TaxTMI 
TaxTMI 
TaxTMI 
1999 (12) TMI 764
X X X X Extracts X X X X
X X X X Extracts X X X X
....the name of the petitioner was changed to Blue Star Private Limited, the name of the Petitioner Company was once again changed to BSL which was duly approved by the Assistant Registrar of Companies, Bombay vide certifi-cate of change of name dated 28-6-1969. BSL has its registered office at Kasturi Building, Mohan T. Advani Chowk, Jamshedji Tata Road, Mumbai- 400 070. BSL is, inter alia, engaged in the business of manufacture, sale, marketing and distribution of 'air conditioners and refrigerators', the objects for which BSL was incorporated are set out in its memorandum of association. The relevant objects are clauses 39, 40 and 41 which are as under : "39. To sell or dispose of the undertaking of the company or part thereof for such consideration as the company may think fit and in particular for shares, debentures or securities of any other company having objects altogether or in part similar to those of this company. 40. To amalgamate, enter into partnership, or any arrangement of sharing profits, union of interests, co-operation, joint venture, reciprocal concession or otherwise with any person, firm or company carrying on or engaged in or about to carry on or engage in any ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rrent Assets (after adjusting Trade Creditors) 6,744.76 8. Carry forward losses Nil 16,449.14 The Sundry Creditors of BSL as on 30-9-1998 amounted to Rs. 28,80,63,329. 4. Since 1984 BSL has also been carrying on the business of software. This is a separate division of BSL, known as International Software Division (I.S.D.). 5. The BSL was incorporated on 4-9-1997 under the Act, in the name of 'My Own Computers Ltd.'. The transferee company recently changed its name to Blue Star Infotech Pvt. Ltd. A certificate to this effect has been issued on 13-7-1998. Once again the transferce company has changed its name to BSIL. The certificate of registration has been issued on 11-9-1998. Mr. Ashok M. Advani, Chairman and Chief Executive of BSL is also the director of BSIL. The memorandum and articles of association of BSIL is attached with the petition as Exhibit-C. The relevant clauses in the objects of the company for the purposes of this petition are clauses 12 and 13 which read as under : "12. To acquire and undertake all or any part of the business, property and liabilities of any person or company carrying on or proposing to carry on any business which this company is authoris....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to carry on or engage in any business transaction on or engaging in which this company is authorised to carry or engage in or which can be carried on in conjunction therewith." The authorised share capital of transferee Company as on 31-8-1998 is as under : Share Capital : Authorised. 1,00,00,000 Equity Shares of Rs. 10 eachRs. 10,00,00,000 However, since the BSIL is a new company, it does not have an audited balance sheet as yet. As mentioned earlier, the object of this petition is to obtain the sanction of the court to the scheme of arrangement whereunder it is proposed to transfer and vest the entire business of BSL with relation to its ISD together with its assets, properties and all debts, liabilities, duties and obligations as provided in the scheme of arrangement to BSIL. The equity shareholders of BSL have approved the scheme at the Extraordinary General Meeting (EGM) held on 13-11-1998 in compliance with the requirements of section 391 sub-section (2) of the Act. At this meeting, 13 amendments were moved, 12 of the amendments were moved by the employees shareholders and one by the financial institutions. The 12 amendments moved by the employees shareholders were reject....
X X X X Extracts X X X X
X X X X Extracts X X X X
....scheme provides for transfer of ISD of BSL to BSIL. Clause 3.1 provides for transfer of the entire assets of ISD of BSL to BSIL together with the liabilities. Thereafter procedure is prescribed for transferring the assets and liabilities. It also provides that except for the transfer of the assets of ISD to BSIL all the other assets continued to vest in BSL. There are usual provisions with regard to legal contracts, legal proceedings etc. Clause 3.6 provides for payment of cash consideration which is as under: "3.6 Consequent upon the transfer and vesting in BSIL of the International Software Division of BSL, BSIL shall, within forty-five days from the Schedule of Arrangement becoming fully effective pay cash consideration for the said transfer and vesting to BSL." Clauses 3.8-1 and 3.8-2 of the scheme protect the interest of the employees of BSL engaged in and for the business of ISD. It is provided that on the effective date any of the employees who are willing to become employees of BSIL shall become the employees of BSIL. There will be no break or interruption in their services. The same terms and conditions on which they were engaged as on the effective date are to be taken ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... allotted being determined in the ratio of 1 (One) Equity Share of Rs. 10 each fully paid up for every 4 (Four) Equity Shares of Rs. 10 each of BSL held by them on the Record Date. The shares to be issued and allotted pursuant to this clause are hereinafter referred to as the "Specified Number of Shares". If the ratio as aforesaid results in a shareholder being entitled to fraction of a share then the Specified Number of Shares in respect of such shareholder shall be determined by rounding off the fraction to the nearest lower share. The total of the entitlement of each shareholder shall be the aggregate specified number of shares. The Board of Directors of BSIL shall be authorised to allot such shares as they deem fit." Clauses 6 provides that : "6.1 On this Scheme becoming effective, the shareholders of BSL shall be deemed to have given a mandate to BSL for the payment of the amount or part thereof, payable by it for reduction of its Share Capital, to BSIL, for the amount payable by the said shareholders to BSIL towards subscription to its Equity Share Capital of BSIL as per Clause 5 hereinabove." Clause 6.2 provides that the adjustment would be considered as constructive pay....
