2012 (8) TMI 79 - HC - Companies Law

Court rejects modification request for 2003 Scheme, upholds asset transfer terms, modifies dispute resolution mechanism.

The Court dismissed the application for modification of a Scheme sanctioned in 2003, rejecting the request for transfer of assets or payment of their ... Demerger as a going concern - transfer of property by virtue of demerger - interpretation of Section 2(19AA) of the Income Tax Act, 1961 - tax neutrality of demerger - retention of common assets and housing colony - company court's power under Section 392(1)(b) of the Companies Act, 1956 - modification of scheme - arbitration clauseRetention of common assets and housing colony - transfer of property by virtue of demerger - Whether the housing colony and common utilities formed part of the properties transferred to the resulting company (IRTL) under the sanctioned Scheme of Arrangement. - HELD THAT: - The Scheme must be read as a whole; clauses and schedules (notably Clauses 1.1(vii), 3, 6, 24 and the annexed Schedules and maps) specifically enumerate the assets transferred. On that construction the housing colony and common utilities were expressly retained and owned by the transferor (respondent-IRSL). Shareholders and creditors consented to the Scheme with knowledge that such common resources would remain with IRSL, and the Memorandum of Understanding of 2005 confirmed that IRSL, as owner, offered the housing colony to IRTL for use on payment of actual costs. Non-transfer of certain common assets does not, by itself, defeat the demerger so long as the assets and liabilities that were transferred constitute a running business capable of being carried on as a going concern. [Paras 37, 38, 39, 43, 44]Housing colony and common utilities were not transferred to IRTL and were retained by respondent-IRSL; their continued ownership by IRSL does not of itself invalidate the demerger.Interpretation of Section 2(19AA) of the Income Tax Act, 1961 - demerger as a going concern - tax neutrality of demerger - Whether Section 2(19AA) requires transfer of all properties relatable to an undertaking so as to make every Scheme of demerger comply mandatorily with that provision. - HELD THAT: - Section 2(19AA) defines demerger and requires that the undertaking transferred be on a going concern basis; the statutory test is whether the undertaking transferred constitutes a business activity capable of being run independently for the foreseeable future. The phrase 'all the property of the undertaking being transferred' applies to those properties that are in fact 'being transferred' to make the undertaking a going concern. There is no statutory requirement that every common asset or liability relatable to the undertaking must be transferred; parties remain free to negotiate which common assets/liabilities are transferred, and tax neutrality under Section 2(19AA) is a matter to be determined post-merger by tax authorities. Reading Section 2(19AA) as mandating transfer of every asset would unduly restrict commercial freedom and improperly rewrite the sanctioned Scheme. [Paras 43, 46, 47, 48, 49]Section 2(19AA) does not automatically require transfer of all common assets; compliance with Section 2(19AA) concerns tax neutrality and is to be determined by tax authorities post-merger; non-transfer of some common assets does not per se negate a valid demerger.Company court's power under Section 392(1)(b) of the Companies Act, 1956 - modification of scheme - arbitration clause - Whether the Court should exercise its power under Section 392(1)(b) to modify the dispute-resolution mechanism in the sanctioned Scheme. - HELD THAT: - The Court's supervisory power under Section 392 is wide but confined to modifications necessary for the proper working of the sanctioned scheme; it cannot rewrite the scheme beyond that scope. Given changes in ownership and management of the parties since sanction, the Court considered it necessary for effective implementation to modify Clause 36 so that disputes are referred to a sole arbitrator nominated jointly by the parties, and where no consensus exists the concerned Court shall appoint the arbitrator. This modification aligns with the Court's power to remove impediments to the scheme's working without altering substantive asset allocations. [Paras 50, 51, 52, 53]Clause 36 of the Scheme is modified to provide for a sole arbitrator to be jointly nominated by the parties, and if no consensus, to be appointed by the concerned Court; with this modification the application is disposed of.Final Conclusion: The Court held that the housing colony and common utilities were expressly retained by the transferor and were not transferred to the resulting company; Section 2(19AA) does not