Aradhana Beverages & Food Company ... vs Regional Director Of Companies
1998 Latest Caselaw 338 Del

ORDER

Anil Dev Singh, J.

1. This is a petition under sections 391-394 of the Companies Act, 1956.

Aradhana Beverages & Foods Company Ltd. (for short the 'transferee company'), a company having a registered office in Delhi, has filed this application in order to seek sanction of this Court to the scheme of amalgamation of Sunrise Products (for short the 'transferor company.) with it. The authorised share capital of the transferee company is Rs. 30 crores divided into 30,00,000 equity shares of Rs.10/- each. The subscribed & paid up capital of that transferee company as on date is Rs. 27.10 crores but as on the date of filing of the petition the same was Rs.8,10,00,000/- divided into 81,00,000/- equity shares of Rs. 10/- each. The objects of the company are set out in its Memorandum and Articles of Association annexed to the petition. Mainly the objects are as under:-

"i) To manufacture, process, produce, make, package, bottle, import, buy, sell, supply, stock, distribute, trade in and carry on business in and deal in all types of goods, food and beverage products including snack foods fruit products, vegetables products, potato. products, cereal products, milk and malted foods, aerated, non aerated and soft drink beverages and mineral waters including caramel, sugar, syrups and concentrates required therefor, diary products, coffee, tea, cocoa, spices, cashew and all types of crops and plants.

ii) To undertake research in the fields of agriculture, horticulture and plantation, particularly to develop, grow, raise and process improved varieties of seeds and planting materials and to buy, sell, import, supply, stock distribute and deal in seeds and planting materials.

iii) To carry on trade or business of buying ,selling, importing, exporting, supplying stocking, distributing and dealing in all types of goods and products mentioned above.

2. On the other hand, the transferor Sunrise Products is a company which is inter alia engaged in the business of manufacture & production of soft drinks, an object which is akin to one of the several objects of the transferee company. The transferor company has authorised capital of Rs. 15 crores divided into one crore fifty lacs equity shares of Rs. 10/- each. The subscribed & paid up capital of the transferor company is also Rs. 15 crores divided into one crore fifty lacs fully paid up equity share of Rs.10/-each.

3. On April 2, 1997 the Board of Directors of the transferor company resolved that the transferor company be amalgamated with the transferee company. It also resolved that the valuation of the respective business of the two companies be carried out in order to arrive at a fair share exchange value. On the same date the Board of Directors of the transferee company passed a similar resolution.

4. On May 15, 1997 the transferee company filed an application under section 391 of the Companies Act, 1956 being CA. 432/97 seeking convening & holding of the meetings of the shareholders and creditors of the company for the purpose of considering the scheme of amalgamation. This Court by order dated May 16, 1997 directed the transferee company to convene & hold separate meetings of its share holders and creditors for considering, and if thought fit, approving with or without modification the arrangements embodied in the proposed scheme of amalgamation & for this purpose appointed Mr. H.S. Phoolka, Advocate as the Chairman for both the meetings. On July 19, 1997 separate meetings of the creditors and shareholders were duly convened & held in accordance with the above said orders. The shareholders and the creditors, as per the report of the Chairman dated July 26, 1997, approved the scheme of amalgamation. By the instant application, dated August 8, 1997 transferee company prays that the scheme of amalgamation which has been duly approved by its shareholder's and creditors be sanctioned by this Court.

5. Learned counsel appearing for the Regional Director has submitted that the valuation of the shares of the transferee and transferor companies have not been fairly and reasonably made by the valuer, M/s Bharat S. Raut & Company. It is pointed out, with reference to the report of the Valuer, that in order to arrive at the valuation of a fully paid up share of the transferee company, an increase in the equity capital of Rs. 27 crores was assumed by the Valuer which was not a correct way of assessing the value. It is further submitted that the Valuer has not satisfactorily explained as to why the capital base of only the transferee company has been expanded by converting loans into capital and why a similar procedure was not followed in the case of the transferor company. Learned counsel for the Regional Director has further contended that the affairs of the transferee company were not being conducted in the public interest. On the other hand, learned counsel appearing for the petitioner has submitted that the transferee company converted its debt liability into share capital thereby increasing its share capital from Rs. 10 lakhs to Rs.8.10 cores in the first instance, and subsequently to Rs.27.10 cores. Therefore, the assumption of the Valuer has been turned into reality. Learned counsel has also contended that the conversion of liability equity cannot be found fault with., It is pointed out that the Regional Director in his affidavits filed on November 3, 1997 and December 6, 1997 failed to disclose that the loans had been actually converted by the transferee company into share capital. Learned counsel has canvassed that the affidavits of the Regional Director suffer from concealment of facts. However, learned counsel for the Regional Director has submitted that the affidavit of the Regional Director filed on January 6, 1998 discloses all the relevant facts. In this regard my attention has been invited to para 8 of the affidavit, which reads as follows:-

