Apex Investments Pvt. Ltd. vs Promain Ltd.
1992 Latest Caselaw 69 Del

JUDGMENT

Arun B. Saharya, J.

(1) By this petition under Section 391 and Section 394 of the Companies Act,, 1956 (hereinafter referred to as the Act). M/s.Apex Investments Pvt. Ltd. (hereinafter referred to as the transferor company)and M/s. Promain Ltd. (hereinafter referred to as the transferee company)have jointly prayed for sanction of a scheme of amalgamation whereby the transferor company proposes to transfer its entire assets and liabilities to vest in the transferee company to achieve best results of investments and finance activities of both the companies.The transferor company is a private limited company duly registered and incorporated on 5th of May 1973 under the Act. The authorised capital of the company originally was Rs. 5 lacs divided into 5,000 equity shares ofRs. 100.00 each. The share capital was increased to Rs. 10 lacs vide resolution passed in the Extra-ordinary General Meeting on 26th of February 1974. Later,by another resolution passed in Extra-ordinary General Meeting held on 26thof May 1988, it was further increased to Rs. 20 lacs divided into 20,000equity shares of Rs. 100.00 each. Since its incorporation in 1973, the company has been carrying on business of an investment company.

(2) The transferee company is a public limited company registered and incorporated an 29th of October 1965 under the provisions of the Act. The authorized share capital of the company was Rs. I lakh originally divided into50,000 equity shares of Rs. 100.00 each, 30,000 Redeemable Cumulative Preference Shares of Rs. 100.00 each and 20,000 unclassified shares of Rs. 100.00each. On 28th of February 1983, vide special resolution passed at the 17thAnnual General Meeting, the share capital of the company was converted and the paid-up value of the share was sub-divided. The same now stands as Rs. 1crore divided into 7.00,000 equity shares of Rs. 10.00 each, 30,000 Redeemable Cumulative Preference Shares of Rs. 100.00 each. Objects of the company, as enumerated originally in the Memorandum and Articles of Association inter alia, were to manufacture, hire, sell and lease out machines and plantsetc., to lend money, and to act as an investment company. By a special resolution passed at the 13th Annual General Meeting held on 26th of March 1979General Financing and Investments were specified as the main objects of thecompany. Thereafter the company has been carrying on the business of general finance and investments only.

(3) The salient features of the Scheme are that with effect from the date of transfer, the undertaking of the transferor company shall vest in the transferee campany. Every holder of one equity share of Rs. 100.00 of the transferor company shall get 20 equity shares of Rs. 10.00 each of the transferee company. The employees of the transferor company shall become the employees of the transferee company. The liabilities of the transferor company shall be taken over by the transferee company; and all pending proceedings by or against the transferor company, all obligations, rights and claims, by or against the transferor company shall be that of the transferee company.

(4) By its resolution dated 9th of August 1980, the Board of Directors of the transferor company resolved to amalgamate the transferor company with the transferee company. Likewise, the Board of Directors of the transferee company in its meeting held on 9th of August 1980, perused and considered the draft scheme and resolved that the same be approved and adopted.

(5) On or about 28th of August 1990, the two petitioners made a joint application to this Court under Sections 391(2) and 393 of the Act seeking directions for convening and holding meetings of se cured creditors, unsecured creditors and members of the transferor and the transferee companies. By order dated 25th of October 1990, Sabharwal, J., after notice to the Central Government and the Official Liquidator, gave directions for convening, holding and conducting separate meetings of the secured creditors, unsecured creditors and the members of the two companies. The meetings were directed to beheld on 7th of December 1990. Separate Chairman and alternate Chairman were designated to preside over the meetings of the transferor company and that of the transferee company. Notice of the meetings was directed to be published in newspapers "Statesman" and "Vir Arjun", in addition to individual notices to the secured creditors, unsecured creditors and members of the two companies. By an order dated 5th of November1990, however, certain modifications were made in the earlier order to substitute the name of the Chairman and to correct the name of alter.nate Chairman appointed for holding meetings of the transferee company. 'Further, instead of 7th of December 1990, the meetings in terms of order dated25th of October 1990 were directed to be held on 15th of December 1990. " -Consequently, separate notices convening the meetings were issued to individual creditors and members of the two companies along with a statement under Section 393 of the Act. Public notices were also advertised in the "Statesman"and "Vir Arjun". Reports submitted by the respective Chairmen show that at each of the meetings held on 15th of December 1990. the Scheme was unanimously approved.

(6) In a report filed by the Official Liquidator, it is staled, inter alia,that the financial position of the transferor company and the transferee company is good; that the proposed exchange ratio of 1:20 is favorable to the shareholders of the transferor company; that both the transferor and transferee companies are earning profits; that the proposed amalgamation will be beneficial to both the companies and more particularly to the share-holders of the transferor company; and that the affairs of the transferor company have not been conducted in a manner prejudicial to the interests of i'ts members or public interest.

