Delhi High Court
Adobe Properties Private Limited vs Amp Motors Private Limited on 16 January, 2017
IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgment reserved on: 26.10.2016
Judgment pronounced on: 16.01.2017
CO.APPL.(M) 150/2016
IN THE MATTER OF:-
ADOBE PROPERTIES PRIVATE LIMITED
...Transferor/Applicant Company No.1
WITH
AMP MOTORS PRIVATE LIMITED
...Transferee/Applicant Company No.2
Through: Mr. D.K. Malhotra & Mr.
Rajesh Kr. Malhotra,
Advocates for the Applicants.
CORAM:
HON'BLE MR. JUSTICE SIDDHARTH MRIDUL
JUDGMENT
SIDDHARTH MRIDUL, J.
1. The present application has been filed jointly, under Sections 391 &
394 of the Companies Act, 1956 (hereinafter referred to as 'the Act') by
Adobe Properties Private Limited (hereinafter referred to as 'Transferor
Company') and AMP Motors Private Limited (hereinafter referred to as
'Transferee Company') seeking directions of this Court to dispense with
the requirement of convening meetings of their equity shareholders,
secured and unsecured creditors; to consider and approve, with or without
modification, the proposed Scheme of Amalgamation (hereinafter referred
to as 'proposed Scheme') of the Transferor Company with the Transferee
Company.
2. The Transferor Company and the Transferee Company are
hereinafter collectively referred to as 'Applicants'.
3. The facts as are necessary for disposal of the present application are
as follows:
a. The registered offices of the Applicants are situated at New
Delhi, within the jurisdiction of this Court.
b. The Transferor Company was incorporated under the Act on
03.01.2014, with the Registrar of Companies, N.C.T. of Delhi
& Haryana at New Delhi.
c. The Transferee Company was incorporated under the Act on
22.10.2009, with the Registrar of Companies, N.C.T. of Delhi
& Haryana at New Delhi.
d. It has been stated by counsel for the Transferor Company and
the Transferee Company that the Applicants herein are Private
Limited Companies and their shares are not listed in any stock
exchange.
e. The authorized share capital of the Transferor Company as on
31.03.2015 is Rs.10,00,000/- divided into 1,00,000 equity
shares of Rs.10/- each. The issued, subscribed and paid-up
share capital of the Transferor Company as on 31.03.2015 is
Rs.1,00,000/- divided into 10,000 equity shares of Rs.10/-
each.
f. The authorized share capital of the Transferee Company as on
31.03.2015 is Rs.5,00,00,000/- divided into 50,00,000 equity
shares of Rs.10/- each. The issued, subscribed and paid-up
share capital of the Transferee Company as on 31.03.2015 is
Rs.4,87,18,000/- divided into 48,71,800 Equity Shares of
Rs.10/- each.
g. Copies of the Memorandum of Association and Articles of
Association of the Applicants have been filed alongwith the
present application and the same are on record. The audited
balance sheets, as on 31.03.2015, of the Applicants along with
the auditor's report have also been filed alongwith the present
application and the same are on record.
h. It is claimed by the Applicants that the proposed scheme will
result in achieving synergy in business operations and greater
work efficiency, which would be achieved by bringing the
Applicants together under a single control. This improvement
would include economies of scale, financial efficiency and
smooth functioning of the businesses.
i. So far as the share exchange ratio is concerned, it is stated on
behalf of the Applicants that upon the proposed scheme being
effective, no consideration shall be payable by the Transferee
Company to the equity shareholders of the Transferor
Company, since the Transferor Company is the wholly owned
subsidiary of the Transferee Company. The resulting
authorized share capital of the Transferee Company on the
proposed scheme getting sanctioned would be
Rs.5,10,00,000/- divided into 51,00,000 equity shares of
Rs.10/- each.
j. It has been stated by the Applicants that no proceedings under
Sections 235 to 251 of the Companies Act, 1956 (or their
corresponding Sections in the Companies Act, 2013) are
pending against the Applicants, as on the date of filing of the
present application.
k. The Board of Directors of the Applicants in their separate
meetings held on 29.12.2015 have unanimously approved the
proposed scheme. Copies of the Resolutions passed at the
meetings of the Board of Directors of the Applicants have
been filed and the same are on record.
l. The status of the equity shareholders, secured and unsecured
creditors of the Applicants and the consents obtained
therefrom to the proposed scheme, has been set out in the
following table: -
Company No. of Equity Consents Given No. of Consents No. of Consents
Shareholders
Secured Given Unsecured Given
Creditors Creditors
Transferor 1 (One) All None N.A. 6 (Five) 5 (Five) in
Company number and
99.91% in
value.
Transferee 7 (Seven) 4 (Four) in 4 (Four) All 65 (Sixty- 20 (Twenty)
Company number Five) in number
constituting constituting
94.45% of
97.49% of
shareholding.
value.
4. The prayer sought by learned counsel appearing on behalf of the
Applicants, is to seek dispensation of the meetings of the equity
shareholders and unsecured creditors of the Applicants; the secured
creditors of the Transferee Company; thereby seeking dispensation of the
requirement of giving individual notices in Form No. 35 of the Company
(Court) Rules, 1959 and publication of notices of the meetings of the said
shareholders and creditors.
5. In support of the prayer sought, learned counsel appearing on behalf
of the Applicants would urge that no prejudice will be caused to equity
shareholders or creditors of the Applicants if their meeting, as
contemplated under Section 391(1) of the Act, is dispensed with. Learned
counsel appearing on behalf of the Applicants would further urge that the
Transferor Company is the wholly owned subsidiary of the Transferee
Company. Additionally, it would be canvassed that the proposed scheme is
not a compromise or an arrangement with the creditors of either of the
Applicants.
6. Learned counsel appearing on behalf of the Applicants, in support of
the relief sought herein, would rely on the following decisions:
a. M/S. Mazda Theatres Pvt. Ltd. and Another versus
M/S. New Bank of India Ltd. And Others, reported as
1975 (1) ILR 1 (DB).
b. S.M. Holding Finance (P) Ltd. versus Mysore
Machinery Manufactures Ltd. (In Liqn.), reported as
I.L.R. 1991 KAR 2672.
c. M/S. GE Capital Transportation Financial Services
Ltd. versus M/S. GE Capital Services India, reported
as 162 (2009) DLT 31.
d. Dabur Foods Ltd. & Anr., reported as 2008 (144)
Comp Cas 378.
e. Madhusudan Auto Ltd. & Anr., reported as 2013 V
AD (Delhi) 527.
f. Masterji Mettalloys (P) Ltd. & Good Luck Steel Tubes
Ltd., reported as 227 (2016) DLT 313.
7. I have heard the learned counsel appearing on behalf of the
Applicants, considered the decisions relied upon by them and perused the
entire material placed on record.
8. The issue that arises for consideration in the present application is
whether the Court has the power to dispense with the requirement of
convening meetings, as contemplated under Section 391(1) of the Act, in
order to enable the members or any class thereof and/or creditors or any
class thereof to consider, and if thought fit, approve, with or without
modifications, the proposed scheme.
9. The Transferor Company has 01 equity shareholder whose written
consent/NOC has been placed on record. The said written consent/NOC
has been examined and found in order.
10. The Transferor Company has no secured creditors.
11. The Transferor Company has 06 unsecured creditors, out of which,
05 (representing unsecured debt of 99.91% in value of the total unsecured
debt) have given their written consents/NOCs to the proposed scheme. The
said written consent/NOCs have been examined and found in order.
