2016 (4) TMI 392 - HC - Companies Law

Court approves Scheme of Amalgamation under Companies Act, 1956

In Re : Radha Raj Ispat Private Limited, KRBL Limited.

The court sanctioned the Scheme of Amalgamation under Sections 391 and 394 of the Companies Act, 1956. The scheme involved simplifying the shareholding ... Scheme of Amalgamation - Held that:- In view of the approval accorded to the scheme by the shareholders of the petitioners and creditors of the transferee company, and, given the fact, that the RD and the OL have not articulated any objections qua the scheme, in my opinion, there appears to be no impediment in the grant of sanction to the scheme. Consequently, sanction is granted to the scheme in terms of Section 391 and 394 of the Act. Consequently, the investment held by the transferor company, to the extent of 11.86%, in the transferee company, shall stand cancelled. The shares of the transferor company, which are in dematerialized form, shall stand extinguished on or from the date of issuance and allotment of new equity shares as envisaged under clause 5.4 of the sanctioned scheme. The aforesaid order shall, therefore, be deemed to be an order under Section 100 and 103 of the Act, as well, and thus, result in confirmation of reduction in capital. Consequently, the provision made in the scheme, in clause 5.5, to the effect that there shall be no requirement of the transferee company, post amalgamation, that is, for amalgamating company, to add the words, “and reduced” as a suffix to its name post reduction in capital will also get triggered. The petitioners will, however, comply with all statutory requirements, as mandated in law. ISSUES PRESENTED AND CONSIDERED 1. Whether this Court has territorial jurisdiction to sanction the Scheme under Sections 391 and 394 read with Sections 100-103 of the Companies Act, 1956. 2. Whether the statutory requirements for convening meetings and obtaining requisite consents of classes (equity shareholders and unsecured creditors) were complied with, including quorum rules and validity of chairperson's reports. 3. Whether objections or adverse reports from statutory authorities (Regional Director, Registrar of Companies, Official Liquidator, Income Tax Department, stock exchanges) impede sanction of the Scheme. 4. Whether the proposed transfer, vesting of assets and liabilities, and consequent dissolution of the transferor company without winding up satisfy the requirements of Sections 391 and 394 and related provisions (including effecting reduction of capital under Sections 100-103 by court order). 5. Whether the Scheme's provisions for cancellation/extinguishment of the transferor company's equity holding in the transferee company (clauses 5.4 and 5.5) legitimately effect reduction of capital and dispense with adding 'and reduced' as a suffix. 6. Whether employees' service continuity and terms (clause 7) are appropriately provided for and relevant to sanction. 7. Whether sanctioning the Scheme bars subsequent action for statutory violations, liabilities, stamp duty, taxes or other approvals. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Territorial jurisdiction Legal framework: Jurisdiction to entertain petitions under Sections 391/394 is conferred on the High Court within whose local limits the registered offices of the companies are situated. Interpretation and reasoning: The petitioners' registered offices are within the Court's territorial jurisdiction. Ratio vs. Obiter: Ratio - jurisdiction established. Conclusion: The Court has jurisdiction to entertain and adjudicate the petition. Issue 2 - Compliance with meeting/consent requirements and quorum Legal framework: Sections 391/394 require class meetings and consent by prescribed majorities; court may dispense with meetings where appropriate. Court's earlier first-motion order dispensed with meetings for certain classes and directed meetings for others with specified quorum. Interpretation and reasoning: Evidence demonstrates compliance: board resolutions, explanatory statements, dispatch of notices, chairpersons' reports showing requisite quorum and majority in number and value for equity shareholders and, after adjournment, for unsecured creditors. The Court examined chairpersons' reports and attendant annexures documenting attendance and proxies. Precedent treatment: No authority considered or relied upon; Court applied statutory scheme and its prior first-motion order. Ratio vs. Obiter: Ratio - consents obtained in accordance with law; quorum satisfied. Conclusion: Meetings were validly convened/adjourned and requisite consents procured; no impediment on this ground. Issue 3 - Responses/objections from statutory authorities (RD, ROC, OL, IT Department, stock exchanges) Legal framework: Court must consider reports/objections of RD, ROC, OL, and other statutory authorities before sanctioning a scheme; RD files affidavit under Section 394A and communications with ROC/IT Department are relevant. Interpretation and reasoning: RD filed an affidavit relying on corporate circulars and reported no objection having been raised by ROC; no response from IT Department had been received; OL reported no complaints and indicated affairs of the transferor company were not conducted so as to prejudice members or the public, and did not invoke the second proviso to Section 394(1). Stock exchanges had issued observation letters earlier (no objection to filing). Petitioners filed affidavit that no objections were received after publication. The Court found no articulated objections from RD or OL and no material adverse comments from ROC. Precedent treatment: No precedents were cited; Court