TaxTMI 
TaxTMI 
2023 (1) TMI 643
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....ational Company Law Tribunal', Kochi Bench, while passing the 'impugned order' dated 05.02.2021 in TCAA/4/KOB/2019 & TCAA/5/KOB/2019, wherein, inter alia at Paragraphs 18 to 20, had observed the following: 18. "This Tribunal heard the arguments advanced by Shri Pranoy Harilal, learned counsel for the petitioners / applicants and gone through the report submitted by the Registrar of Companies, Kerala. The Registrar of Companies has stated that the Regional Director, Ministry of Corporate Affairs, who is the competent authority in the matter, has strongly objected to the Scheme of amalgamation submitted by the petitioner companies for the reasons that the companies have violated Section 74(1)(b) of the Companies Act, 2013 by retaining amounts of Rs.17,50,000/- accepted from Sri Mohammed Kasim Varikkodan, a Director of the transferor company during the year 2014-15 as also Rs.15,00,000/- from Sri Ibrahim Kutty another Director of the transferor company during the year 2015-16. In the Board report for 2014-15 and 2015-16 the company has not made disclosure regarding acceptance of deposits of the aforesaid two amounts from the said Directors violating the provisions of Section ....
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.... 19. In order to see whether on the basis of the objections raised by the Regional Director, Ministry of Corporate Affairs, pointing out various lapses on the part of the petitioner companies, this Tribunal refers to a decision of the coordinate Bench of this Tribunal at Mumbai in the case of UFO Moviez India Limited and another - C.P. (CAA) No./1920/MB/2018 in C.A. (CAA) No. 120 of 2018, wherein even though the facts are different, the question whether based on the report of the Regional Director, the relief for sanction of amalgamation can be rejected has been answered. The Mumbai Bench in that case held as under:- "It is not that this Bench is against any business combinations, mergers or any proposition that would make the investors, promoters and shareholders more and more profitable. In fact, we welcome it. But at the same time, one must be humble and serious enough to abide by law and any proposition of business must be planned in such a manner that no law, logic and rights of any person are violated. There may be some repetitions which we are conscious of but the same is done to emphasize on various viewpoints differently. In the present case on hand, the Peti....
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....019 & Appellant No. 2 / Transferee Company is the Applicant in TCAA/5/KOB/2019 in the Application filed before the 'National Company Law Tribunal', Kochi Bench. In these two 'Applications', the 'Appellants / Petitioners', had sought a 'relief', in sanctioning a 'Scheme of Amalgamation' of the 'Appellant No. 1 / Transferor Company', with the 'Appellant No.2 / Transferee Company', within the meaning of Sections 230 and 232 of the Companies Act, 2013, read with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (the Rules). 7. It is pointed out on behalf of the Appellants, that the aforesaid Applications, were filed initially, before the 'Hon'ble High Court of Kerala', in Company Petition Nos. 36 and 38 of 2016, praying for 'Sanction of Scheme of Amalgamation' of the 'Appellant No. 1 / Transferor Company' with 'Appellant No. 2 / Transferee Company'. After the 'Constitution of National Company Law Tribunal', the 'Hon'ble High Court of Kerala', had transferred the abovementioned Company Petitions, as per Order dated 13.03.2017 to the 'National Company Law Tribunal', Chennai Bench, where it was numbered as TP(HC)/ 112 & 113 (Kerala)/2019. Later, after the 'Nationa....
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....', against the provisions of the Companies Act, 2013, the 'Scheme of Arrangement', is not to be 'rejected'. 14. It is the version of the Appellants, a mere glance of the documents and records, will exhibit that the whole process, contemplated under the Companies Act, 2013 and the Rules were satisfied and all requirements were complied with. Furthermore, by virtue of the 'Amalgamation', there shall be an 'impetus' and 'increase', in the 'area of operations' of the '2nd Appellant / Transferee Company', apart from the 'reduction in costs'. 15. On behalf of the Appellants, it is projected before this 'Tribunal' that the 'Amalgamation', shall result in the combination of manpower of both the Companies and a 'single management structure' for the 'Companies'. Added further, the combined managerial and technical expertise, will enable the '2nd Appellant / Transferee Company', to develop a business model, that would be 'competitive' and 'cogent'. 16. The Learned PCS for the Appellants contends that there is nothing in the 'Scheme', which aims to achieve anything 'fraudulent' or 'hidden' or which may result in 'violation' of any 'Law', for the time being in force. Although the Compa....
