MERGER AND AMALGAMATION

MERGER AND AMALGAMATION

1. Meaning of 'merger'

A merger has been defined as an arrangement whereby the assets of two or more companies become vested in, or under the control of one company, which may or may not be one of the original two companies. The merger may also involve more than two companies. In the above instance after merger the transferor company (ies) will cease to exist and the transferee company will takes over and absorbs the assets, liabilities and business of the transferor company (ies) within itself.

“Meaning of Amalgamation”

The term amalgamation has not been defined under the Companies Act. Amalgamation is an arrangement or reconstruction by a legal process by which two or more companies joined together to form a new company and as a consequence the amalgamating companies loses their existence and their shareholders becomes the shareholders of the new company or the amalgamated company. In the case of an amalgamation, a new company may come into existence or an old company may survive while amalgamated company may lose its existence. As per the Accounting Standard 14, issued by the ICAI, 'amalgamation' means an amalgamation pursuant to the provisions of the Companies Act or any other statute, which may be applicable to companies. Section 2(1B) of the Income-tax Act has defined the term 'amalgamation' and has stipulated three conditions:—

(a) all the property of the amalgamating company(ies) should vest with the amalgamated company;

(b) all the liabilities of the amalgamating company(ies) should become the liabilities of the amalgamated company; and

(c) the shareholders holding not less than 75% in value or voting power in the amalgamating company (other than the shares hold by the amalgamated company or its subsidiary) should become shareholders of the amalgamated company.

3. Meaning of 'compromise'

The term 'compromise' signifies a dispute between a company and its creditors and others. Section 391 provides a method by which a compromise agreed to by the creditors or any of them and the company may be placed before the Court for sanction.

4. Meaning of 'arrangement'

The term 'arrangement' is of wide importance and includes re organisation of share capital and may also mean modification of the rights. Where a rearrangement includes a reduction of capital, the procedure for reduction of capital has also to be followed unless the High Court orders otherwise. Mostly a compromise or arrangement may be internal to a company. But this may also concern other companies when a scheme of compromise or arrangement in one company may precede the amalgamation process with another company or in an arrangement some property and/or rights may be transferred by one company to another for valuable consideration.

5. The word 'arrangement' has wider scope than 'compromise'

The meaning of words 'arrangement' and 'compromise' under section 390(b) of the Act are different. While 'compromise' presupposes the existence of a dispute, nothing like that is implied in the word 'arrangement'. The word 'arrangement' is of wider importance than 'compromise'. 'Compromise' implies the existence of a dispute, which it seeks to settle. Reorganisation of share capital by consolidation of different classes of shares or division of shares into different classes of shares amounts to an arrangement [Hindustan Commercial Bank Ltd v General Electric Corporation AIR 1960 Cal 637]. The Supreme Court has stated that "Generally, where only one company is involved in a change and the rights of the shareholders and creditors are varied, it amounts to reconstruction or reorganization or scheme of arrangement." [Saraswati Industrial Syndicate Ltd v CIT (1991) 70 Comp Cas 184 (SC)]

6. Companies eligible to enter into a scheme of compromise or arrangement

Any company can amalgamate with another company. According to section 2(10) "company" means a company as defined in section 3. Section 3 provides that "company" means a company formed and registered under this Act or an existing company as defined in clause (ii).

6.1 Company means a company liable to be wound up under the Companies Act

However, according to section 390(a), in sections 391 and 393, 'company' means any company liable to be wound up under the Companies Act. The expression 'company' used in section 390(b) applies to all companies, which can be wound up; it is not confined only to the companies, which are presently in a position to be wound up.

6.2 Section 25 company may be amalgamated into manufacturing company

Amalgamation of a company licensed under section 25 of the Companies Act with a commercial, trading or manufacturing company could be sanctioned under sections 391/394. [Re, Sir Mathurdas Vissanji Foundation (1992);] There is nothing in law to prevent a company carrying on business in shares from amalgamating with one engaged in transport. [EITA India Ltd v Narayan Prasad Lohia (1997)] The primary object of amalgamation of one company with another is to facilitate reconstruction of the amalgamating companies. [W A Beardsell & Co Private Ltd v State (1968) 1]

Whether there is a need to file a separate petition by the transferee company where the transferor company is 100% subsidiary of Transferee Company?

In Sanathanalaxmii Investments (P.) Ltd, in re (2006) 65 SCL 406, the Regional Director among other things, pointed out that only one application by the transferor company had filed, the Court held that in the judgment of Andhra Pradesh High Court in re Andhra Bank Housing Finance Lid., the application of the scheme of amalgamation can even be permitted at the instance of the transferor company, which is 100% subsidiary of the transferee company and that there is no need to file a separate petition by the transferee company. The court allowed the proposed scheme of amalgamation under sections 391 to 394 of the Companies Act, 1956 although only the transferor company had made the application as it was a wholly owned subsidiary of the transferee company.

