2025 (5) TMI 1925 - AT - Companies Law

NCLAT overturns dismissal of family company demerger application under sections 230-232 Companies Act 1956

Lincon Polymers Private Limited, Lincon Polyplast Private Limited Versus NA

Lincon Polymers Private Limited, Lincon Polyplast Private Limited Versus NA - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal include:- Whether the dismissal of the application for first motion of scheme of demerger under Sections 230-232 of the Companies Act, 1956 by the Learned NCLT was justified on grounds of shareholding pattern discrepancies and valuation concerns.- Whether the difference in shareholding percentages and identities of shareholders between the demerged company and the resulting company invalidates the valuation report and share swap ratio.- Whether the absence of detailed identification of assets and liabilities of the demerged undertaking and segmental accounts justifies rejection of the scheme.- Whether the increase in authorized share capital without issuance of additional shares affects the scheme's validity.- The extent to which the consent affidavits by all shareholders in closely held family companies can obviate the need for meetings and scrutiny of valuation and swap ratio.- The role and scope of judicial interference in valuation and share exchange ratio in schemes of arrangement, especially where valuation is done by independent experts and approved by overwhelming majority of shareholders.- The applicability of precedents relating to family-owned companies, valuation standards, and the supervisory jurisdiction of company courts in sanctioning schemes of arrangement.- The relevance of objections raised by creditors or minority shareholders when the scheme is approved by near-unanimous shareholder consent.- The treatment of potential tax-related objections and public interest considerations in sanctioning schemes.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of dismissal by NCLT based on shareholding pattern differences and valuation reportRelevant legal framework includes Sections 230-232 of the Companies Act, 1956 governing schemes of arrangement, and judicial precedents emphasizing the supervisory (not appellate) jurisdiction of company courts in sanctioning schemes.The NCLT dismissed the scheme primarily because the shareholding pattern differed quantitatively between the demerged and resulting companies, specifically noting that two shareholders, husband and wife, held shares differently across the companies, and that the valuation report assumed identical shareholders and shareholding percentages, thus invalidating the swap ratio.The Court's interpretation, however, focused on the fact that the companies are closely held family entities, and cumulatively the husband and wife held the same percentage of shares (43.72%) in both companies. The Tribunal held that the NCLT erred in not considering the familial relationship and the consent affidavits by all shareholders, which indicated no prejudice or unfairness.The valuation was conducted by independent, IBBI-registered valuation experts using the Discounted Cash Flow (DCF) method, a universally accepted approach. No party challenged the independence or methodology of the valuers. The Tribunal emphasized that where valuation is done by competent experts and accepted by an overwhelming majority of shareholders, courts should not interfere unless there is evidence of manifest unreasonableness, unfairness, or illegality.Precedents such as the Gujarat High Court's judgment in Mahavir Weaves Pvt. Ltd. and Takshashila Gruh Nirman Pvt. Ltd., and the Tribunal's own ruling in Indiabulls Real Estate Limited were relied upon to support the principle that in closely held family companies, unanimous shareholder consent can obviate the need for detailed valuation scrutiny.The Tribunal also cited the Supreme Court's guidance in Hindustan Lever Employees' Union v. Hindustan Lever Ltd., which underscored that the company court's jurisdiction is grounded in fairness, not mathematical precision, and that valuation by independent experts accepted by shareholders is conclusive unless there is a fundamental error.Application of law to facts led the Tribunal to conclude that the NCLT's dismissal on this ground was unjustified.Issue 2: Increase in authorized share capital and issuance of sharesThe NCLT noted a discrepancy between the shares to be issued (9,38,206) and the increase in authorized share capital (9,40,000), questioning the issuance of 1,794 additional shares without details.The appellants clarified that the increase in authorized capital was rounded to the nearest figure and did not imply issuance of additional shares beyond the stated number. The Tribunal accepted this explanation, finding no merit in the objection.Issue 3: Identification of assets and liabilities of the demerged undertakingThe NCLT had observed that assets and liabilities of the Khatraj undertaking were not distinctly identified and segmental accounts were not furnished.The appellants submitted detailed lists of assets and liabilities, which were on record and available