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of <h1>Court rejects amalgamation scheme due to tax avoidance, citing public interest, emphasizes scrutiny</h1> <h3>In Re :Woodcraft Products Limited, Wood Polymer Limited and Bengal Hotels Private Limited,</h3> The court rejected the petitions for sanctioning the scheme of amalgamation as it was primarily aimed at tax avoidance, contrary to public interest. The ... Compromise and arrangement, Amalgamation Issues Involved:1. Compliance with statutory provisions.2. Fair representation of classes.3. Reasonableness of the arrangement.4. Legislative intent behind the second proviso to section 394.5. Scope and concept of 'public interest.'6. Relevance of disclosed purpose of amalgamation.7. Tax avoidance as a purpose for amalgamation.8. Judicial facilitation of tax avoidance.Issue-Wise Detailed Analysis:1. Compliance with Statutory Provisions:The court examined whether the statutory provisions had been complied with. Both the transferor and transferee companies filed separate petitions under section 391(2) of the Companies Act for sanctioning a scheme of amalgamation. Separate meetings of equity and preference shareholders and unsecured creditors were convened as directed by the court. The official liquidator was directed to scrutinize the books and papers of the transferor company to check if the affairs were conducted prejudicially to members or public interest.2. Fair Representation of Classes:The court considered whether the classes had been fairly represented. The members and creditors of both companies approved the scheme. The chairman's report indicated adequate representation, and there was no suggestion of coercion or unfair advantage taken by the majority over the minority.3. Reasonableness of the Arrangement:The court evaluated if the arrangement was one that a reasonable business person would approve. The exchange ratio of shares was based on a valuation by Talbot & Co., but the court noted that the equity shares of the transferor company were quoted lower in the market. Despite this, no objections were raised by shareholders or creditors, leading the court to accept the scheme as fair and reasonable.4. Legislative Intent Behind the Second Proviso to Section 394:The court examined the legislative intent behind the second proviso to section 394, which requires the official liquidator to report that the affairs of the transferor company have not been conducted prejudicially to its members or public interest. The official liquidator's report indicated that the transferor company was created to facilitate the transfer of 'Avenue House' to avoid capital gains tax.5. Scope and Concept of 'Public Interest':The court explored the ambit of 'public interest' as envisaged in the second proviso. Public interest in company law includes ensuring that the affairs of a company are not conducted in a manner prejudicial to the public. The court emphasized that public interest is a positive check on the unhindered exercise of private rights and must be considered in the context of the legislation.6. Relevance of Disclosed Purpose of Amalgamation:The court considered whether the disclosed purpose of the amalgamation was relevant. It was revealed that the transferor company was created to avoid capital gains tax, which would have been payable if the property was transferred directly from DOC Pvt. Ltd. to the transferee company. The court found that this purpose was relevant and could not be ignored.7. Tax Avoidance as a Purpose for Amalgamation:The court examined whether tax avoidance as the major and only purpose for the scheme could be grounds for rejecting it. The court concluded that if tax avoidance is the sole purpose, it is opposed to public interest, and the court should not sanction the scheme.8. Judicial Facilitation of Tax Avoidance:The court deliberated whether it should facilitate tax avoidance through its process. It was held that the court should not lend its assistance to schemes designed to avoid tax, even if such avoidance is legal. The court emphasized that judicial process should not be used to defeat tax provisions, as it is against public interest.Conclusion:The petitions for sanctioning the scheme of amalgamation were rejected on the grounds that the scheme was primarily designed to avoid capital gains tax, which is contrary to public interest. The court underscored its duty to scrutinize such schemes vigilantly and not act as a mere rubber stamp.
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