2018 (8) TMI 2052 - Tri - Companies Law

Company's Scheme of Arrangement Approved as Fair and Compliant with Legal Requirements

The Tribunal found the Scheme of Arrangement proposed by the Petitioner Company to be fair, reasonable, and compliant with the law. The Scheme involved ... Sanction of scheme of arrangement - validity of reclassification of general reserves to profit and loss account - interpretation and applicability of dividend provisions and rules - scope of 'arrangement' under sections 230/391-394 - public interest test in company scheme sanction - statutory compliance for filings and stamp duty consequent to sanctioned schemes - judicial control over implementation and limitations on board discretionSanction of scheme of arrangement - public interest test in company scheme sanction - Sanction of the Scheme of Arrangement between the Petitioner Company and its members. - HELD THAT: - The Tribunal examined the Scheme, the explanations and written submissions of the Petitioner Company and the observations of the Regional Director and Registrar of Companies. The Bench recorded that the Scheme had overwhelming shareholder support, the company demonstrated consistent cash generation and dividend history, and no specific adverse impact on public interest was shown by RD/ROC. On the material presented the Scheme was held to be fair and reasonable, not violative of law and not contrary to public interest or public policy. Consequently, the Transfer Company Scheme Petition was made absolute in terms of the prayers. [Paras 19, 20, 21]Scheme sanctioned as fair, reasonable and not contrary to law or public interest; petition allowed.Validity of reclassification of general reserves to profit and loss account - scope of 'arrangement' under sections 230/391-394 - Permissibility of crediting the General Reserves to the Profit and Loss Account by a court-sanctioned scheme and whether such step falls within the ambit of an 'arrangement' under the relevant Companies Act provisions. - HELD THAT: - The Tribunal accepted the Petitioner Company's submissions that (a) there is no statutory prohibition on crediting amounts from General Reserves to the Profit and Loss Account by way of a scheme, (b) the term 'arrangement' is of wide import and can encompass restructuring of reserves as part of a scheme between a company and its members, and (c) the present Scheme does not amount to an improper revision of financial statements under Section 131. The Tribunal relied upon precedent and the inclusive definition of 'arrangement' to conclude the Scheme constitutes an arrangement properly maintainable under the statutory scheme for sanction. [Paras 12, 13, 14, 18, 20]Reclassification by court-sanctioned scheme is permissible and the Scheme qualifies as an 'arrangement' under the statutory provisions.Interpretation and applicability of dividend provisions and rules - Whether the Scheme is framed to circumvent Section 123 of the Companies Act, 2013 and the Companies (Declaration & Payment of Dividend) Rules, 2014. - HELD THAT: - The Tribunal accepted the Petitioner Company's submission that the RD/ROC misconstrued the Scheme as being a mechanism for direct dividend payment from General Reserves. The Bench found that the proviso to Section 123(1) and the 2014 Rules apply in years of inadequacy or absence of profit and are not engaged in the present factual matrix where accumulated profits are being reclassified and any payout remains subject to board discretion and legal compliances. Thus the objections alleging circumvention of dividend provisions were rejected. [Paras 12, 15, 19, 20]Objections that the Scheme circumvents dividend provisions and related rules are rejected; the provisions relied upon do not prohibit the Scheme.Judicial control over implementation and limitations on board discretion - Whether any additional controls or conditions should be imposed on the company's post-sanction implementation of the Scheme. - HELD THAT: - While sanctioning the Scheme, the Tribunal noted the concerns raised by RD/ROC and, as a prudential measure, directed that the Company/Board obtain prior shareholder approval (AGM/EGM) for any occasion/event leading to an outflow exceeding Rs. 100 crores other than dividend. The Tribunal also required the Company to comply with applicable tax laws and to pay any taxes consequent to the Scheme. [Paras 19]Directional limitation imposed: prior shareholder approval required for non-dividend outflows exceeding Rs. 100 crores; compliance with tax laws mandated.Statutory compliance for filings and stamp duty consequent to sanctioned schemes - Post-sanction compliances including filing with Registrar of Companies, e-form INC 28 and lodging of order for stamp duty adjudication. - HELD THAT: - The Tribunal directed the Petitioner Company to lodge a copy of the sanctioned Scheme and the order with the Collector of Stamps for adjudication of stamp duty within 60 days of receipt of certified copy, and to file the order and sanctioned Scheme electronically with the Registrar of Companies using e-form INC 28 within 30 days of receipt of the certified copy. These directions ensure statutory filings and stamp duty