X X X X Extracts X X X X
X X X X Extracts X X X X
....majority will continue with BSL. 10. The objectors to the scheme are employees shareholders/employed creditors of the company. List of creditors was settled by this Court in its order dated 20-4-1999. Ultimately the certificate was issued on 7-5-1999 under rule 58 of the Companies (Court) Rules ('the Rules'). The Court had directed that the creditors be secured by providing a Bank Guarantee. The appropriate Bank Guarantee has been furnished. Therefore, the objectors as creditors are fully secured. It is submitted that in view of the objectors as creditors being secured they are not entitled to raise any objection to the scheme of amalgamation or for reduction of share capital. The learned counsel has relied on rule 60 of the Rules. I do not think the submission of Mr. Tulzapurkar can be accepted as rule 60 simply provides that any person who has not been secured in the manner provided by section 101(2)(c ) is permitted to oppose the scheme. It does not provide that if the creditor is secured then the scheme cannot be opposed by him. Section 101(2)(c) of the Act also provides that if there is no consent given by the creditor, Court can order the interest of the creditor to be secur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to minutely scrutinise the scheme and to arrive at an independent conclusion whether the scheme should be permitted to go through or not when the majority of the creditors or members or their respective classes have approved the scheme as required by section 391(2) of the Act. 11. Mr. Grover, the learned Counsel appearing for the objectors has raised a large number of objections. Mr. Grover is right in his submission that the objectors cannot be told that they have no locus standi to object to the scheme as they have come before the Court in various capacities as creditors, employees, shareholders, proxy-holders of shareholders of BSL and as members of the Federation and Blue Star Workers Union which are recognised Unions. The objections have been raised by them in a representative capacity for and on behalf of other employees' creditors. He has relied on a large number of authorities to show that the objectors have locus standi. It is, however, not necessary to consider them as I have already held that the objectors have the locus standi to object. Mr. Grover has submitted that the scheme is liable to be rejected as there has breach of fiduciary duties on the part of the director....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hile dealing with section 391(2) it was observed that the Company has chosen to file balance-sheet upto March, 1980 and has not cared to submit the latest balance-sheet. The Company had been specifically directed in that case to submit the latest balance sheet, profit and loss account, list of shareholders and shares held by them and the auditor's report, during the course of argument a month earlier before the judgment was given. It was, therefore, held that the company has withheld the full material facts and its latest financial position. Therefore, I am of the opinion that the observations made by the Delhi High Court are not contrary to the law laid down by the Gujarat High Court. It has held that the scheme is mala fide and that the sole purpose of the scheme appears to be to defeat the claim of these creditors by 50 per cent, get released the attachment of goods that they have got effected and pay the rest in driblets covering a period of five years. Mr. Grover thereafter relied on the case of Maneckchowk & Ahmedabad Mfg. Co. Ltd., In re [1970] 41 Comp. Cas. 819 (Guj.). In head note 3 and 4 of this case it is held as follows : "(iii) Before the Court accords its sanction to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d High Court in the case of Premier Motors (P.) Ltd. v. Ashok Tandon [1971] 41 Comp.Cas. 656 (All.). This judgment merely reiterates that all material particulars should be placed before the Court to enable the Court to come to a conclusion with regard to the question of propriety of sanctioning the scheme. It does not decide the issue as to when the latest petition should be placed before the Court. Mr. Grover thereafter relied upon. Bharat Synthetics Ltd. v. Bank of India [1995] 82 Comp. Cas. 437 (Bom.). In this case a single Judge of this Court has held that the Company had not placed before the Court the authenticated latest financial position as required under sub-section (2) of section 391 and, therefore; it is not in compliance with the provisions of section 391(2). From the conspectus of the judgments noticed above it becomes apparent that it is incumbent on the petitioner to place before the Court the latest audited financial position of the company. It also becomes apparent that the Court has to be satisfied that section 391(2) has been complied with by taking into consideration the facts and circumstances of each case. In the present case the audited accounts for the yea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ontrol of the new Company BSIL without compensating the shareholders of BSL. It is for this reason that the valuation report was only made available to the shareholders when the petitioners took out Judge's summons for disclo-sure of the report. It was at that stage that the report was attached to the affidavit of Mr. Vasudevan on behalf of the petitioners dated 