TaxTMI 
TaxTMI 
2009 (6) TMI 581
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.... integrated non-ferrous metal company in the country and among the largest primary producers of aluminium and copper in Asia. It is further stated that in 2007, the acquisition of Novelis Inc., a world leader in aluminium rolling and can recycling, marked a significant milestone in the history of aluminium industry in India. It is the case of the Company that an important element of HIL's growth strategy has been to seek out opportunities for acquisitions and strategic partnerships in India as well as overseas with a view to diversify its product portfolio, consolidation of customer base and to extend the presence of the Company in overseas markets. It is stated that such an endeavour by the Company would not only provide the Company with an opportunity to widen its international footprint but also enable the newly acquired companies to increase their margins through reduction of labour and other costs. It is further stated that the Company has been successful in enhancing its presence in the international markets. However, this has resulted in HIL incurring various costs relating to organic as well as inorganic growth projects. It is also stated that in its endeavour to grow furth....
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....s/divisions in part and/or whole by HIL and/or any of its subsidiaries and financial costs associated with delay in projects; 1.4.6. Consultants/law firms fees and/or any fees payable towards professional services (say due diligence, etc.) in connection with financing/refinancing acquisitions." Further, Part III of the Scheme provides for Financial Restructuring of HIL and Accounting Treatment. Clause 3 pertains to creation and utilization of Business Reconstruction Reserve Account and the modalities therefor. Clause 4 provides for alteration in the Articles of Association, which is stated to be an integral part of this Scheme. Article 71 of the Articles of Association of the Company are intended to be amended to read "The words 'Share Premium Account' shall be substituted with the words 'Securities Premium Account' in Article 71(c) of the Articles of Association of the Company." Clause 5 of the Scheme envisages that the Scheme would result in the Company improving its financial status for the benefit of all the shareholders/stakeholders. It mentions that the parties to the Scheme agree and acknowledge the adequacy and sufficiency of the consideration. It is further agreed an....
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....ich, 424 members holding 72,19,93,282 Equity Shares of Re. 1 each of the aggregate value of Rs. 72,19,93,282 voted in favour of the Scheme. 11 members holding 8,997 equity shares of Re. 1 each of the aggregate value of Rs. 8,997 voted against the said Scheme. Votes of 58 members for aggregate 4,73,90,050 shares cast were declared invalid. In other words, the resolution was passed by requisite majority of Equity Shareholders supporting the same. The Chairman of the said meeting has submitted report recording these facts. It is further stated that pursuant to the order of this Court an Extraordinary General Meeting was held on the same date i.e. 2-4-2009, at the same place at Ravindra Natya Mandir, P.I. Deshpande Maharashtra Kala Academy, Prabhadevi, Mumbai at 12.00 p.m. which was again chaired by Mr. A.K. Agarwala. In the said meeting a Special Resolution was proposed as per the provisions of section 100 of the Companies Act for utilization of the Securities Premium Account of the Petitioner Company as stated in clause 3 of the proposed scheme. The resolution was put to vote and carried out by the requisite majority by show of hands. It is stated that separate procedure under sectio....
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....the Act. It is stated that the meeting of Preference Shareholders was dispensed with by this Court vide order passed in Company Application No. 234 of 2009 on the basis of undertaking given by the Petitioner Company that all Preference Shares will be redeemed and fully paid off by 1-4-2009. It is stated that as per the said undertaking, all its Preference Shareholders have been redeemed by 1-4-2009 and the Petitioner company has no Preference Shareholders on the date of presentation of the Petition. It is also stated that meeting of secured creditors and unsecured creditors has also been dispensed with by this Court. As on 31-1-2009, the Petitioner company has had 57 Secured Creditors of the value of Rs. 5,741.73 crores and 11,646 Unsecured Creditors of the value of Rs. 4561.02 crores. It is stated that the Secured Creditors will continue to hold charge over the respective assets even after the proposed Scheme is sanctioned. Further, there will be no dilution in securities/charge created on the assets of the Petitioner. The Petitioner has also stated that individual notices have been given to the secured and unsecured creditors of the value above Rs. 10 lakhs. 7. In this backgro....
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....pated in the meeting and registered his objection. But the Resolution was passed with overwhelming majority. Moreover, on the one hand he objected to the proposed scheme and on the other hand, after the meeting of the Equity Shareholders, he has purchased additional 50 Equity Shares of the Petitioner company, which reflects on his bona fide. According to the Company, his objection should be thrown out on this count alone. Besides raising issue of locus and bona fide of the objectors, the Petitioner company has also countered the grievance of the objectors on merits. On merits the issue raised by the objectors are broadly that the scheme if approved would result in allowing the Petitioner company to violate accounting standards by providing for adjustment against the Reserve Account instead of profit and loss account. Besides, it would give wide and unguided discretion to the Board of Directors by keeping the scheme open ended. Moreover, the scheme does not disclose the figures of expenses to be adjusted in the Reserve Account. Nor does the Scheme defines the non-operating and extraordinary expenses. It was also emphasized on behalf of the objectors that the scheme intends to write ....
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..... Jain [1979] 49 Comp. Cas. 342 . He placed emphasis on the observations in the said decision at page 353 of the reported Judgment to contend that if the Court can suo motu act, it is immaterial as to who drew the attention of the Court to a situation which necessitated Court's intervention. Reliance placed on this decision is inapposite. Inasmuch as, the observations in this decision are in the context of proceedings under section 392 of the Act. As a matter of fact, the Supreme Court in the same Judgment has noted the distinction between the proceedings under sections 391 and 392, as can be discerned from the observations at pages 350 to 352 of the reported decision. At page 352, the Apex Court has noted the distinction in the scheme of section 391 in contradiction to that of section 392, as the Legislature has used the expression "any person interested in the affairs of the company" in section 392, which has wider denotation unlike the expression "a member or creditor or liquidator of a company" used in section 391. Having regard to the fact that this is a composite Petition under section 391 as well as sections 100 and 101 of the Act, the person who is neither a shareholder nor....