adjudication consequent to the sanction. [Paras 22, 23]Company directed to comply with specified filings and to lodge the order and Scheme for stamp duty adjudication within prescribed timelines.Costs - Payment of costs to the Regional Director in respect of the Transfer Company Scheme Petition. - HELD THAT: - The Tribunal directed the Petitioner Company to pay costs of the petition to the Regional Director, Western Region, Mumbai, specifying the quantum and timeline for payment. [Paras 24]Petitioner Company to pay specified costs to the Regional Director within four weeks.Final Conclusion: The Tribunal sanctioned the Scheme of Arrangement as fair, reasonable and not contrary to law or public interest; objections raised by the Regional Director and Registrar of Companies were considered and rejected; limited conditions were imposed requiring prior shareholder approval for non-dividend outflows exceeding Rs. 100 crores, compliance with tax and filing obligations including stamp duty adjudication and e-form INC 28, and payment of specified costs to the Regional Director. Issues Involved:1. Compliance with Sections 230 and 123 of the Companies Act, 2013, and related rules.2. Validity and legality of the Scheme of Arrangement.3. Observations and objections raised by the Regional Director (RD) and Registrar of Companies (ROC).4. Public interest and shareholder benefits.5. Compliance with accounting standards and statutory requirements.Detailed Analysis:Compliance with Sections 230 and 123 of the Companies Act, 2013:The Petitioner Company sought sanction for a Scheme of Arrangement under Sections 230 and other relevant provisions of the Companies Act, 2013. The Scheme proposed the reclassification of Rs. 2,187.33 crores from General Reserves to the Profit and Loss Account, to be treated as accumulated profits for previous financial years. The Advocate for the Petitioner Company clarified that this reclassification is not prohibited by any provision of the Companies Act, 2013, or any other law. The Scheme was approved by the Board of Directors and a majority of equity shareholders, as required by the Act.Validity and Legality of the Scheme of Arrangement:The Scheme was designed to provide greater flexibility for the utilization of excess reserves, which were deemed more than necessary for the company's operational needs. The Petitioner Company argued that the Scheme is not a method to circumvent Section 123 or the 2014 Rules, as it does not involve the payment of dividends from the General Reserves directly but rather reclassifies these reserves as accumulated profits. The Tribunal found the Scheme to be fair, reasonable, and compliant with the law.Observations and Objections Raised by RD and ROC:The RD and ROC raised several objections, including:- The Scheme circumventing Section 123 and the 2014 Rules.- The Scheme not constituting an 'arrangement' under the Act.- The Scheme being incomplete and hypothetical.- Lack of transparency and good governance.- Violation of specific sections of the Companies Act, 2013.The Petitioner Company responded by explaining that the Scheme is an arrangement between the company and its members, which is permissible under Sections 230-232 of the Companies Act, 2013. The term 'arrangement' is broadly defined and includes the proposed reclassification. The Petitioner Company also provided a certificate from its auditor confirming compliance with accounting standards and SEBI regulations.Public Interest and Shareholder Benefits:The Tribunal considered whether the Scheme was in the public interest. The Petitioner Company argued that the Scheme does not harm public interest and benefits shareholders, including public shareholders, by allowing for potential payouts from the reclassified reserves. The overwhelming approval by shareholders further supported this claim. The Tribunal directed the company to obtain shareholder approval for any outflow exceeding Rs. 100 crores, other than as dividends, to ensure transparency and accountability.Compliance with Accounting Standards and Statutory Requirements:The Petitioner Company provided assurances and documentation to demonstrate compliance with all statutory requirements, including accounting standards and tax obligations. The Tribunal was satisfied with these assurances and the company's track record of compliance and financial prudence.Conclusion:The Tribunal found the Scheme to be fair, reasonable, and compliant with the law. It directed the Petitioner Company to comply with all applicable tax laws and obtain shareholder approval for significant outflows. The Scheme was sanctioned, and the Petitioner Company was instructed to file the necessary documents with the relevant authorities.Orders:1. The Scheme is sanctioned as per prayer clauses (a) and (b).2. The Petitioner Company must lodge a copy of the order with the Collector of Stamps within 60 days.3. The Petitioner Company must file a copy of the order with the Registrar of Companies electronically within 30 days.4. The Petitioner Company must pay costs of Rs. 25,000 to the RD within four weeks.5. All concerned authorities are to act on the certified copy of the order and the sanctioned Scheme.