(7) In pursuance of the provision made in Section 394A of the Act,the Central Government has raised no objection to sanction of the scheme, andhas, by a representation dated 2nd of May 1991, held it to the Court to decide the case on its merits. -

(8) With regard to reasonableness of. the proposed exchange ratio of shares, Counsel for the petitioners has contended that no hard fast rule can be laid down for this purpose. The exchange ratio of 1:20 has been assessed byM/s. K. Shroff & Co., Chartered Accountants, by a report dated 6th of August1990, on the basis of an average derived by integration of the asset valuation method and the yield method. The Supreme Court in Commissioner of Wealth-Tax, Assam v. Mahadeo Man and Others, 86(1972) I.T.R. 621, after examining various aspects of valuation of shares in a limited company, laid down six principles for guidance, which are set out below :- "(1)Where the shares in a public limited company are quoted on the stock exchange and there are dealings in them, the price prevailing on the valuation date is the value of the shares. (2) Where the shares are of a public limited company which are not quoted on a stock exchange or of a private limited company the value is determined by reference to the dividends if any, reflecting the profit-earning capacity on a reasonable commercial basis,But, where they do not, then the amount of yield on that basis will determine the value of the shares. In other words, the profits which the company has been making and should be making will ordinarily determine the value. The divided and earning method or yield method are not mutually exclusive: both should help in ascertaining the profit earning capacity as indicated above. if the results of two methodsdiffer, an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion ofprofits. .(3) In the case of a private limited company also where the expenses are incurred out of all proportion the commercial venture,they will be added back to the profits of the company in computing the yield. In such companies the restriction on share transfers will also be taken into consideration as earlier indicated in arriving at a valuation.(4) Where the dividend yield and earning method break down by reason of the company's inability to earn profits and declaredividends, if the set-back is temporary then it is perhaps possible to take the estimate of the value of the shares before set-back and discount it by a percentage corresponding to the proportionate fall in the price of quoted shares of companies which have suffered similarreverses.(5) Where the company is ripe for winding up then the breakup value method determines what would be realised by that process.(6) As in Attorney-General of Ceylon v. Mackie, (1952) 2 AllE.R. 775 (P.C.) a valuation by reference to the assets would be justified where as in that case the fluctuations of profits and uncertainty of the conditions at the date of the valuation prevented any reasonable estimation prospective profits and dividends."

(9) An arrangement for reconstruction or amalgamation of a company is essentially in the nature of a contract. What should be the terms and conditions of the contract has to be left for consideration by the concerned parties from a business point of view in a commercial sense. The adequacy of consideration for making the agreement is also for them to decide. The Courts will not make bargains for the parties. Except in a case of fraud or prejudice to public .interest, if the proposed terms of the arrangement are acceptable to the concerned parties, for considering grant of sanction of the Scheme under Section 391 of the Act, the Court will not interfere with it.

(10) The exchange ratio as per report of B.K. Shroff &Co.has been arrived at by taking into account both the asset valuation method and the yield method on the basis of the last audited balance-sheet as at31st of March 1990 of the two companies with adjustment of appreciation in quoted investments. Profits of the last five years have been taken into account for computing average maintainable profits and an annual yield of 12%has been adopted. It is observed that only shares of the transferee company are quoted. Keeping in view these factors, among others, the mean of net assets and yield basis has been adopted for arriving at the exchange ratio. Details on which share valuation has been made, are indicated in the annexures to theReport. The net assets value per share of the transferee company and the transferor company has been found to be Rs. 179.63 and Rs. 3,319.20 respectively which works out to a ratio of 1:19. On the yield basis, value per share of the transferor and transferee companies is found to be Rs. 13.83 andRs. 352.10 respectively bearing a ratio of I : 25. The main exchange ratio recommended is 1:20 i.e. one share of the transferor company in relation to the 20 shares of the transferee company.

(11) For the present purpose, there appears to be no violation of any provisions of law in taking the mean of the two methods. In determination of the exchange ratio, no illegality or fraud is alleged or .discernible. No objection has been raised by anyone at any of the meetings of the two companies nor in pursuance of public notices issued for hearing of the petition. The difference in the two methods is not much. The proposal to give to every share-holder for every holder of one fully paid-up equity share of Rs. 100.00 in the transferor company 20 equity shares, of Rs. 10.00 each credited as fully paid-up in the transferor company appears to be fair and reasonable.

(12) The members, as well as the secured and unsecured creditors of the transferor company and the transferee company are agreeable to the proposed scheme of amalgamation. The petitioners have disclosed to the Court and placed on record all material facts relating to the two companies. No investigation proceedings in relation to the two companies are pending. The proposed amalgamation appears to be in the interests of the members, creditors and employees of the transferor company and the transferee company as also in the public interest. The scheme of amalgamation is therefore sanctioned.

(13) The Registry shall draw and issue the formal order in accordance with the Rules.

(14) It is hereby declared that 'he scheme of amalgamation shall be binding on the transferor and transferee companies as well as on their respective share-holders and creditors.Further, it is directed that the petitioners will file with the Registrar of Companies a certified copy of the order within 14 days from this date.

(15) The scheme shall be effective from the date when the certified copy of the order is filed with the Registrar of Companies. The petition is, accordingly allowed.