Implications of the term 'unsecured creditors who may have filed suits or obtained decrees shall be deemed to be of the same class as other unsecured creditors'

Under section 390(c) of the Act the term 'unsecured creditors who may have filed suits or obtained decrees shall be deemed to be of the same class as other unsecured creditors' is quite important. Obtaining decrees or filing suits by an unsecured creditor does not make him a secured creditor. Unsecured creditors who have obtained decrees will be treated at par with those who are yet to obtain decree. If an award does not indicate that any specific liability has been created against any one of the assets of a company, it can be taken as one in the nature of a mere money decree, in which case the creditor can only be taken as an unsecured one [Syndicate Bank v Official Liquidator AIR 1985 Del 256 and Suresh (B.) v Andhra Pradesh Mahesh Cooperative Urban Bank Ltd.] However, where the decree has already been executed, the unsecured creditors will not be clubbed with those who are yet to obtain decrees. [Seksaria Cotton Mills Limited v Naik (A.E.) (1967) 37 Comp Cas 656 (Bom)]

11. Debenture holder cannot claim position different from that of other secured creditors?

In Simbholi Sugar Mills Ltd., the Court held that so long the procedure has been followed and the scheme approved by the majority is bona fide, just and fair, and violative of any provision of law and neither unconscionable nor contrary to public policy, the court shall pierce the veil if apparent corporate purpose underlying the Scheme. Debenture holders do not enjoy different position other than the secured creditor. All the secured creditors enjoy the same status and rights and constitute one class. The scheme does not require unanimity or any debenture holder in favor, of any debenture holder and applies equal to all secured creditors including the debenture holders.

12. Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act) having

overriding effect on Companies Act

The Bombay High Court has held that the Recovery of Debts Due to Bank and Financial Institutions Act, 1993 (RDB Act) is a special statute and will have overriding effect over the provisions of the Companies Act. The Bombay High Court further held that it has no jurisdiction to adjudicate upon a claim of a secured creditor or sanction a scheme, which has an effect of varying the terms of contracts between the company and its secured creditors so as to be binding on the Debt Recovery Tribunal formed under the RDB Act. The sanctioned scheme of arrangement under section 391 was made binding on only those secured creditors who had not opposed the scheme at the court convened meeting. [IMP Powers Ltd., In re (2007) 77 SCL 144 (Bom)]

13. Mere fact of violation of provisions of sections 235 to 351 by itself does not invalidate or warrant Court refusing to sanction a scheme of arrangement

Mere fact of violation of provisions of sections 235 to 351 by itself does not invalidate or warrant Court refusing to sanction a scheme of arrangement under sections 391 to 394, and it is only those violations which adversely reflect upon or affect scheme would persuade Court not to sanction scheme. Petitioner companies filed petition for sanction of scheme of their amalgamation. Equity shareholders and only secured creditor, i.e., PNB, of transferor-company had consented to proposed scheme. Shareholders and creditors of transferee-company had also approved proposed scheme. However, Regional Director stated that PNB had granted a loan to transferor-company which was secured, inter alia, by a guarantee issued by transferee-company and that ‘A’ and ‘K’ being directors of both transferor and transferee companies, guarantee was issued contrary to and in violation of section 295 and same should be brought to notice of shareholders and creditors. According to Regional Director, in view of said violation, ‘A’ and ‘K’ had, by virtue of provisions of section 283(1)(b), vacated office as directors and, therefore, resolution, dated 20-11-2007 of Board of Directors of transferee company proposing said scheme was void because of lack of requisite quorum. Since there was sufficient material before members and shareholders in regard to guarantee issued by transferee-company to PNB and details of Directors of companies to have enabled them to take an informed decision as to whether scheme ought to or ought not to have been sanctioned, there was no reason to compel facts regarding violation under section 295 to be placed before member or creditors again. Therefore, resolution dated 20-11-2007 could not be held to be void and proposed scheme of amalgamation was to be sanctioned. [Niulab Equipment Co. (P.) Ltd. In re (2009) 91 SCL 387 (Bom)]

MERGER OR AMALGAMATION UNDER THE COMPANIES ACT

The Scheme of compromise and arrangement under section 391 of the Companies Act, 1956 is a complete code in itself. The section provides for all matters, which the High Court has or has not to consider and the types and conditions under which it has to exercise its powers. The scheme can be approved and implemented under section 391 without recourse to other provisions of the Act. The object of section 391 of the Act is to enable financially weak companies, which are liable to be wound up under the Act, to reach compromise and arrangement between the creditors and members, to revive business and become financially viable. The amended sections 390 to 394 provide set of provisions, which specially deals with the amalgamation of companies and provide procedures through which the proposals of amalgamation, merger, reconstruction, compromise and arrangement may be placed before the High Court for sanction.

Salient features

Meaning of expression 'company liable to be wound up under this Act', provisions under section

390(a) of the Act is wider than "company" and includes even unregistered company under section 582 of the Act. [Malayalam Plantations India Limited & Harrison & Crossfields India Limited (1985) 2 Comp LJ 409 (Ker)] For example, it includes companies incorporated outside India, having business operations in India under section 591 of the Act. Simply stated, the words 'liable to be wound up' means a company, which on appropriate grounds, may be wound up. [Khandelwal Udyog Ltd. and Acme Manufacturing Ltd]

The provisions in section 391 can be availed of even to revive a company, which is already in the

process of winding-up. The salient features of sections 391 and 394 are:—

(a) There should be a scheme of compromise or arrangement for restructuring or amalgamation.