12. The Transferee Company has 07 equity shareholders out of which,
04 (representing 94.45% of the total shareholding) have given their written
consents/NOCs to the proposed scheme and same have been placed on
record. The said written consents/NOCs have been examined and found in
order.
13. The Transferee Company has 04 secured creditors. All the secured
creditors have given their written consents/NOCs to the proposed scheme
and same have been placed on record. The said written consents/NOCs
have been examined and found in order.
14. The Transferee Company has 65 unsecured creditors out of which
20 unsecured creditors (representing 97.49% in value of the total
unsecured debt) have given their written consents/NOCs to the proposed
scheme and the same have been placed on record. The said written
consents/NOCs have been examined and found in order.
15. Before proceeding further, it would be beneficial to examine the
legal position with regard to the subject issue and consider the decisions
relied upon by the learned counsel appearing on behalf of the Applicants.
16. In Masterji Mettalloys (P) Ltd. & Good Luck Steel Tubes Ltd.
(supra) a Single Judge of this Court, whilst considering a scheme of
amalgamation, dispensed with the requirement of convening meetings of
the shareholders and creditors of the Transferee Company under section
391(1) of the Act on the basis, that the Transferor Company was the
wholly owned subsidiary of the Transferee Company and the rights of the
said shareholders and creditors of the Transferee Company would remain
unaffected by the Scheme.
17. A single judge of this Court in Madhusudan Auto Ltd. & Anr.
(supra), dispensed with the requirement of convening meetings of the
equity shareholders, creditors and unsecured debenture holders of the
applicant companies, to consider and if thought fit, approve, with or
without modifications, the scheme of arrangement proposed therein. The
said decision was arrived at in view of the circumstance that the written
consents/NOCs to the scheme had been given by a majority of such
shareholders, creditors and unsecured debenture holders of the applicant
companies.
18. In Dabur Foods Ltd. & Anr. (supra), the Court whilst placing
reliance on the decision in Sharat Hardware Industries Limited, reported
as (1978) 48 Comp Cas 23, dispensed with the requirement of convening
meeting of the equity shareholders of the Transferee Company on the
ground that Transferor Company is the wholly owned subsidiary of the
Transferee Company and that the shareholding pattern of the Transferee
Company prior and post amalgamation would remain the same, not
requiring any reorganization or restructuring of the capital and thus not
adversely affecting the shareholders thereof. Further, the meeting of the
creditors of the Transferee Company was also dispensed with in view of
the circumstance that the Transferor Company was a wholly owned
subsidiary of the Transferee Company; the said scheme would not result in
any variation in the rights of the creditors of the Transferee Company; and
that the consent of the secured creditors representing 97.6% in value of the
total secured debt had been obtained outside a meeting. However, the
meeting of the unsecured creditors of the Transferor Company was
directed to be convened by the Court in view of the absence of the
NOC/written consent.
19. At this juncture, it would be relevant to examine the decision in
Sharat Hardware Industries Limited (supra). A Single Judge of this
Court therein, whilst sanctioning a scheme of arrangement, proposed
therein, between the wholly owned subsidiary and its holding company,
observed as hereinunder:
"4. I had noticed in the order dated 19th April, 1976, that a
question had been urged before me whether the scheme had to be
sanctioned by the transferee-company, M/s. Choudhari Metal
Industries (P.) Ltd., as well as by the petitioner-company. No
doubt, the proposed scheme has been passed by the requisite
majority of the shareholders of the petitioner-company. In fact, it
has been unanimously passed. The question which was raised
was whether a similar requirement is necessary qua the
shareholders of M/s. Choudhari Metal Industries (P.) Ltd., i.e.
the transferee-company. I had noticed a decision of the Bombay
High Court, Bank of India Ltd. v. Ahmedabad Manufacturing &
Calico Printing Co. Ltd. [1972] 42 Comp Case 211 (Bom),
where this question had been analysed. It had there been noticed
that in certain cases it would be necessary for the transferee-
company to get the proposed compromise or scheme sanctioned
by the court before it would become binding on both companies.
I also noticed that the transferor-company (the petitioner) was a
wholly-owned subsidiary company of the transferee-company
and, therefore, it was not necessary for the transferee-company
to approve the scheme. The reason I reached this conclusion was
that Section 391 of the Act deals with two special cases : (a)
when there is a compromise or arrangement between a company
and its creditors or any class of them and (b) where the
compromise or arrangement is between a company and its
members or any class of members. Considered from the point of
view of the petitioner-company there is a scheme affecting the
members of the company because as a result of the scheme, the
transferor-company will cease to exist and will be fully merged
in the transferee-company. When the scheme comes into
operation, the shareholders of the petitioner-company will cease
to have any shares in the petitioner-company. Therefore, there is
a compromise between the petitioner-company and its
shareholders. Considered from the point of view of the
transferee-company, there is no such proposal. The assets and
liabilities of the petitioner-company will be appropriated under
the scheme by the transferee company, the shareholding and
other rights of the members of the transferee-company will be
unaffected, because no new shares are being issued and there is
not going to be any change in the capital structure of the
transferee-company. These are facts which are ascertainable on
an analysis of the scheme. Therefore, the scheme or arrangement
considered from the point of view of the transferee-company is
not a scheme or arrangement coming within the field of
operation of Section 391 and does not seem to require the
approval of creditors or a subsequent sanction by the court. Now,
two other cases have been brought to my notice in which the
question whether the transferee-company is also required to
approve the scheme, has been considered. Those two cases are In
re Carron Tea Co. Ltd. [1966] 2 Com LJ 278 (Cal) decided by
the Calcutta High Court and In re Union Services Private Ltd.
[1973] 43 Comp Case 319 (Mad) decided by the Madras High
Court; although both these cases are somewhat different on facts,
the decision in both cases was that the scheme does require the
approval of the transferee-company under Section 391 of the
Act. In both cases there was some change affecting the members
or creditors of the transferee-company. That position is not true
in the present case. The point that requires analysis is whether, in
law, the present scheme requires the approval of the transferee-
company, because if it does, it would be pointless approving the
scheme which could not be carried into effect qua the transferee-
company.
5. For this purpose, it is necessary to keep in view the essential
features of a scheme or arrangement. In essence, a scheme is a
contract between two or more parties. It requires the necessary
approval in accordance with Section 391 of the Act, if it is a
scheme covered by that provision, otherwise any other contract
entered into by a company does not require such approval. The
essential features of the present scheme under consideration are
that two companies are merging with each other. Therefore, it is
a contract between companies. Such a contract does not require
the approval of the court. But, as one of these companies will
merge into the other and will thereafter have to be dissolved
under Section 394 of the Companies Act, 1956, considered from
the point of view of that company which is to cease to exist, the
scheme or arrangement between the two companies is also a
scheme or arrangement between the transferor-company and its
shareholders and creditors, etc. That is why the scheme requires
to be placed for consideration in the manner required by Section
391. It also requires the sanction of the court. Seen from the
point of view of the transferee-company, the agreement is
essentially a contract which does not affect the creditors or
members of the transferee-company in any manner. Therefore,
the scheme does not require to be sanctioned from the point of
view of the transferee-company under Section 391 of the Act.
However, if the scheme had some flaws whereby the rights of
the transferee-company were affected, it would require the
approval of those persons at a meeting or meetings held in
accordance with Section 391 and would also require the sanction
of the court having jurisdiction which in this case would be the
Calcutta High Court.
