2017 (1) TMI 961 - HC - Companies Law

Court waives shareholder meetings in amalgamation scheme involving wholly owned subsidiary

The Court exercised its discretion to dispense with the requirement of convening meetings of equity shareholders and unsecured creditors of both ... Scheme of Amalgamation - Requirement of convening meetings - nature of scheme - Held that:- In the present case, by virtue of the proposed scheme, the entire business and undertaking of the Transferor Company is being taken over and transferred to the Transferee Company. Further, upon the proposed scheme coming into effect, as consideration, there will be no issuance of new shares by the Transferee Company to the shareholders of the Transferor Company in view of the circumstance that the latter is the wholly owned subsidiary of the former. Therefore in the instant case, on the proposed scheme coming into effect, no variation in the rights of the equity shareholders of the Transferee Company shall be caused. Resultantly, judicial discretion can be exercised to dispense with the requirement of convening the meetings of the equity shareholders of the Transferee Company, in the case of a wholly owned subsidiary being amalgamated into the Transferee Company, on the ground that no variation in rights thereof is contemplated by way of the proposed scheme. In so far as the creditors of the Transferee Company are concerned, no variation in their rights is being proposed by way of the proposed scheme. Thus rights of the creditors of the Transferee Company, pre and post amalgamation, as against the Transferee Company would not stand varied. In so far as the requirement of convening a meeting of the unsecured creditors of the Transferor Company is concerned, by lifting the corporate veil, in the present case, of wholly owned subsidiary being amalgamated with its holding company, it would be established that the creditors of the Transferor Company are, and have always been, dealing with the Transferee Company de-facto though they are the creditors of the Transferor Company de-jure. Further, it has been noted that, upon the proposed scheme coming into effect, all the existing liability, debts, duties, obligations, inter alia, of the Transferor Company shall in any event stand transferred to the Transferee Company. Therefore, no variation in the rights of the unsecured creditors of the Transferor Company is proposed. Hence, in effect, it could not be said that any ‘compromise or arrangement’ is being offered by way of the proposed scheme to the creditors or shareholders of the Transferee Company; or the unsecured creditors of the Transferor Company. Therefore, in view of this circumstance and the foregoing discussion, the requirement of convening a meeting of the creditors and equity shareholders of the Transferee Company; and the unsecured creditors of the Transferor Company, to consider, and if thought fit, approve, with or without modifications, the proposed scheme can be dispensed with. Directed accordingly. Since the Transferor Company has no secured creditors, therefore the question of convening a meeting thereof does not arise. Ordered accordingly. Issues Involved:1. Dispensation of the requirement of convening meetings of equity shareholders, secured creditors, and unsecured creditors of the Transferor and Transferee Companies.2. Examination of the legal position regarding the dispensation of meetings under Section 391(1) of the Companies Act, 1956.3. Consideration of precedents and judicial discretion in dispensing with meetings.Detailed Analysis:1. Dispensation of the Requirement of Convening Meetings:The application was filed jointly by the Transferor Company and the Transferee Company under Sections 391 & 394 of the Companies Act, 1956, seeking directions to dispense with the requirement of convening meetings of their equity shareholders, secured and unsecured creditors to consider and approve the proposed Scheme of Amalgamation. The Transferor Company is a wholly owned subsidiary of the Transferee Company. The authorized and paid-up share capital details of both companies were provided, and it was stated that the proposed scheme would result in achieving synergy in business operations and greater work efficiency.The Applicants claimed that no consideration would be payable by the Transferee Company to the equity shareholders of the Transferor Company since the latter is a wholly owned subsidiary. The Board of Directors of both companies had unanimously approved the proposed scheme in their separate meetings. The status of consents obtained from equity shareholders, secured and unsecured creditors was detailed, showing substantial compliance.The prayer sought by the Applicants was to dispense with the meetings of equity shareholders and unsecured creditors of both companies, and the secured creditors of the Transferee Company, thereby seeking dispensation of the requirement of giving individual notices and publication of notices of the meetings.2. Examination of the Legal Position:The issue for consideration was whether the Court has the power to dispense with the requirement of convening meetings under Section 391(1) of the Act. The Court examined several precedents:- Masterji Mettalloys (P) Ltd. & Good Luck Steel Tubes Ltd.: Dispensed with the requirement of convening meetings on the basis that the Transferor Company was a wholly owned subsidiary of the Transferee Company.- Madhusudan Auto Ltd. & Anr.: Dispensed with the requirement of convening meetings due to the written consents/NOCs from a majority of shareholders and creditors.- Dabur Foods Ltd. & Anr.: Dispensed with meetings of equity shareholders of the Transferee Company and creditors of the Transferee Company due to the Transferor Company being a wholly owned subsidiary.- Sharat Hardware Industries Limited: Highlighted that a scheme affecting the members of a company does not necessarily require approval from the transferee company if it does not affect the rights of its members or creditors.- Mazda Theatres Pvt. Ltd.: Established that the consent of all shareholders given outside a meeting is sufficient to comply with the requirement of a meeting.- Magnaquest Solutions P. Ltd.: Discussed the necessity of holding meetings of creditors in schemes of arrangement and the concept of lifting the corporate veil in cases of wholly owned subsidiaries.3. Judicial Discretion and Precedents:The Court summarized the legal position that it may dispense with the requirement of convening meetings of members and/or creditors if:- The scheme is not proposed to members and/or creditors.- A wholly owned subsidiary is being amalgamated into its holding company without variation of rights.- Consent from the majority in number and three-fourths in value of members and/or creditors is obtained in writing.The Court has the discretion under Section 391(1) to direct convening meetings or dispense with them, considering the rights and interests of members and creditors. The Court noted that the proposed scheme in this case involved the amalgamation of a wholly owned subsidiary with its holding company, with no issuance of new shares or variation in the rights of equity shareholders and creditors.Conclusion:The Court exercised its discretion to dispense with the requirement of convening meetings of the equity shareholders and unsecured creditors of both companies, and the secured creditors of the Transferee Company. The sole equity shareholder of the Transferor Company, being the Transferee Company, had given written consent to the proposed scheme. The Transferor Company had no secured creditors. The requirement of giving individual notices and publication of notices was also dispensed with. The application was allowed in these terms.