Court allows scheme of arrangement for amalgamation, permits use of reserve for dividends under Companies Act

The Court allowed the appeals, sanctioning the scheme of arrangement for amalgamation under Sections 391 to 394 of the Companies Act, 1956. The direction prohibiting the use of the amalgamation reserve fund for declaring dividends was set aside. The Court held that utilizing the reserve for dividends was permissible, especially as there were no objections raised by the Regional Director or shareholders. The appellants were directed to bear the costs of the respondent-Regional Director, and the appeals were disposed of accordingly.

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Issues:
Challenge to order of Single Judge regarding approval of scheme of arrangement for amalgamation under Companies Act, 1956.

Analysis:
The judgment involved a challenge to the order of a learned Single Judge regarding the approval of a scheme of arrangement for amalgamation under Sections 391 to 394 of the Companies Act, 1956. The appellant companies had filed company petitions seeking approval for the amalgamation of three companies. The Single Judge approved the scheme but directed that the amalgamation reserve fund should not be used for declaring dividends. The appellants challenged this direction on various grounds.

The appellant argued that the commercial activities of the companies were similar, and no objections were raised during the process. They contended that utilizing the reserve for dividends was necessary for future use. The appellant also highlighted that the learned Single Judge's direction was unexpected and not raised during the proceedings. They argued that various courts had allowed such reserves to be used for dividends, citing relevant case laws.

On the other hand, the respondent-Regional Director submitted that the Single Judge may have imposed the condition considering the provisions of the Companies Act. Reference was made to Section 205 of the Companies Act, which stipulates that dividends should be paid only out of profits.

The Court examined Clause-10.5 of the original scheme and referred to relevant case laws to support the argument that reserves could be used for dividends. The Court noted that the direction by the Single Judge was unwarranted, especially since no objections were raised by the Regional Director or shareholders. The Court held that the reserve could be utilized for declaring dividends and set aside the Single Judge's direction. Consequently, all appeals were allowed, and the scheme was sanctioned as a whole, including the original Clause-10.5.

In conclusion, the Court directed the appellants to bear the costs of the respondent-Regional Director and disposed of the appeals accordingly.

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