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....al and supervisory and not appellate. The Court acts like an umpire in a game of cricket who has to see that both the teams play their game according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire. The supervisory jurisdiction of the Company Court can also be culled out from the provisions of Section 392 of the Act which reads as under : "392, (1) Where a High Court makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company, it - (a) shall have power to supervise the carrying out of the compromise or arrangement ; and (b) may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or thereafter, give such modifications in the compromise or arrangement as it may consider necessary for the proper working or the compromise or arrangement. (2) If the Court aforesaid is satisfied that a compromise or arrangement sanctioned under section 391 cannot be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of any per....
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.... purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interest of the class which it is empowered to bind, or some blot is found in the Scheme." In the case of Alabama, New Orleans, Texas and Pacific Junction Railway Company reported in (1891) 1 Ch 213: (1886-90) All ER Rep Ext 1143, the relevant observations regarding the power and jurisdiction of the Company Court which is called upon to sanction a scheme of arrangement or compromise between the company and its creditors or shareholders were made by Lindley, L.J. as under: "What the court has to do is to see, first of all, that the provisions of that statute have been complied with; and, secondly, that the minority has been acting bona fide. The....
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.... such as a man of business would reasonably approve." The Learned Single Judge of the Calcutta High Court in the case of Mankam Investments Ltd. Re. 3 (1995) 4 Comp LJ 330 (Cal) relying on a catena of decisions of the English Courts and Indian High Courts observed as under on the power and jurisdiction of the Company Court which is called upon to sanction a scheme of merger and amalgamation of companies. "It is a matter for the shareholders to consider commercially whether amalgamation or merger is beneficial or not. The court is really not concerned with the commercial decision of the shareholders until and unless the court feels that the proposed merger is manifestly unfair or is being proposed unfairly and / or to defraud the other shareholders. Whether the merged companies will be ultimately benefitted or will be able to economise in the matter of expenses is a matter for the shareholders to consider. If three Companies are amalgamated, certainly, there will be some economies in the matter of maintaining accounts, filing of returns and various other matters. However, the court is really not concerned with the exact details of the matter and if the shareholders....
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....arrangement was such as a man of business would reasonably approve between two private companies may be correct and may normally be adhered to but when the merger is with a subsidiary of a foreign company then economic interest of the country may have to be given precedence. The jurisdiction of the court in this regard is comprehensive." Sen, J. speaking for himself and Venkatachaliah, CJ., also towed the line indicated by Sahai, J., about the jurisdiction of the Company Court while sanctioning the Scheme and made the following pertinent observations: (SCC p. 528, para 84) "An argument was also made that as a result of the amalgamation, a large share of the market will be captured by HLL. But there is nothing unlawful or illegal about this. The Court will decline to sanction a scheme of merger, if any tax fraud or any other illegality is involved. But that is not the case here. A company may, on its own, grow up to capture a large share of the market. But unless it is shown that there is some illegality or fraud involved in the scheme, the Court cannot decline to sanction a scheme of amalgamation. It has to be borne in mind that this proposal of amalgamation arose....
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.... seeking sanction for such a scheme and the Court gets satisfied about the same. 6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the Scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the 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 of 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 bee....
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....ot otherwise covered". It clearly shows that the Court was of the opinion that consent decree which purports to convey the title in the property was in an instrument liable for stamp duty at all times and it was only by way of abundant caution that the legislature had included the consent decree in the definition of the word "conveyance". 32. In view of the aforesaid discussion, we hold that the order passed by the Court under Section 394 of the Companies Act is based upon the compromise between two or more companies. Function of the Court while sanctioning the compromise or arrangement is limited to oversee that the compromise or arrangement arrived at is lawful and that the affairs of the company were not conducted in a manner prejudicial to the interest of its members or to public interest that is to say, it should not be unfair or contrary to public policy or unconscionable. Once these things are satisfied the scheme has to be sanctioned as per the compromise arrived at between the parties. It is an instrument which transfers the properties and would fall within the definition of Section 2 (1) of the Bombay Stamp Act which includes every document by which any right or ....
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....areholders of Navjivan had to be called twice. At the first meeting of the ordinary shareholders, out of a total 45,000 equity shares, 41,710 shares were represented and the holders of the same voted in favour of the scheme. At the second meeting of ordinary shareholders, out of 45,000 shares, 40,132 shares were represented and the altered ratio was also unanimously voted upon, the reasons for which are not far to seek and to which I would presently advert. At the meeting of preference shareholders, out of the total of 7,000 preference shares, 4,144 shares were represented and the scheme was approved unanimously. At the meeting of unsecured creditors who were depositors and holders of loan accounts, out of a total debt under this head of Rs. 25,72,374, creditors, the value of those deposits was Rs. 24,92,280 attended and unanimously approved the scheme. At the meeting of unsecured creditors who were suppliers of stores, etc., out of the total value of debt of Rs. 29,75,556 affirmative voting represented debt worth Rs. 18,18,370 and the negative voting represented the debt in the value of Rs. 1,22,575. These figures would at a glance show that the classes were fairly represented and....
