2011 (3) TMI 1481 - HC - Companies Law

High Court approves demerger scheme between KTM Jewellery and Aathava Garments

KTM Jewellery Ltd., In re

The High Court of Madras sanctioned a demerger scheme between M/s. KTM Jewellery Limited and M/s. Aathava Garments India Private Limited, finding ... Compromise and arrangement - Held that:- Mere fact, that the memorandum of association of the demerged or transferor company does not have enabling provision for arrangement, cannot be the ground to refuse sanction. There is no objection from the secured creditor, i.e. City Union Bank Limited. After going through the scheme of demerger, this court does not find any objectionable features. Accordingly, the scheme of demerger is sanctioned. Issues:- Sanction of demerger scheme by High Court- Compliance with provisions of Income-tax Act, 1961- Transfer of assets and liabilities to resulting company- Consent of shareholders- Report by Regional Director, Ministry of Corporate Affairs- Legal principles regarding enabling provisions in memorandum of associationSanction of Demerger Scheme:The High Court of Madras considered company petitions filed by a demerger company and a resulting company to sanction a demerger scheme. The scheme aimed to be binding on all equity shareholders of the demerged company from April 1, 2010. The demerger company, M/s. KTM Jewellery Limited, and the resulting company, M/s. Aathava Garments India Private Limited, were involved in the petitions.Compliance with Income-tax Act:The demerger scheme was found to comply with the provisions of section 2(19AA) of the Income-tax Act, 1961. The scheme proposed the transfer of the entire undertaking, assets, and liabilities of the demerged company to the resulting company. All shareholders of both companies had given consent to the scheme, and there were no pending investigation proceedings related to the companies.Transfer of Assets and Liabilities:The resulting company undertook the liability of the demerged company, ensuring that the interest of the secured creditor, City Union Bank Limited, was not prejudiced. The court dispensed with the meeting of equity shareholders and found no objectionable features in the scheme of demerger.Consent of Shareholders:All shareholders of the demerged and resulting companies had provided consent affidavits for the demerger scheme. The directors of the companies had no interest in the scheme beyond their shareholding.Report by Regional Director:The Regional Director, Southern Region, Ministry of Corporate Affairs, Chennai, submitted a report affirming the examination of the company petitions. The report highlighted the transfer of employees from the demerged company to the resulting company and suggested amending the memorandum of association to include an amalgamation clause.Legal Principles on Memorandum of Association:Citing a judgment by the High Court of Calcutta, the Madras High Court noted that the absence of enabling provisions in the memorandum of association of the demerged company should not be a ground to refuse sanction. The court referred to statutory powers for amalgamation under the Companies Act, 1956, and found no objections to sanctioning the demerger scheme.In conclusion, the High Court of Madras sanctioned the demerger scheme, finding it compliant with legal provisions and shareholder consents. The court considered the transfer of assets and liabilities, the report by the Regional Director, and legal principles regarding the memorandum of association in its decision.