6. In the analysis, I have considered also one possible case which
might arise which is, let us assume that the scheme is approved
by the members of the transferor-company but, later, the
transferee-company refuses to give effect to the scheme. That is
the position also analysed in the case of Union Services Private
Ltd. [1973] 43 Comp Case 319 (Mad) referred to earlier and
decided by the Madras High Court. Obviously, if the transferee-
company refuses to give effect to the scheme, the purpose and
object of the scheme would be demolished. Now, is there any
material before me to suggest that M/s. Choudhari Metal
Industries (P.) Ltd. has approved the scheme or has agreed to be
bound by the scheme ? For this purpose, there are two pieces of
evidence before me. Firstly, the holding company qua the
petitioner-company is M/s. Choudhari Metal Industries (P.) Ltd.
and I am told that it is holding 100 per cent, of the shares of the
petitioner-company. As the present scheme has been approved
by the members of the petitioner-company, it follows that M/s.
Choudhari Metal Industries (P.) Ltd. has approved of the scheme
fully by participating at the meeting of the members of the
petitioner-company. In fact, without the approval of the
transferee-company, the scheme could not have been passed by
the members of the petitioner-company. Secondly, the scheme
could not have been put forward as a proposal unless there was
an arrangement between the petitioner-company and M/s.
Choudhari Metal Industries (P.) Ltd. Thirdly, I now have the
resolution passed by the members of M/s. Choudhari Metal
Industries (P.) Ltd. before me. This resolution was passed as a
result of a general meeting of that company held under the orders
or directions of this court. The resolution and the affidavit
accompanying it show that almost all the shareholders of the
transferee-company attended the meeting. Thus, the members of
the transferee-company have also approved the scheme.
Therefore, there is nothing at all to show that the transferee-
company is not intending to be bound by the scheme. In fact, as
the transferee-company is the holding company and also owns
all the shares of the transferor-company, it would follow that the
transferee-company has not only approved the scheme but has
actively brought about the arrangement and certainly wants to
enforce the scheme. For these reasons, I think that in the present
case, there can be no doubt that the scheme is not going to be
thrown overboard . and there is no such intention. The contract
is, therefore, binding on the transferee-company. All it requires
now is the approval of the court. As soon as the scheme is
sanctioned, it becomes effective."
(Emphasis supplied.)
20. In M/S. GE Capital Transportation Financial Services Ltd.
(supra), the Court dispensed with the requirement of convening meeting of
the creditors of the transferor and transferee companies on account of the
applicant companies therein giving an undertaking to the effect that, upon
Court notice being issued in the confirmation petition, the applicant
companies would issue notice to their creditors inviting objections, if any,
to the proposed scheme. The same was done in view of the circumstance
that upon the scheme coming into effect, the entire business and
undertaking would stand transferred to the Transferee Company thereby
leading to no variation of rights of the said creditors. Further, the majority
shareholder of the Transferor Company with a holding of 92.74% of the
paid up equity share capital was exempted from participating in the
shareholders meeting on account of his NOC/written consent being given
beforehand.
21. In S.M. Holding Finance (P) Ltd. (supra), a Single Judge of the
Karnataka High Court, whilst dealing with a scheme of arrangement and/or
compromise proposed by the company in liquidation, to discharge its
debts, observed that Section 391(2) of the Act is not prohibitory but
directory in character, unlike its proviso and it would suffice if there is
substantial compliance thereof.
22. In M/S Mazda Theatres Pvt. Ltd. (supra), a Division Bench of this
Court, whilst laying down three exceptions to the normal rule of convening
meeting, as contemplated by the provisions under Section 391 of the Act,
observed as follows:
"Let us examine whether the second part of the arrangement
relating to the subsidiary and its members complies with the
requirements of section 391. Ordinarily a company acts by its
Board of Directors and the shareholders act in a general meeting of
the shareholders. The meeting contemplated in section 391 is
analogous to an extraordinary general meeting of the members of
the company inasmuch as a three-fourths majority is required to
pass the required resolution. The normal rule is that the consent of
the shareholders whether it is unanimous or by a three-fourths
majority must be obtained in a meeting summoned on the orders of
the Court under section 391. This is in accordance with the general
principle that the members must act in a general meeting.
Inroads have, however, been made on this formal doctrine. Firstly,
the consent of all the shareholders given even outside a meeting is
sufficient to comply with the requirement of a meeting. After this
principle was established by judicial decisions, a legislative
recognition was given to it by paragraph 5 of Part II of Table A of
the English Companies Act, 1948 which applies to the management
of a private company limited by shares and is relevant for our
purpose. It runs as follows: --
"Subject to the provisions of the Act, a resolution, in
writing signed by all the members for the time being
entitled to receive notice of and to attend and vote at
general meetings (or being corporations by their duly
authorised representatives) shall be as valid and
effective as if the same had been passed at a general
meeting of the company duly convened and held."
Further, section 143 of the English Companies Act, 1948 now
expressly enables written resolutions which are not passed at a
general meeting to be registered. This change is reflected in India
also. Under section 82 of the Indian Companies Act, 1913, special
and extraordinary resolutions passed at general meetings alone
were capable of being registered. But section 192 of the Companies
Act, 1956 enables written resolutions not passed at general
meetings to be registered.
The second inroad on the requirement of a formal meeting is that
the consent of the shareholders may be ascertained without calling
any meeting at all. Further, the doctrine of lifting the veil of
incorporation and looking at the reality of the action of the
members of the company enables us to hold that the consent of the
overwhelming majority of the shareholders outside a meeting is
sufficient to show that the resolution was supported virtually by all
the members of the company. Professor L. C. B. Gower calls this as
"informal ratification by the members of the acts done on behalf of
the company." He draws the distinction between the formal and the
informal acts as follows: --
"The law normally insists that only a resolution duly
passed at a meeting of the company can be regarded as
an act of the company itself. In a number of cases,
however, the question has arisen whether something less
formal than a resolution passed at a duly convened
meeting will suffice. In other words, can the veil be
lifted so as to equate a decision of the members with a
decision of the company itself ?"
(The Principles of Modern Company Law, 3rd Edn., pages 206-
209).
Decisions on this subject may be classified into (a) those requiring
a formal compliance, and (b) those requiring only a substantial
compliance.
Formal compliance: --
In Re George Newman Ltd., (1895) 1 Ch. 674, C.A., (11) it was
held by Lindley L. J., that "individual assents given separately may
preclude those who have given them from complaining of what
they have sanctioned, but for the purpose of binding a company in
its corporate capacity individual assents given separately are not
equivalent to the assent of a meeting." In Re Express Engineering
Works, (1920) 1 Ch. 466 (12), and in E.B.M. Co. Ltd. v. Dominion
Bank, (1937) 3 A.E.R. 555 (13), the decisions proceeded on the
view that the consent of all the shareholders was necessary if no
meeting was called.
Substantial compliance: --
In Parker & Cooper Ltd. v. Reading, (1926) Ch. 975 (14), the
decisions in Re George Newmaa Ltd. (11) and in Re Express
Engineering Works (12) were fully considered but were
distinguished on the ground that the transactions requiring
ratification in those cases were illegal. It was held that when
transaction was not illegal it was not necessary that the
shareholders should meet in a meeting summoned for that purpose
if the transaction is an honest bona fide one entered into for the
benefit of the company. In Re Duomatic Ltd., (1969) 2 W.L.R. 114
(15), also no meetings of the shareholders were called. Of the
transactions to be ratified one was ratified by all the shareholders
but the other was not approved by the minority ordinary
shareholders but only by the holder of the majority of shares. The
minority shareholders did not object. The ratification was held to be
valid. All the relevant case-law was reviewed before the decision
was arrived at.
