TaxTMI 
TaxTMI 
1987 (8) TMI 450
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....exporters, importers of and dealers in Tea, Coffee and other specified products. 2. Presently the appellant no. 1 is engaged in the business of cultivating, manufacturing and processing tea and manufacturing textiles. 3. Bengal Tea & Fabrics Limited, the appellant no. 2 was incorporated on the 16th July 1983 under the Companies Act, 1956. The authorised share capital of the appellant no. 2 is Rs. 50 lakhs divided into 5,00,000 equity shares of Rs. 10/- each. The issued, subscribed and paid up capital of the appellant no. 2 is Rs. 20,00,000/- divided into 2,00,000 fully paid up equity shares of Rs. 10/- each. 4. The objects for which the appellant no. 2 was incorporated as appearing in its Memorandum of Association are, inter alia, (a) To carry on the business as traders, dealers, wholesalers , retailers, makers, designers, combers, scorers, scourers, spinners, weavers, finishers dyers and manufacturers of ready made garments, yarns and fabrics of wool, cotton jute, silk, rayon, nylon terylene and other natural, synthetic fabrics. (b) To own, purchase, take on lease, hire or exchange or otherwise acquire any estate, land, tea garden, orchards groves, plant....
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....endous goodwill and reputation in the tea industry in India. (c) The scheme would enable the appellant No. 2 to establish itself in tea business. (d) The appellant No. 2 had surplus funds which could be profitably utilized. (e) The appellants Nos. 1 and 2 were under common management and control. The registered office of both appellants Nos. 1 and 2 were situate at the same premises. (f) The amalgamation will result in economics of a centralised and a larger concern including reduction in over-heads, better and more productive utilisation of labour and other resources and a reduction in procedural and administrative work. (g) The scheme would enable the establishment of a larger company with larger resources and a larger capital base enabling further expansion and development. 8. An order was made on the 25th September 1985 in the said application whereby separate meetings of the equity shareholders of the appellants Nos.1 and 2 were directed to be convened and held for the purpose as aforesaid. 9. Notices of the said meetings were sent individually to each equity shareholder of the appellants as directed by the said order enclosin....
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....d, Calcutta, affirmed an affidavit on the 17th February 1986 which was filed in opposition to the said petition. It was contended in the said affidavit, inter alia, that the exchange ratio proposed in the said scheme was highly unfavourable to the members of the appellant No.1. It was contended that the break up value of the equity shares of the appellant No. 1 computed from its audited books of accounts would be Rs. 976/-per share of the face value of Rs. 100/-. the break up value of the equity shares of the appellant No. 2 computed similarly would be Rs. 10.12 per share of the face value of Rs. 10/-. On amalgamation, if shares of the appellant no. 1 in the proposed exchange ratio, the value per share of the appellant No.1 would come down to Rs. 791/- per share. 16. It was further contended, that it appeared from records that the appellant No. 2 had not carried on any business in tea or textile in the year ending on the 31st March 1985 and had earned only Rs. 2.11 lakhs by way of interest. The appellant No.2 came within the mischief of section 434(c) of the Companies Act, 1956. 17. It was contended further that the appellant no. 1 was a highly profitable and prosperous compa....
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....provided specifically that the liabilities of the transfer company would stand transferred to the transferee company and that the assets transferred would be subject to all charges, liens, mortgages and encumbrances, if any, affecting the same. The scheme, in fact, provided for a total merger of the appellant No. 1 with the appellant no. 2. 25. The appellant no. 1, it was submitted had not made any default in meeting the claims of the' respondent no. 2. The securities of the respondent no. 2 were not alleged to be in jeopardy. The respondent no. 2 would be benefited by the amalgamation as the assets of the appellant no. 2 would also be available to meet the claims of the former. 26. It was submitted that as the scheme did not contemplate any arrangement with the creditors nor adversely affected the interest of such creditors, calling of any meeting of the creditors was not required in law. 27. On the objections raised by the Central Government in the affidavit filed on its behalf and also during the hearing of this appeal it was submitted that in the statement under section 393 of the Companies Act annexed to the notices issued to the shareholders of the appellants suf....
