company and in that it is stated that the affairs of the transferor-company have not been conducted in a manner prejudicial to the public interest and further they had stated that the proposal of the company seeking its transfer to, or amalgamation with, another company is also a part of the affairs of the said company. If it is a part of its affairs then a question arises as to whether such proposal would result in reduction of tax liability when the proposal takes effect. Further, it is stated that they have not expressed any opinion on merits on the said question of tax reduction. The relevant portion of the report of the official liquidator read as follows :
"The transferor-company commenced commercial production with effect from April, 1989, and hence the transferor-company is entitled to carry forward of business loss and depreciation allowance only with effect from April 1, 1989, i.e., for the financial year ended March 31, 1990, relevant to assessment year 1990-91. The transferee-company can reduce its tax liability without further investment in such a big project with the transferor-company. The auditors have indicated that this hon'ble court may decide as to whether the aforesaid proposed scheme of amalgamation resulting in future reduction in income-tax liability of the transferee-company will amount to tax avoidance or not in the light of the observations made in the judgments of the Supreme Court and the High Courts."
20. Further, it is averred that, subject to what is stated supra about the tax avoidance of the transferee-company, the affairs of the transferor-company have not been conducted in any manner prejudicial to the interest of its members or to the public interest.
21. Learned counsel for the official liquidator submitted that, in view of the official liquidator's report based on the auditor's statement contained in its minutes report dated May 28, 1990, and August 17, 1990, there is likelihood of the transferee-company reducing its tax liability without further investment in such a big project by the amalgamation, and, by such amalgamation, the transferor-company gets itself dissolved. Further, he has argued that, by the scheme of amalgamation, there would be, in the future, tax reduction in the income-tax liability of the transferee-company. Learned counsel relied on the decision of the Supreme Court in McDowell and Co. Ltd. v. CTO and Wood Polymer Ltd., In re [1977] 47 Comp Cas 597 (Guj).
22. When a scheme of compromise and/or arrangement is submitted to the court for its sanction, the court would ordinarily pose to itself three questions, viz., (i) whether the statutory provisions have been complied with or not; (ii) whether the class or classes have been fairly represented; and (iii) whether the arrangement is such as a man of business would reasonably approve.
23. In respect of these three questions, I find that there is absolutely no dispute between the parties. The members in the case of the transferor-company and unsecured creditors as well as equity and preference shareholders of the transferee-company have approved the scheme of amalgamation. That apart, the report of the chairman clearly goes to show that there appears to have been adequate representation. There is not even a suggestion that the majority have coerced the minority into submission or are trying to take unfair advantage of the minority. So far as the other point is concerned, viz., whether there is a fair and proper amalgamation resulting in the dissolution of the transferor-company without being wound up, the court is to be satisfied granting the scheme.
24. It is seen from the scheme of amalgamation that the transferee-company would generate more funds and generate more profit and, therefore, the amalgamation is in the interest of both the companies' shareholders and creditors. It is also seen that, because of the aforesaid advantages, the board of directors of both the companies were of the opinion that it is expedient and in the best interest of all concerned that the transferor-company be amalgamated and merged with the transferee-company and, accordingly, they approved the said scheme of amalgamation by the requisite majority of shareholders and creditors which is subject to the sanction of this court.
25. As already seen, the terms of the scheme of amalgamation as aforesaid and approved by the board of directors are in accordance with the requirement of law. Under the scheme of amalgamation, the assets and liabilities of the transferor-company shall be transferred to and vested in the transferee-company with effect from April 1, 1989, as follows :
"(a) With effect from the appointed day, i.e., April 1, 1989, all the properties movable and immovable and other assets of Shankaranarayana Steel and Polymer Concrete Limited shall be deemed to be transferred, and vested in Shankaranarayana Hotels Pvt. Ltd. Similarly all debts, liabilities, duties and obligations of every kind, nature and description of the transferor-company shall stand transferred and shall become the debts, liabilities, duties and obligations of the transferee-company.
(b) In consideration of the said transfer of amalgamation, for every 100 equity shares of Rs. 10 each fully paid of the transferor-company, one equity share of Rs. 1,000 fully paid of the petitioner-company will be allotted to the members of the transferor-company and for fractions, if any, payment to the shareholders of the transferor-company shall be made by the petitioner-company at the rate of Rs. 10 per equity share of the transferor-company. Such newly allotted shares shall be entitled to participate in the dividend, if any, declared by the petitioner-company for the accounting year ending 31st March, 1990."
26. The principles governing the amalgamation/compromises and merger of the transferor and transferee-companies are well-settled. Amalgamation should not only be beneficial to the companies, but should also be in the interest of creditors and members of both the transferor and transferee-companies and should be in the public interest.
27. The court, in exercising its discretion under sections 391 and 394 of the Act, has to see that the scheme as a whole, having regard to the general conditions and background and object of the scheme is reasonable and fair. If the court finds that the scheme of amalgamation is beneficial to the members of both the companies and the affairs of the company which is going to be dissolved - the transferor-company - have not been conducted in any manner prejudicial to the interest of its members or to public interest, it is not for the court to launch any investigation upon the commercial merits or demerits of the scheme. The court shall not dwell upon or interfere with the collective wisdom of the shareholders of the company.