(b) An application must be made to the High Court for direction to hold meetings of shareholders/ creditors.

(c) The High Court may order a meeting of shareholders/creditors.

(d) Holding of meeting of shareholders/creditors as per the High Court's order.

(e) Scheme of compromise or arrangement must be approved by 3/4th in value of creditors, class of creditors, members, class of members.

(f) Another application must be made to the High Court sanctioning the scheme of compromise or arrangement.

(g) An approved scheme duly sanctioned by the High Court is binding on all the shareholders/ creditors/company(ies).

(h) The High Court may stay the commencement or continuation of any suit or proceeding against the company after application have been moved in the Court.

(i) The Court's order is appealable to the Court empowered to hear appeals from the decision of that Court. Therefore, amalgamation can be effected by any one of the following ways:—

(a) Transfer of undertaking by the order of the Court. [Section 394]

(b) Purchasing of shares of one company by another company — section 395 of the Companies Act, Compliance of section 372A and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

(c) Amalgamation of companies in the national interest. [Section 396]

(d) Amalgamation of companies under section 494.

Widest discretion to the Tribunal

A National Company Law Tribunal has been proposed to be set up by the Companies (Second

Amendment) Act, 2002. The powers and jurisdiction presently being exercised by various bodies viz, CLB or BIFR or High Courts will be consolidated and entrusted to the Tribunal. Thus, multiplicity of litigation before various courts or quasi-judicial bodies or forums regarding revival or rehabilitation or merger or amalgamation or winding up will be avoided as all these matters will be heard and decided by the Tribunal. The Tribunal shall work through Benches. There shall be ten special Benches, which will deal with the matters relating to revival or reconstruction or rehabilitation or winding up of companies. All the parties will be bound by the Tribunal's orders and in case of non-availability of a workable proposal for revival or rehabilitation, etc., the Tribunal can decide the matter on merits including introduction of its own scheme. This will reduce the entire process, which is presently taking several years in winding up of the companies. As a result of this enactment everyone including workers, creditors, investors and the economy as a whole will stand to benefit. Sections 391 to 394 intended to be in the nature of a system of single window clearance so that the parties are not put to avoidable, unnecessary and cumbersome procedure of making separate applications to the Tribunal for various other alterations or changes which might be needed effectively to implement the sanctioned scheme whose overall fairness and feasibility has been judged by the Tribunal. However, the constitutionality of the Tribunal which was challenged in various courts and ultimately it was referred to the constitution bench of the Supreme Court which though has upheld the constitutionality of the Companies (Second Amendment) Act, 2002 but at the same time has shown reservations with regard to the provisions of Parts IB and IC. [Union of India v Gandhi (R) (2010) 100 SCL 142 (SC)]

Jurisdiction of the High Court

The High Court having jurisdiction of the place at which the registered offices of each of the companies are situated is the appropriate Court for hearing a petition under section 391. Where two companies are parties for amalgamation and they are situated in two different States, each company should move a petition before the respective High Court..

Sanction of a scheme of amalgamation of the transferor company, a subsidiary of the transferee company, a body corporate under the Banking Companies Acquisition Act, is permissible under section 391 to 394

In the case of sanction of a scheme of amalgamation between the companies, what is essential is a transferor company and transferee company. Section 394(4)(b) defines transferee company, as not to include any company other than a company under the Act while the transferor company to include any body corporate, whether company within the meaning of the Act or not. A careful examination of the definition of a body corporate under sub-section (7) of section 2, reveals that, it is a wider term than the term 'company' which takes into fold any foreign company, a corporate constituted under any special law of India and the body corporate, a company defined under the Act, while excluding a corporation or a cooperative society. [Vibank Housing Finance Ltd., In re (2006) 72 CLA 341 (Kar)]

Section 42 of the Companies Act cannot be read in context of amalgamation of companies

Section 42 of the Companies Act provides that a subsidiary company cannot hold shares or be a

member of its holding company. Section 42(3) provides an exception to the general rule and permits a subsidiary company to continue as member of the holding company. Existing shareholding of the subsidiary company in the holding company will be protected under section 42(3) of the Act but the subsidiary company will not have any voting rights. It was held in the case of Ashim Investment Co. Ltd., that power of the court under section 391 to 394 is not curtailed and is not subject to section 42 of the Act.

Single window clearance in a scheme of arrangement not applicable for issue of further shares

Single window clearance contemplated in a scheme of arrangement will apply only if the alteration is restricted to the structural changes of the company for implementation of the Scheme and the issuance of further shares to the promoter company by conversion of preference shares and bonds for the purposes of increasing the share capital is not such alteration and the procedure laid down under Section 81(1A) of the Companies Act, 1956 has to be followed. [J. K. Agri Genetics Ltd. v Florence Alumina Ltd

Acceptance of combined petition

Where both the companies are situated in the same State, a joint application may be made by the

transferor and the transferee company. [Mohan Exports India Ltd. v Tarun Overseas (P) Ltd.

