TaxTMI 
TaxTMI 
2013 (1) TMI 125
X X X X Extracts X X X X
X X X X Extracts X X X X
....bilities of Spice were taken over by the appellant. Spice was also having certain licenses namely UAS-Unified Access Service License for Punjab, by the Union of India, Department of Telecommunication (hereinafter referred to as the respondent) under Section 4 of the Indian Telegraph Act, 1885 (hereinafter referred to as the Act). There was a clause in the Scheme, as per which this licence also stood transferred to the appellant. 2. According to the respondent, such a course of action was not permissible without specifically taking its prior approval and the amalgamation of Spice with the appellant was resorted to without the knowledge of or taking consent of or notice of the proceedings to the respondent. On coming to know of the sanctioning of the Scheme, the respondent moved an application for recall of orders dated 5.2.2010 and de-merger of the two companies. This application alongwith other miscellaneous application filed by the respondent has been decided by the learned Company Judge vide orders dated 4.7.2011. The learned Company Judge has recorded a finding that non-disclosure and suppression of material facts from the Court, while seeking sanction of the Scheme, amounts ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hich Scheme was sanctioned. For this reason, the appellant has challenged that part of the order by preferring Company Appeal 42/2011. The DoT, on the other hand, also feels dissatisfied with the outcome of the proceedings/demerger application filed by it as according to the DoT, once findings of fraud has been returned by the learned Company Judge itself, there was no other course of action left for the Court to recall sanctioning order dated 5.2.2010 inasmuch as fraud vitiates every action. This has prompted DoT to file Company Appeal 67/2011. 4. With these preliminaries, we now proceed to take note of the facts in detail. 5. The appellant is a Cellular Mobile Telephone Service (CMTS) License holder in the services areas of Haryana, Maharashtra, Andhra Pradesh and Delhi and is licensed to establish, install, operate and maintain Cellular Mobile Services under the Licenses granted to it by the DoT under the first proviso to Section 4 of the Indian Telegraph Act, 1885. The respondent no.1 is the Department of Telecommunication under the Government of India which issued Licenses under Section 4 of the Indian Telegraph Act, 1885 to the appellant herein. The appellant has been o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r directly or through its associates, shall have substantial equity holding in more than one Licensee Company in the same service area for the Access Services. 'Substantial equity' herein will mean equity of 10% or more'. A promoter company/Legal person cannot have stakes in more than one Licensee Company for the same service area." Clause 6 provides for 'Restrictions on 'Transfer of License'. Clause 6.1 provides as under:- "The Licensee shall not, without the prior written consent as described below, of the Licensor, either directly or indirectly, assign or transfer this Licence in any manner whatsoever to a third party or enter into any agreement for sub-Licence and/or partnership relating to any subject matter of the Licensee to any third party either in whole or in part i.e. no sub-leasing/partnership/third party interest shall be created." Clause 6.2 provides as under:- "6.2 Intra service area mergers and acquisitions as well as transfer of licenses may be allowed subject to there being not less than three operators providing Access Service in a Service Area to ensure healthy competition as per the guidelines issued on the subject from time to time." Clause 6.3 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he applicable rate of spectrum charge shall be doubled every 3 months in case of excess spectrum held by post merger licensee. Further, the spectrum transfer charge, as may be specified by the Government, shall be payable within the prescribed period." "17. Any permission for merger shall be accorded only after completion of 3 years from the effective date of licences. 18. The duration of licence of the merged entity in the respective service area will be equal to the remaining duration of the Licence of the two merging licensees whoever is less on the date of merger. For example, if licence of company 'A' is merging with Licence of company 'B', and the remaining duration of licence of 'A' or 'B' whoever is less will be applicable for the merged entity in the respective service area." 8. On 25.6.2008 the appellant and the Spice announced their proposed merger. The respective Board of Directors of these companies in their meetings held on 25.6.2008 approved the proposed merger of the Spice with the appellant. On the same day, the appellant sent communication dated 25.6.2008 to the DoT informing about the proposed merger. Correspondence was exchanged between the appell....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng licenses would be transferred in accordance with the scheme of demerger. The relevant portion of the Clause 17 of the Scheme sanctioned by this Court is reproduced herein below:- "17. Scheme Conditional on approvals/sanctions The Scheme is conditional and subject to: ** ** ** 17.3 the sanction of the Scheme of Demerger-Spice and the sanction of the Scheme of demerger-Idea by the Courts and the same being made effective in terms of the Scheme of Demerger-Spice and the Scheme of demerger-Idea, respectively, or such other arrangement being made by Idea and Spice with respect to overlapping Idea UASLs and Overlapping Spice UASLs, respectively, in accordance with the prevailing UASL conditions and applicable regulations in the event in the Scheme of Demerger-Spice and the Scheme of Demerger-Idea is not pursued or that the said Scheme of Demerger-Spice and the Scheme of Demerger-Idea do not become effective for any reason whatsoever." 12. On 11.5.2010, petitioner-companies withdre....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (ii) The merger will result in the vesting of the Spice Licenses in India with means that merger of companies would mean transfer of license. (iii) Moreover, Idea admitted that Merger guidelines 2008 would be applicable in this case but it contended that since Idea and Spice are providing services from last 12 years, 3 years restrictions will not be applicable. (iv) Idea also contended that after merger the violation of substantial equity clause would cease to exist. 