2005 (7) TMI 364 - HC - Companies Law

Court approves Scheme of Arrangement involving Slump Sale and Amalgamation despite Auditor objections

The Court granted the petitions for the sanction of a Scheme of Arrangement involving Slump Sale and Amalgamation, despite objections raised by Auditors ... Compromise and arrangement Issues Involved:1. Sanction of a Scheme of Arrangement involving Slump Sale and Amalgamation.2. Approval and objections by shareholders, creditors, and regulatory authorities.3. Observations and objections raised by the Official Liquidator and Auditors.4. Compliance with statutory requirements and procedural aspects.Detailed Analysis:1. Sanction of a Scheme of Arrangement involving Slump Sale and Amalgamation:The petitions were filed by three companies for the sanction of a Scheme of Arrangement involving the Slump Sale of two divisions of Casil Health Products Limited (CHPL) to Biosulin International Private Limited (BIPL) and the amalgamation of the residual CHPL with Genvista Pharmaceuticals Private Limited (GPPL) under sections 391 and 394 of the Companies Act, 1956. The proposed arrangement aimed to segregate manufacturing and trading activities to facilitate concentrated efforts for expansion.2. Approval and objections by shareholders, creditors, and regulatory authorities:The Scheme received unanimous approval from the Equity Shareholders and Unsecured Trade Creditors of CHPL, and the consent letters from preference shareholders and unsecured loan creditors were recorded. The Equity Shareholders of both Transferee Companies also approved the Scheme through consent letters, leading to the dispensation of meetings for Preference Shareholders, Secured Creditors, and Unsecured Loan Creditors of CHPL.3. Observations and objections raised by the Official Liquidator and Auditors:The Official Liquidator reported that the affairs of CHPL were not conducted prejudicially to the interest of its members or public interest. However, the Auditors raised several issues:- Subsidiary Status: BIPL was not a wholly owned subsidiary of CHPL till the court order date.- Consideration: The net assets worth Rs. 948.68 lakhs were transferred to BIPL for Rs. 100,000, deemed unjust.- Purpose and Benefits: The transfer of divisions to BIPL would not achieve the intended benefits and would negatively affect CHPL.- Interest of Members and Public: The transfer would result in members losing profit-making divisions and assets, and it was not in the public interest due to potential financial difficulties for BIPL.Regarding the merger of residual CHPL with GPPL, the Auditors questioned the valuation of shares and share exchange ratio, the purpose and benefits of the merger, and its interest to members and the public.4. Compliance with statutory requirements and procedural aspects:Mr. Soparkar, representing the petitioners, argued that the Auditors' observations on the merits were irrelevant and exceeded their jurisdiction. He explained that the restructuring aimed to address substantial bad or doubtful assets and significant losses. The restructuring plan, including the reduction of preference share capital and the transfer of divisions to a wholly owned subsidiary, was designed to preserve shareholder value. The Stock Exchange Mumbai had approved the Scheme, and the necessary consents from secured creditors were filed.The Regional Director raised six observations, including the need for compliance with section 80(5A) of the Act, the increase in authorized share capital of GPPL, and the division-wise position in the balance sheet. These were addressed by the petitioners, including the filing of Form No. 5 for the increase in share capital and the clarification that division-wise balance sheets were prepared for clear demarcation of properties and liabilities.Conclusion:The Court concluded that the observations made by the Auditors regarding financial restructuring were irrelevant and beyond their scope. The commercial wisdom of the shareholders was upheld, and the explanations provided by the petitioners were found satisfactory. The Scheme of Arrangement was deemed to be in the interest of the companies, their members, and creditors. The petitions were granted, and the costs were quantified at Rs. 3,500 per petition to be paid to the Assistant Solicitor General.