**********
A third exception to the rule that all the shareholders of a company
must cast their votes in a formally called meeting is made by the
doctrine of acquiescence. If all the shareholders acquiesce in a
certain arrangement, the question of a meeting having been called
does not arise at all, Professor R. R. Pennington in the third edition
of his "Company Law" at pages 557-558 has expressed this
doctrine of acquiescence in the following words: --
"The court has said in some cases that a company may
be treated as bound by a resolution, even though it is not
shown that it was duly passed at a general meeting or
that it was assented to by all the members. Thus, it has
been held that a company loses its right to rescind a
contract with its promoters if substantially all its
members are aware of the right to rescind and fail to act
for an unreasonable length of time. (Erlanger v. New
Somrero Phosphate Co. (1878) 3 A.C. 1218) (16). It has
also been held that a company could not sue its directors
for borrowing beyond the powers conferred on them by
the articles (Re Norwich Yarn Co. Ex parte Bignold
(1856) 22 Beav. 143) (17), nor treat an irregular
surrender of partly paid shares as void (Phosphate of
Lime Co. v. Green (1871) L.R. 7 C.P. 43) (18), when all
the members had an opportunity of discovering the
irregularity, and no one had taken steps to challenge it
for several years. Similarly, where members of a
company which had gone into voluntary liquidation took
an active part in the liquidation proceedings, fully aware
of a procedural defect in the passing of the resolution to
wind up the company up, it was held that neither they
nor the members who voted for the resolution could
challenge its validity (Re Bailey, Hay & Co. Ltd. (1971)
3 A.E.R. 693) (19). Again, where no properly subscribed
articles had been filed on the incorporation of a
company, but it had acted for many years as though an
informal document which had been filed contained its
articles, it was held that the members must be taken to
have adopted the informal document as the company's
articles (Ho Tung v. Man On Insurance Co. (1902) A.C.
232) (20). It is submitted that the first three of these
cases can be explained by the fact that the company was
asserting a right against the other party to the litigation
which could be lost by acquiescence, and that when
acquiescence by a company is alleged, it is not necessary
to show that every member of it expressly or tacitly
assented to what was done. The fourth case (Re Bailey,
Hay & Co. Ltd.) (19) was one in which the company
sought to recover money paid to the 1 members in
question as a fraudulent preference, and they relied on
the invalidity of the winding up resolution as a defence,
clearly it is right that a member should not be able to
challenge the validity of a liquidation when he has
acquiesced in the liquidator's acts or has allowed it to
continue without drawing the liquidator's attention to the
defect of which he complains, but in the instant case the
court merely treated him as estopped from pleading the
invalidity as a defence, and it certainly did not rule that
the winding up resolution must be deemed valid against
all persons and for all purposes. The fifth case (Re
Bailey, Hay & Co. Ltd.) (19), it is submitted, was merely
an application of the principle that the law will presume
that acts have been done regularly and properly when
they appear to have been, and it is noteworthy that the
court said that it was entitled to infer that all, and not
merely some, of the members had assented to the
adoption of the informal document as the company's
articles." "
(Emphasis supplied.)
23. The decisions in M/S Mazda Theatres Pvt. Ltd. (supra) and S.M.
Holding Finance (P) Ltd. (supra) were relied upon in the decision of this
Court in Company petition No. 251 of 2000 titled as 'In Re: DCM Estates
and Infrastructure Limited' rendered on 30.09.2003. The relevant
paragraphs thereof are reproduced hereinunder:
"In the backdrop of this decision as well as on proper
interpretation of section 391(2) which is not mandatory,
but directory and there has been substantial compliance
that three-fourths value of the unsecured creditors have
agreed to and approved the scheme, the contention of the
objector that there was no proper compliance with the
Act and that the court has no jurisdiction to sanction the
scheme will have to be rejected. As already noticed,
once the scheme is held to be reasonable and proper,
merely because there is one objector to the approval of
the scheme, who is none other than the sole dissenter,
the court should not refuse to sanction the scheme. What
the court could do in such circumstances is to give
protection to the dissenter, by amending the scheme. The
above views of mine receive support from Palmer's
Company Law, volume 1, twenty-third edition, para 79-
13, which reads:
"...... The court will not, however, upset a
scheme for minor irregularities, as where
consent of a class has been subsequently
obtained, and where the necessary majority
of one class was absent when the petition
was presented, the court allowed a fresh
petition to be presented subsequently when
the necessary majority was later obtained,
without requiring the other class meetings
to be held again."
Thus not only the Karnataka High Court in the above
judgment, but also this Court in Mazola's (sic) Theatres
(P) Ltd. 's case (supra) have approved the consents given
outside a meeting held under Section 391 of the Act. The
view of Palmer on Company Law noticed above is also
to the effect that such minor irregularities of a
subsequent consent will not persuade the court to upset a
scheme which has subsequently obtained the requisite
majority's approval.
*********
(29) So far as plea of SHF that the majority in the
meeting of the secured creditors was manipulated is
concerned, subsequently during the proceedings in this
Court IFCI HDFC, ICICI Bank and Gruh Finance have
recorded their consents to the scheme. Whatever be the
merit of the SHF's plea in view of the position of law
laid down in SM Holding Finance Pvt. Ltd's case
(supra), such consents even given after the meeting are
valid as per the said judgment and consequently such
consents Constituting 93.11% in value and 5 out of 6 in
numbers comply with the statutory requirement.
Accordingly this plea of SHF is not sustainable."
(Emphasis supplied.)
24. A Single Judge of the Andhra Pradesh High Court, in Magnaquest
Solutions P. Ltd., In re, reported as (2008) 141 Comp Cas 728, whilst
sanctioning a scheme of amalgamation, proposed therein, between the
wholly owned subsidiary and its holding company, has made the following
observations:
"SCHEME OF ARRANGEMENT BETWEEN THE
COMPANY AND ITS MEMBERS: SHOULD A
MEETING OF THE CREDITORS BE HELD?
10. While the sole secured creditor of the transferor
company, M/s Centurian Bank of Punjab, for Rs. 44,021/-
and its unsecured creditors for Rs. 93,98,865/- have given
individual letters of consent to the scheme of
amalgamation, the sundry creditors, as reflected in the
Balance sheet under the head "current liabilities", have not.
11. A creditor, who has a debt due from the transferor
company, would, on the scheme of amalgamation being
sanctioned, be required to look not to the transferor for
repayment of his dues but to the transferee with whom he
neither had any dealings in the past nor privity of contract
prior to its substitution in the place of transferor. In a given
case, the transferee company may have negative assets or
may not have sufficient liquidity to repay the creditor, as
per the original terms agreed between him and the
transferor company. Whether he would be adversely
affected by being required to deal with the transferee, in
substitution of the transferor, is a matter of perception of
the creditor. (Zee Interactive Multi Media Ltd., In re (2002)
3 Comp Cas 733 (Bomb), Mayfair Limited and Zodiac
Clothing Co. Ltd. In re (2003) 4 Com. L.J. 102 (Bom),
Union of India v. Asia Udyog Pvt. Ltd. (1974) Vol.44
Com. Cases 359 (Delhi)).