14. Vide letter dated 15.7.2008 the appellant again wrote to DoT stating that it believed that transaction qualifies as 'permissible merger of Licenses' under the merger guidelines 2008 and further sought answers from DoT whether merger of Licenses was permissible under Clause 17 of the merger guidelines. Thereafter, the appellant wrote to DoT vide letter dated 17.7.2008 stating that amalgamation would happen through a Court approved Scheme of Arrangement under Section 391/394 of the Companies Act and after this Spice would cease to exist. There would be only one company and the question of cross holding in two companies will not arise. Thereafter vide letter dated 1.8.2008, the appellant wrote to Do....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat it has filed on 11.5.2009, the Scheme for the amalgamation of Spice with appellant in the high Court of Gujarat. Vide letter dated 24.6.2009 the Spice wrote a similar letter stating that it has filed a scheme for demerger Spicer and Claridges under Section 391 of the Companies Act on 15.5.2009 and also stated that it has filed the scheme for the amalgamation of Spice with the appellant in Delhi High Court on 15.5.2009. The appellant vide its letter dated 6.1.2010 stated that scheme of amalgamation of Spice Communication Ltd. with the appellant company was approved by the High Court of Gujarat on 26.11.2009. The DoT vide its letter dated 7.1.2010 regarding merger/amalgamation of companies M/s Idea Cellular Ltd. with Spice Communications Ltd. and regarding demerger of the overlapping UAS Licenses intimated its decision to Idea Cellular ltd. that since the merger was not permissible under Clause 17 of the Merger Guidelines, merger of companies cannot be permitted. Vide its letter dated 18.1.2010 reiterated that permission of the amalgamation of the companies of the Companies M/s Spice Communications Ltd. with Idea Cellular Ltd. cannot be acceded to. Vide letter dated 25.1.2010 the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fter completion of Court process of amalgamation, the DoT ought to have issued formal orders forthwith". On 15.1.2011 a petition was filed before TDSAT challenging the communications dated 7.1.2010 and 18.1.2010 of the DoT. The appellant vide its letter dated 27.1.2011 wrote to the DoT as under:- "Further, we have also recently filed the petition No. 35 of 2011 in the Hon'ble TDSAT on above issue, which is ending consideration of the Hon'ble Tribunal....Without prejudice to our rights and contentions in the above petition and in continuation to our earlier letters, and now that the licenses held by Idea & erstwhile Spice are more than three years old, we request the DoT to transfer the licenses and issue a formal letter in this regard, for Merger of licenses as per applicable intra Service merger guidelines dated 22nd April, 2008 of DoT and relevant license conditions." Vide communication dated 24.2.2011 a penalty of Rs. 50 crore was imposed on Spice for violation of condition 1.4, condition 61. And condition 6.2 of the UAS Licence and Clauses 1 and 17 of the Guidelines dated 22.4.2008 for Intra Service Area Merger of Licences. A show cause notice dated 24.2.2011 was also iss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0 to the DoT had stated that the merger of licence was different from merger of companies and Clause 17 of the Merger Guidelines, 2008 was not attracted. Prior permission of DoT for merger of companies were mandatory not only it was not taken but these facts were not placed before the Courts. We may reproduce the summation of the fraud findings in the impugned order contained in paras 67 to 71 thereof which read as under: "67. Keeping in view the aforesaid mandate of law as well as the facts of the present case, it is apparent that non-placing of DOT's letters dated 7th January, 2010 and 18th January, 2010 was not an innocent act. Non-filing of the aforesaid letters was a part of design to misdirect and mislead this Court as would be apparent from non-filing of Licences as well as Merger Guidelines, 2008 and correspondence exchanged between the parties. It is pertinent to mention that the primary business of both the petitioner- companies pertain to telecommunication licences which were not produced before this Court. In fact, both the petitioner- companies did not bring to the notice of this Court that unlike any other case in the past decided by this Court, the present Sche....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... our meeting with DoT - this letter came soon after we confirmed the approval of Hon'ble High Court). The same was evidently wrong and uncalled for, considering the advise for approval given earlier and given that merger of companies is not in the DoT's domain, and was appropriately responded by us. In fact on the contrary, upon us informing DoT about completion of the Court process of amalgamation, the DoT ought to have issued formal orders forthwith. 'Also, Idea in its petition bearing No. 143/2011 filed before TDSAT stated once the merger is approved it mandates the DoT to give its approval as it does not leave the DoT with any discretion to refuse the same.' Idea in its application for withdrawal of demerger application being Co. Appl. (M) 98/2009 stated in light of the aforesaid sanctioning of the Scheme of Amalgamation, the application filed by Spice before this Hon'ble Court for the proposed demerger of its overlapping UASLs would not be maintainable as Spice has already merged into the Applicant Company and the overlapping UASLs of Spice now vest in the Applicant Company by virtue of the Scheme of Amalgamation. 