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.... Bhupendra Gandhi, who had forwarded the complaint for reconsideration. Significantly, the Regional Director has not adverted to any provision of law which obligates the Petitioner company to limit the period to write off all the expenses in the Books of Account. It would have been a different matter, if the law obliged the company to do so within a particular time. In absence of such requirement, the Regional Director ought to have assigned tangible reason as to why it was still necessary to impose the outer limit for writing off the expenses. Even during the argument advanced on behalf of the Regional Director or for that matter the objectors, I was unable to discern any tangible reason to justify such restriction. Understood thus, taking any other view would be interfering with the commercial wisdom or business decision of the overwhelming majority of stakeholders of the Company, who have reposed trust and confidence in the Board of Directors, who are expected to exercise their discretion with prudence. The Petitioner has justly relied on the observations of the Madras High Court in the case of Parrys Confectionery Ltd. In re [2004] 122 Comp. Cas. 900 ^1. In paragraphs 13 and 14....
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....rs. The Court has considered the same in the following words: "Secondly it was said that there was a worry because the amount of goodwill to be written off could not be specified. It is said in the affidavit to be a sum in excess of GBP140m. But at present, the balance sheet date not having arrived and the accounts not having been prepared, the amount is not clear and fixed. In my judgment counsel for the company is again correct when he submits that that factor has no effect on discretion. Counsel wholly accepted that the court will not do anything in vain and that, if a reduction was applied for, approved by shareholders but on the evidence was not for any discernable purpose at all but simply an act in a vacuum, the court might well say that it would not in its discretion sanction it. That refusal by the court would not be because the reduction was not within the powers of the shareholders and the jurisdiction of the court, but as a matter of discretion: the court will not act in vain; the matter had not been shown to have any real purpose; it never was more than a hollow act, of no merit or purpose, and should not be troubling the court or wasting everybody's time; and fo....
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....ovided the creditors are safeguarded, the court will habitually sanction reductions and exercise its discretion in favour of them unless the act is a pointless and hollow act. Provided those requirements are satisfied, the company may reduce its capital in any way that it thinks fit and the court will normally sanction those reductions." [Emphasis supplied] Applying the principle stated in the abovesaid decisions, if the grievance of the objector or for that matter opinion of the Regional Director were to be acted upon, it would trench upon the discretion of the stakeholders and the Board of Directors in propounding the Scheme for stated purpose. For, it is not a hollow act. It will be apposite to advert to another decision pressed into service by the Petitioner in the case of Hyderabad Industries Ltd., In re [2004] 55 SCL 1 (AP). where the Court has noted that it is very well settled and needs no restatement that the court does not exercise any appellate power over the decision of the Company or its management. The Company Court in its equity jurisdiction is required itself to satisfy and see that the procedure, by which resolution is carried through, is legally correct and the....
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....ed with amendment of placing time-limit for implementation of scheme and to limit write off Securities Premium Account upto 31-3-2009 and not thereafter. If the equity shareholders or the stakeholders of the Company have resolved consciously and approved the proposed scheme, inspite of open ended scheme, they have exercised business discretion. It is not open for this Court to sit over the said view as an Appellate Court, unless the same was against the framework of law or public policy. There is nothing wrong in the decision to spread out or adjust and write off all the expenses. The fact that this may enable the Company to declare sufficient dividend as have been declared in the past, does not militate against the Company; so long as the Company makes necessary declaration of all the facts and figures in its Books of Account. 15. The next question is: whether there would be violation of accounting standards. The objection will have to be answered keeping in mind provisions of section 211 of the Act. Sub-section (3A) thereof stipulates that every profit and loss account and balance sheet of the company shall comply with the accounting standards. Sub-section (3B) provides that w....
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....deviation from the accounting standards; the reasons for such deviation; and the financial effect, if any, arising due to such deviation.' In view of the above, if an item in the financial statements of a Company is treated differently pursuant to an Order made by the Court/Tribunal, as compared to the treatment required by an Accounting Standard, following disclosures should be made in the financial statements of the year in which different treatment has been given: A description of the accounting treatment made along with the reason that the same has been adopted because of the Court/Tribunal Order. Description of the difference between the accounting treatment prescribed in the Accounting Standard and that followed by the Company. The financial impact, if any, arising due to such a difference. It is recommended that the above disclosures should be made by enterprises other than companies also in similar situations." 16. A priori, it is not as if deviation of the accounting standards per se can be a ground to reject the scheme propounded by the Petitioner company. In the present case, it is noticed that the scheme is the product of conscious act of the sha....
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....business practice which the Petitioner company intends to adopt. The Court cannot sit over the said decision as Court of Appeal. The argument of the objectors that the scheme does not disclose the amount or for that matter non-operating extraordinary expenses, is also of no avail. The Petitioner Company has rightly pointed out that the Books of Account are prepared in accordance with the requirement of law. Not only the Books of Account and the balance sheet of the Petitioner Company are duly prepared, but a separate consolidated statement of the Petitioner company and its subsidiary is also prepared and issued. Financial position of the Company is reflected from the consolidated accounts prepared in accordance with the requirement of law. 19. Counsel for the objector placed emphasis on clause 58 of the Accounting Standard (AS) 28 (issued 2002). Clause 58 reads thus: "58. An impairment loss should be recognised as an expense in the statement of profit and loss immediately, unless the asset is carried at revalued amount in accordance with another Accounting Standard (see Accounting Standard (AS) 10, Accounting for Fixed Assets), in which case any impairment loss of a revalued ....