MAHAVIR WEAVES PRIVATE LIMITED v. UNION OF INDIA — 1994 DIGILAW 333 (GUJ)

M. S. PARIKH, J. ( 1 ) ALL these three petitions are submitted by the petitioners for sanctioning the scheme of Amalgamation (Annexure-C) in all the petitions, by virtue of the provisions contained in Secs. 391, 392 and 394 of the Companies Act, 1956 (the Act for short ). ( 2 ) THE petitioners of Company Petitions Nos. 24 of 1994 and 25 of 1994 respectively Mahavir Fabrics (Surat) Pvt. Ltd. and Mahavir Marketing (Surat) Pvt. Ltd. are the transferor companies, whereas the petitioner Mahavir Weaves Pvt. Ltd. in Company Petition No. 23 of 1994 is the transferee company. They are respectively referred to as the transferor companies and the transferee company in this judgment. The two transferor companies are sought to be amalgamated with transferee company. ( 3 ) THE main objects of the transferee company and the transferor companies are also set out in the petitions. The main objects of transferor company Mahavir Fabrics (Surat) Pvt. Ltd. inter alia are to carry on business comprising all activities connected with manufacture and, or process of cotton, blended and synthetic yarn and cloth which include spinning, crimping, texturising, twisting, carding, combing, weaving, dyeing, printing and to work as Commission Agent and/or otherwise to have dealing in all kinds of cotton, blended and synthetic yarns, fabrics and textile including garments and hosiery. The main object of the other transferor company, viz. , Mahavir Marketing (Surat) Pvt. Ltd. is to carry on the business of purchasing, selling, importing, exporting, marketing, acting as commission agents or otherwise deal in all the kinds and qualities of chemicals, dyes, colours, paints, varnishes, resins, glues, chemical-compounds (organic or inorganic) in all forms, acids, alkalies, petro-chemicals and petrolium products, solvents, plastics, rubber, drugs and medicines and textile auxiliaries. The detailed ancillary objects are set out in the Memorandum of Association annexed in Company Petition No. 25 of 1994. The detailed ancillary objects are set out in the Memorandum of Association annexed in Company Petition No. 25 of 1994. The main objects of the transferee company are inter alia to own, work, erect, instal,maintain, equip, repair, alter, add to or otherwise handle or deal in spinning mills, weaving mills, knitting factories, and other factory for processing, ginning, carding, combing, finishing, threading, twisting, crimping, texturising, bleaching, printing, dyeing or finishing whether rayon, man-made, staple firbre yarn, raw silk, silk yarn, waste silk, cotton flax, jute, hamp, wool, hessian, HDP linens and any other textiles of any description and kind, and to deal in by-products or waste resultant in manufacturing and processing of all types of product and to further process and use as raw materials the by-products and waste products. The detailed ancillary objects are set out in the Memorandum of Association annexed in Company Petition No. 23 of 1994. ( 4 ) BOTH the transferor companies and the transferee company are Private Limited Companies under the same management. The shares of all the three companies are closely held by the members of two families. All the three companies are involved in manufacturing, processing and marketing of textiles in one or other form. The transferee company has the factory building and the plant and machinery which has been let out to the transferor companies for carrying on some of the job work. The transferor companies are also having some machinery which has been installed in the rented premises belonging to the transferee company. The line of business of all the three companies is the same and their activities are almost intermingled with each other. All the three companies are having their operations and doing their business reasonably well with growth potential. Under such circumstances they have thought it fit to enter into scheme of Amalgamation (Annexure-C ). It was, therefore, proposed to merge both the transferor companies with the transferee company. ( 5 ) PURSUANT to the notice to the Central Government, the learned Addl. Standing Counsel Mr. Jayant Patel, has appeared. The Central Government has filed its representation and has placed on record its objections to sanction the scheme of amalgamation. The same shall be considered hereafter. ( 5 ) PURSUANT to the notice to the Central Government, the learned Addl. Standing Counsel Mr. Jayant Patel, has appeared. The Central Government has filed its representation and has placed on record its objections to sanction the scheme of amalgamation. The same shall be considered hereafter. ( 6 ) THE Official Liquidator who was required to submit his report under the provision of Sec. 394 (1) of the Act has submitted his report and he has no objection to the grant of scheme of amalgamation inasmuch as the affairs of the company have not been conducted in any manner prejudicial to the interest of the companies or to the public interest. ( 7 ) IT would, therefore, be appropriate to consider now the objections of the Central Government as displayed in letter dated 26th September, 1994, placed on record by the learned Addl. Standing Counsel. The objections contained in this letter are treated as the objection for the purpose of the same being considered by this Court without insisting upon any affidavit-in-reply in support of these objections. The first objection, then, reads : "the companies have not got the valuation of shares done by any Chartered Accountant and Companies themselves have fixed the exchange ratio of 1 : 1 which is not based on facts. The net intristic worth of one equity share of Rs. 100. 00 based on the respective balance-sheet as at 31-3-1993 of the said company works out as under : (I) Mahavir Fabrics (Surat) Pvt. Ltd. Rs. 422 (ii) Mahavir Marketing (Surat) Pvt. Ltd. Rs. 394 (iii) Mahavir Weaves Pvt. Ltd. Rs. 622the fair exchange ratio, therefore, would be 2 : 3 that is to say that 2 equity shares of Rs. 100. 