70. In any event, even if this Court were not to accept the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation for the purpose of adjudicating 'fraud' plea. It was argued that the learned Company Judge was conscious of the legal position adumbrated in Hamza Haji v. State of Kerala [2006] 7 SCC 416 and Meghmala v. Narasmiha Reddy [2010] 8 SCC 383 which are taken note of by the learned Company Judge himself in the impugned order on the basis whereof, it is observed in the order itself that the suppressed facts/documents cannot be irrelevant one. It must be a matter which is material for consideration of the Court, whatsoever, the decision the Court may ultimately take. 20. It was the submission of Mr. Salve that the aforesaid material had no bearing on the sanctioning of the amalgamation scheme from the stand point of Sections 391 to 394 of the Companies Act and, therefore was totally irrelevant. According to him, it is where the learned Company Judge committed an error treating the supply of aforesaid information as relevant and determining the non-disclosure thereof as fraud upon the Court. His argument in this behalf was that the order under Section 391 read with Section 394 cannot and does not bind any party to any contract (other than a Transferor and/or Transferee) nor does it ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....greements and its consequences is a matter beyond the purview of proceedings before this Court. Equally the order of this Court sanctioning the Scheme would be of no avail to the appellants if the Government declines to continue the Licence Agreements between Spice and the Government, and any such dispute would have to be decided on the basis of the terms of the Licence agreements, the Government Policies and other matters of relevance and NOT the order of this Court sanctioning the merger. On this premise, it is submitted with great vehemence that in these proceedings was unnecessary as their rights to decline the continuance of any licence agreements and act as per the law and their policies is not in any manner impaired by this Order. 22. In order to appreciate the aforesaid contention, a peep into the language of Section 391 and 394 would be essential: "391. Power to compromise or make arrangements with creditors and members.-(1) Where a compromise or arrangement is proposed- (a) between a company and its creditors or any class of them; or (b) between a company and its members or any class of them, the [Tribunal] may, on the application of the company or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on of any suit or proceeding against the company on such terms as the [Tribunal] thinks fit, until the application is finally disposed of. "394. Provisions for facilitating reconstruction and amalgamation of companies. (1) Where an application is made to the Court under section 391 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Court- (a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies; and (b) that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme (in this section referred to as a "transferor company") is to be transferred to another company (in this section referred to as "the transferee company"); the Court may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters:- (i) the transfer to the transferee company of the whole or ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....If default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees. (4) In this section- (a) "property" includes property, rights and powers of every description and" liabilities" includes duties of every description; and (b) "transferee company" does not include any company other than a company within the meaning of this Act; but" transferor company" includes anybody corporate, whether a company within the meaning of this Act or not." 23. Proviso to Section 391(2) of the Act clearly mandates that the company or any other person by whom an application for sanctioning is made to disclose to the Court "all material facts relating to the company". Example of these facts is given with the expression "such as" by specifically stipulating the latest financial position of the company, the latest auditor's report on the accounts of the company and the pendency of any investigation proceedings in relation to the company under Section 235 to 351 of the Companies Act. It is made clear that this information is not exhaustive and other material facts are al....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e same. 7. That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent. 8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. 9. Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tself had started communicating with the DoT seeking such prior permission. Whether the action of DoT in refusing to grant such a permission is valid or not is not the question. What is important is that all this becomes relevant information and material information casting an obligation upon the appellant to have disclosed the same. It is rightly pointed out by the learned Company Judge that sanction under Section 391 to 394 of the Companies Act is a 'single window clearance' for the purpose of said Act. There is no need to file application under the Act for consequential changes like for change of name of company or Alteration of Memorandum, Article of Association except for rejection of capital in certain circumstances which required a special procedure. It is well settled that Section 391 of the Companies Act is a complete code under which the Court can sanction a scheme containing all the alterations required in the structure of the company for the purpose of carrying out in the structure of the company for the purpose of carrying out the scheme, except reduction of share capital which requires a special procedure. The whole purpose of Section 391 is to reconstitute the compan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....plea, it would now be necessary to examine the effect of non-disclosure of the material facts namely whether it would amount to fraud thereby vitiating the very order sanctioning the scheme. 29. We are of the opinion that had this fact been disclosed it would not have resulted in non sanction of the scheme of amalgamation of the two companies. Instead, the company Judge would have passed a conditional sanction order. We say so keeping in mind the following aspects. 30. As noted above, argument of the appellant is that as per the Licence Agreement, read in the light of the Merger Guidelines issued by the Government, the action of the government in refusing merger of the existing licences of Spice with the existing licences of the appellant is not appropriate. Thus, according to the appellant, even as per the terms of the Licence Agreement, the government is obliged to recognize the appellant as the licensee in place of Spice. The DoT contends otherwise. The DoT has refused the permission. It is a common case that this dispute is to be ultimately resolved by the TDSAT which is the appropriate forum. The matter is already before the TDSAT. At the same time, the scheme contains t....