12. On the question whether a meeting of the creditors is
statutorily required to be called for, even in a scheme of
arrangement between the company and its members, one
view is that the creditors are not entitled, as of right, to
participate in the process of consideration of sanction of the
scheme, as the Companies Act does not contain a specific
provision for notice being given to the creditors at any
stage either prior to the making of the order or subsequent
thereto, except in so far as the creditors may have notice of
it by public advertisement, (Asia Udyog Private Limited),
and that the legislature has cast a duty on the Court to
ascertain whether the Scheme affects the interests of the
creditors to such an extent that holding of their meeting is
essential and, if the Court were of the view that the
interests of the creditors are adversely affected, it could
refuse to sanction the scheme unless their consent has been
obtained. (Ansal Properties and Industries Ltd., In re
(1978) 48 Comp Cas 184 (Delhi)).
13. Another facet of this view is that, under Section 391 of
the Act, a compromise or arrangement is either between a
company and its creditors or between a company and its
members. An arrangement, in the nature of amalgamation,
is the result of an agreement between the amalgamating
company and its members, as well as a corresponding
agreement between the transferee company and its
members, and there is, therefore, no provision for the
participation of persons other than the members of the two
companies to vote on an arrangement of amalgamation
proposed between a company and its members. (Nav
Bharat Ferro Alloys In re (A.P.) Vol. 89 (1997) CC 285;
Mafatlal Industries Ltd., In re (1995) 84 Comp Cas 231
(Guj); Coimbatore Cotton Mills Ltd. and Lakshmi Mills
Co. Ltd., In re (1980)50 Comp Cas 623 (Madras);
Telesound India Ltd., In re (1983) 53 Comp Cas 927
(Delhi) and Nav Chrome Ltd., In re Vol. 89 1997 CC 285
(AP))
14. A slightly different view was taken by D.G. Karnik. J
of the Bombay High Court, in Re: ICICI Bank Limited
(2002) 104 Bom LR 399. To quote:
...I have my own doubt about the view taken by the Delhi
High Court in expressing that the creditors have no right to
participate in the process of consideration of the Scheme of
Arrangement between the Company and its
members. Section 391(1) gives a discretion to the Court to
convene a meeting of the creditors or any class of them.
The Court would exercise the discretion by convening a
meeting of creditors if the creditors are likely to be
adversely affected by an arrangement between the
Company and its members. Attending the meeting and
voting are steps of participation in the process of
consideration of the Scheme....
...I am of the firm view that while considering any Scheme
of Arrangement or Compromise proposed under Sections
391 to 394 of the Companies Act the Court is duty-bound
to consider the interests of all the creditors. What
importance should be given to the fact that the creditors are
likely to be affected would vary from case to case but the
Judge would certainly treat whether the creditors are
adversely affected or not as the relevant circumstance. How
then Court is to ascertain as to whether the creditors are
adversely affected? If the creditors have no right of hearing
at the time of hearing of the petition under Section 391 as
held by Delhi High Court and this Court, (I have my own
doubts about the correctness of this view) the only way of
ascertaining whether the creditors are affected or not would
be through the wishes of the creditors which may be
expressed by them in a meeting which the Court
undoubtedly is entitled to convene under Sub-section (1)
of Section 391. Therefore, the Court would exercise
discretion as a matter of course to convene meeting of the
creditors of the Company under Sub-section (1) of Section
391 unless the Court is prima facie satisfied that the
interests of the creditors are not likely to be adversely
affected by the Scheme. I am of the opinion that if an
anomaly, as pointed out in Telesound India Limited, by the
Delhi High Court exists in Section 391, the Courts would
not fold their hands and wait for the Legislature to provide
a cure, but would exercise their discretion under Sub-
section (1) of Section 391, almost in every case in which
creditors are likely to be affected, and convene a meeting
of the creditors and ascertain their wishes by looking not
only at the Resolutions passed in their meeting but looking
at the entire report of the Chairman of the meeting which is
expected to contain the details of the proceeding in brief
and the views expressed by the creditors in the meeting....
15. Can failure to hold a meeting of the creditors, in a
scheme of arrangement between the company and its
members, be justified on the ground that it is always open
to the Court, on a bare perusal of the audited financial
statements placed before it, to ascertain whether or not their
interests are safeguarded? Would that not amount to
usurping the rights of the creditors to decide for themselves
whether or not to approve the scheme? In the light of the
settled legal position that the Court has no power to usurp
the rights of the class of members or creditors to decide
whether or not to approve the scheme, if the class whose
interests are affected by the scheme, neither assent to nor
approve of it in a meeting held in accordance with the
statutory provisions and that the Court cannot confirm the
scheme even if it considers that the class concerned has
been fairly dealt with or that it would have approved the
scheme (Palmers Company Law), would the Court be
justified in examining the scheme and recording its
satisfaction that the interests of the creditors are not
affected, when these are matters which the creditors should
have been permitted to examine and decide for themselves
in a meeting to be called for this purpose?
16. If the jurisdiction of the Company Court, in examining
a scheme of arrangement, is peripheral, supervisory and not
appellate, since it does not have the expertise to delve deep
into the commercial wisdom of the members who have
ratified the scheme by the prescribed majority, (Miheer H.
Mafatla), on what basis would the Court decide that, in the
facts and circumstances of a given case, a meeting of the
creditors or a class of them should or should not be held to
ascertain whether they approve of the scheme or not?
17. Section 391(1), enables the Court, on the application of
a company or a creditor or a member of the company, to
order a meeting of the creditors/or the members "as the
case may be" to be held and conducted in such a manner as
the Court directs. Under Section 391(2), if a majority
representing 3/4th in value of the creditors/members agree,
in the meeting, for the compromise or arrangement, the
scheme, on its sanction by the court, would be binding on
all the creditors/members "as the case may be" and also on
the company. The expression "as the case may be" finds
place both in Sub-sections (1) and (2) of Section 391. If the
words "as the case may be" in Section 391(1) are construed
as requiring the Court to order the meeting of only the
members, in a Scheme of arrangement between the
Company and its members, and only a meeting of the
creditors in a Scheme of arrangement between the
Company and its creditors, should the expression "as the
case may be" in Section 391(2) then not be read as to bind
only the members where a meeting of the members is held
and only the creditors where a meeting of the creditors is
held? The safeguard in the provision, of 3/4 the members
or creditors in value voting in the meeting to approve the
scheme, is that the wishes of a majority of the class should
prevail, and the dissenting minority of 1/4th or less of the
class should not be permitted to derail the scheme of
arrangement unless, of course, the Court, on examining the
scheme, finds that the objection of the minority is justified.
If no meeting of the creditors is required to be held, in a
scheme of arrangement between the Company and its
members, then, in the absence of ascertaining whether
3/4th in value of the creditors approve the scheme or not,
would the Court be justified in statutorily imposing such a
scheme of arrangement on the creditors, even though their
consent has not been obtained or their wishes ascertained?
If it were held that not holding the meeting, and
ascertaining the wishes of the creditors, would result in the
scheme of arrangement not to bind them, would the very
purpose of sanctioning the scheme by the Court not be
defeated and approval of the scheme not be an exercise in
futility? If, on the other hand, the view, that a meeting of
the creditors/members must necessarily be held in all cases
irrespective of whether the scheme of arrangement is
between the Company and its members or the creditors, is
accepted would that not render the words "as the case may
be" in Section 391(1)mere surplusage? These are several
questions which need answers.