"That since the basis of valuation of shares of M/s. Aradhana Beverages & Foods Co. Ltd. as on 31.03.96 has not been arrived at in accordance with the accepted accounting norms and auditing practice, no cognizance should be taken of the valuation report by the Hon'ble High Court. In this context it is submitted that 80,00.000 shares of Rs.10/- each were issued and allotted on 1st April, 1997 and 1,90,00,000 shares of Rs.10/- each were issued and allotted on 20.10.97. Thus it is clear that as on 31.12.1995 and also as on 31.3.96 the paid up capital of the company was Rs.10,00,000/- only and therefore increased capital of the company subsequent to submission of petition in valuation report dated 14.03.1997 should have not been taken into account. Therefore, it is evident that under no circumstances paid capital of Rs. 27,00,00,000 could have been taken into account for the purpose of valuation of shares of M/s. Aradhana Beverages & Foods Co. Ltd. as on 31.03.1996 and working out the exchange ratio more so as the effective date is from 1st June 1996 but increase in capital took place only on 1st August, 1997 and on 20th october, 1997."

6. I have considered the submissions of learned counsel for the parties. At the threshold it must be noticed that the Valuer, as clearly appears from the report dated March 14, 1997, determined the valuation of a fully paid up share of the transferee company by assuming an increase in its share capital by Rs. 27 crores. This was achieved by the Valuer by a notional conversion of the debt liability of the company into its share capital. It may also be noticed that subsequently the debt liability of the transferee company to the extent of Rs.27 crores was actually converted into its share capital by issuing shares at par as per the following details:-

Value of the shares Issued Date

Rs.8 crores April 1, 1997

Rs. 17 crores October 20, 1997

This position is confirmed by the Valuer in his certificate dated December 9, 1997 in which it is pointed out that shares aggregating to Rs. 27 crores were issued by the transferee company and the valuation as determined earlier remains the same. These facts are not disputed by the learned counsel for the Regional Director. It is also not disputed on both sides that there only three shareholders of the transferee company and one of them is Pepsico India Holding Limited. From the report of the Chairman dated 26th July, 1997, all the three shareholders attended the meeting in person or through their authorised representatives. The shareholders approved the scheme of amalgamation unanimously. It is also not in dispute that there are only eight creditors of the transferee company and seven were represented in the meeting through their authorised representatives. All the creditors present at the meeting approved the scheme unanimously. Thus the shareholders and creditors of the company have not found any fault with the scheme of amalgamation. I am told by learned counsel for the petitioner that the shareholders and creditors of the transferor company have also approved the scheme of amalgamation and the Calcutta High Court has already sanctioned the scheme. Since the shareholders and radiators of both the companies did not find fault with the scheme of amalgamation and are satisfied with the exchange ratio as determined by the Valuer, this court will not interfere with their decision as share holders and the creditors are the best judges of their interests.

7. In Re: E.I.T.A. (India) and others ( 1996) 4 Comp. L.J. 346. the Calcutta High Court has held that if the statutory formalities have been complied with and the scheme of amalgamation is fair and reasonable, and there is no fraud involved, the Court would proceed to give effect to the scheme. In Re: Mcleod Resell (India) Ltd. (1997)4, Comp. L.J. 60 (Cal.), the Calcutta High Court has again expressed the view that it is a matter for the shareholders to consider on a commercial plane, as to whether amalgamation would benefit the companies.

