2016 (3) TMI 654 - HC - Companies Law

Court approves amalgamation scheme under Companies Act, 1956 Sections 391 & 394 despite objections. Compliance required.

The court sanctioned the scheme of amalgamation under Sections 391 and 394 of the Companies Act, 1956, after addressing objections raised by the Regional ... Scheme of amalgamation - Sanction under Sections 391 and 394 of the Companies Act, 1956 - Board resolution extending scheme effective date - Registration of charge / CHG 1 compliance - Undertaking as to RBI / FEMA approvals - Share exchange ratio correction - Transfer of assets and liabilities on amalgamation - Employees continuity on amalgamation - No objection by the Official LiquidatorSanction under Sections 391 and 394 of the Companies Act, 1956 - Scheme of amalgamation - Sanction of the scheme of amalgamation in terms of Sections 391 and 394 of the Companies Act, 1956. - HELD THAT: - Having considered the petition, the affidavits of the Regional Director and the Official Liquidator, the consent of shareholders and creditors (where given), and the petitioners' responses to the concerns raised, the court found no impediment to sanctioning the scheme. The Official Liquidator reported no objections from interested parties and opined that the affairs of the transferor company did not contravene the second proviso to Section 394(1). The court therefore granted sanction to the scheme, subject to compliance with statutory requirements and the filing of a certified copy of the order with the Registrar of Companies within thirty days. [Paras 14, 15, 16]Sanction granted to the scheme; petition allowed and disposed of in the terms recorded.Board resolution extending scheme effective date - Validity of the extension of the scheme's operative date beyond 01.04.2013. - HELD THAT: - The Regional Director queried whether the scheme had been validly extended beyond 01.04.2013. The petitioners produced a Board resolution dated 18.09.2014 extending the scheme's operative date to 01.04.2017 (or such other date as fixed by the court), thereby curing the perceived gap in clause 17.2 of the scheme. The court accepted that the extension had been effected by the Board resolution and that this addressed the RD's concern. [Paras 10, 15]Extension of the scheme's operative date upheld as validly effected by the petitioners' Board resolution.Registration of charge / CHG 1 compliance - Whether the transferor company was obliged to register a charge (file CHG 1) in respect of working capital facilities guaranteed by third parties. - HELD THAT: - The RD drew attention to MCA records suggesting non filing of CHG 1. The petitioners explained that working capital facilities were extended to the transferor company on the basis of guarantees furnished by third parties and submitted that no charge had been created by the transferor company; consequently Section 77 of the Companies Act, 2013 (and analogous Section 125 of the 1956 Act) did not require filing of CHG 1. The court accepted the petitioners' position that no registrable charge had been created and that the alleged non compliance did not preclude sanction of the scheme. [Paras 10, 11, 15]No requirement to register a charge by the transferor company in respect of the said working capital guarantee; CHG 1 filing not attracted on facts presented.Undertaking as to RBI / FEMA approvals - Requirement that the transferee company furnish an undertaking to obtain necessary RBI approvals under FEMA, where applicable. - HELD THAT: - The RD sought an undertaking from the transferee company that it would obtain requisite approvals under FEMA/RBI. The petitioners produced an undertaking dated 29.04.2015 to the RD by the transferee company, and the court directed that the transferee company shall file an undertaking in court within two weeks confirming it will adhere to and comply with applicable RBI requirements and that statutory authorities remain entitled to proceed against the transferee company in respect of liabilities fastened on the transferor company. [Paras 10, 13]Transferee to file the RBI/FEMA undertaking in court and remains subject to any statutory action in respect of liabilities.Share exchange ratio correction - Resolution of the apparent inconsistency in the share exchange ratio between the petition and the scheme. - HELD THAT: - The Official Liquidator pointed out inconsistency between the valuation report/petition and clause 10.1.1 of the scheme regarding the share swap ratio. The petitioners explained that clause 10.1.1 contained an inadvertent typographical error and affirmed that the correct ratio is as stated in the valuation report (9 shares of the transferee for every 1 share of the transferor). The court accepted the petitioners' explanation and treated the inconsistency as rectified by the affidavit in rejoinder. [Paras 11, 15]Apparent inconsistency in share exchange ratio attributed to inadvertent error and accepted as rectified by the petitioners.Employees continuity on amalgamation - Transfer of assets and liabilities on amalgamation - Effect of the scheme on employees and on the transfer of assets, rights and liabilities. - HELD THAT: - The scheme provides that permanent employees of the transferor company in employment on the effective date shall become permanent employees of the transferee company without break, and that upon sanction the entire