] But it may also be stated here that the Karnataka High Court is reported to have stated the opposite view that even where two companies are situated in the same State, each company should file a separate petition. [Electro Harmonium (P) Ltd. v Electric Materials Co. (P) Ltd.  It was held in the case of Larsen & Toubro Ltd., that there could be a combined petition for demerger of one of the undertakings of the transferor company, for the transfer of the demerged undertaking of a subsidiary and for the reduction in the capital of the transferor company.

Public interest

Section 394 casts an obligation on the Court to be satisfied that the scheme for amalgamation or merger is not contrary to public interest. In amalgamation of companies, the Court have evolved the principle of "prudent business management test" or that the scheme should not be a device to evade law. Where the merger is with a subsidiary of a foreign company, then the economic interest of the country may have to be given precedence. The jurisdiction of the Court in this regard is comprehensive. [Hindustan Lever Employees Union v Hindustan Lever Ltd.

PROCEDURAL FORMALITIES OF MERGER OR AMALGAMATION

Merger or amalgamation under a scheme of arrangement as provided under sections 391 to 394 of the Companies Act, 1956 is the most convenient and common for obtaining a complete merger or amalgamation between two companies. There shall be active involvement of the Court and an amalgamation shall be complete only after the sanction of the Court under section 394(2) and takes effect when such order of the Court is filed with the Registrar.

Object clause in the Memorandum of Association for amalgamation

Section gives power to the Court to sanction an arrangement even though there may be no specific clause in the object clause of the Memorandum of Association.

Single application under section 391 to 394 is enough for all the alterations in the Memorandum and Articles

Amalgamation under section 391 to 394 does not require number of applications under the Companies Act, 1956 for various alterations in the Memorandum and Articles of Association because section 391 to 394 is in itself a complete code and can be incorporated in the Scheme itself, therefore company not required to make separate application under Companies Act, 1956 for each alteration.

Sanction of Court under section 391 to 394 constitutes single window clearance for alteration in the Object Clause

In the case of Motorola India (P) Ltd., , it was pointed out that the provisions of the sections 391 to 394 of the Act is a complete code in itself and the sanction therein constitutes single window clearance under the Act. In view thereof, since the scheme had been approved by the shareholders in the general meeting, the requirements of a special resolution in terms of section 17 of the Act was a matter of procedure alone, which procedure stood followed with the approval of scheme by shareholders in a meeting convened and presided over by a nominee of this court..

Approval of shares exchange ratio by the Board of directors of both the companies

In case of an amalgamation, the scheme of amalgamation provides for the allotment of equity shares by the transferee company to the shareholders of the transferor company on the basis of the valuation of the shares of the two companies carried out by a chartered accountant appointed by the companies and approved by the Boards of the respective companies.

No requirement of a valuation report in a scheme of amalgamation

In this case all the shareholders of the companies amalgamating except one, were the same. The Bombay High Court held that shares are the properties of the shareholders and they are the ultimate and the best judge of the value they would put on their charges. There is no requirement in the Companies Act, 1956 that in such a case the share exchange ratio has to be determined on a valuation made by chartered accountant. No shareholder had challenged the amalgamation and hence the valuation report was not necessary. [Advance Plastics Pvt Ltd. In re, Dynamic Plastics Pvt. Ltd.]

Valuation of shares and determination of share exchange ratio

Valuation of shares and the exchange ratio in the case of mergers/amalgamations/de-mergers/spin-offs would be sanctioned by the Court if the following conditions are fulfilled:

(i) The material on the basis of which the valuation is worked out should be placed on record of the Court and also brought to the notice of the shareholders.

(ii) The methodology adopted for carrying out the valuation should not be arbitrary.

(iii) The valuation shall be carried out by independent professional valuers, even if one of them is a director of the concerned company and is affirmed by the other valuers.

(iv) Majority of the shareholders have accepted the valuation and/or approved the merger.

(v) The scheme should be just and fair and not detrimental to public/shareholders'/creditors' interest and doesn't violate any law.

Book value method of valuation in a scheme of amalgamation permissible

The valuation of shares following the book value method is accepted as a proper mode of valuation of shares. The concept of book value is an accepted accountancy concept of valuation and it cannot be said to be illusory. The exchange ratio had been determined by an experienced firm of chartered accountants on the basis of known and accepted method of valuation. Therefore, there was no justifiable and reasonable ground to reject the said valuation. The valuation of the assets or shares of any company is always a matter relating to technicalities and within the realm and ambit of the jurisdiction of experts. The High Court of Punjab and Haryana has held that, in a scheme of compromise & arrangement, based on the facts of the case the valuation of shares following book value method is acceptable as a proper method of valuation of shares and cannot be said to be illusory. [Ruhantia Spinners (P.) Ltd. v Rajashree Vanijya (P.) Ltd] It was further held that, where the exchange ratio has been determined by a firm of Chartered Accountants on the basis of known and accepted method, the Court will not act as the Court of Appeal and decide over the view of the experts. [Max Estates Ltd. v Malsi Estates Ltd.]

Acceptance of the share exchange ratio by the Court

The basis of the valuation made by the chartered accountant will be placed on record of the Court and also brought to the notice of the shareholders. The Court will generally accept such valuation done by qualified persons unless any valid mistake is pointed out in the valuation. [Brooke Bond Lipton India Ltd.,]

Whether scheme to be approved if company is holding material facts and misleading court?