compel transfer of every common asset and its tax consequences are for tax authorities to decide post-merger; exercising its limited supervisory power under Section 392(1)(b), the Court modified the Scheme's dispute-resolution clause to provide for joint nomination of a sole arbitrator (or court appointment if no consensus) and disposed of the application. Issues Involved:1. Modification of a Scheme sanctioned by the Court.2. Transfer of assets or payment of their value.3. Compliance with Section 2(19AA) of the Income Tax Act, 1961.4. Interpretation and implementation of the Scheme of Arrangement.5. Dispute resolution mechanism.Detailed Analysis:1. Modification of a Scheme Sanctioned by the Court:The present application was filed under Section 392(1)(b) of the Companies Act, 1956 by Spentex Industries Limited (Applicant) for the modification of a Scheme sanctioned by the Court on 27th February, 2003. The modification sought was for the transfer of specific assets or, alternatively, the payment of their value amounting to Rs. 61,30,56,983/-.2. Transfer of Assets or Payment of Their Value:The Applicant claimed that the second unit at Butibori, Nagpur, including the housing colony, was constructed using funds from the spinning business. The Scheme of Arrangement in 2002 involved the demerger of the spinning business to Indo Rama Textile Limited (IRTL), while the polymer business was retained by Indo Rama Synthetics Limited (IRSL). The Applicant argued that the housing colony and common utilities should have been transferred to IRTL as part of the demerger. However, the Court found that the Scheme specifically mentioned the properties and assets to be transferred, and the housing colony and common utilities were agreed to be retained by IRSL. The shareholders and creditors were aware of this arrangement.3. Compliance with Section 2(19AA) of the Income Tax Act, 1961:The Applicant argued that the demerger should comply with Section 2(19AA) of the Income Tax Act, 1961, which stipulates that all properties of the undertaking being transferred should become the property of the resulting company. The Court, however, held that the definition of demerger under Section 2(19AA) would be satisfied if the undertaking being demerged constituted a business activity capable of being run independently. The Court noted that non-transfer of some common assets would not affect the status of IRTL as a going concern. The compliance with Section 2(19AA) was relevant only for determining tax neutrality and had consequences for IRSL only.4. Interpretation and Implementation of the Scheme of Arrangement:The Court emphasized that the Scheme of Arrangement must be read as a whole and not in a piecemeal manner. The Court found that the Scheme, including Clauses 1.1(vii), 3, 6, 24, along with the Schedules and map, indicated that the housing colony and common utilities were to be retained by IRSL. The Court concluded that the Scheme was properly implemented, and the Applicant's interpretation would amount to rewriting the Scheme, which the Court could not do.5. Dispute Resolution Mechanism:The Court modified the dispute resolution mechanism in Clause 36 of the Scheme. Initially, disputes were to be referred to a sole arbitrator nominated by Mr. O.P. Lohia. The Court directed that future disputes should be referred to a sole arbitrator appointed with the consent of both parties. If no consensus is reached, the sole arbitrator would be appointed by the concerned Court. The modified Clause 36 stated:'If any dispute, doubt or difference or issue shall arise between the parties hereto or any of their shareholders, creditors, employees and/or any other person, as to the construction hereof or as to any account, valuation or apportionment to be taken or made of any asset or liability transferred under this Scheme or as to the construction hereof or as to any account, valuation or apportionment to be taken or made of any asset or liability transferred under the Scheme or as to the accounting treatment thereof or as to anything else contained in or relating to or arising out of this Scheme, the same shall be referred to the sole arbitrator to be nominated jointly by both the parties. The Arbitrator's decision shall be final and binding. If, however, there is no consensus upon the name of the sole arbitrator, the sole arbitrator shall be appointed by the concerned court. The Courts in New Delhi shall have exclusive jurisdiction in respect of any disputes arising out of or relating to this Scheme.'Conclusion:The application for modification was disposed of with the modification to the dispute resolution mechanism, ensuring that the Scheme of Arrangement was properly implemented and complied with the relevant legal provisions.