Delhi High Court
Jindal (India) Limited vs Cold Rollings India Pvt. Ltd. on 1 October, 1997
Equivalent citations: 1998IAD(DELHI)278, 69(1997)DLT363, (1998)118PLR34
JUDGMENT M.K. Sharma, J.
(1) This is a petition filed under Section 391 read with Section 394 of the Companies Act by the transferee company praying for sanction of this Court to a scheme of amalgamation of Cold Rollings India Pvt. Ltd. (the transferor company) with the petitioner company (the transferee company). The scheme of amalgamation stipulates that all the properties, rights and claims whatsoever of the transferor company and its entire undertaking together with all rights and obligations relating thereto is to be transferred to and vested in the transferee company on the terms and conditions as set out in the scheme of amalgamation.
(2) The transferee Company was incorporated on 14th January, 1952 under the provisions of the-Companies Act having its registered office at "PIPE HOUSE" 56, Hanuman Road, New Delhi. The authorised share capital of the transferee company is Rs. 7,50,00,000.00 divided into 7,50,000 equity shares of Rs. 100.00 and paid up equity share capital is Rs. 6,50,00,000.00 divided into 6,50,000 equity shares of Rs. 100.00 . The main objects of the transferee company are set out in its Memorandum and Articles of Association.
(3) The transferor company was incorporated on 25th August, 1994 as a private limited company. The main objects of the transferor company are also set out in its Memorandum and Articles of Association.
(4) The transferor company is engaged in the business of manufacturing and trading of cold rolled steel strips, galvanised or ungalvanised in coils or in sheets, black and galvanised steel tubes, strips, steel scrap, billets and slabs. It is thus apparent that the transferor company is predominantly engaged in carrying on the business of manufacturing and trading of cold rolled steel etc. and transferee company is engaged in the business of manufacturing and trading of M.S. pipes and tubes poles, cold rolling strips, steel structural poles and also in investing, trading and dealing in shares and debentures and in financing industrial enterprises.
(5) The transferor and the transferee company thought it fit that there should be amalgamation of the transferor company with the transferee company and for that a scheme of amalgamation was proposed, to be effective from 1.4.1995. The aforesaid scheme of amalgamation has been approved by the Board of Directors of the transferor company and the transferee company in a meeting held on 25.2.1996 and 24.2.1996 respectively.
(6) By order made in the C.A. 410/96 on 6.5.1996, this Court directed that meeting of the equity share holders, secured and unsecured creditors of the transferee company to consider the scheme of amalgamation of transferor company with the transferee company be held. By virtue of the said order, Ms. Minakhshi Singh, Advocate and Mr. Ashwani Kumar Sharma, Assistant Registrar of this Court were appointed as Chairperson and Alternate Chairman respectively for the meeting of the equity shareholders. For the meeting of secured creditors Ms. Seema Gulati, Advocate and Mr. Tej Pratap Singh, Consultant (Protocol) were appointed as Chairperson and Alternate Chairman respectively, and for the meeting of the unsecured creditors Mr. R.K. Chadha &, advocate and. Gaurav Duggal Advocate were appointed as Chairperson and Alternate Chairman respectively.
(7) The Chairpersons and the Alternate Chairman appointed for the purpose by this Court have submitted their reports. It is stated in the report that notices of the meetings were served to each of the shareholders, secured and unsecured creditors of the transferee company together as required by the order dated 6.5.1996 together with a copy of the scheme of amalgamation and the statement required by Section 393 of the Companies Act and the prescribed form and the notice of the same was also published in the newspapers in terms of the order passed by this Court. It is also stated that on 29.6.1996 the meetings of the equity shareholders, secured and unsecured creditors of the transferee company were attended by the equity shareholders, secured and unsecured creditors either in person or by proxy. It is stated that the scheme of amalgamation was unanimously approved.
(8) After presentation of the present petition in this Court and notice on the same having been issued, the Registrar of Companies have filed a reply affidavit to the aforesaid petition raising objection to the scheme of amalgamation on the ground that the petitioner company does not belong to the same management and is not under common control as that of the transferor company. The further objection of the Registrar of Companies as is disclosed from the aforesaid reply affidavit is that the transferor and the transferee companies both have adopted book value for valuation of shares / assets instead of resorting to assessment of valuation on market value. It was also stated that the transferor company is going to transfer imported plant and machinery worth more than Rs. 95.00 lakhs to the transferee company and, therefore, the transferee company is benefited to the aforesaid extent. The Registrar of Companies stated that the affairs of the company do not appear to have been conducted in a manner prejudicial to the interest of its members or public.
