AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (2) TMI 317
X X X X Extracts X X X X
X X X X Extracts X X X X
....amation of appellant Nos. 3, 4 and 5 into appellant No.1. The learned Company Judge rejected the petition on the ground that a composite scheme of this nature is not maintainable. 3. The question in this appeal is whether a composite scheme such as this is maintainable under sections 391 and 394 of the Companies Act, 1956. It certainly is Composite schemes have been regularly sanctioned by many courts under sections 391 and 394 of the Act. Our attention has not been invited to any authority to the contrary. 4. The preamble to the scheme states that it is in the interest of the shareholders, creditors and employees of each of the companies as it would result in enhancement of the shareholder's value enable re-organization of the business leading to operational efficiencies and synergies and facilitate the management of companies to vigorously pursue growth and expansion opportunities. It is important to note the rationale for the scheme. It is stated to be as follows:- "As a step to simplify the group structure and make it more transparent by eliminating cross holdings and to achieve a focused auto-companies manufacturing company which can attract strategic allian....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y an order dated 05.12.2014, the Company Judge directed a meeting of the unsecured creditors of Appellant No.3 to be convened, dispensed with the meetings of the shareholders of the appellants, the unsecured creditors of appellant Nos. 3, 4 and 5 and of the secured creditors of appellant Nos. 1 and 3 and noted that there were no secured creditors of appellant Nos. 2, 4 and 5. The meeting as directed was held and the Chairman submitted his report dated 18.02.2015. The Chairman reported that the unsecured creditors of Appellant No.1 present in the meeting unanimously approved the scheme. The report was taken on record and the first motion petition was disposed of accordingly by an order dated 20.03.2015. The scheme has, therefore, been unanimously approved by all the parties concerned, namely, the shareholders and the secured and unsecured creditors. (B) The appellants, therefore, moved a second motion petition being Company Petition No. 29 of 2015 in which the Company Court by an order dated 03.03.2015 issued notices to the Regional Director and the Official Liquidator and directed publication of the notices of hearing in the newspapers and in the official gazette of the St....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the other companies which are sought to be merged and demerged with the resultant company i.e. appellant No.1 demerged. If a composite petition is to be filed, it should be an arrangement between two or more companies and not different arrangements involving different companies. 7. We are with respect unable to agree with the learned Judge. 8-9. Sections 391, 392 and 394 of the Companies Act, 1956 in so far as they are relevant read as under:- Section 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 Court may, on the application of the company or of any creditor or member of the company, or, in the case of a company, which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs. (2) If a majority in number representing three- fourths in value of the creditors, or class of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 any part of the undertaking, property or liabilities of any transferor company; (ii) the allotment or appropriation by the tra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nishable 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 any body corporate, whether a company within the meaning of this Act or not. Notice to be given to Central Government for applications under sections 391 and 394.' 10. The learned Judge with respect approached the matter on an erroneous basis. These were not independent schemes. The appellants have not proposed two independent schemes, one for de-merger of the 'Auto Component Division' of appellant No.1 and the merger thereof with appellant No.2 and the others for the amalgamation of appellant Nos. 3, 4 and 5 with appellant No.1. The mergers and de-mergers were part of one composite scheme. The demerger and each merger constitute components of a single, indivisible composite scheme. The creditors and the shareholders did not compartmentalize each of the mergers and the demerger and consider them sep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se of merger and demerger as is the case before us. The shareholders and the creditors of company 'B' may not agree to the merger unless and until company 'A' agrees to hive of its textile business. If the shareholders and the creditors of company 'A' accept the proposal, there would come into existence not two independent schemes one of merger and the other of demerger but a composite, indivisible scheme comprising of a merger and a demerger. 