TaxTMI 
TaxTMI 
2007 (9) TMI 402
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....e parties to the scheme, or other persons interested, be at liberty to apply to the High Court for any direction that may be necessary to carry out the scheme of amalgamation. 2. The petitioner was incorporated in the State of Andhra Pradesh on 18-10-1999 with its registered office in Hyderabad. Its share capital as on 31-3-2006 was Rs. 15,00,000 divided into 1,50,000 equity shares of Rs. 10. The entire share capital is fully issued, subscribed and paid up and is entirely held by the transferee company. Its main objects are to carry on the business of manufacture, import, export and to otherwise deal in all kinds of computers, calculators, micro processors, electronic and electrical apparatus, software equipment, etc. The petition gives details of the provisional financial summary of the transferor company as on 31-12-2006 according to which the value of the current assets is Rs. 1,00,12,261, the current liabilities and provisions are for Rs. 17,03,712 and its profit and loss account shows a profit of Rs. 83,08,541. 3. The Transferee company was initially incorporated as a private limited company on 14-10-1997 under the name and style of M/s. Zeus Software Private Limited. It....
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....ise or arrangement it would, on its being sanctioned by the Court, bind all the creditors, all the members and the company. Before sanctioning a scheme of compromise or arrangement, the proviso to section 391(2) requires the Court to satisfy itself that the company has disclosed all relevant material facts, such as its latest financial position, the latest auditor's report on its accounts, pendency of investigation proceedings under sections 235 to 251 etc. A certified copy of the order passed by the Court, sanctioning the compromise or arrangement, is required to be filed with the Registrar of Companies until which the order would have no effect. 7. Under section 394(1), when a compromise or arrangement has been proposed in connection with a scheme for the amalgamation of two or more companies, and thereunder the whole or any part of the undertaking, property or liabilities of the transferor company is to be transferred to a transferee company, the court may, by the order sanctioning the compromise or arrangement, make provision for (i) the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of the transferor company; (ii) the....
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....such meeting (3) appoint a chairman for the meeting (4) fix the quorum and the procedure to be followed at the meeting including voting by proxy; (5) the procedure for determining the value of the creditors and/or the members, or the creditors or members of any class whose meetings have to be held; (6) notice to be given of the meeting or meetings and advertisement of such notice; and (7) the time within which the chairman of the meeting is to report to the Court the result of the meeting. The order, made on the summons, should be in Form No. 35 with such variations as may be necessary. Rule 73 requires notice of the meeting to be given to the creditors and/or members or to the creditors or members of any class as the case may be, to be in Form No. 36 and to be sent to them individually by the Chairperson appointed for the meeting not less than 21 clear days before the date fixed for the meeting. The notice is required to be accompanied by a copy of the proposed compromise or arrangement and the statement required to be furnished under section 393. Rule 74 relates to advertisement of the notice of the meeting. Rule 75 requires every creditor or member entitled to attend the meeting....
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....the Court must be satisfied that the statutory provisions are complied with, that in case a meeting, of the members or a class of members or of the creditors or a class of creditors, is called for, the class is fairly well represented and that the scheme of arrangement is such as a man of business would reasonably approve. It is the commercial wisdom of the parties to the scheme, who have taken an informed decision about the usefulness and propriety of the scheme supporting it by the requisite majority vote, that has to be kept in view by the Court. The Court would not act as a court of appeal and sit in judgment over the informed view of the parties to the compromise as it has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the scheme by the requisite majority. The Company Court's jurisdiction to that extent is peripheral and supervisory and not appellate. The supervisor cannot ever be treated as the author or the policy-maker. The propriety and the merits of the compromise or arrangement has to be judged by the parties who, as sui juris with their open eyes and fully inform....
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.... whom he neither had any dealings in the past nor privity of contract prior to its substitution in the place of transferor. In a given case, the transferee company may have negative assets or may not have sufficient liquidity to repay the creditor, as per the original terms agreed between him and the transferor company. Whether he would be adversely affected by being required to deal with the transferee, in substitution of the transferor, is a matter of perception of the creditor-Zee Interactive Multimedia Ltd., In re [2002] 38 SCL 538 (Bom.), Mayfair Limited & Zodiac Clothing Co. Ltd., In re [2003] 46 SCL 672 (Bom.), Union of India v. Asia Udyog (P.) Ltd.. [1974] 44 Comp. Cas. 359 (Delhi). 14. On the question whether a meeting of the creditors is statutorily required to be called for, even in a scheme of arrangement between the company and its members, one view is that the creditors are not entitled, as of right, to participate in the process of consideration of sanction of the scheme, as the Companies Act does not contain a specific provision for notice being given to the creditors at any stage either prior to the making of the order or subsequent thereto, except insofar as th....