16-9-1999 (E xh. B). Information given in this report was not available to the share-0holders. For the first time the petitioners came to know the details of the subsidiaries. It is further submitted that the idea behind the scheme seems to be to list the company on the stock exchange. For this reason a capital of Rs. 10 crores was, therefore, necessary. Therefore, the book value has been relied upon which comes to Rs. 767 lakhs. He submits that even the figures in the valuation report are wrong. This valuation is motivated and has been made to fit the design of the promoters of the company to enable them to take control of BSIL at a ridiculously low price. According to the learned counsel, the greatest asset of ISD was the intellectual property rights. These are not even taken into consideration whilst placing a value on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e company would require at least 150 crores to service the capital. The company has a negative cash flow and has actually borrowed money to pay the dividends. Thus the amount of Rs. 10 crores received from BSIL would hardly be enough to service the capital. He submitted that the only motive is to list the company on the stock exchange and to allow the promoters to control 33 per cent of the shares through other interests i.e., BSL and Stock Exchange Option Scheme. Even with regard to the employees stock option scheme it is submitted that it will apply to employees who are going to be hired or transferred to BSIL. It will not apply to the old employees of BSL who built ISD. No details are given as to which of the employees are going to be given the Employees Stock Option Scheme. No valuation has been done of the fixed assets and investments of ISD. He thereafter gave details as to how the Advani Brothers are interested in the scheme and the same is not being disclosed. Ashok Advani is said to be holding 36,04,590 shares and Sunil Advani holds 18,54,274 shares. Apart from this, these persons also control shares held by family members, relatives and shares held by companies controlled....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... commentary it is stated that when an amendment has been put to the meeting and carried, it must be put a second time, embodied in a substantive motion, which supersedes the original motion. He has also referred to the commentary by A. Ramaiya on the Companies Act (1998 Edn. page 1412). On this page of this commentary it is also mentioned that if an amendment is carried, it should be incorporated in the original motion which is then, as amended, put before the meeting for further debate, and the next amendment (if any) can then be moved. There is no dispute with the aforesaid proposition but I am unable to agree with Mr. Grover on facts that the amendment has not been put to vote in accordance with any of the rules. A perusal of the ballot papers on pages 279-280 of the petition would show that it was made sufficiently clear as to what the voters were required to do on the amendments as well as the original motion. On page 279 is the main ballot paper asking the members to either vote for on against the scheme. On page 280 is the voting for amendment Resolution and the voters were asked to vote either for or against. The main stress of the argument of Mr. Grover, however, is on the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rover has thereafter referred to another judgment of the Supreme Court in the case of National Textile Workers Union v. P.R. Ramakrishnan AIR 1983 SC 75. In that case it is held that the workers of a Company are entitled to appear at the hearing of the winding up petition whether to support or to oppose it so long as no winding order is made by the Court. There is no dispute with the aforesaid proposition and it is for that reason that the respondents have been fully heard. The learned counsel has thereafter relies on J.S. Davar v. Dr. Shankar Vishnu Maratha AIR 1967 Bom. 456. In this case it is held that the Court will not sanction the scheme if the facts which would have influenced the decision of the majority were not known or disclosed to the majority or if the sponsors of the scheme have misrepresented the true position of the Company. Finally, if the acceptance of the scheme would lead to the starting of an inquiry into the conduct of the delinquent directors, the Court would be slow to give its sanction to the scheme. These observations are of no assistance to Mr. Grover in that 99.98 of the shareholders have sanctioned the scheme. Till today nobody has come to complain that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t financial position of TOMCO. Nor there was anything to show that the material was not disclosed. The court held that the petitioner failed to establish any fraud or prejudice. On valuation of share for exchange ratio, the court found that a well-reputed valuer of a renowned firm of chartered accountants and a director of TOMCO determined the rate by combining three well-known methods, namely, the net worth method, the market value method and the earning method. The figure so arrived could not be shown to be vitiated by fraud and mala fide and the mere fact that the determination done by slightly different method might have resulted in different conclusion would not justify interference unless it was found to be unfair. And in that the petitioner failed miserably. The High