LIFTING THE CORPORATE VEIL: PERMISSIBLE IN
CASES WHERE A HOLDING COMPANY AND ITS
SUBSIDIARY ARE INVOLVED:
18. It is, however, not necessary for us to seek answers to
the aforesaid questions in the present case, as a wholly
owned subsidiary is sought to be amalgamated with its
holding company. Under Section 4(1)(a) and (b)(ii) of
the Companies Act, a company shall be deemed to be the
subsidiary of another only if that other controls the
composition of its Board of Directors or where the other
company holds more than half, in nominal value, of its
equity share capital. In the present case, the entire nominal
value of the equity share capital of the transferor is held by
the transferee.
19. The legal entity of the Corporation is separate from that
of its shareholders; it bears its own name and has a seal of
its own; its assets are separate and distinct from those of its
members; it can sue and be sued exclusively for its own
purpose; its creditors cannot obtain satisfaction from the
assets of its members; the liability of the members or
shareholders is limited to the capital invested by them.
Similarly, the creditors or the members have no right to the
assets of the Corporation. However the doctrine, that the
Corporation or a Company has a legal and separate entity
of its own, has been subjected to certain exceptions by the
application of the fiction that the veil of the Corporation
can be lifted and its face examined in substance. The
doctrine of the lifting of the veil has been applied in five
categories of cases: where companies are in the relationship
of holding and subsidiary (or sub-subsidiary) companies;
where a shareholder has lost the privilege of limited
liability and has become directly liable to certain creditors
of the company on the ground that, with his knowledge, the
company continued to carry on business six month after the
number of its members was reduced below the legal
minimum; in certain matters pertaining to the law of taxes
and stamps, particularly where the question of "controlling
interest" is in issue; in the law relating to exchange control;
and in the law relating to trading with the enemy where the
test of control is adopted. (Tata Engineering and
Locomotive Co. Ltd. v. The State of Bihar ; Palmer's
Company Law)
20. In DHN Food Distributors Ltd. v. London Borough of
Tower Hamlets (1976)3 All ER 462, Lord Denning quoted
with approval the statement in Gower's Company Law that:
there is evidence of a general tendency to ignore the
separate legal entities of various companies within a group,
and to look instead at the economic entity of the whole
group, and observed that "this group is virtually the same
as a partnership in which all the three companies are
partners". He called it a case of "three in one" - and,
alternatively, as "one in three....". Goff, L.J. said : "This is a
case in which one is entitled to look at the realities of the
situation and to pierce the corporate veil." The observations
of Shaw, L.J. were:
Why then should this relationship be ignored in a situation
in which to do so does not prevent abuse but would on the
contrary result in what appears to be a denial of justice?
21. Similarly in Harold Holdsworth & Co. (Wakefield) Ltd.
v. Caddies (1995) 1 All ER 725 it was argued that the
subsidiary companies were separate legal entities each
under the control of its own board of directors, that in law
the board of the holding company could not assign any
duties to anyone in relation to the management of the
subsidiary companies, and that, therefore, the agreement
cannot be construed as entitling them to assign any such
duties to the respondent. The argument was rejected by
Lord Reid with the observation: "This is too technical an
argument", "This is an argument in re mercatoria, and it
must be construed in the light of the facts and realities of
the situation."
22. The aforesaid judgments, in which the corporate veil
was lifted, were quoted with approval by the Supreme
Court in Delhi Development Authority v. Skipper
Construction Co. (P) Ltd. and New Horizons Limited v.
Union of India . In State of U.P. v. Renusagar Power Co.
the Supreme Court lifted the veil to hold that Hindalco, the
holding company, and Renusagar Power Co., its subsidiary,
should be treated as one concern and the power plant of
Renusagar must be treated as the own source of generation
of Hindalco and Hindalco would be liable to payment of
electricity duty on that basis. It was observed:
...It is high time to reiterate that in the expanding horizon of
modern jurisprudence, lifting of corporate veil is
permissible. Its frontiers are unlimited. It must, however,
depend primarily on the realities of the situation.... The
horizon of the doctrine of lifting of corporate veil is
expanding....
23. Lifting the corporate veil, in cases where a wholly
owned subsidiary is amalgamated with its holding
company, would establish that the creditor is, and has
always been, dealing with the transferee company de-facto
though he is the creditor of the transferor company de-jure.
In such limited cases of amalgamation, as the creditors'
rights cannot be said to be affected, holding of a meeting to
ascertain their views, and obtain their consent to the
scheme of amalgamation, may not be necessary."
25. The legal position that emerges from a conspectus of the above
decisions can be summarized as follows:
i. The Court may dispense with the requirement of convening
meetings of members and/or creditors or a class thereof, in
view of the circumstance that a scheme is not being proposed
to members and/or creditors or a class thereof.
ii. The Court may dispense with the requirement of convening
meetings of the members and/or creditors of the holding
company in the event a wholly owned subsidiary is being
amalgamated into its holding company and no variation of
rights is being caused to such members and/or creditors of the
holding company.
iii. The Court may dispense with the requirement of convening
meetings of creditors or a class thereof, of the wholly owned
subsidiary, in the event a wholly owned subsidiary is being
amalgamated into its holding company and the rights of
creditors of wholly owned subsidiary remain unaffected
therein.
iv. The Court may exercise its discretion to dispense with the
requirement of convening meetings of members and/or
creditors, or a class thereof, in view of the consent obtained
from majority in number and three-fourths in value of such
members and/or creditors, or a class thereof, as the case may
be, in writing to the proposed scheme.
26. In order to further amplify the reasons underlying the dicta in the
above decisions, it would first be convenient to reproduce sub-sections (1)
and (2) of Section 391 of the Act, which read as hereunder: -
"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 creditors, or members,
or class of members as the case may be, present and
voting either in person or, where proxies are allowed
under the rules made under section 643, by proxy, at the
meeting, agree to any compromise or arrangement, the
compromise or arrangement shall, if sanctioned by the
Court, be binding on all the creditors, all the creditors of
the class, all the members, or all the members of the
class, as the case may be, and also on the company, or,
in the case of a company which is being wound up, on
the liquidator and contributories of the company:
Provided that no order sanctioning any compromise or
arrangement shall be made by the Court unless the Court
is satisfied that the company or any other person by
whom an application has been made under sub-section
(1) has disclosed to the Court, by affidavit or otherwise,
all material facts relating to the company, such as the
latest financial position of the company, the latest
auditor's report on the accounts of the company, the
pendency of any investigation proceedings in relation to
the company under sections 235 to 251, and the like.
************** "
27. Section 391 of the Act is a complete code in itself and acts as a
'single window clearance' system, so to speak in order to safeguard the
rights of parties, members and creditors, or any class thereof, of
companies; and to ensure that they are not put to any avoidable,
unnecessary and cumbersome procedures in order to effectively implement
such a scheme of compromise or arrangement proposed by the companies.
It vests wide amplitude of powers in the Court to approve a scheme which
is for the benefit of the companies and the members and creditors thereof.
28. A bare reading of the provision of sub-section (1) of section 391 of
the Act reveals that the expression that has been used therein is 'may'. As a
general principle of interpretation of statutes, the expression 'may', as used
in sub-section (1) of section 391 of the Act, is permissive and operative to
confer discretion. The intent of the Legislature is to empower the Court,
with wide powers in order to approve the Scheme whilst ensuring that the
rights of members and creditors of the company proposing the scheme are
protected.
