2016 (2) TMI 317 - HC - Companies Law

Court approves composite scheme of arrangement involving demerger and mergers under Companies Act, 1956.

The Court allowed the appeal, sanctioning the composite scheme of arrangement involving demerger and mergers under Sections 391 to 394 of the Companies ... Seeking approval of a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956 - learned Single Judge dismissed the petition - Held that:- It is on account of error that the learned Judge also observed that after implementation of the first part of the scheme, the shareholding pattern, the business and the profits etc. of the transferor and transferee companies will undergo change and that those figures and particulars are required to be presented before the members and the shareholders of the resultant companies and the other companies who are sought to be merged and demerged with the resultant company i.e. appellant No.1 as demerged. In the case of a composite scheme such as the one before us, the question of implementing the various components thereof separately does not and indeed cannot arise. There is no question, therefore, of the particulars being required to be presented before the stakeholders and the Court upon implementation of each of the components. The consequence of each of the components is viewed by the stakeholders not independently but together with the other components while deciding whether or not to approve the scheme. Company Appeal No. 52 of 2015 filed by the Demerged Companies and the Resulting Company respectively is allowed and the scheme is sanctioned as proposed. - Petitioners-appellants are directed to file a copy of this order along with a copy of the Scheme with the concerned Registrar of Companies, electronically, along with E-Form INC 28 in addition to physical copy as per the relevant provisions of the Companies Act, 1956. Issues Involved:1. Maintainability of a composite scheme of arrangement involving merger and demerger under Sections 391 to 394 of the Companies Act, 1956.Detailed Analysis:1. Maintainability of Composite Scheme:The primary issue in this appeal was whether a composite scheme involving both merger and demerger is maintainable under Sections 391 to 394 of the Companies Act, 1956. The appellants proposed a scheme that included the demerger of the 'Auto Component Division' of appellant No.1 into appellant No.2 and the amalgamation of appellant Nos. 3, 4, and 5 into appellant No.1. The learned Company Judge rejected the petition on the ground that such a composite scheme is not maintainable.2. Legal Provisions and Interpretation:Sections 391, 392, and 394 of the Companies Act, 1956, empower the Court to sanction schemes of compromise or arrangement between a company and its creditors or members. The Court can also make provisions for the reconstruction or amalgamation of companies. The term 'arrangement' in Section 391 is of wide amplitude and is not defined in the Act, allowing for various types of corporate restructuring.3. Previous Judgments and Precedents:The Court referred to previous judgments, including the Bombay High Court's decision in Larsen & Toubro Ltd., which held that the word 'arrangement' in Section 390(b) is inclusive and contemplates all arrangements, not limited to the reorganization of share capital. The Court also cited Maneckchowk and Ahmedabad Mfg. Co. Ltd., where it was held that Section 391 is a complete code that can include reorganization of share capital and other corporate restructuring activities.4. Analysis of the Composite Scheme:The Court disagreed with the learned Company Judge's view that the Act does not permit sanctioning a scheme involving different arrangements for different companies. The Court emphasized that the mergers and demergers in this case were part of a single, indivisible composite scheme. The creditors and shareholders considered and approved the scheme as a whole, not as independent components.5. Practical Considerations:The Court noted that it is common for stakeholders to agree to various elements of a scheme taken together rather than independently. Business decisions, such as focusing on a single line of activity or creating synergies through mergers, are best left to the stakeholders. The Court should not interfere with these commercial decisions unless there is a legal impediment.6. Objections and Rebuttals:The learned Company Judge's concerns about the availability of exact figures and the ability of stakeholders to understand the scheme were dismissed. The Court found that all necessary information was available and that the scheme was considered as a whole by the stakeholders. The Court also noted that the implementation of the scheme's components separately was not contemplated, as it was a composite scheme.7. Conclusion and Directions:The Court concluded that the composite scheme was maintainable and set aside the impugned order. The scheme was sanctioned as proposed, with directions for filing and publication, payment of costs, and compliance with relevant provisions of the Companies Act, 1956.Final Judgment:The appeal was allowed, and the composite scheme of arrangement involving the demerger and mergers was sanctioned. The appellants were directed to file the order and scheme with the Registrar of Companies, publish the sanction in specified newspapers and the Official Gazette, and pay costs to the Regional Director and Official Liquidator.