Appointed date

The scheme of amalgamation agreed to by the parties' states that as on a date, called the appointed date, the assets and liabilities of the transferor company, subject to the approval of the Court, would be transferred to the transferee company.

 Appointed date should be as close as possible to the date of presentation of application

The said appointed date would be as close as possible to the date of presentation of application to the Court and the audited financial position of the companies as on the appointed date would form the basis for arriving at the said date. The said appointed date will become the effective date if the Court sanctions the scheme.

Appointed date /relevant date of scheme – Will it be date of initiation of statutory process for convening meeting of shareholder petitioner-company

While the meeting of the Board of directors is a matter of internal management of the petitioner company, the relevant date/appointed date in the scheme of amalgamation would be the date of initiation of the statutory process for convening the meeting of the petitioner-company by moving to the company court. Where it appears to the court that the statutory process is not initiated for convening of the meeting by moving the company court, the appointed date in the scheme normally should not be accepted beyond the date of beginning of such accounting year. [Shree Balaji Cinevision (India) (P.) Ltd., In re. (Guj.)]

Meeting of the Board of directors of transferor and transferee companies

The first step in carrying out amalgamation is approval of scheme of amalgamation by the Boards of both the companies. The Board of directors of the transferor company will take on record the discussions that have taken place with the transferee company and submit to the Board of the transferee company, the transferor company's desire, subject to the Court's sanction, to amalgamate itself with the transferee company. The Board of the transferee company will be requested to take necessary action on this matter. Assuming that in many cases the transferee company gives the lead and takes the initiative, its Board would take on record the discussions held between the two companies on the proposal of the transferor company to merge itself with the company. The Board of the transferee company would take the following steps:—

(a) Subject to the approval of the Court, the Board will agree to the transferor company's proposal to merge with the company.

(b) Subject to the approval of the Board of the transferor company, the auditors of both the companies will be asked to value the shares of their companies and suggest a fair and reasonable ratio for the exchange of shares in the transferee company to the shareholders of the transferor company in respect of the shares held by them in the latter company.

(c) The Managing Director and the Company Secretary will be asked to prepare a draft scheme in consultation with the company's legal consultant.

(d) The Board of directors of the transferor company will be requested to take on record that consequent on the discussions with the two companies, the transferee company has agreed with the company's request to amalgamate itself with the transferee company. The transferor company

will be asked to confirm the appointment of auditors for the valuation of the shares of the two companies.

(e) Board resolution should, besides approving the scheme, authorise a director/secretary/other officer to make an application to the Court, to sign it and other documents and to do all and every

necessary thing in connection therewith, including changes in the scheme.

Further action by the Board of transferee company

The Board of directors of transferee company will further:—

(i) consider the recommendation of the auditors on the fair ratio of exchange of shares in the transferee company for the shares of the transferor company and will approve the same;

(ii) approve the draft scheme of amalgamation;

(iii) accord approval, after receiving the approval of the Board of the transferor company, to move a joint application to the Court if both the transferor and transferee companies are situated in the jurisdiction of the same Bench of the High Court;

(iv) request the Board of the transferor company to approve the exchange of shares recommended by the auditors and also the draft scheme of amalgamation, referred to above and submit a petition to the Court having jurisdiction over the transferor company under section 391 of the Act and praying for a direction to convene a meeting of its shareholders to consider the draft scheme of amalgamation. The transferor company will also be requested to:—

(a) accord their approval in writing to the auditors' recommendation on valuation and the draft

scheme of amalgamation;

(b) forward to the transferee company certified copy of the petition moved in the Court by the transferor company;

(v) the Board will also authorise the managing director and/or the company secretary severally to move, on receipt of the certified copy of the petition from the transferor company, before the Court having jurisdiction over the transferee company.

Basic contents of a scheme of amalgamation

The Companies Act or the Rules made there under do not prescribe any form or contents of a scheme of amalgamation. Conventionally, however, certain standard clauses are included in a scheme of amalgamation. (See Appendices 3, 4 and 6) These are as follows:—

1. Appointed Date (or Transfer Date) of amalgamation.

2. Effective Date of amalgamation.

3. Capital structure of the transferor company and the transferee company

4. Share Exchange Ratio.

5. Transfer of undertaking and liabilities of transferor company to the transferee company from the appointed date.

6. Continuance of legal proceedings of the transferor company by transferee company after the

effective date.

7. Transferor company to carry on business on behalf of the transferee company between appointed date and effective date.

8. Effect of amalgamation on contracts of the transferor company after the effective date.

9. Services of the transferor company's employees, their service conditions, effect of amalgamation thereon, retirement benefits, etc.

10. Allotment of the transferee company's shares to the transferor company's shareholders in exchange of their shares in the transferor-company as per the share exchange ratio, treatment as to fractions, rights of the shareholders.

