2016 (11) TMI 28 - HC - Companies Law

Court approves scheme of arrangement between companies under Companies Act, ensuring fairness and shareholder value

The court sanctioned the scheme of arrangement between two companies under Sections 391 to 394 of the Companies Act, 1956 and Companies Act, 2013. The ... Scheme of Arrangement - Amalgamation - Sanction of Scheme - Meetings dispensed with - Compliance with Accounting Standards - FEMA and RBI compliance - Contingent liabilities and going concern - Binding effect on shareholders, creditors and authorities - Preservation of books under section 396A of the Companies Act, 1956Scheme of Arrangement - Amalgamation - Sanction of Scheme - Binding effect on shareholders, creditors and authorities - Sanction of the composite scheme of arrangement and amalgamation between the Transferor Company and the Transferee Company. - HELD THAT: - The Court examined the composite scheme proposed to consolidate similar businesses of the two companies and considered material on record including dispensation of meetings where applicable, publication of public notices, absence of objections, the affidavits filed by the Regional Director and the Official Liquidator's report. The court found the scheme to be fair and reasonable, not violative of public policy, and in the interests of the companies, their members and creditors. The scheme was therefore sanctioned and declared binding on all equity shareholders, preference shareholders, secured and unsecured creditors and relevant authorities. [Paras 3, 6, 12, 13, 15]The composite scheme of arrangement and amalgamation is sanctioned and shall be binding on the companies' stakeholders and relevant authorities.Meetings dispensed with - Compliance with Accounting Standards - FEMA and RBI compliance - Contingent liabilities and going concern - Whether statutory and regulatory concerns raised by the Regional Director have been addressed and whether meetings could be dispensed with as recorded. - HELD THAT: - The Court noted prior orders dispensing with meetings of shareholders and creditors where written consents were on record or where there were no creditors or where rights of unsecured creditors were not affected. The Regional Director's observations requiring compliance with Accounting Standard-14, FEMA/RBI guidelines, and disclosure/satisfaction about contingent liabilities were considered. Petitioners furnished affidavits and undertakings to make required disclosures and to comply with FEMA, RBI and tax provisions; the Transferee Company placed financials on record demonstrating sufficient net worth to meet contingent liabilities. On this basis, the Court held that the Regional Director's observations stood addressed. [Paras 8, 9, 10, 11, 12]The Regional Director's observations are addressed by the affidavits and undertakings; prior dispensation of meetings was in order.Official Liquidator's opinion - Fairness to members and public interest - Effect of the Official Liquidator's report on sanction of the scheme. - HELD THAT: - The Official Liquidator filed an affidavit stating that the affairs of the petitioner companies were not conducted in a manner prejudicial to the interests of members and that they may be dissolved without winding up. The Court treated this as supportive material and, in conjunction with other material, found no impediment arising from the Official Liquidator's report to sanction the scheme. [Paras 14, 15]The Official Liquidator's report does not preclude sanction; it supports sanction of the scheme.Preservation of books under section 396A of the Companies Act, 1956 - Requirement for preservation of books of account and connected papers of the Transferor Company. - HELD THAT: - Pursuant to section 396A requirements, the Court directed that the Transferor Company shall not dispose of or destroy its books of accounts or connected papers without prior consent of the Central Government and shall preserve such records. This direction was imposed as a condition of sanction. [Paras 16]Transferor Company must preserve books and connected papers and shall not dispose of them without prior Central Government consent.Costs and filing directions - Adjudication of stamp duty - Directions regarding costs to Central Government Counsel and Official Liquidator, and directions for lodging authenticated order and scheme for stamp duty adjudication and filing with Registrar of Companies. - HELD THAT: - The Court quantified costs to be paid to Central Government Counsel and to the Official Liquidator and directed payment. It further directed the petitioner companies to lodge a copy of the order, schedules of immovable assets and the Scheme with the Superintendent of Stamps for adjudication within 60 days, and to file the order and Scheme with the Registrar of Companies electronically (E-Form INC-28) and physically as required. Authentication and dissemination of the order by the Registrar, High Court of Gujarat were also directed. [Paras 17, 18, 19, 21]Costs quantified and payable; petitioners directed to comply with stamp duty adjudication and filing requirements and Registrar to authenticate and issue copies.Final Conclusion: The High Court sanctioned the composite scheme of arrangement and amalgamation between the petitioner companies as fair and in the interests of the companies, their members and creditors; regulatory observations were addressed, preservation of Transferor Company's records was directed under section 396A, costs were quantified and procedural filing and stamp duty compliance directions were given. Issues:Sanction of scheme of arrangement between two companies under Sections 391 to 394 of the Companies Act, 1956 and Companies Act, 2013.Analysis:The petition was filed for the sanction of a composite scheme of arrangement and amalgamation between two companies. The purpose of the scheme was to achieve consolidated management focus over similar business operations conducted by both companies. It was believed that the arrangement would create enhanced value for the shareholders and stakeholders of both entities. The scheme aimed at facilitating integration and vertical extension of business activities. The court heard and disposed of two related petitions concerning the common scheme in a single judgment.Regarding the Transferor Company, it was noted that the meetings of Equity Shareholders, Secured Creditors, and Unsecured Creditors were dispensed with as per the court order, as there were no objections or compromise arrangements affecting these parties. Similarly, for the Transferee Company, meetings of Equity Shareholders, Secured Creditors, and Unsecured Creditors were dispensed with based on court directives, ensuring no adverse impact on their rights and interests due to the scheme of arrangement.The court admitted the Company Petitions and public notices were duly advertised in newspapers. No objections were raised against the petitions post-publication. The Central Government was served notice through the Regional Director, who made observations regarding compliance with Accounting Standards, FEMA, RBI guidelines, and disclosure of contingent liabilities. The companies undertook to comply with these requirements in their affidavits.The net worth and contingent liabilities of both companies were presented to show their financial positions. The Regional Director confirmed no complaints against the companies and opined that the proposed scheme was not prejudicial to shareholders or the public. The Official Liquidator also stated that the companies' affairs were not conducted in a prejudicial manner, suggesting dissolution without winding up.After addressing all observations and opinions, the court found no impediment to granting sanction to the scheme of arrangement. It was deemed fair, reasonable, not violative of public policy, and in the interest of the companies, members, and creditors. The scheme was sanctioned, binding all relevant parties and authorities. Various directions were issued regarding compliance with Companies Act provisions, preservation of documents, payment of costs, and filing of necessary documents with authorities.In conclusion, the court approved the scheme of arrangement between the companies, ensuring compliance with legal requirements and protecting the interests of stakeholders.