(9) The petitioner company filed a rejoinder to the aforesaid reply affidavit filed on behalf of the Registrar of Companies. It was pointed out in the said rejoinder that the issue as to whether the two companies, namely, the transferor and the transferee companies, belong to the same management or not is not material and/or considered important as the reason, that is, to consolidate the goods structure is only one of the reasons and circumstances for entering into the scheme of amalgamation. It was also stated that the valuation of the shares of the transferor and the transferee companies was made on the basis of a valuation report prepared by a recognised chartered accountant of repute, namely, by M/s. Kanodia Sanyal & Associates. It was also stated that the aforesaid valuation of shares has been calculated on the basis of guidelines issued by the Ministry of Finance dated 30.7.1990 and since the said valuation has been made according to the guidelines prescribed by the Central Government, the said valuation should be accepted as fair and reasonable. It is also stated that the aforesaid valuation report has been approved by both the companies concerned, their shareholders and all concerned in their respective meetings and, therefore, no objection could be taken as against the aforesaid valuation. It is also stated that valuation of shares on the book value is an accepted method of valuation. It has also been set out that the aforesaid scheme of amalgamation, as approved by the shareholders of both the transferor and the transferee companies, has already been sanctioned by the Calcutta High Court.
(10) In the context of the aforesaid pleadings of the parties, it would be necessary to analyse and scrutinise the validity of the objection raised by the Registrar of Companies objecting to the scheme of amalgamation and find out and assess the feasibility and/or validity of the said objection.
(11) During the course of the arguments. Counsel appearing for and on behalf of the Registrar of Companies argued that the share ratio proposed in the scheme of amalgamation is 1:2. It was also submitted that as per the balance sheet as on 31.3.1995, the cost book value of land and building comes to Rs. 2,93,98,667.00 and if the said asset is valued as per the prevailing market rate, its value would run into several crores and, therefore, the shareholders of the transferor company are being given indirect benefits. It was also submitted that the transferee company having an investment in quoted shares amounting to Rs. l,20,00,000.00 as stated in the balance sheet as on 31.3.1995. Its market value has been shown to the extent of Rs. 5,28,00,000.00 thereby causing a great loss for a sum of Rs. 4,08,00,000.00 to the shareholders of the transferee company.
(12) Objection was also taken by the Counsel with regard to the capital reserve as shown in the balance sheet of the transferee company. It was submitted that the net worth of the transferee company while working out the value of shares has been reduced by a sum of Rs. 16,39,240.00 which is shown as capital reserve in the balance sheet of the transferee company and in doing so the exchange ratio has been manipulated to the aforesaid extent. Similarly, the net worth of M/s. Cold Rollings India Pvt. Ltd., the transferor company, has also been manipulated by addition of the proposed issue of capital to the extent of Rs. 7,28,000.00 .
(13) In the context of the aforesaid objection and submission of the learned Counsel appearing for the registrar of Companies, it would be necessary to consider how far the said objections are relevant and/or applicable when considered in the light of the provisions of Sections 391 to 394 of the Companies Act. The said provisions lay down the statutory requirement to be complied with for supporting a scheme of amalgamation. Section 391(l)(a) requires the requisite meetings to be held under Sub-section (2) of Section 391. It is provided that the relevant scheme should be backed up by requisite majority as laid down therein. The further requirement is that the concerned meetings of the members or any class of them had the relevant material to enable the voters to arrive at an individual decision for approving the scheme in question and that the majority decision of the concerned class of voters is just and fair to the class as a whole, so as to legitimately bind even the dissenting members of that class. It is also one of the requirements that the necessary material as indicated by Section 391(l)(a) is placed before the voters of the concerned meetings. It is also necessary that all the requisite materials envisaged under the proviso to Sub-section (2) of Section 391 of the Companies Act are placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court must be satisfied about the same. It is also necessary that the proposed scheme of compromise and arrangement is not found to be violative of any provisions of law and is not contrary to public policy.
(14) On a conjoint reading of the relevant provisions of Sections 391 and 393 of the Companies Act, it becomes crystal clear that the Company Court which is called upon to sanction such a scheme would not be influenced merely by the decision of the majority of the shareholders or creditors but shall have jurisdiction and power to consider the pros and cons of the scheme in order to come to a satisfaction that the scheme is fair, just and reasonable and is not contrary to any provision of law and is not violative of the public policy. The Sanctioning Court has also to be satisfied that there is no fraud involved. Once the aforesaid broad parameters on the requirement of a scheme for getting sanction of the Court are satisfied, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who, with their open eyes, have given their approval to a scheme, although the Court may carry a view that there could be a better scheme for the company and its members or creditors for whom the scheme is framed.
(15) In Miheer H. Mafatlal v. Mafatlal Industries Limited reported in 1996 Vol. 87 Company Cases Page 792, the Supreme Court has held that no Court of Law would countenance a scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is unconscionable or an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. It was also held that the Court would not act as a Court of Appeal and sit in judgment over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom of the concerned parties. The Supreme Court also observed that the Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the scheme by the requisite majority and consequently the Company Court's jurisdiction to that extent is peripheral and supervisory and not appellate.
(16) The issue, therefore, arises for my consideration in the present case is whether those formalities as prescribed under the statute have been complied with in the present case. Once it is found that such statutory formalities have been duly complied with, the next question that is to be examined by me is whether the scheme is fair and reasonable and that there is no fraud involved. Once I come to such a conclusion that the scheme is fair and reasonable and there is no fraud involved, then this Court has to proceed to give effect to the decision of the shareholders of the company. The facts of the present case are, therefore, to be tested with the touchstone of the law laid down by the Supreme Court and in the light thereof, the issues raised in the present petition are required to be answered.