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....sently point out such as the workers have to choose between starvation and meager employment the same was the position of shareholders of Navjivan. I must also remember that, much though I may detest this imposition by the Kohinoor shareholders on the Navjivan shareholders leaving them little choice and freedom for manoeuvre, ultimately, the shareholders of Navjivan are the sound judges of their own interest and the support that they have extended to the scheme would indisputably indicate that they are people who have properly considered the whole thing and possibly reached a conclusion which represents their best judgment. Presumably, they must have honestly acted. There is no allegation of coercing the minority. There was not even a single dissenting vote. Therefore, despite my intense feeling that Kohinoor has almost dictated its terms to Navjivan I would accept the scheme as reasonable and fair one. At any rate, this narration by itself would effectively repel the contention of the Central Government that the interest of Kohinoor is jeopardised in the scheme. That, in my opinion, is begging the issue. Be that as it may, in the circumstances disclosed in the case, I would accept....
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....of the provisions of Sections 235 - 351 by itself does not invalidate or warrant the Court refusing to sanction a scheme of arrangement under Sections 391 - 394, including a scheme of amalgamation. It is not every violation of these sections that disentitles a scheme being proposed or sanctioned. It is only those violations which adversely reflect upon or affect the scheme that would persuade the Court not to sanction the scheme. That Section 391(2) only requires the disclosure of all material facts to the Court, establishes this. If it were otherwise, Section 391, and in particular, Sub-section (2) thereof, would have been worded differently. The purport of Section 391(2) is that all the material facts relating to the company including the pendency of any investigation proceedings in relation to the company under Sections 235 - 351 and the like, ought to be disclosed to the Court in order to enable the Court to decide whether or not the scheme ought to be sanctioned in view of such facts. The manner of exercise of discretion would then depend upon the facts of each case." Appellate Tribunal's Decisions: 24. In the decision of this 'Tribunal', in Mel Windmills Pvt. Ltd. v. Mi....
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....d given for rejection in the impugned order dated 21st January, 2019 were uncalled for and the Tribunal was only required to notice all the requirements of Section 230-232 of Companies Act. The Tribunal was also required to follow the Accounting Standard for the treatment of shareholders. However, it is expected that such Issue was not raised and were not discussed by the 'National Company Law Tribunal'." Respondent's Contentions: 26. According to the Learned Counsel for the Respondent, the '1st Appellant / Company', had collected 'Deposits', from six Directors of the company and 76 number of shareholders of the '1st Appellant / Company'. Moreover, according to the Respondent, on verification, it was found that 'all the six Directors, were appointed, on dates, before giving 'Loans', to the '1st Appellant / Company', and all the 'Shareholders', who were given 'Unsecured Loans', to the '1st Appellant / Company', are also the 'Shareholders' of the 'Company', as per 'Register of Member', furnished by the 'Company'. 27. It is represented on behalf of the 'Respondent / Union of India', through the 'Regional Director' (SR), Ministry of Corporate Affairs, Chennai, on 'verification....
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....im / purpose of convening the 'Board Meeting' of both the 'Transferor' / 'Transferee' company for 'Merger', is an 'invalid' one. 31. The Learned Counsel for the Respondent, brings it to the notice of this 'Tribunal', that the '1st Appellant / Company', in the year 2013-14, had accepted 'numerous Deposits', from as many as '100 Members', (including the Directors), and that '37 Members', out of 100, were 'existing', as on 12.09.2013, the date prior to the 'Notification' of the Companies Act, 2013, which permitted the 'Private Companies', to 'increase the Limit', on the 'number of Members', from 50 to 200. 32. As a matter of fact, the '1st Appellant / Company', had shown in their record, that 63 more persons, from whom the 'Deposits', were 'accepted', became 'Members', from 13.09.2013 to 31.03.2014. 33. Indeed, the '1st Appellant' / 'Company', had manipulated the 'records', to reflect that the 'Sum' received from these '63 persons', as amount received from the 'Members', with a view to 'escape', from the 'breach of the ingredients of Section 58A of the Companies Act, 1956'. 34. It is pointed out on behalf of the Respondent that the '1st Appellant / Company', had filed two ....