11. Dissolution of the transferor company (without winding up) on the effective date.

12. Main objects of the transferor company to become one of the main objects of the transferee company.

13. Conditions subject to which the scheme is to take effect.

Direction by the Court to hold meeting of members and/or creditors

The Court will consider the petition, whether the scheme is fair and is not illegal under the Companies Act. Where satisfied, the Court will direct for holding separate meetings of members and creditors as have been proposed in the petition and the day, date, time and place will be fixed by the Court. The Court will also appoint a chairman and/or alternate to the chairman for each of the meeting. The expression 'may' used in section 391 has to be construed in the sense that the Court has the full discretion to call for the meeting of the shareholders or refuse to call for a meeting it is only in that sense that the expression 'may' has been employed in the section. A collective decision of the shareholders would be far different from their individual decisions from their houses or offices. Meeting of the shareholders cannot be regarded as an empty formality. Where rights of members of transferee company not affected by proposed scheme of amalgamation, transferee company not required to hold meetings of equity shareholders and creditors for considering scheme.  transferor company and transferee company proposed a scheme of their amalgamation. They filed an application for convening of meetings of equity shareholders and creditors of transferee company for sanction of proposed scheme and also sought for dispensation of meeting of shareholders of transferor company. Since entire paid-up share capital of transferor company was owned by transferee company and Board of directors had already approved proposed scheme of amalgamation, no meeting of shareholders of transferor company was required to be convened. Meetings of equity shareholders of transferee company and creditors of transferor company and transferee company were to be held after appointing Chairman and alternate Chairman for such meetings.

Notices to members and/or creditors for the meeting

A company shall send notices to members, creditors and each class of members or creditors as approved by the business of the meeting shall be to consider and approve the scheme of amalgamation or the scheme of compromise/arrangement, as may be applicable. The members and/or creditors will be asked to give their decision by poll (Rule 77). In terms of section 391, the scheme shall be deemed to be approved, if at least a majority of members, present in person or by proxy and voting representing three fourths in value, agree to the proposal. The Court has no jurisdiction to sanction a scheme if it is not approved by three-fourths majority of the creditors or class of creditors. Considering the question of sanctioning the scheme by the court would arise only if the scheme has been approved by the statutory majority provided for under section 391(2) of the Act. However, where 100 percent of the secured creditors are opposing the scheme, it would be an idle formality to direct the convening of the meeting of the unsecured members to consider the scheme. In such a case application filed is liable to be rejected and the direction as sought by the applicant for convening the meeting cannot be issued. it was held that sub-section (2) of section 391 of the Act requires that the resolution approving the scheme of arrangement should be passed by majority in number representing 3/4ths in value of the creditors or class of creditors and/or members or class of members as the case may be. If the resolution granting approval to the scheme of arrangement is passed by more than 3/4th in value of the creditors but, is not carried by the majority in number of the creditors the scheme would not be approved by the Court. The majority in number of the creditors is provided in the section for safeguarding the interests of the large number of small creditors whose voice is often lost amongst small number of big creditors. The conditions of approval by majority in number and 3/4ths in value of credit are cumulative. The language of section 391(2) clearly shows that the requirement of three-fourth majority relates to the value of shares/credit represented by the shareholders or creditors who are present and voting and not of the total value of shares/credit of the company.

Once the majority of shareholders accorded their consent to a scheme of amalgamation, the court had no jurisdiction to go into the merits of amalgamation. RBI's permission was not required for amalgamation of a non banking financial company with banking company.  Section 394(1)(v) empowers the court to make provision for any persons who dissent from the scheme. The dissenting shareholders get spot cash, which can be utilized in investment at a higher rate of return and they must get substantially less than the value of the package per share, which those who accept the scheme would get. The fact that the company moves application to get through the scheme of a newly created class, namely, ‘scheme lenders’ by a requisite statutory majority at the meeting so as to bind the debenture holders, holding more than 2000 debentures of the company and constituting a minority, is not by itself enough to out rightly reject the scheme, especially when the minority will have an opportunity to discuss and deliberate at the scheme. Even if the scheme is approved at the meeting by requisite statutory majority, despite the valid and strong objections, the minority will again have an opportunity to raise their grievance before the court when substantive petition is filed by the company for confirmation of the scheme. Whether the contingent creditors are creditor and have a right to object, it has been decided that the “Creditors” in this section would also include a contingent creditor such as the government, sales tax, income tax or other tax liability which has arisen but may not have become final on account of pending appeals. Where the creditor has challenged the order of Single Judge for issuing notices to all creditors individually without providing for separate meetings for different categories of creditors as envisaged in the compromise scheme, the objection is procedural and not substantive to deserve any interference in the order of the Company Judge. However, the company will solve the practical difficulty at the time of holding meeting to avoid any grievance, and even otherwise the dispute can be raised by aggrieved creditors at the time of confirmation of the scheme.

Report of the Chairman of the meeting to the Court

Immediately on conclusion of the meeting, the chairman of the meeting will submit a report to the Court, which will indicate the names of persons who attended the meeting, the number of persons who have voted in favour and those against with the respective quantum of votes.

Petition to the Court having jurisdiction on the company

Within seven days of filing of the report by the chairman, the company shall present a petition before the Court in Form 40 for sanctioning the scheme alongwith an affidavit. Where the transferor and transferee companies come under the jurisdiction of two Courts, the Court, where the transferor company has moved the petition, would consider the scheme and order amalgamation of the transferor company.