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....nt no. 1 to the appellant no. 2 as the contracts of service were personal and not transferable was also not tenable. 33. The scheme specifically provided that all the workers of the appellant no. 1 would become the workers of the appellant no. 2 without any interruption in their services and on the same terms and conditions. The interest of the workmen was, therefore, fully protected. Their existing rights and future employment on the same terms and conditions were guaranteed. The scheme had been publicized widely and there was no opposition from the workmen. 34. Learned Advocate for the Central Government reiterated the contentions raised in the affidavit filed on behalf of the respondent No. 1. He submitted further that the appellants have violated mandatory provisions of sections 391, 392, 393 and also section. 173 of the Companies Act, 1956 by failing and neglecting to disclose material facts relating to the affairs of the appellants and by not preparing or disclosing any valuation report by an independent chartered accountant at any stage showing the basis of the valuation of the shares of the appellants and to establish the fairness and reasonableness of the proposed ex....
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....crutinised carefully. 39. The appellant no. 2 had not carried any business for at least one year and was therefore, liable to be wound up under section 434(c) of the Companies Act. 1956. It was also not in the public interest that the appellant No. 2 should be allowed to take over the assets of the appellant No. I. It was submitted further that the appellant no. 2 could not carry on its existing business of money lending without complying with the mandatory provisions of sections 370 and 372 of the Companies Act, 1956 and its activities in such business had been illegal, arbitrary and void. 40. It was submitted last that in view of the objection raised by the respondent No. 2 a secured creditor, to the proposed scheme, the views of the creditors of the appellants should be ascertained before the proposed scheme was sanctioned. 41. Learned Advocate for the respondent no. 2 adopted the contentions raised on behalf of the respondent no. 1 and submitted further that the terest of the respondent no. 2 should be protected before any scheme was sanctioned. 42. In support of the respective contentions of the parties a large number of decisions were cited at the Bar which are co....
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.... misdemeanours of delinquent Directors of the company as the pending misfeasance proceedings against the Directors will not be prosecuted effectively if the winding up order was set aside. It was also found that other provisions of the scheme were improper, unreasonable and arbitrary. The High Court set aside the order sanctioning the scheme and observed as follows : " On a review of these authorities and from the provisions in section 153(2) of the Indian Companies Act, 1913, it seems to us clear that the consent of the majority of creditors or shareholders to a scheme does not conclude the issue whether the scheme should be sanctioned. The jurisdiction of the Court which is called upon to sanction a scheme transcends the mere consideration that a majority of those affected by the scheme is willing to submit to the scheme. The creditors of a company may agree to accept a fraction of the amount due to them from the company and yet, on considerations of more lasting importance, like public or commercial morality, the Court may refuse to accept the verdict of the majority. It may also refuse to accept, the scheme on the ground that it is not reasonable or that it is not f....
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....nd the transferee company. (d) New Central Jute Mills Co. Ltd. v. Rivers Steam Navigation Co. Ltd. & Ors., reported in AIR 1959 Cal. 352. In this case the point for determination before a Division bench of this Court was whether a right to sue for damages for breach of contract appertaining to the business of the transferor company was transferred to the transferee company by vesting order passed under section 153A of the Indian Companies Act, 1913. Prior to the said order of vesting, a suit had been filed by the transferor company against a third party where damages were claimed for breach of a contract of carriage. Subsequent to the passing of the vesting order, the transferee company applied for an order that its name should be brought on record as the plaintiff in the pending suit in place and stead of the transferor company. The said application was dismissed on the ground that what was transferred under the said order of vesting was a mere right to sue for damages for breach of contract and the same was ineffective under section 6(c) of the Transfer of Property Act. The decision of the House of Lords in Nokes (supra) was applied. On an appeal, it was held by....
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....kers, It would be for the workers to apply for being heard and if they do so, they would be entitled to appear and be heard on the application for appointment of provisional liquidator ." (f) Mc Dowell & Company Limited v. Commercial Tax Officer, reported in AIR 1986 SC 649. This decision was cited for the following rervations in the judgment of Chinnappa Reddy, j. : " In our view, the proper way to construe a taxing statute while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, whether the transaction is such that the judicial process may accord its approval to it. * * * * It is neither fair not desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation, It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of 'emerging' techniqu....