undertaking, properties, rights and powers of the transferor company shall vest in the transferee company and all liabilities shall stand transferred without further act or deed. The court recorded these legal effects in granting sanction and reiterated that sanction would not exempt statutory compliances including taxation, stamp duty or other permissions. [Paras 12, 16]Employees to continue in service with the transferee; assets, rights and liabilities to vest/transfer to the transferee on sanction, subject to statutory compliances.Final Conclusion: The court found no impediment to sanctioning the scheme of amalgamation and accordingly sanctioned the scheme under Sections 391 and 394 of the Companies Act, 1956, subject to the petitioners' compliance with statutory requirements, filing of the certified copy with the Registrar of Companies, and the transferee furnishing the directed RBI/FEMA undertaking; statutory authorities retain the right to proceed as per law in respect of any liabilities. ISSUES PRESENTED AND CONSIDERED 1. Whether the Court has territorial and subject-matter jurisdiction to entertain and sanction the scheme under Sections 391 and 394 of the Companies Act, 1956. 2. Whether meetings of shareholders and creditors could be dispensed with where all shareholders consent and secured creditors have given NOCs, and whether dispensing such meetings adversely affects unsecured creditors. 3. Whether a scheme containing a temporal proviso (clause 17.2) requiring the scheme to take effect by a specified date may be validly extended by board resolutions, and whether such extension must be proved before sanction. 4. Whether registration of a charge (filing of e-form CHG-1) was required in respect of working capital facilities supported by guarantees, having regard to Section 77 of the Companies Act, 2013 and Section 125 of the Companies Act, 1956. 5. Whether the transferee must furnish undertakings regarding compliance with Reserve Bank of India/Foreign Exchange Management Act requirements where the companies are subsidiaries of a foreign concern. 6. Whether apparent inconsistencies between the petition/valuation report and the scheme as to the share-exchange ratio require rejection or can be cured by affidavit/explanation. 7. Whether the scheme's provisions as to transfer of employees, vesting of assets and liabilities, and dissolution of the transferor without winding up are consistent with statutory requirements and warrant sanction. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Jurisdiction to entertain and sanction under Sections 391 & 394 of the 1956 Act Legal framework: Sections 391 and 394 of the Companies Act, 1956 empower the Court to sanction compromises, arrangements or amalgamations where the companies concerned are within its territorial jurisdiction. Precedent Treatment: No precedent was cited or applied by the Court in the judgment. Interpretation and reasoning: The petitioners' registered offices are within the territorial jurisdiction of the Court; hence the statutory precondition for exercise of jurisdiction is satisfied. Ratio vs. Obiter: Ratio - jurisdictional fact established is essential to the power to sanction the scheme. Conclusion: The Court has jurisdiction to entertain and sanction the scheme under Sections 391 and 394 of the 1956 Act. Issue 2 - Dispensing with meetings of shareholders and creditors Legal framework: The scheme approval process contemplates meetings of shareholders and creditors unless dispensed with by the Court; the Court may dispense where consent is obtained and interests are not prejudiced. Precedent Treatment: The Court referred to its earlier order (first motion) dispensing with meetings in light of unanimous shareholder consent and secured creditors' NOCs. Interpretation and reasoning: All shareholders had given consent; secured creditors had given consent/NOC; unsecured creditors had not consented but the Court found that their interests would not be adversely affected and might be improved post-amalgamation. On that basis, convening meetings was dispensed with. Ratio vs. Obiter: Ratio - where unanimity among shareholders and no adverse impact on unsecured creditors is demonstrated, the Court may dispense with convening statutory meetings. Conclusion: Dispensing with meetings was justified and correctly ordered in the first motion; nothing in the second motion undermined that rationale. Issue 3 - Extension of scheme's effectiveness date under clause 17.2 by board resolution Legal framework: A scheme may include a saving/temporal clause stipulating that it will lapse if not effective by a date; extension provisions may be exercised by boards if the scheme permits. Precedent Treatment: No precedent directly applied. Interpretation and reasoning: The RD queried whether boards had agreed to extend the date beyond 01.04.2013; petitioners produced Board resolutions dated 18.09.2014 extending the date to 01.04.2017. The Court held that the BOD resolution fills the perceived gap in the scheme in accordance with clause 17.2. Ratio vs. Obiter: Ratio - where a scheme permits extension by boards, a valid BOD resolution must be placed on record before sanction; such resolution cures temporal deficiency. Conclusion: The extension by BOD resolution was validly executed and satisfactorily proved; no impediment to sanction on this ground. Issue 4 - Requirement to register