applied statutory considerations and administrative responses. Ratio vs. Obiter: Ratio - absence of adverse reports from RD/ROC/OL and absence of objections in published notice supports sanction. Conclusion: No statutory objections impeded sanctioning of the Scheme. Issue 4 - Transfer/vesting of assets and liabilities; dissolution without winding up Legal framework: Under Sections 391 and 394, a sanctioned scheme effects transfer and vesting of the undertaking, properties, rights, liabilities and duties of the transferor in the transferee without further act or deed; dissolution may follow without winding up. Interpretation and reasoning: Clause 4 of the Scheme provides for automatic transfer/vesting of undertaking, properties, rights and liabilities. Clause 15 provides for dissolution of the transferor company without winding up. The Court expressly sanctioned the Scheme under Sections 391 and 394, thereby giving effect to automatic transfer and dissolution as contemplated by statute. Ratio vs. Obiter: Ratio - sanctioned Scheme validly effects transfer/vesting and dissolution without winding up subject to statutory compliance and outstanding liabilities. Conclusion: Transfer/vesting and dissolution without winding up are sanctioned as meeting statutory requirements; transferee assumed liabilities with an undertaking to defray them. Issue 5 - Cancellation/extinguishment of transferor's equity stake in transferee and reduction of capital (clauses 5.4 & 5.5) Legal framework: Reduction of share capital is governed by Sections 100-103; a court order sanctioning a scheme may operate as an order confirming reduction where the Scheme so provides. Cancellation/extinguishment of shareholdings upon amalgamation is permissible if effected by sanctioned scheme and compliant with statutory requirements, including filings with ROC and compliance with stamp/tax laws. Interpretation and reasoning: Clauses 5.4 and 5.5 stipulate that upon issue/allotment of new shares, the investment held by the amalgamating company (transferor) shall stand cancelled and dematerialized shares extinguished; the Court's sanction is deemed an order under Sections 100-103 confirming the reduction, and clause 5.5 seeks to dispense with the suffix 'and reduced.' The Court sanctioned these clauses, declared the sanction to be an order under Sections 100 and 103, and thereby treated the cancellation as an effected reduction of capital; however the Court required statutory compliances and filings with ROC and clarified that sanction does not exempt payment of stamp duty, taxes or other statutory permissions. Ratio vs. Obiter: Ratio - cancellation/extinguishment and concomitant reduction of capital are effective upon Court sanction under Sections 100-103 as part of the Scheme; clause dispensing with suffix 'and reduced' operates as contemplated once statutory requirements are satisfied. Conclusion: The Court sanctioned cancellation of the 11.86% stake and confirmed that the sanction operates as a reduction of capital order under Sections 100-103, subject to compliance with statutory obligations. Issue 6 - Employees' service continuity (clause 7) Legal framework: Schemes ordinarily provide for protection of employees' rights on amalgamation - continuity of service on terms not less favourable. Interpretation and reasoning: Clause 7 provides that employees of the transferor in service on the effective date shall become employees of the transferee without break and on terms not less favourable. The Court noted this provision as part of the Scheme and sanctioned the Scheme without recording any objection on this point. Ratio vs. Obiter: Obiter - while the provision is recognised and approved as compliant, the Court did not have to adjudicate a dispute regarding its interpretation or enforceability beyond sanction. Conclusion: Employees' continuity and protection clause is sanctioned as part of the Scheme; no impediment found. Issue 7 - Effect of sanction on subsequent proceedings, liabilities, duties, taxes and compliance Legal framework: Court sanction of a scheme does not grant immunity from prosecution or proceedings for statutory violations, nor does it automatically absolve parties from payment of stamp duty, taxes or need for other approvals; statutory authorities retain power to enforce liabilities. Interpretation and reasoning: The Court expressly stated that sanction will not bar action against concerned persons/directors/officials for any deficiency or violation of enactments; sanction does not amount to exemption from stamp duty, taxes, charges or statutory permissions. The transferee was required to file an undertaking to defray liabilities; statutory authorities remain entitled to proceed against the transferee for liabilities fastened on the transferor for relevant periods or arising post-sanction. Ratio vs. Obiter: Ratio - sanction does not preclude subsequent lawful proceedings or statutory obligations; transferee remains responsible for liabilities and must comply with statutory requirements. Conclusion: The Court's sanction is subject to compliance with statutory duties, taxes and does not shield parties from future legal action in accordance with law. Cross-references - Issues 2 and 3 are interrelated: valid consents from shareholders/creditors (Issue 2) and absence of adverse statutory reports (Issue 3) together determine fitness for sanction. - Issues 4 and 5 are linked: vesting of assets/liabilities and dissolution (Issue 4) operate in tandem with cancellation of shares and reduction of capital (Issue 5) as part of the operative effect of a sanctioned scheme under Sections 391/394 and Sections 100-103.