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....ctive shares of the transferor and transferee company had been provided. As there was no material on record to show how the ratio had been worked out, the learned judge directed the transferee company to record in an affidavit an explanation of the basis of the ratio which was filed in the proceedings. After examining the same, the learned Judge of the Gujarat High Court was pleased to sanction the scheme, It was held that the ratio of exchange provided in the scheme was neither unfair nor unreasonable and particularly as the same had been approved by substantial majority of the shareholders. (i) In re Wood Polymer Ltd. reported in 47 Comp. Cas. 597. In this case, the Court refused to sanction an arrangement whereby properties were sought to be transferred through a company set up for the purpose, which was found to be a paper company, with the object of evading capital gains tax. (j) Kumarapura Gopal Krishna Ananthakrishnan v. Burdwan-Cutwa Railway Co. Ltd. reported in 48 Comp. Cas. 611. In this case, the respondent Company was incorporated with the object of constructing and running a railway between Burdwan and Cutwa. The entire business undertaking of the comp....
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....ed, All the shareholders of both the companies unanimously approved the scheme. At the time of sanctioning the scheme of amalgamation, it was contended on behalf of the Regional Director of the Company Law Board that the shares of the transferor company had been undervalued in determining the ratio of exchange. The transferor company contended that the valuation adopted by the Regional Director was incorrect and that fundamental principles had been ignored in such valuation. It was held by a learned Judge of the Bombay High Court that the valuation of shares of a company was a technical matter requiring considerable skill and expertise. There were bound to be differences of opinion as to the correct value of the shares of a company and simply because it may be possible to value the shares of the transferor company in a manner different from one which has been adopted, it could not be said that the valuation adopted was unfair. What was important that the shareholders had unanimously accepted the adopted valuation and there has been no complaint from the shareholders. It was held further that the Court should not examine the question of fairness or unfairness of valuation of shares ....
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....d on, inter alia, the grounds that the exchange ratio provided for in the scheme being 1 : 4 was not fair and the proper exchange ratio on the basis of correct valuation of the assets of the companies would be 1:320. It was also contended that no meeting of the creditors of the companies had been held for approval of the scheme. It vas held by a learned Judge of the Andhra Pradesh High Court that on the facts the principal creditors of the transferor company had consented to the proposed scheme and that the creditors of the transferee Company would not be in any way prejudicially affected by the amalgamation which amply protected their interest. The learned Judge held that in a scheme proposed between the company and its members, it was not mandatory to direct 'the holding of the meeting of the creditors and in the facts holding of meeting of the creditors of the two companies were not Called for.The learned Judge further held that the shareholders of both the companies had unanimously agreed to the ratio of exchange and that no public interest was involved. The learned Judge quoted with approval the observation of the Gujarat High court In re Sidhpur Mills Co. Ltd. reported in....
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....r re-valuation of the assets and the goodwill of the companies. The market price of the shares or the quotations in the stock exchange were not considered. It was held by the Court that the chartered accountant had proceeded mechanically only on the basis of information furnished by the management of the company. On this ground, a learned Judge of this Court refused to sanction the scheme. It was observed in the judgment that the approval of the shareholders to the scheme recorded at the meeting of the shareholders as directed might be often illusory as only few shareholders take active interest in the affairs of the company and some shareholders who considered themselves to be in a minority might not attend such a meeting as they may feel that the majority of the shareholders would control the meeting. Other shareholders might think that Court will look after their interest. Therefore, it was the duty of the Court to probe and find out whether the scheme was reasonable or not. (p) In re Associated Hotels of India Ltd., reported in 1968(2) Comp. Law Journal, 292. In this case a scheme for amalgamation of two companies was sanctioned subject to the filing of an affidavit by....