Forwarding a copy of the application and petition to the Registrar

Pursuant to section 394A of the Act, a copy of the company's petition moved to the Court for direction under section 391 and a copy of the petition for sanction of the scheme shall be served electronically to the concerned Registrar of Companies along with the e-Form 62 as prescribed by the Notification No. GSR 56(E), dated 10th Feb., 2006.

Hearing of the petition and order of the Court

On receipt of the petition, the Court shall fix a date for the hearing and shall also order that notice of the hearing shall be advertised in the same newspaper in which the notice for the meeting was advertised or in such other papers as the Court may direct. At this stage on the directions of the Court the official liquidator shall, after a scrutiny of the books and papers of the company, make a report to the Court that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest and after hearing the petition, the Court may make such order as it deems fit. In Kriti Plastics (P.) Ltd. In re (1993) 78 Comp Cas 138 (MP), the court held that once shareholders of the company unanimously sanctioned the scheme of amalgamation, then objection of the official liquidator on the basis of inspection of the account books could not be sustained, and it could not be held that the scheme was not in the public interest. In view of this, it was not necessary for the company to supply copy of account books for inspection of the company. The Company Law Board had already granted its consent for the scheme of amalgamation. Moreover, the shareholders in their meeting had unanimously approved the scheme, and similarly none of the creditors of the company had raised any objection at the time of meeting held for the said purpose. In view of this, scheme of amalgamation had to be approved.

Dissolution of transferor company is compulsory in case of amalgamation

The scheme of amalgamation is bound to provide for merger of the transferor company with the

transferee company being dissolved. An amalgamation would not be possible without dissolution of the transferor company. Once amalgamation takes place under section 391 to 394 of the Companies Act, the existence of transferor company is lost by virtue of Court order.

Report of Official Liquidator

Amalgamation gives rise to dissolution of the transferor company without winding up, by virtue of an order of the High Court under section 391/394. No order for the dissolution of a transferor company can be made by the Court unless the Official Liquidator has, on scrutiny of the books and papers of the company, made a report to the Court that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest. The Official Liquidator's report can be obtained after the order sanctioning amalgamation is passed. It

is, however, desirable to secure this report well in advance before an order is passed by the Court. This report is required in respect of the transferor company, which is dissolved without winding up and loses entity on amalgamation.

Report of the Registrar of Companies

If a scheme is for the amalgamation of a company, which is being wound up, with any other company or companies, before passing an order sanctioning the scheme a report from the Company Law Board or the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest is required to be obtained [section 394(1), first proviso]. This report is not required unless the company, which is proposed to be amalgamated with another company, is under winding up.

Consideration by Court while approving the scheme

Section 392 which dealt with the supervisory jurisdiction of the Court clearly earmarked the field in which the sanction of the Court would operate. it was observed that the Court is not merely to go by the ipse dixit (an assertion without proof) of the majority of shareholders/creditors or their respective classes, who might have voted in favour of the scheme by requisite majority, but has to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reason-able and isn't contrary to any provisions of law and doesn't violate any public policy. The propriety and merits of the compromise or arrangement had to be judged by the parties and the Court would not undertake the exercise of scrutinizing the scheme with a view to find out whether a better scheme could have been adopted by the parties. Section 393(1) showed that the special interest of the director which was required to be brought home to the voters must satisfy three requirements before it could be treated to be special interest of the directors

— (a) the director's interest must be a special interest different from the interest of other members who were the voters at the meeting; (b) the compromise or an arrangement which was put to vote must have an effect on such special interest of the director; and (c) such effect must be different from the effect of compromise and arrangement or similar interest of other persons who were called upon to vote at the meeting. Scheme of amalgamation to be rejected where adequate assistance not received from Central Government. The courts would not sanction a scheme of amalgamation if the object of amalgamation is mainly to avoid liability to tax. The Court would interfere only when the proposed merger is shown to be manifestly unfair or is adopted as a devise to defraud some shareholders. The Supreme Court has held that the Court called upon to sanction a scheme of amalgamation of companies under the Companies Act, 1956 would not act as a court of appeal and sit in judgment over the informed view of the parties to the scheme as the same is best left to corporate and commercial wisdom of the parties to the scheme. However, section 394 of the Act casts an obligation on the court to be satisfied that the Scheme of amalgamation is not prejudicial to the interest of its members or to public interest. The Court therefore is not expected to put its seal of approval on the scheme merely because it is approved by requisite majority of shareholders and creditors as required under the Act. Since the scheme of merger once sanctioned by the court is binding on the dissenting minority members or creditors, the court is obliged to examine the scheme in its proper perspective together with its various manifestations and ramifications with a view to finding out whether the scheme is fair, just and reasonable to the concerned members and is not contrary to any law or public policy i.e. the public good and the public interest.

In case of report of the Registrar or the Regional Director, Court can prevented sanctioning scheme of arrangement or winding up

The only two circumstances under which the court is prevented from according sanction are contained in proviso to sections 391 & 394 where the Official Liquidator or the Registrar of Companies files a report stating that the affairs of the company are conducted in a manner prejudicial to the members of the company or the company.

