2016 (4) TMI 1408 - HC - Companies Law

Approval Granted for Company Amalgamation Scheme | Importance of Legal Compliance

The court granted sanction to the scheme of amalgamation under Sections 391 and 394 of the Companies Act, 1956. The approval was based on unanimous ... Scheme of amalgamation - sanction of scheme under Section 391 and 394 of the Companies Act, 1956 - transfer of assets, rights and liabilities without further act or deed - dissolution without winding up - employees to be absorbed on existing terms - no consideration where transferor companies are wholly owned subsidiaries - pooling of interests method - undertaking to defray liabilities by transferee company - statutory compliance and non-exemption from taxes and duties - absence of objections from Regional Director and Official LiquidatorSanction of scheme under Section 391 and 394 of the Companies Act, 1956 - absence of objections from Regional Director and Official Liquidator - Sanction of the proposed scheme of amalgamation. - HELD THAT: - The court examined the approvals obtained from shareholders and creditors, the report/affidavit filed by the Regional Director under Section 394A and the Official Liquidator's report. The RD had sought responses from ROC and the Income Tax Department and recorded no adverse comments from ROC; no response from the I.T. Department was received. The OL reported no complaints and stated that the affairs of the transferor companies did not appear prejudicial to members or the public. In view of unanimous board approvals, consents by relevant classes of shareholders and creditors in earlier proceedings and the absence of objections from RD and OL, the court found no impediment to sanctioning the scheme and granted sanction under Sections 391 and 394 of the Act, subject to statutory compliance by the petitioners. [Paras 3, 5, 6, 7, 13]Scheme sanctioned in terms of Sections 391 and 394 of the Companies Act, 1956.Employees to be absorbed on existing terms - Status of employees of the transferor companies on the effective date. - HELD THAT: - The court noted clause 2.6(vi) of the scheme which provides that all permanent employees in service on the effective date shall become employees of the transferee company without break and on terms and conditions not less favourable than their current terms. The court incorporated this provision in its directions when granting sanction. [Paras 8, 14]All permanent employees to be absorbed by the transferee on terms not less favourable and without interruption of service.No consideration where transferor companies are wholly owned subsidiaries - Treatment of consideration on amalgamation given the ownership structure. - HELD THAT: - The court recorded clause 3.2 of the scheme stipulating that since the transferor companies are wholly owned subsidiaries of the transferee, no consideration is payable and the transferee's investments in the transferors would stand cancelled in entirety. This contractual arrangement was accepted as part of the sanctioned scheme. [Paras 9]No consideration payable; investments of transferee in transferors to stand cancelled.Dissolution without winding up - Final status of the transferor companies on sanction. - HELD THAT: - The court noted clause 2.11 of the scheme providing that the transferor companies shall stand dissolved without being wound up and accepted this consequence as part of the sanctioned amalgamation. [Paras 10]Transferor companies to be dissolved without winding up.Pooling of interests method - transfer of assets, rights and liabilities without further act or deed - Accounting treatment and effect of transfer of assets and liabilities pursuant to the scheme. - HELD THAT: - The court recorded clause 3.3.2 requiring the transferee to apply the pooling of interests method as per Accounting Standard 14 and clause 2 of the scheme and statutory provisions providing that all business, properties, assets, rights and liabilities of the transferor companies shall transfer to the transferee without any further act or deed. The court sanctioned the scheme subject to adherence to the stated accounting method and the automatic transfer of assets and liabilities. [Paras 11, 12]Transferee to apply pooling of interests; assets, rights and liabilities to vest in transferee without further act or deed.Undertaking to defray liabilities by transferee company - Requirement of an undertaking by the transferee to meet liabilities of the transferor companies. - HELD THAT: - Despite petitioners' assertions, the court directed the transferee to file an undertaking within two weeks that it will take over and defray all liabilities of the transferor companies. The court further clarified that statutory authorities retain the right to proceed against the transferee for liabilities fastened on the transferor companies and that the sanction will not preclude action for any statutory violations. [Paras 15]Transferee to file undertaking to defray liabilities; sanction does not bar action for any statutory violations.Statutory compliance and non-exemption from taxes and duties - Effect of the order on liabilities such as stamp duty, taxes and other statutory charges. - HELD THAT: - The court expressly stated that the order sanctioning the scheme shall not be construed as granting exemption from payment of stamp duty, taxes or other penalties/charges payable under law. Petitioners must comply with statutory requirements and the order does not override such obligations. [Paras 13, 15]Order does not grant exemption from stamp duty, taxes or other statutory charges; petitioners to comply with statutory requirements.Filing certified copy with ROC - Post-sanction compliance concerning filing with Registrar of Companies. - HELD THAT: - The court directed that a certified copy of the order sanctioning the scheme be filed with the Registrar of Companies within thirty days of receipt, thereby prescribing the statutory compliance step to be taken following sanction. [Paras 13]Certified copy of the sanction order to be filed with the ROC within thirty days.Final Conclusion: The High Court granted sanction to the scheme of amalgamation under Sections 391 and 394 of the Companies Act, 1956, subject to the petitioners' compliance with statutory requirements, the transferee's undertaking to defray liabilities, application of pooling of interests accounting, absorption of employees on existing terms, filing of the certified order with the ROC and without any exemption from taxes, stamp duties or action for statutory violations. Issues involved:Petition for approval of scheme of amalgamation under Sections 391 and 394 of the Companies Act, 1956.Detailed Analysis:1. Approval of Scheme by Board of Directors: The Board of Directors of the transferor and transferee companies unanimously approved the scheme in separate meetings, highlighting the benefits of the amalgamation in simplifying ownership structure, reducing costs, and optimizing resource utilization.2. Previous Court Order Dispensing Meetings: A previous court order had dispensed with the requirement of convening meetings of shareholders and creditors as all necessary consents were obtained, ensuring compliance with procedural formalities.3. Publication and Responses: Notices were issued, and citations were published to ensure transparency. The Regional Director and Official Liquidator did not raise any objections to the scheme, indicating compliance with legal requirements.4. Employee Transition and Consideration: The scheme outlined provisions for the seamless transition of employees from transferor to transferee company without interruption in service or adverse changes in employment terms. No consideration was payable as the transferor companies were wholly owned subsidiaries of the transferee.5. Dissolution and Accounting Standards: The scheme specified that transferor companies would stand dissolved without winding up, and the transferee company would follow the pooling of interest method as per Accounting Standard 14.6. Transfer of Business and Liabilities: The scheme detailed the transfer of business, assets, liabilities, and obligations from transferor to transferee companies as per Sections 391 and 394 of the Act, ensuring a smooth transition of operations.7. Sanction of Scheme: Considering shareholder and creditor approvals, lack of objections from regulatory authorities, and compliance with legal provisions, the court granted sanction to the scheme, with a directive for statutory compliance and filing of the order with the Registrar of Companies.8. Undertaking and Compliance: The transferee company was directed to file an undertaking to assume all liabilities of transferor companies, with a warning that any violations or deficiencies would not be exempted by the court's sanction.9. Legal Clarity and Non-exemption: The court clarified that the order did not grant exemption from stamp duty, taxes, or penalties, emphasizing compliance with all legal provisions despite the scheme's approval.In conclusion, the court allowed and disposed of the petition, emphasizing the importance of adherence to statutory requirements and legal obligations in the amalgamation process.