(17) Pleadings and the arguments put forth on behalf of the Registrar of Companies indicate that objection is mainly raised in respect of exchange ratio. According to the petitioner, the exchange ratio is fixed at 1:2. The said objection appears to be incorrect on the face of the records of the case as exchange ratio is apparently fixed at 1:20. The objection taken is that the fixed assets of the transferee company should have been valued at the market value instead of taking the same at the book value for determining the exchange ratio. There is no denial of the fact that the book value is also an accepted method of valuation. In the present case, the records disclose that the method of book value has been resorted to while valuing the fixed assets of both the transferee and transferor companies for arriving at the exchange ratio. Besides, the aforesaid valuation was conducted by a recognised firm of Chartered Accountants of repute who have sated that while making the valuation they have followed the guidelines of the Central Government dated 13.7.1990. The said valuation report submitted by the Chartered Accountants was placed in the meetings of the Board of Directors and shareholders and has been approved in the said meetings of the concerned shareholders and the Board of Directors. When exchange ratio has been determined by an experienced and reputed firm of Chartered Accountants on the basis of guidelines issued by the Central Government, and on the basis of a known and accepted method of valuation, I find no justifiable and reasonable ground to reject the said valuation, particularly when no fraud has been alleged in the present case. Valuation of assets or shares of any company is always a matter relating to the technical field and within the realm of ambit and jurisdiction of expert in the field.
(18) The Supreme Court in Miheer H. Mafatlal (supra) has held that once the exchange ratio of the shares of the transferee company to be allotted to the shareholders of the transferor company has been worked out by a recognised firm of Chartered Accountants, who are experts in the field of valuation and if no mistake can be pointed out in the said valuation, it is not for the Court either to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the shareholders of the two companies or to say that the shareholders in their collective wisdom should not have accepted the said exchange ratio on the ground that it will be detrimental to their interest. The Supreme Court further went on to say that the Court will not act as a Court of appeal and sit in judgment over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom of the concerned parties. The Supreme Court also observed that the Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the scheme by the requisite majority and consequently the Company Court's jurisdiction to that extent is peripheral and supervisory and not appellate.
(19) Counsel appearing for the Registrar of Companies although tried to persuade me to hold that a mistake has been committed by the Chartered Accountant in resorting to and 'adopting the method of book valuation while valuing the shares or assets of the company, I am, however, unable to agree with the contention of the learned Counsel for the simple reason that the method of book valuation is also an accepted and recognised method of valuation. Such valuation of shares following book value method was accepted as a proper and valid mode of valuation of shares in the Tinsukia Electric Co. Ltd. v. State of Assam, . In paragraph 98 of the said judgment, it has been held by the Supreme Court that the concept of book value is an accepted accountancy concept of valuation and that it cannot be said to be illusory. This Court also in a Division Bench decision held that calculation of the share value after ascertaining the net asset value on the basis of book value could be accepted as a proper mode of valuation of shares, (see Cwp No. 4842 of 1994, Mis. Kma Ltd. and Another v. Union of India & Others, date of decision 16.2.1996). The said valuation report has also been accepted by the Board of Directors and the shareholders in their meetings. It is not disputed that the Chartered Accountant who carried out the valuation has experience in the field and is a reputed firm of Chartered Accountants.
(20) The Calcutta High Court in E.I.TA. (India) Ltd. & Others reported in (1996) 4 Company Law Journal 346 has held that no two valuations are likely to be identical and in fact valuation is a matter of opinion. It further went on to hold that if the ratio of exchange has been fixed by experienced and reputed firm of Chartered Accountants, then in the absence of any charge of fraud against them, the Court will accept such valuation and ratio of exchange. The Calcutta High Court while coming to the aforesaid conclusion relied upon the observations of the Supreme Court in Hindustan Lever Employees' Union v. Hindustan Lever Ltd. & Others, reported in (1994( 4 Company Law Journal 267.
(21) Taking the entire facts and circumstances of the case and in the light of the discussion aforesaid, I cannot accept the submission put forth by the learned Counsel for the Central Government that the ratio of exchange as proposed is not fair and should not be sanctioned by this Court. It is also noteworthy that none of the shareholders of the petitioner company has filed any objection with regard to the ratio of exchange or to the scheme of amalgamation in the meetings duly held, convened pursuant to the directions of this Court. Accordingly, the contention of the Central Government fails. It is on record that all the statutory formalities have been complied with. Even the Calcutta High Court has already sanctioned the present scheme of amalgamation and the exchange ratio as proposed in the petition filed before it of the transferor company. Mention may also be made to the fact that the Central Government did not raise any objection to the sanction of the scheme of amalgamation including the exchange ratio before the Calcutta High Court.
(22) Accordingly, in my considered view, the scheme, if approved, will be beneficial for all concerned and as such the scheme approved by, the members stands confirmed. No order as to cost.
(23) Scheme approved.