a charge (filing CHG-1) for working capital facilities guaranteed by third parties Legal framework: Section 77 of the Companies Act, 2013 requires registration of charges; Section 125 of the Companies Act, 1956 had similar object. Timing of applicability: Section 77 of the 2013 Act came into force on 01.04.2014. Precedent Treatment: RD initially suggested prima facie non-compliance; petitioners argued no charge created and hence no registration required. The RD later acknowledged that where working capital is advanced on the basis of guarantees furnished by other entities, CHG-1 need not be filed. Interpretation and reasoning: The working capital facility was granted on the basis of guarantees given by other corporate entities; no charge was created by the transferor. As Section 77 applied only from 01.04.2014, and no charge exists, filing CHG-1 is not mandated either under Section 77 or Section 125 of the 1956 Act. Ratio vs. Obiter: Ratio - advance of funds secured solely by third-party guarantees does not create a registrable charge on the borrower's assets requiring CHG-1 under the cited provisions. Conclusion: No obligation to file CHG-1 arises; perceived non-compliance with Section 77 is unfounded on facts. Issue 5 - Requirement of RBI/FEMA approvals and undertaking by transferee Legal framework: FEMA and RBI regulations govern cross-border investments and approvals; court may require undertakings to ensure statutory compliance post-sanction. Precedent Treatment: The RD sought an undertaking; petitioners furnished an undertaking to the RD and undertook to comply with applicable RBI requirements subject to court sanction. Interpretation and reasoning: ROC records indicated foreign ultimate parentage; RD therefore reasonably sought an undertaking. The transferee furnished an undertaking to seek necessary RBI approvals as applicable. The Court further required the transferee to file an undertaking within two weeks to take over and defray all liabilities and accepted that statutory authorities remain free to proceed against the transferee for liabilities. Ratio vs. Obiter: Ratio - where foreign ownership may trigger FEMA/RBI considerations, the transferee must give binding undertakings to obtain necessary approvals and accept liabilities; sanction does not immunize non-compliance with other statutes. Conclusion: Appropriate undertakings were given/ordered; sanction conditioned on compliance and without prejudice to actions by statutory authorities. Issue 6 - Apparent inconsistency in share exchange ratio between petition/valuation report and scheme Legal framework: Accuracy and consistency in scheme documents and valuation reports are material; court may permit correction of inadvertent clerical errors if substantive fairness is maintained. Precedent Treatment: OL pointed out contradiction; petitioners admitted clerical/typographical error in clause 10.1.1 and relied on valuation report and affidavit to clarify true ratio. Interpretation and reasoning: The discrepancy (formula reversed) was explained as inadvertent oversight; documentary evidence (valuation report) and affidavit clarified that the intended ratio is 9 transferee shares for 1 transferor share. The Court found the explanation adequate. Ratio vs. Obiter: Ratio - clerical or drafting inconsistencies in a scheme may be rectified by the Court where the correction reflects the true agreement/valuation and does not prejudice stakeholders. Conclusion: The inconsistency was satisfactorily remedied by affidavit and supporting valuation report; no bar to sanction. Issue 7 - Transfer of employees, vesting of assets/liabilities, and dissolution without winding up Legal framework: Sanctioned schemes effect transfer/vesting and dissolution provisions subject to statutory limits; employees' continuity and transfer of liabilities are common features of amalgamation schemes. Precedent Treatment: The scheme provided for employees to become transferee's permanent employees without break and for dissolution of the transferor without winding up upon effective date. Interpretation and reasoning: Court accepted scheme clauses (employee transfer clause 8.1; dissolution clause 12.1) and the express undertaking by transferee to assume liabilities. The Court clarified that sanction will not shield against obligations to statutory authorities (taxes, stamp duty, RBI), and that statutory actions may proceed notwithstanding the sanction. Ratio vs. Obiter: Ratio - sanction vests undertakings, properties, rights, liabilities in transferee and permits dissolution without winding up, subject to statutory compliance and without creating immunities from other statutory liabilities. Conclusion: Provisions concerning employee transfer, vesting and dissolution are consistent with statutory scheme and sanctionable, subject to payment of applicable duties/approvals and without prejudice to actions by statutory authorities. Overall Conclusion Having addressed jurisdiction, dispensation of meetings, temporal extension, charge registration, RBI/FEMA undertakings, correction of share-exchange inconsistency, and transfer/dissolution provisions, the Court found no impediment to sanctioning the scheme under Sections 391 and 394 of the Companies Act, 1956, while mandating compliance with all statutory requirements and preserving rights of statutory authorities to proceed in accordance with law.