29. Therefore, whilst adjudicating an application pertaining to a
compromise or arrangement proposed, between a company and its
members; or between a company and its creditors, the Court has been
vested with the power under the provision of sub-section (1) of section 391
of the Act, to direct that meetings of members, creditors, or a class thereof,
as the case may be, be called, held and conducted. Such meetings can be
called, held and conducted in any manner as directed by the Court, in order
to enable the members, creditors, or a class thereof, to consider, and if
thought fit, to approve, with or without modifications, the proposed
scheme.
30. In light of the settled principles of interpretation of statutes, it is
trite to state that there can be no manner of doubt that the Court may,
prima facie, dismiss the application under the provision of sub-section (1)
of section 391 of the Act on various grounds, including the scheme being
opposed to public policy and public interest; prejudicial to any member
and/or creditor or a class thereof; unconscionable.
31. Therefore, it would not be incorrect to conclude that this judicial
discretion conferred on the Court under the provision of sub-section (1) of
section 391 of the Act may also be exercised in a manner so as to dispense
with the requirement of convening meetings of members and/or creditors
or a class thereof, in certain circumstances.
32. Thus, the discretion so conferred upon the Court under the provision
of section 391(1) can be summarized as follows:
i. Upon taking a prima facie view, the Court may dismiss the
application, proposing a scheme of compromise or
arrangement between a company and its creditors or any class
thereof; or between a company and its members or any class
thereof, on various grounds; OR
ii. Direct convening of meetings of the members and/or creditors
or any class thereof, of the company, to whom a scheme of
compromise or arrangement is proposed, in order to enable
such members and creditors to consider and if thought fit,
approve, with or without modification, such s scheme; OR
iii. Dispense with the requirement of convening meetings of
members and creditors or any class thereof, of the company
proposing a scheme of compromise or arrangement.
33. However, it would be trite to state that when a statute confers
discretionary power on the Court, such power has to be exercised
judicially, as and when an occasion arises, to further the ultimate aim and
objective of the statute which confers such discretion; and the specific
provision therein. Therefore, ordinarily discretion must be brought to bear
on every case as and when it comes up before the Court.
34. Thus, in order to further elaborate the circumstances in which the
Court may exercise its judicial discretion to dispense with the requirement
of convening meetings of members and/or creditors, or a class thereof, of
the applicant companies, it would be necessary to advert to the facts of the
present case. In the present case, the proposed scheme which is the subject
matter of the present application is one of amalgamation between a wholly
owned subsidiary and its holding company. The expressions 'wholly
owned subsidiary' and 'holding company' have been defined under the
provisions of section 4 of the Act. Section 4 is extracted hereinbelow for
the sake of convenience:
"4. Meaning of "holding company" and "subsidiary".
(1) For the purposes of this Act, a company shall, subject
to the provisions of sub- section (3), be deemed to be a
subsidiary of another if, but only if,-
(a) that other controls the composition of its Board of
directors; or
(b) that other-
(i) where the first-mentioned company is an existing
company in respect of which the holders of preference
shares issued before the commencement of this Act have
the same voting rights in all respects as the holders of
equity shares, exercises or controls more than half of the
total voting power of such company;
(ii) where the first-mentioned company is any other
company, holds more than half in nominal value of its
equity share capital; or
(c) the first-mentioned company is a subsidiary of any
company which is that other's subsidiary.
Illustration: Company B is a subsidiary of Company A,
and Company C is a subsidiary of Company B. Company
C is a subsidiary of Company A, by virtue of clause (c)
above. It Company D is a subsidiary of Company C,
Company D will be a subsidiary of Company B and
consequently also of Company A, by virtue of clause (c)
above; and so on.
(2) For the purposes of sub-section (1), the composition of
a company' s Board of directors shall be deemed to be
controlled by another company if, but only if, that other
company by the exercise of some power exercisable by it
at its discretion without the consent or concurrence of any
other person, can appoint or remove the holders of all or a
majority of the directorships; but for the purposes of this
provision that other company shall be deemed to have
power to appoint to a directorship with respect to which
any of the following conditions is satisfied, that is to say-
(a) that a person cannot be appointed thereto without the
exercise in his favour by that other company of such a
power as aforesaid;
(b) that a person's appointment thereto follows necessarily
from his appointment as director, managing agent,
secretaries and treasurers, or manager of, or to any other
office or employment in, that other company; or
(c) that the directorship is held by an individual nominated
by that other company or a subsidiary thereof;
(3) In determining whether one company is a subsidiary of
another-
(a) any shares hold or power exercisable by that other
company in a fiduciary capacity shall be treated as not
held or exercisable by it;
(b) subject to the provisions of clauses (c) and (d), any
shares held or power exercisable-
(i) by any person as a nominee for that other company
(except where that other is concerned only in a fiduciary
capacity); or
(ii) by, or by a nominee for, a subsidiary of that other
company, not, being a subsidiary which is concerned only
in a fiduciary capacity; shall be treated as held or
exercisable by that other company;
(c) any shares held or power exercisable by any person by
virtue of the provisions of any debentures of the first-
mentioned company or of a trust deed for securing any
issue of such debentures shall be disregarded-,
(d) any shares held or power exercisable by, or by a
nominee for, that other or its subsidiary[ not being held or
exercisable as mentioned in clause (c); shall be treated as
not held or exercisable by that other, if the ordinary
business of that other or its subsidiary, as the case may be,
includes the lending of money and the shares are held or
the power is exercisable as aforesaid by way of security
only for the purposes of a transaction entered into in the
ordinary course of that business.
(4) For the purposes of this Act, a company shall be
deemed to be the holding company of another if, but only
if, that other is its subsidiary.
(5) In this section, the expression "company" includes any
body corporate, and the expression "equity share capital"
has the same meaning as in sub- section (2) of section 85.
(6) In the case of a body corporate which is incorporated
in a country outside India, a subsidiary or holding
company of the body corporate under the law of such
country shall be deemed to be a subsidiary or holding
company of the body corporate within the meaning and for
the purposes of this Act also, whether the requirements of
this section are fulfilled or not.
(7) A private company, being a subsidiary of a body
corporate incorporated outside India, which, if
incorporated in India, would be a public company within
the meaning of this Act, shall be deemed for the purposes
of this Act to be a subsidiary of a public company if the
entire share capital in that private company is not held by
that body corporate whether alone or together with one or
more other bodies corporate incorporated outside India."
35. Thus, in view of the foregoing and on a perusal of the record in the
present case, the Transferor Company is the wholly owned subsidiary of
the Transferee Company.
36. Discussing the nature of a scheme of amalgamation, in Magnaquest
(supra), the Andhra Pradesh High Court further observed as hereunder:
"33. In Telesound India Ltd., In Re, [1983] 53 Comp Cas 926, the Delhi
High Court observed (page 942):
"...Amalgamation of a company with another or an
amalgamation of two companies to form a third is
brought about by two parallel schemes of arrangements
entered into between one company and its members and
the other company and its members and the two separate
arrangements bind all the members of the companies and
the companies when sanctioned by the court.
Amalgamation is, therefore, an absorption of one
company into another or merger of both to form a third
which is not a mere act of the two companies or their
members but is brought about by virtue of a statutory
instrument and to that extent has statutory genesis and
character, and to that extent it is distinguishable from a
mere bilateral arrangement to merge or join in a
common endeavour, an undertaking or enterprise. (J.K.