Filing a copy of the order of the Court with the Registrar of Companies

Pursuant to section 391(3) and section 394(3) a certified copy of the Court's order shall be filed electronically with the Registrar of Companies within 30 days of the receipt of the order in e-form 21 of Companies (Central Government's) General Rules and Forms, 1956 and the Court's shall have no effect until the certified copy is so filed with the Registrar of Companies. When the court sanctions a scheme of arrangement or compromise, the scheme is sanctioned as a whole with all its clauses and proposals. The certified copy of the order sanctioning the scheme filed with the Registrar of Companies shall be treated as intimation to the Registrar of Companies and he shall take note of all the changes proposed and sanctioned by the court. Since all the changes were proposed to be effected as an integral part of the scheme, the approval granted by the shareholders at the meeting to the scheme as a whole amounted to approval granted to all such incidental proposals and no separate procedure was required to be followed as envisaged by sections 17, 31, 94, 97, 81(1A), 100 and 149(2A), respectively. Therefore, there was no need to comply with the provisions of the Act. The scheme of amalgamation being in the interest of the companies and their members and creditors, the scheme was to be sanctioned.

No separate notice to be filed before Registrar of Companies for enhancement of share capital

When the certified copy of the order sanctioning the scheme of amalgamation by the Court is required to be filed before the Registrar of Companies under section 394(3), no separate notice need to be given to the Registrar for enhancement of share capital as envisaged under section 95/97 in as much as the object being the same, recording of necessary changes that is required to be made in the concerned register by the Registrar of Companies can be affected after receiving the certified copy of the order of the Court sanctioning the same.

Change of name of the company pursuant to scheme of amalgamation

Under section 21 the Company is required to pass a special resolution and obtain approval of the

Central Government (powers delegated to the Registrar of Companies) for change of its name. The change in the name of the company cannot be effected merely on the scheme becoming effective the transferee 1 For e-Form 21, log on to www.mca.gov.in. company has to adopt proceedings for change of name after complying with the provisions of section 21 of the Companies Act, 1956. The transferee company could always go before the Registrar of Companies for obtaining the necessary approval after the scheme of arrangement is sanctioned by the court. In Sherno Investment & Finance Limited v Registrar of Companies (2006) 70 CLA 21 (Guj), the Court held that when the proposed scheme was approved on the basis of the resolution of the company, the same can be the basis for change of name also, together with the sanction passed by this High Court in  the event of such meeting is dispensed with by the High Court, while sanctioning the scheme under Section 394, mere reference to the order of the court will be sufficient. It is not open to the Registrar of Companies to raise objection for change of name, which forms part of the scheme of amalgamation duly sanctioned by the High Court on the ground that separate procedure under Section 21 of the Act is not followed or is required to be followed. It is for the opponent Registrar of Companies to issue necessary certificate by implementing the order already passed by this court.

Issuance of shares by the transferee company

Issuance of shares to the shareholders of the transferor company by the transferee company will require compliance with the provisions of section 81(1A) of the Companies Act, 1956 in case of a limited company. The process of the exchange of shares will be commenced after the copies of the orders of the High Court sanctioning the scheme of amalgamation have been filed with the Registrar of Companies by the transferor company and the transferee company. For the purpose of drawing-up list of shareholders of the transferor company who will be entitled to get the shares of the transferee company as per the share exchange ratio:—

(a) Register of members of the transferor company will be closed if the transferor company is an

unlisted company;

(b) A record date will be fixed to ascertain the names of shareholders and their shareholdings in the transferor company if the transferor company is a listed company.

If the transferor company is a listed company, a notice of the proposed record date will be given to the Stock Exchanges on which the company's shares are listed stating the record date, and specifying the purpose for which the record date is fixed. Copies of such notice will be sent to other recognised Stock Exchanges in India simultaneously. A public notice regarding the record date will be given in the newspapers.

Where the Register of members is proposed to be closed and/or record date is declared, a public notice shall be given in newspapers in accordance with the requirement under section 154 of the Companies Act. A statement of allotment will be prepared based on the list of members of the transferor company as on the last date of the closure of the Register of members or the record date. This statement will specify in respect of each member:—

(a) the name;

(b) the number of shares held in the transferor company; and

(c) the number of shares to be exchanged and allotted in the transferee company.

A meeting of the Board of directors will be convened for allotment of the shares to the shareholders of the transferor company. The Board will allot the shares according to the Statement of Allotment. The transferor company will inform the Stock Exchange/s on which the shares of the transferor company and the transferee company are listed regarding the allotment of shares. Return of allotment in e-Form 2 will be filed electronically with the Registrar of Companies within 30 days of allotment.

In case if the transferee company is listed at any stock exchange it will submit information for corporate action to the CDSL and NSDL for admission of the securities for D-mat purposes.

Exchange of share certificates

The shareholders of the transferor company will be intimated about the sanctioning of the scheme of amalgamation and advise them to exchange of shares with the shares of the transferee company. Alternatively it may cancel the existing share certificate of the transferor company and issue fresh certificate to the holders. New share certificates will be prepared according to the Statement of Allotment. The transferee company will dispatch the new share certificate to the shareholders by registered post. The transferor company will inform the Stock Exchange of the allotment of the shares. In case of a listed company, the company may give option to get the shares in the D-mat Form and may require the details of the DP ID and Client ID for crediting the shares in the D-mat account directly.