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.... Court is duty-bound to consider the interests of all the creditors. What importance should be given to the fact that the creditors are likely to be affected would vary from case to case but the Judge would certainly treat whether the creditors are adversely affected or not as the relevant circumstance. How then Court is to ascertain as to whether the creditors are adversely affected? If the creditors have no right of hearing at the time of hearing of the petition under section 391 as held by Delhi High Court and this Court, (I have my own doubts about the correctness of this view) the only way of ascertaining whether the creditors are affected or not would be through the wishes of the creditors which may be expressed by them in a meeting which the Court undoubtedly is entitled to convene under sub-section (1) of section 391. Therefore, the Court would exercise discretion as a matter of course to convene meeting of the creditors of the company under sub-section (1) of section 391 unless the Court is prima facie satisfied that the interests of the creditors are not likely to be adversely affected by the Scheme. I am of the opinion that if an anomaly, as pointed out in Telesound Indi....
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....eme or not? 19. Section 391(1), enables the Court, on the application of a company or a creditor or a member of the company, to order a meeting of the creditors/or the members "as the case may be" to be held and conducted in such a manner as the Court directs. Under section 391(2), if a majority representing 3/4th in value of the creditors/members agree, in the meeting, for the compromise or arrangement, the scheme, on its sanction by the court, would be binding on all the creditors/members "as the case may be" and also on the company. The expression "as the case may be" finds place both in sub-sections (1) and (2) of section 391. If the words "as the case may be" in section 391(1) are construed as requiring the Court to order the meeting of only the members, in a Scheme of arrangement between the Company and its members, and only a meeting of the creditors in a Scheme of arrangement between the Company and its creditors, should the expression "as the case may be" in section 391(2) then not be read as to bind only the members where a meeting of the members is held and only the creditors where a meeting of the creditors is held? The safeguard in the provision, of 3/4 the members ....
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....action from the assets of its members; the liability of the members or shareholders is limited to the capital invested by them. Similarly, the creditors or the members have no right to the assets of the Corporation. However the doctrine, that the Corporation or a Company has a legal and separate entity of its own, has been subjected to certain exceptions by the application of the fiction that the veil of the Corporation can be lifted and its face examined in substance. The doctrine of the lifting of the veil has been applied in five categories of cases: where companies are in the relationship of holding and subsidiary (or sub-subsidiary) companies; where a shareholder has lost the privilege of limited liability and has become directly liable to certain creditors of the company on the ground that, with his knowledge, the company continued to carry on business six months after the number of its members was reduced below the legal minimum; in certain matters pertaining to the law of taxes and stamps, particularly where the question of "controlling interest" is in issue; in the law relating to exchange control; and in the law relating to trading with the enemy where the test of control....
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....: "66. It is high time to reiterate that in the expanding horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation. . . . The horizon of the doctrine of lifting of corporate veil is expanding. . . ." [Emphasis supplied] 25. Lifting the corporate veil, in cases where a wholly owned subsidiary is amalgamated with its holding company, would establish that the creditor is, and has always been, dealing with the transferee company de facto though he is the creditor of the transferor company de jure. In such limited cases of amalgamation, as the creditors' rights cannot be said to be affected, holding of a meeting to ascertain their views, and obtain their consent to the scheme of amalgamation, may not be necessary. 26. Along with C.A. 1420 of 2007, the audited Balance Sheet of the transferor company, as at 31-3-2007, is filed. Sri V.S. Raju, learned counsel for the petitioner would submit that the audited Balance Sheet of the transferee company as at 31-3-2007 has not yet been finalised and that the latest available audited balance sheet is only as on 31-3-2006. Th....
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....ditor audits the accounts and prepares his report, the date on which the company petition is filed and the date on which the petition is actually heard. The statutory requirement of submission of the latest auditor's report, stipulated in the proviso to sub-section (2) of section 391, would mean the latest auditor's report for the period for which the accounts are audited or ought to have been audited. In a given case the Court is not powerless to ask for further details of the latest financial position as on the date of the hearing of the petition, or as near to the date of the hearing of the petition, as is reasonably practicable. This is especially necessary when there is a long gap between the date of filing of the petition and the date of its hearing - Zee Interactive Multimedia Ltd.'s case (supra ). 28. The petitioner-transferor company has submitted its audited Balance Sheet as at 31-3-2007, and the audited Balance Sheet of the transferee company as at 31-3-2006 along with its schedules. Accepting the submission of Sri V.S. Raju, learned Counsel for the petitioner, that the audited Balance sheet and profit and loss account of the transferee company, for the year ending 31....
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.... up capital, that two notional limits cannot be clubbed together, that, since the authorized capital of the company is a liability, unlike other liabilities to be returned or refunded, it would not come under the purview of transfer of liabilities under the scheme of amalgamation, that the transferor and transferee companies are separate legal entities and, on amalgamation, it is only the transferor company which would be dissolved and the transferee company would continue to exist, that at this stage if the transferee, on account of the scheme of arrangement, increases its authorised capital it has to comply with the provisions of sections 94 and 97 of the Companies Act, 1956 by filing the relevant returns with the Registrar of Companies with registration fee/filing fee, that the Companies Act does not specifically exempt the transferee company, on account of the scheme of arrangement, from payment of registration fee for increase of its authorized capital, that if the transferee-company was allowed to increase its authorized capital, on clubbing the authorized capital of the transferor company without any further act or deed as contemplated in the scheme, it would not only be aga....