(Bombay) P. Ltd. v. New Kaiser-I-Hind Spg. & Wvg.
Co. Ltd. (1970) 40 Comp Cas 689 (SC). Once the court
sanctions the amalgamation, the amalgamation is made
effective and binding by virtue of statutory power, inter
alia, by the transferor to the transferee-company of the
whole or any part of the undertaking, property rights
and liabilities of the transferor-company by virtue of the
provisions of Section 394 of the Act, which are intended
to facilitate the process of amalgamation: Sailendra
Kumar Ray v. Bank of Calcutta Ltd. (1948) 18 Comp
Cas 1 (Cal). The expression "property" and "liabilities",
which can be transferred on amalgamation,
under Section 394(1) have been defined in very wide
terms by Sub-section (4)(a) of that section, so as to
include "rights and powers of every description" and
"duties of every description" respectively. The
expression "property" would, therefore, be wide enough
to include rights under a contract, including a contract
of tenancy. These are co-extensive with the property and
right which the transferor-company has in relation to its
assets, but would not be wider than what the transferor-
company was entitled to enjoy. The rights, property, as
indeed the liabilities of the transferor-company, become
the rights, property and liabilities of the transferee-
company by virtue of the order of vesting made by the
court consequent on amalgamation. It is neither an
assignment of right or property, nor an assignment of
property by the company. It is the transfer of rights,
property and liabilities along with the company itself
and it is only a result of confusion of thought that it
could be described as an assignment by the company to
another-person, which is independent and distinct from
the company. Such a notion ignores the peculiar position
of amalgamation in company law and its true legal
incident. It is for historical reasons that the device of
amalgamation was built into the company law for
facilitating the merger of companies, inter alia, with a
view to help restoration of sick units to health, better,
more effective and economical management of the
corporate sector to ensure continued production,
increased employment avenues and generation of
revenues. Section 72-A of the I.T. Act is one of the
incentives for this kind of absorption of one company
into another. On amalgamation the transferor-company
merges into the transferee-company shedding its
corporate shell, but for all purposes remaining alive and
thriving as part of the larger whole. In that sense the
transferor -company does not die either on
amalgamation or on dissolution without winding up
under Sub-section (1) of Section 394. It is not wound up
because it has merged into another. Winding-up is
unnecessary. It is dissolved not because it has died, or
ceased to exist, but because for all practical purposes, it
has merged into another forming part of one corporate
shell. The dissolution is the death of its independent
corporate shell, because a company cannot have two
shells. It is, therefore, dissolved because the independent
shell or corporate name is superfluous."
37. A reading of the above extract makes it clear that ordinarily, by
virtue of a scheme of amalgamation, the Transferor Company merges its
corporate identity into the corporate identity of the Transferee Company.
All the properties and liabilities of the Transferor Company are transferred
to the Transferee Company upon the scheme of Amalgamation coming
into effect.
38. In case of a wholly owned subsidiary amalgamating into its holding
company, the wholly owned subsidiary merges its corporate identity into
the corporate identity of its holding company. In order to ascertain whether
the rights of the creditors of the wholly owned subsidiary would be
affected by the proposed scheme, it becomes necessary to pierce the
corporate veil of the wholly owned subsidiary and determine whether the
creditors of the wholly owned subsidiary are, and have always been,
dealing with the holding company de-facto though they are the creditors of
the wholly owned subsidiary de-jure. [Ref: Magnaquest (supra)]
39. Ordinarily, seen from the lens of the holding company, a scheme of
amalgamation is essentially a contract which does not affect the creditors
or members of the holding company in any manner. Therefore, the scheme
is not required to be sanctioned from the point of view of the holding
company, under Section 391 of the Act. [Ref: Sharat Hardware industries
(supra)]
40. However, if the Court, on examination of the record and the
proposed scheme, is of the view that the scheme is found to have some
flaws/drawbacks, inasmuch as, whereby the rights of the members and/or
creditors or a class thereof, of the holding company stand varied, it would
require the approval of such members and/or creditors, at a meeting or
meetings held in accordance with Section 391 of the Act and would also
require the sanction of the Court.
41. In the present case, by virtue of the proposed scheme, the entire
business and undertaking of the Transferor Company is being taken over
and transferred to the Transferee Company. Further, upon the proposed
scheme coming into effect, as consideration, there will be no issuance of
new shares by the Transferee Company to the shareholders of the
Transferor Company in view of the circumstance that the latter is the
wholly owned subsidiary of the former.
42. Therefore, in effect, in the instant case, on the proposed scheme
coming into effect, no variation in the rights of the equity shareholders of
the Transferee Company shall be caused. Resultantly, judicial discretion
can be exercised to dispense with the requirement of convening the
meetings of the equity shareholders of the Transferee Company, in the case
of a wholly owned subsidiary being amalgamated into the Transferee
Company, on the ground that no variation in rights thereof is contemplated
by way of the proposed scheme.
43. In so far as the creditors of the Transferee Company are concerned,
no variation in their rights is being proposed by way of the proposed
scheme. Thus rights of the creditors of the Transferee Company, pre and
post amalgamation, as against the Transferee Company would not stand
varied.
44. In so far as the requirement of convening a meeting of the unsecured
creditors of the Transferor Company is concerned, by lifting the corporate
veil, in the present case, of wholly owned subsidiary being amalgamated
with its holding company, it would be established that the creditors of the
Transferor Company are, and have always been, dealing with the
Transferee Company de-facto though they are the creditors of the
Transferor Company de-jure.
45. Further, it has been noted that, upon the proposed scheme coming
into effect, all the existing liability, debts, duties, obligations, inter alia, of
the Transferor Company shall in any event stand transferred to the
Transferee Company. Therefore, no variation in the rights of the unsecured
creditors of the Transferor Company is proposed.
46. Hence, in effect, it could not be said that any 'compromise or
arrangement' is being offered by way of the proposed scheme to the
creditors or shareholders of the Transferee Company; or the unsecured
creditors of the Transferor Company. Therefore, in view of this
circumstance and the foregoing discussion, the requirement of convening a
meeting of the creditors and equity shareholders of the Transferee
Company; and the unsecured creditors of the Transferor Company, to
consider, and if thought fit, approve, with or without modifications, the
proposed scheme can be dispensed with. Directed accordingly.
47. It has been noted that the sole equity shareholder of the Transferor
Company is the Transferee Company, the former being the wholly owned
subsidiary of the latter. The sole equity shareholder/Transferee Company
has given its written consent to the proposed scheme and the same is on
record. Therefore, the requirement of convening meeting of the sole equity
shareholder of the Transferor Company to consider and if thought fit, to
approve, with or without modifications, the proposed scheme is also
dispensed with.
48. Since the Transferor Company has no secured creditors, therefore
the question of convening a meeting thereof does not arise. Ordered
accordingly.
49. In view of the circumstance that the requirement of convening
meetings of the creditors and members of the Applicants has been
dispensed with hereinabove; the requirement of giving individual notices
in Form No. 35 of the Company (Court) Rules, 1959 and publication of
notices of the meetings of the shareholders and creditors of the Applicants
is also dispensed with. Directed accordingly.
50. Resultantly, in view of the foregoing discussion with regard to the
legal position and the determination upon the facts, the issue that arose for
consideration stands answered in the affirmative.
51. The application stands allowed in the aforesaid terms and is
accordingly disposed of.
SIDDHARTH MRIDUL, J
JANUARY 16, 2017
ap/sb/mk