28. Even at the cost of repetition, it may be stated that the scheme has been approved. The scheme of amalgamation provides for transfer of all assets, properties and liabilities of the transferor-company and the same to be vested with the transferee-company. In consideration of such vesting, the transferee-company shall allot to the shareholders of the transferor-company one equity share of Rs. 1,000 each, credited as fully paid against every 100 equity shares of Rs. 10 each fully paid and held by such members.
29. After going through the amalgamation and taking into consideration the fact that at the meetings of the members and creditors of both the transferor and the transferee-companies, the amalgamation scheme was approved, in my opinion, the scheme is both fair and reasonable and it is in the interest of both members and creditors.
30. In so far as the official liquidator's report is concerned, it is stated that, due to the merger of the transferor-company with the transferee-company, there shall be tax reduction by the transferee-company, particularly future reduction in income-tax liability of the transferee-company. It is true that, even when it is satisfactorily established that statutory formalities have been duly complied with, and the scheme of amalgamation has been reported, the court has got a discretion to accept or reject the scheme.
31. Let me recapitulate the facts as to the amalgamation and the statements contained in the report of the official liquidator to find out whether there is any substance in the contentions of the official liquidator that the scheme is nothing but a device to reduce the income-tax payable by the transferee-company. It is noticed in the earlier part of the order that the official liquidator, in his report, has stated that, on amalgamation, the transferor-company merged with the transferee-company with the transferor-company being dissolved without being wound up thus resulting in the likelihood of the transferee-company reducing its tax liability. The auditor's report annexed to the report of the official liquidator is rather vague as to how the transferee-company is going to reduce its tax liability. It is relevant to refer to sections 391 and 394 of the Act to find out whether it is required to investigate and find out whether there is likelihood of tax avoidance by the transferee-company in the matter of sanctioning amalgamation of companies by the court.
32. Section 391 of the Act envisages amalgamation of companies. Section 394(1)(a) of the Act makes provision for amalgamation of companies by resorting to the provisions of section 391. There are two provisos to section 394(1), and the second proviso, which is relevant for discussion, reads as follows :
"Provided further that no order for the dissolution of any transferor company under clause (iv) shall be made by the court unless the official liquidator has, on scrutiny of the books and papers of the company, made a report to the court that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest."
33. As per the provisions, it is clear that no order for dissolution of any transferor-company under clause (iv) (which refers to the transferor-company) could be made unless the official liquidator scrutinises the books and papers of the company and makes a report to the court that the affairs of the company have not been conducted in a manner prejudicial to the interest of its members or public interest. The words "the company" occurring in the proviso refer to the transferor-company, for that is the company to be dissolved as contemplated in clause (iv), in the matter of amalgamation. Necessarily, as per the statutory requirements, the official liquidator, after investigation has to submit a report on the affairs of the transferor-company and not of the transferee-company. The very object of calling for the report of the official liquidator is to satisfy the court that the interest of the shareholders and public interest are not prejudicially affected by the amalgamation. Even the case cited by learned counsel for the official liquidator in Wood Polymer Ltd., In re [1977] 47 Comp Cas 597 (Guj), shows that clause (iv) of sub-section (1) of section 394 is applicable to the transferor-company in all cases of amalgamation. In the said case, it is pointed out that the court is precluded from making any order of dissolution of the transferor-company if the report of the official liquidator reports to the effect that its affairs are conducted in a manner prejudicial to the public interest and to avoid capital gains tax by the amalgamation. In this case, there is no such report of the official liquidator that the transferor-company is going to avoid any tax payable by it by amalgamation, but, in fact, the official liquidator's report is specific that the affairs of the transferor-company have not been conducted in a manner prejudicial to the interest of its members or to public interest. The report of the official liquidator that there is every likelihood of tax reduction of the transferee-company if the amalgamation takes place, is beyond the scope of its investigation and report, for such a report is uncalled for and it is in excess of its authority to investigate and report.
34. The decision cited by learned counsel for the official liquidator in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 is not applicable to the facts of this case. In the said case, the Supreme Court has no doubt laid down the principle that (at p. 171) "tax planning may be legitimate provided it is within the frame work of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the tax honestly without resorting to subterfuges."
35. As already pointed out by me there is no report by the official liquidator to show that the transferor-company is going to avoid tax or reduce its payment of tax liability by getting itself merged with the transferee company. In my opinion, in this case, there can be no dispute that, by the amalgamation scheme, it cannot be said that it is for the avoidance of tax or, for that matter, of any other tax liability. Therefore, I reject the contention of the official liquidator. After careful consideration of the amalgamation scheme, I am of the opinion that the amalgamation scheme is fair, good, reasonable and that it is in the interests of the members and creditors of both the transferee and transferor-companies and also in public interest. I do not find any legal or equitable bar in sanctioning the scheme. The scheme has been passed by a statutory majority of both the companies. In the facts and circumstances of the case, I have no hesitation to accord my sanction to the said scheme.
36. In the result, I make both the company petitions, viz., Company Petitions Nos. 9 and 10 and 1990, absolute in terms of the prayers thereof. I direct that the orders passed in the said petitions be communicated by the petitioners to the Registrar of Companies, Karnataka, within thirty days from the date of receipt of the order. I direct that the transferor-company stand dissolved on sanction to the order of amalgamation. The aforesaid scheme shall take effect from April 1, 1989. The Registrar of Companies, on receipt of the order, do place all documents relating to the said transferor-company and register with him on the file kept by him in relation to the transferee-company and the files relating to the said transferee-company be consolidated accordingly.
37. Parties to bear and pay their own costs.