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.... was confirmed by the Court. The absence of such a report would not stand in the way of the Court to sanction the scheme. 43. The following decisions were also cited : (a) Mansukhlal v. M. V. Shah, Official Liquidator, reported in 46 Comp. Cas. 279. (b) Panchmahals Steel Ltd. v. Universal Steel Traders, reported in 46 Comp. Cas. 706. (c) In re Bhavnagar Vegetable Products Ltd. (In liquidation) reported in 55 Comp. Cas, 107. (d) In re Auto Steering Ltd. reported in 47 Comp. Cas. 247. The principles laid down in the said decisions do not advance the case of the parties any further and the said decisions need not be considered in detail. 44. We first take up for consideration the objections raised by the respondent No. 2, the secured creditor. It is contended that in the scheme, provision had not been made for transfer of cash balances. reserve funds, investment and other rights and interests in the assets and properties of the respondent No. 1. The scheme further did not provide that on transfer of the undertaking of the transferor company, the liabilities of the transferor company would become the liabilities and obligations of the transf....
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.... scheme. 48. It this context, we next take up for consideration the objection raised on behalf of the Regional Director, Company Law Board that the scheme should not be sanctioned without ascertaining the views of the creditors of the appellants. The scheme which is before us concerns only the two appellants and their members. The scheme does not provide for any arrangement with the creditors of the appellants. It has not been shown that the scheme adversely affects the interest of the creditors of the appellants in any manner. In that view, we hold that it is not necessary in Law to call a meeting of the creditors and obtain their views on the scheme. Our view is supported by the decisions, In re Coimbatore Cotton Mills Ltd. (supra); Vijay Durga Cotton Trading Co. Ltd. (supra) and Ambalal Sarabhai Enterprises Ltd. (supra). 49. we next consider whether sanction to the proposed scheme should be refused as the transferee company has not carried on any significant business for the past one year and is liable to be wound up under section 434 of the Companies Act, 1956 and also on the ground that the transferee company had carried on business in money lending in violation of the p....
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....o be dissolved. 52. Such objections are, in our view, without any substance. In the scheme it has been specifically provided that the employees of the appellant No.1 would become or be deemed to have become the employees of the appellant No.2 on transfer without any interruption of their services and on the existing terms of their services. There is no scope for retrenchment of any workmen under the said scheme and on the other hand the economies which were expected to be effected through the amalgamation with more productive utilisation of labour ensure that the workmen would have nothing to lose and would have a better chance of participation in a more efficiently run concern. 53. It is the usual practice and procedure that a scheme for amalgamation of companies require that the members of the companies should consider and approve the scheme at a meeting. Where a scheme of arrangement is sought to be made with the creditors it is also required that the creditors also hold a meeting and' express their views on the proposed arrangement. It is not a legal requirement that prior to the sanction of the scheme of amalgamation, the workers of the concern involved should also h....
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....cted on this ground. We note that in New Central Jute Mills Co. Ltd. (supra) a Division Bench of this Court has considered and distinguished the decision in Nokes. 55. It has been faintly argued on behalf of the Regional Director that the scheme has been promulgated by the appellants for the purpose of evasion of payment of tax and that the scheme is a mere device which has been adopted to facilitate such evasion. There is no allegation in the affidavit filed on behalf of the Regional Director, Company Law Board that the scheme has been mooted for the purpose of evasion of any tax. Further, it has not been brought to our notice that any particular tax is being sought to be evaded by any particular provision in the scheme. The decisions cited on behalf of the Regional Director in this connection viz. In re Wood Polymer Ltd. (supra) and Mc Dowell & Co. Ltd. (supra) have no application in the facts and circumstances of the instant case. In every case of amalgamation of two companies, transfer of all assets and liabilities of one to the other is involved and unless it is specifically established that the scheme was a device for evasion of payment of any tax it can not be rejected on....
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....ansferor company and was accepted. It is nobody's case that the majority of the shareholders of the transferor company has coerced the minority in any manner in accepting the said ratio of exchange. It is also not the case that the shareholders of the transferor company would not get anything in lieu of their shares of the transferor company. If the contention of the regional Director is accepted, the shareholders of the transferor company would no doubt get a little more on. the basis of a more favourable ratio. Valuation is ultimately a matter of expert opinion. There are more than one method of valuation and a valuation would vary if different methods are adopted. The shares are the properties of the shareholders and they are the ultimate and the-best judge of the value which they would put on their shares. There is no requirement in the Companies Act in such' a case. The ratio of exchange has to be determined on a valuation made by a chartered accountant or an auditor though we feel that in the best interest of all concerned and to prevent controversy a proper basis of valuation should be recorded. 59. We make it clear that in the event any shareholder of the transfe....