13. One of the reasons for the composite scheme before us is that it would facilitate strategic alliance/joint venture partners. A strategic alliance/joint venture was obviously perceived by the creditors and the shareholders of the transferor company to be desirable being in the business interest of the transferee company/appellant No.1. They also apparently considered it necessary in the interest of the transferee company that the 'Auto Component Division' be demerged. Having opted for the composite scheme, it is obvious they considered it necessary that both the components operate simultaneously as a single arrangement. The agreement with the shareholders of the transferor company to the merger being cond....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the objections was to the sanction of an integrated and composite scheme of amalgamation. The scheme involved the amalgamation of PMP Auto Industries Ltd. in S.S.Miranda Ltd. and immediately thereafter S.S.Miranda Ltd. in Morarjee Goculdas Spinning and Weaving Co. Ltd. The objection was that the memorandum of association of the transferee company i.e. Morarjee Goculdas Spinning and Weaving Co. Ltd. did not permit it to carry on the business activities as carried out by the two transferor companies, namely, PMP Auto Industries Ltd. and S.S.Miranda Ltd. However, the scheme itself apart from providing for the amalgamation provided for the amendment of the Memorandum of Association of the transferee company authorizing it to carry out such business as well. The authorities contended that such a composite scheme was not permissible especially as the jurisdiction to decide the application for amendment in the memorandum of association was with the Company Law Board under Sections 17 and 19 of the Companies Act and that the scheme insofar it sought an order permitting an amendment of the Memorandum of Association usurped the power of the Company Law Board. The learned Judge accepted th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cludes reduction of capital special procedure in respect of reduction of capital must be gone through before it could be sanctioned as part of the scheme of compromise and arrangement. There seems to be good reason for making such a provision in rule 85 ..." Though these observations were made by the Gujarat High Court in connection with reduction of capital and the special procedure to prescribe therefor, in my view these observations are equally applicable in so far as the special procedure prescribed for alteration of memorandum of association of a company is concerned. In fact, the reason why section 391 of the Act is to be treated as a complete code is postulated by the Gujarat High Court thus (at page 855) : "If section 391 was subject to other provisions of the Act, every time the scheme of compromise and arrangement is put forth for the sanction of the Court, if it includes things for which specific provisions are made and that will have to be gone through before the scheme is sanctioned, it would result in unnecessary duplication of procedure and would be cumbersome. On the contrary, it appears that if the creditors and members of the company arrive at a certai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Companies Act is not required to be followed before sanctioning a scheme involving such alterations. The whole purpose of section 391 is to reconstitute the company without the company being required to make a number of applications under the Companies Act for various alterations which may be required in its memorandum and articles of association for functioning as a reconstituted company under the scheme." (emphasis* supplied) Thus the position in law appears to be clear. Section 391 invests the court with powers to approve or sanction a scheme of amalgamation/arrangement which is for the benefit of the company. In doing so, if there are any other things which, for effectuation, require a special procedure to be followed-except reduction of capital then the court has powers to sanction them while sanctioning the scheme itself. It would not be necessary for the company to resort to other provisions of the Companies Act or to follow other procedures prescribed for bringing about the changes requisite for effectively implementing the scheme which is sanctioned by the court. Not only is section 391 a complete code as held by the courts, but, in my view, it is intended to be in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....based thereon take an informed decision whether or not to approve the scheme as proposed or as may be modified. That is entirely within their domain. We are unable to agree that the process adopted cannot be approved for this reason or otherwise. 21. The finding that the exact figures, numbers and finances of the companies sought to be merged and demerged will not be available before the Court as well as for presentation before the members and the creditors of the companies in the meetings is incorrect. They are and in any event can be made available. None of the creditors or the shareholders has alleged that this information was not available. 22. The learned Judge observed that it would not be possible for the members or the creditors to know the status of the company after implementing the first part i.e. demerger of the ''Auto Component Division' of appellant No.1. This finding, however, is based on an incorrect premise that the demerger of the 'Auto Component Division' of appellant No.1 is independent of the mergers of appellant Nos. 3, 4 and 5 with appellant No.1 and that the merger of the 'Auto Component Division' of appellant No.1 with appe....