8. Therefore, the net result is that unless, the court was of the view that the proposed merger between the companies was for evading the law or was manifestly unfair and would defraud the shareholders and creditors, the Company Court will not interfere with scheme of amalgamation.

9. The Supreme Court in Re: Hindustan Lever Employees Union Vs. Hindustan Lever Ltd. and others ( 1994)4 Comp. L.J. 267 (SO) held that the jurisdiction of the Company Court while considering in the scheme of amalgamation does not extend to, ascertaining with mathematical accuracy if the determination of valuation of shares of the transferor and transferee companies by the Valuer satisfies the arithmetical test. A Company Court does not exercise an appellate jurisdiction. It exercises a jurisdiction founded on fairness. It is not required to interfere only because the share exchange ratio arrived at by the Valuer by a particular method was not as beneficial to the shareholders as it would have been if another method would have been adopted. What is imperative is that such determination should not have been contrary to law and that it was not unfair for the shareholders of the company which is being merged. It was emphasised that the court's obligation is to be satisfied that valuation was in accordance with law and it was carried out by an independent body. When the statutory formalities have been complied with and the scheme is fair and reasonable and there is no fraud involved, the court must precede to give effect to the business of the shareholders of the company.

10. Reverting to the case in hand it has not been alleged by the Regional Director that the scheme was conceived for fraudulent purposes or statutory formalities for convening & holding of the meeting of the shareholders & creditors of the transferee company were not complied with or the scheme of amalgamation was not approved by them with requisite strength. All that has been pointed out by the learned counsel for the Regional Director is that the Valuer while fixing the share exchange ratio assumed the conversion of the debt liability of the transferee company into its share capital. But criticism of the learned counsel is of no avail to him as the debt owed by the transferee company has been actually & in reality converted into share capital. This being so the share exchange ratio comes to J : 1. This calculation has not been disputed by the learned counsel for the respondent. The grievance of the Regional Director as already noticed is that upto the date of Valuer's report the loans had not been converted into share capital and the Valuer had assumed the conversion of the loan into share capital and on that basis he had arrived at the above said share exchange ratio. Since as a matter of fact and undisputedly the loan has been subsequently converted into shares, the grievance of the Regional Director in my view does not survive. The shareholders and creditors are better equipped to gauge the value of their shares with reference to market trends & if they have approved the amalgamation, the Regional Director cannot be heard to say that the merger would not be in interest of the shareholders and creditors & consequently in the public interest. To my mind in a given case, the interest of the shareholders may or may not be synonymous with the public interest. But in the instant case determination of the share exchange ratio does not affect public interest. Therefore, the submission of the learned counsel for the Regional Director that the amalgamation not being in the interest of shareholders will also be apposed to public interests is untenable as they do not coincide. It may also be noticed that both the transferor and the transferee companies are the subsidiaries of Pepsico. Both the companies are closely held companies and the share exchange ratio seems to be fair to the shareholders. THe Regional Director has not been able to show that the valuation is manifestly un-reasonable, unfair and arbitrary. This being so, the judgment of the shareholders must be respected & cannot be disturbed.

11. Learned counsel for the Regional Director submitted that' according to the proviso to sub-section (2) of section 391 of the Companies Act, 1956 the latest report of the auditor with regard to the accounts of the company should have been filed before the said scheme of amalgamation could be considered for approval by the Court. Learned counsel submitted that since the latest auditor's report on the accounts of the transferee company with regard to the financial year ending December 31, 1997 has not been filed, the requirement of the proviso is not fulfillled. I do not subscribe to the view of the learned counsel for the Regional Director. The proviso to subsection (2) of Section 391 requires that the applicant company seeking amalgamation must satisfy the Court that all the relevant, necessary & material facts including the latest auditor's report have been disclosed to the Court by affidavit or otherwise. The latest auditor's report of the company which is required to be disclosed is the one which would be available as on the date of filing of the application. Since the application was filed on August 8, 1997, the latest auditors report would be the one relating to the financial year ending on December 31, 1996, which has been filed by the transferee company.

12. Having regard to the facts and circumstances of the case, I consider it appropriate to approve the scheme of amalgamation. I order accordingly. The office will prepare the formal order in accordance with law.

13. A copy of this order be given lastly to learned counsel for the petitioner.

Petition disposed of.