to the NCLT. The Tribunal found that sufficient disclosure had been made, particularly given the family-owned nature of the companies and the focused management objective of the scheme.Issue 4: Role of shareholder consent affidavits and dispensation of meetingsThe appellants sought dispensation of meetings of equity shareholders of the demerged and resulting companies based on consent affidavits by all shareholders.The Tribunal noted that all shareholders had given unequivocal consent and that the scheme was a family arrangement with no dissent. Precedents such as Mahavir Weaves Pvt. Ltd. and Takshashila Gruh Nirman Pvt. Ltd. support dispensation of meetings in such cases.The Tribunal directed the NCLT to issue consequential orders regarding convening or dispensation of meetings accordingly.Issue 5: Judicial interference in valuation and share swap ratioThe Tribunal extensively reviewed authoritative precedents:Cetex Petrochemicals Ltd. (Madras High Court) - Approval by overwhelming majority is a symbol of soundness; courts should not substitute shareholders' collective wisdom.Aradhana Beverages & Foods Company Ltd. (Delhi High Court) - Courts should not interfere where valuation is determined by experts and shareholders are satisfied.Hindustan Lever Employees' Union v. Hindustan Lever Ltd. (Supreme Court) - Jurisdiction is grounded in fairness, not mathematical exactitude; valuation by independent experts accepted by shareholders is conclusive.Miheer H. Mafatlal v. Mafatlal Industries Ltd. (Supreme Court) - Courts should not substitute exchange ratio accepted by bona fide shareholders and determined by recognized experts.Duncans Industries Ltd. v. State of U.P. and G.L. Sultania v. SEBI (Supreme Court) - Valuation is a technical, complex issue; courts reluctant to interfere absent fundamental error.Alstom Power Boilers Ltd. v. State Bank of India & IDBI (Bombay High Court) - Company courts have supervisory jurisdiction; dissenting minority cannot tyrannize majority.Alfa Quartz Ltd. v. Cymex Time Ltd. (Gujarat High Court) - Courts should not interfere with exchange ratio accepted by overwhelming majority.Suresh Kumar Rungta v. Roadco (India) Pvt. Ltd. (Calcutta High Court) - Courts should not set aside judgments on ground of fraud if effect is same as if fraud had been practiced.APCO Industries Ltd. (Gujarat High Court) - Absence of fraud and use of standard valuation methods preclude interference.Vodafone Essar Ltd. & Ors. (Delhi High Court) - Sanction of scheme does not preclude tax authorities' rights; lawful tax avoidance not against public interest.Parke Davis (India) Ltd. (Bombay High Court) - Court's enquiry on swap ratio is limited to legality, independence of valuer, and fairness; overwhelming shareholder approval is conclusive.The Tribunal applied these principles and held that the valuation and swap ratio in the present case were fair, lawful, and accepted by nearly 100% shareholders and creditors. No evidence of fraud, mala fide, or fundamental error was shown.Issue 6: Public interest and tax objectionsThe Tribunal referred to the Vodafone Essar Ltd. judgment, which clarified that lawful tax avoidance does not render a scheme against public interest, and that objections on tax matters are within the domain of tax authorities, not company courts.There were no specific tax objections in the present case that would impede sanctioning the scheme.3. SIGNIFICANT HOLDINGS'The jurisdiction of the Court in sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical test. A company court does not exercise an appellate jurisdiction. It exercises a jurisdiction founded on fairness. It is not required to interfere only because the figure arrived at by the valuer was not as better as it would have been if another method would have been adopted. What is imperative is that such determination should not have been contrary to law and that it was not unfair to the shareholders of the company which was being merged.''Since both the demerged company and the resulting company are family-owned concerns and all shareholders have given their consent, no prejudice is caused to any shareholder in regard to the valuation or swap ratio.''Where valuation is done by independent experts using accepted methods, and the scheme is approved by an overwhelming majority of shareholders and creditors, courts should not interfere unless there is evidence of manifest unreasonableness, unfairness, or illegality.''The dissent of a microscopic minority cannot be allowed to stall a scheme approved by almost 100% members. Even minority cannot tyrannise the majority.''The increase in authorized share capital rounded to the nearest figure does not imply issuance of additional shares beyond those proposed.''The scheme is just, fair and reasonable from the point of view of all concerned and deserves to be sanctioned.'Final determination: The Tribunal set aside the order of the NCLT dismissing the scheme application, directing the NCLT to proceed with the scheme's sanction, including convening or dispensing with meetings as appropriate, within three days of receipt of the order.