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AI Drafter ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: (i) Whether payment of cash to redeem preference shares under a scheme of amalgamation amounted to reduction of share capital requiring compliance with the procedure for reduction under the Companies Act, 1956; (ii) Whether payment of preference shares under a scheme of amalgamation was impermissible except in winding up.
Issue (i): Whether payment of cash to redeem preference shares under a scheme of amalgamation amounted to reduction of share capital requiring compliance with the procedure for reduction under the Companies Act, 1956.
Analysis: The scheme transferred the entire undertakings, assets, rights, liabilities and obligations of the amalgamating companies to the new company, and the amalgamating companies were to cease to exist on amalgamation. The statutory provisions on reduction of capital were treated as directed to an existing company, and the protective purpose of those provisions was held not to be defeated where creditors' interests were preserved through the merger structure. Payment to redeem preference shares in such a scheme was therefore not treated as a reduction of capital of a continuing company.
Conclusion: The objection based on reduction of capital failed and was rejected against the appellant.
Issue (ii): Whether payment of preference shares under a scheme of amalgamation was impermissible except in winding up.
Analysis: The scheme contemplated dissolution of the amalgamating companies without winding up, with all assets and liabilities vesting in the new company. In that setting, the winding-up provisions were held not to govern the transaction, and no prohibition was found in the Companies Act, 1956 against providing for payment of preference shares as part of the amalgamation arrangement.
Conclusion: The objection based on alleged illegality of payment of preference shares outside winding up failed and was rejected against the appellant.
Final Conclusion: The sanction for the amalgamation scheme was upheld, and the appeals were dismissed with no costs.
Ratio Decidendi: In a scheme of amalgamation where the transferor companies cease to exist and all assets and liabilities vest in the transferee, redemption or payment of preference shares is not treated as a reduction of capital of an existing company, and such payment may be validly provided for even though the companies are dissolved without winding up.
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