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....orm a third is brought about by two parallel schemes of arrangements entered into between one company and its members and the other company and its members and the two separate arrangements bind all the members of the companies and the companies when sanctioned by the Court. Amalgamation is, therefore, an absorption of one company into another or merger of both to form a third, which is not a mere act of the two companies or their members but is brought about by virtue of a statutory instrument and to that extent has statutory genesis and character, and to that extent it is distinguishable from a mere bilateral arrangement to merge or join in a common endeavour, an undertaking or enterprise. J.K. (Bombay) (P.) Ltd. v. New Kaiser-I-Hind Spg. & Wvg. Co. Ltd. [1970] 40 Comp. Cas. 689 (SC). Once the Court sanctions the amalgamation the amalgamation is made effective and binding by virtue of statutory power, inter alia, by the transferor to the transferee-company of the whole or any part of the undertaking, property rights and liabilities of the transferor-company by virtue of the provisions of section 394 of the Act, which are intended to facilitate the process of amalgamation : Sailen....
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.... of one corporate shell. The dissolution is the death of its independent corporate shell, because a company cannot have two shells. It is, therefore, dissolved because the independent shell or corporate name is superfluous. . . ." [Emphasis supplied] (p. 942) 35. On the scheme of amalgamation being sanctioned by the Court, the rights, property and liabilities of the transferor become the rights, property and liability of the transferee company and, as a consequence thereof, the right which the transferor has to issue share capital and the existing liability in the form of its authorized capital stand transferred to and are vested in the transferee company. Since the authorised capital of the transferor, which is transferred to and stands vested in the transferee, has already been subjected to payment of the prescribed fee, absence of a specific provision either in the Companies Act, 1956, or the Rules made thereunder, requiring the transferor to again seek approval of the Registrar of Companies or to pay fees on such authorized capital, the contention, that approval of the Registrar must again be sought and fees paid all over again, must necessarily be rejected. 36. In Saparn....
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....(3) of section 97. The object of sections 95 and 97 seems to be to keep the Registrar informed about the changes and to incorporate the same in the memorandum or articles of association or both of the respective companies. 10. The present scheme of arrangement or amalgamation if it is sanctioned by this Court, the certified copy of the order of this Court is required to be filed before the Registrar within 30 days from the date of the order under sub-section (3) of section 394, for the purpose of its registration. The object behind such intimation, which is required under law either under section 95 or under section 97 or under section 394(3), appears to be one and the same. Again the default in not filing certified copy of the order of this Court before the Registrar within 30 days entails penal consequences. Well, when the certified copy of the order sanctioning the scheme by this Court is required to be filed before the Registrar for the purpose of its registration, there is no reason as to why it shall not be treated as notice to the Registrar as envisaged under sections 95 and 97 of the Companies Act. Inasmuch as, as discussed hereinabove, the object being the same, the nec....
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....of 2003 to the effect that Clause 10 of the Scheme of Amalgamation would not be part of the approved scheme, is set aside and O.S.A. No. 24 of 2005 is allowed to that extent." (p. 177) No good reason has been shown why the two merged companies should be required to pay fees again, on the same authorized capital on which the prescribed fee has already been paid by the transferor Company - Jaypee Cement Ltd., In re [2004] 52 SCL 801 (All.). As an order can be passed, under section 391 of the Companies Act itself, regarding increase of authorized share capital by merger of the authorized capitals of the two companies, Vasant Investment Corpn. Ltd. v. Official Liquidator , Colaba Land & Mills Co. Ltd. [1981] 51 Comp. Cas. 20 (Bom.), Jaypee Cement Ltd.'s case (supra), the objections of the Central Government, to the scheme of amalgamation, are overruled. Is the Scheme of amalgamation in public interest 40. The Court cannot abdicate its duty simply because the statutory majority has approved it and there is no opposition to the scheme of amalgamation in Court. It must scrutinize the scheme to find out whether it is an arrangement which can, by reasonable people conversant with t....
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....c concept which keeps on changing. It has been explained in Black's Law Dictionary as:- "Something in which the public, the community at large, has some pecuniary interest, or some interest by which their legal rights or liabilities are affected. It does not mean anything so narrow as mere curiosity, or as the interests of the particular locality which may be affected by the matters in question. Interest shared by citizens generally in affairs of local, State or National Government." 43. It is an expression of wide amplitude. A scheme valid and good may yet be bad if it is against public interest. The basic principle of the satisfaction, that the scheme is not contrary to public interest, is none other than the broad and general principles inherent in any compromise or settlement entered into between the parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, the Courts have evolved, the principle of "prudent business management test" or that the scheme should not be a device to evade the law - Hindustan Lever Employees' Union v. Hindustan Lever Ltd. [1995] 83 Comp. Cas. 30^1 (SC). No court of law would ever countenan....