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.... Companies (Acceptance of Deposits), Rules 2014, 'any 'Sum' received from the 'Directors', will be exempted, only if a 'Declaration', is furnished by such 'Director', to the company that the amounts, so given were not 'borrowed', from 'Third Parties' (others) and that such 'Disclosure', along with the 'details of money', so collected, was made in the 'Board's Report'. But, a glance of the 'Board's Report' for the year 2014-15 and 2015-16, shows that such a 'Disclosure', was not made, rendering 'Acceptance of Deposits' of Rs.17,50,000/- and Rs.15,00,000/- from the said 'Directors', which is in 'negation of Section 73 of the Companies Act, 2013, for which, the company, is 'liable to pay a minimum penalty of Rs. 1 Crore', and that the 'Officer' in 'Default', shall be 'punishable' with 'imprisonment', for a term of seven years or with 'Fine', which shall not be less than Rs.25,00,000/-, but, which may extend to Rs.2 Crores. In effect, the submission of the Learned Counsel for the Respondent is that, the 'Acceptance of the aforesaid Deposits', attracts the 'Penal provision'. 39. The Learned Counsel for the Respondent comes out with a plea that the '1st Appellant / Company, had as muc....
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.... the above, same kind of 'Disclosures', were seen in the 'Balance Sheet', as on 31.03.2017, 31.03.2018 and as well as on 31.03.2019. Because of the fact that the 'Outstanding Loans / Deposits', so received, was over Rs.14 Crores, in comparison to that of the 'Share Capital' of around Rs.2.5 Crores, this 'Misleading Disclosure', is to be read as a 'Material Misstatement', leading to the 'violation' of Section 448 of the Companies Act, 2013 'Punishment for false statement', in regard to all these 'Balance Sheets', which attracts the 'Punishment for Fraud', under Section 447 of the Companies Act. 45. The Learned Counsel for the Respondent, brings it to the notice of this 'Tribunal', that the 'Regional Director' of the 'Respondent', had observed that 'similar breaches', committed by the '2nd Appellant / Company', and that the 'objection', was placed by the 'Regional Director', of the 'Respondent', against the 'Approval', being accorded to the 'Scheme'. 46. Furthermore, the 'Registrar of Companies', Ernakulam, was directed to examine the above issues, in 'depth' / 'detail', and 'Show Cause Notices', were to be issued to the '1st Appellant', and the '2nd Appellant / Companies' and ....
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....s 'overdue', ofcourse, after 'Maturity of Deposit'. 'Damages' for 'Fraud': 54. Section 75 of the Companies Act, 2013, relates to 'Damages for Fraud', due to 'failure to repay the Deposits', accepted by a 'Company'. Further, the definition of 'Fraud', under Section 447 of the Companies Act, 2013, is an inclusive one and it concerns the 'Affairs' of a 'Company' or a 'Body Corporate'. 55. In this connection, this 'Tribunal', worth points out the decision in Swansea Corporation v. Harpur, reported in (1912) KB 493 (CA), where Fletcher Moul Ton LJ, observed to the effect the words 'damages' and 'damage in Law', have more than one meaning and great care has to be exercised, in examining the context in which they severally appear. 'Disqualification for Appointment of Director': 56. Section 164 of the Companies Act, 2013, pertains to the 'Disqualification of Directors', incurred during the 'Terms of Office', as 'Directors', and not with the 'Retirement of a Director', as per decision B.R. Kundra, Delhi v. Motion Pictures Association, reported in (1976) 46 CompCas 339 (Del). 'Compromises, Arrangements and Amalgamations, under the Companies Act, 2013': 57. Section 230 of....
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....sclosure of material information, which could have a major influence/impact on the decision as to whether the scheme has to be approved or not. In our opinion, the High Court has not committed any error of jurisdiction in rejecting the submission of the appellant that the non-disclosure of the letter dated 18th January, 2005 was not material." Tribunal's Role : 61. The 'Tribunal', under the Companies Act, 2013, is to perform a 'supervisory role', near to a 'Judicial Review', of 'Administrative' action. Assessment : 62. In the instant case on hand, although on behalf of the 'Appellants', it is projected before this 'Tribunal', that the 'sanctioning of the arrangement', mentioned in the 'Scheme', will be for the 'advantage and benefit' of the 'Appellants'/'Companies', its 'Shareholders', and the 'Creditors', coupled with the fact that no 'investigation proceedings', were instituted or pending, in terms of the relevant provisions of the Companies Act, etc., this 'Tribunal', on a consideration of the submissions made on behalf of the 'Respondent' / 'Union of India' (Regional Director, Southern Region, Ministry of Corporate Affairs, Chennai), pertinently points out that the ....