Court did not agree that the approval to scheme of merger should be withhold till the complaint filed before Monopolies and Restrictive Trade Practices Commission was not finally decided as the jurisdiction exercised by the High Court under the Act and that by the Commission under MRTP Act were entirely different. Nor did it find any merit in the challenge that interest of employees of the two companies was not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hich was being merged. The courts obligation is to be satisfied that valuation was in accordance with law and it was carried out by an independent body. The High Court appears to be correct in its approach that this test was satisfied as even though the chartered accountant who performed this function was a director of TOMCO, but he did so as a member of renowned firm of chartered accountants. His determination was further got checked and approved by two other independent bodies at the instance of shareholders of TOMCO by the High Court and it has been found that the determination did not suffer from any infirmity. The Company Court, therefore, did not commit any error in refusing to interfere with it. May be as argued by the learned counsel for the petitioner that if some other method would have been adopted, probably the determination of valuation could have been a bit more in favour of the shareholders. But since admittedly more than 95% of the shareholders who are the best judge of their interest and are better conversant with market trend agreed to the valuation determined, it could not be interfered by courts as, certainly it is not part of the judicial process to examine ent....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... found that service conditions of the merged company shall not be to their prejudice, it was fully justified in rejecting the claim of employees as it was neither unfair nor unreasonable. Further the court in its anxiety to be fair to the employees recorded the statement of the learned Advocate General who appeared for HLL that no employee of HLL has been rendered surplus and in such contingency, the company has resorted to friendly handshake by either giving lump sum or pension. A scheme of amalgamation cannot be faulted on apprehension - and speculation as to what might possibly happen in future. The present is certain and taken care of by clauses 11.1, 11.2 and 11.3 of the scheme. And unfriendly throwing out being amply protected by taking recourse to labour court, no unfairness arises apparent or inherent. Nor the claims that merger shall result in synergies can render the scheme bad. Improved technology and scientific method results in better employment prospects. Anxiety should be to protect workers and not to obstruct development and growth. May be that advanced technology may reduce the manpower, but so long as those who are working are protected, they are not entitled to h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ders had approved the scheme at the meeting called for this purpose and had approved the exchange ratio. In fact, a proposal for amendment of the exchange ratio was also rejected by the overwhelming majority of 99% shareholders. There is no reason to presume that the shareholders did not know what they were doing. Being dissatisfied with the valuation made by Mr. Malegam, Mr. Jajoo had insisted for independent valuation and that was done. Two independent valuers - A.F. Ferguson and N.M. Raiji and CO - had valued the shares and came to the conclusion that exchange ratio of 15 : 2 was correctly determined by Mr. Malegam. ****** 48. Mr. Ashok Desai, appearing on behalf of TOMCO; has argued that the valuation of shares had to be done according to well-known methods of accounting principles. The valuation of shares is a technical matter. It requires considerable skill and experience. There are bound to be difference of opinion among accountants as to what is the correct value of the shares of a company. It was emphasised that more than 99% of the shareholders had approved the valuation. The rest of fairness of this valuation is not whether the offer is fair to a particular shareholder....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of their service will be continuous and uninterrupted and their service conditions will not be prejudicially affected by reason of the scheme. The grievance made, however, is that there is no job security of the workers, after the amalgamation of the two companies. It has been argued that there should have been a clause in the scheme ensuring that no retrenchment will be effected after the amalgamation of the two companies. There was no assurance on behalf of the TOMCO that the workers will never be retrenched. In fact, the performance of TOMCO over the last three years was alarming for the workers. It cannot be said that after the amalgamation, they will be in a worse position than they were before the amalgamation." (p. 471) Similar is the situation here. As observed earlier, over 98 per cent of the shareholders including the financial institutions have approved the scheme. The financial institutions were in fact so vigilant that they moved an amendment resolution and approved the scheme only after the valuation was to their satisfaction. The Supreme Court has clearly held that hypothetical questions are not to be considered by the Court whilst sanctioning the scheme. It is he....