00 each of the Transferee company would be allotted against three equity shares of the respective transferor companies. " ( 8 ) IN support of this objection Mr. Jayant Patel, learned Addl. Standing Counsel for Central Government has placed reliance upon the following decisions : (I) Patiala Starch and Chemicals Works Ltd. , reported in 1958 (28) Company Cases 111. It would be an interesting reading of the principle laid down by the Punjab high Court in this case. Accordingly, the Court ought not to substitute its discretion for that of the shareholders of a Company, who should normally be permitted to manage their own affairs themselves. It would be an interesting reading of the principle laid down by the Punjab high Court in this case. Accordingly, the Court ought not to substitute its discretion for that of the shareholders of a Company, who should normally be permitted to manage their own affairs themselves. While setting out this principle the Punjab High Court has also observed that in sanctioning the scheme, the Court does not simply register the wishes of the shareholders or the creditors, as the case may be, as expressed in their resolution passing the scheme. It is the duty of the Court to examine the scheme and to see whether there has been compliance with the provisions of law. The scheme must conform to the standard of reasonableness, having regard to all the information that may be available. The commercial advantage, and the parties who stand to benefit thereby, are matters which cannot be left to the exclusive decision of the persons attending the meeting. It is further observed that the share-holders and creditors having approved of a scheme should normally carry great weight. The Court has, however, to examine the scheme with a view to see whether independent and honest member of the company while wisely acting in respect of his own interest could have approved the scheme or not. In the facts of the case the Court was not satisfied that there was any proper or expert valuation and that the members were fairly represented at the meeting held to consider the scheme. (ii) Bank of Baroda Ltd. v. Mahindra Ugine Steel Co. Ltd. , reported in 1976 (46) Company Cases 227. This Court while dealing with proposed scheme of amalgamation held that in exercising its discretion in according sanction, the Court will consider, first, whether the statutory provisions have been complied with; secondly, whether the classes were fairly represented by those who attended the meeting and whether the majority were acting bona fide; and, thirdly, whether the scheme is such as a man of business would reasonably approve. One of the notable features of the facts in this case is that the majority of the shareholders had approved the scheme in the meeting held for the purpose of considering the approval of the scheme. One of the notable features of the facts in this case is that the majority of the shareholders had approved the scheme in the meeting held for the purpose of considering the approval of the scheme. With regard to the ratio of exchange it was held that the ratio of exchange of the shares was by and large fair and reasonable and since it had received the approval of the statutory majority and nobody had complained about it in Court, the scheme could not be said to be unfair or unreasonable on that account. (iii) M. G. Investment and Industrial Company Ltd. v. New Shorrock Spinning and Mfg. Co. Ltd. , reported in 1972 (42) Company Cases 145. It was held in this case that two reputed firms of Chartered Accountant had, after careful consideration, come to the conclusion that the ratio of 5 : 2 for allotment of shares was fair and equitable, and that a scheme of amalgamation may be open to criticism but unless it was affirmatively shown that scheme was unfair, the Court would not interfere. ( 9 ) HAVING heard the learned Additional Standing Counsel on the aforesaid three authorities, it was pointed out to him that in none of the aforesaid three cases private limited companies were concerned. His attention was drawn to the fact that in the present petition the members are belonging to a group of two families and they have consented to the sanction of the scheme without there being any exception. Besides, the companies are having their operations almost intermingled with each other. Added to this is the submission of Mr. Soparkar that the exchange ratio which has been worked out by the Central Government is on the basis of the balance-sheets and that would not disply the appreciated value of the assets of the three companies. The fact that the transferee company has let out the premises as well as some of the machineries to the respective transferor companies would aslo assume importance. That would, also have some effect on the exchange ratio. Mr. Soparkar submitted that it would not be necessary to go into the valuation submitted by the expert for the simple reason that the shareholders who belonged to two families have accorded their consent to the proposed amalgamation and it would be unnecessary to burden the companies with extra cost of valuation. Having heard Mr. Mr. Soparkar submitted that it would not be necessary to go into the valuation submitted by the expert for the simple reason that the shareholders who belonged to two families have accorded their consent to the proposed amalgamation and it would be unnecessary to burden the companies with extra cost of valuation. Having heard Mr. Soparkar on the question of exchange ratio, I am of the opinion that bearing in mind the exchange ratio worked out by Central Government at 3 : 2 and the exchange ratio adopted by the company to 1 : 1, in view of the facts and circumstances of the case, i do not find any unreasonableness in the exchange ratio which has been adopted by the three companies. There is, therefore, no reason to distrub the wishes of the shareholders of the company. I find that the above decisions which have been pressed into service by the learned Additional Standing Counsel are distinguishable on facts whereas the basic principle of maintaining the wishes of the statutory majority of the shareholders flowing from the said decisions applies to the present matters with greater force. ( 10 ) THE second objection reads "it may further be submitted to the Honourable court that as on the "appointed date" viz. , 1-4-1993 the authorised share capital of the transferee company is not sufficient to give effect to the said scheme. The appointed date, therefore, needs be suitably amended. " with regard to the above objection it has been submitted by Mr. Jayant Patel, learned Addl. Standing Counsel that the authorised capital of the transferee company having not been increased as on appointed date the scheme cannot be effected. In reply it has been submitted by Mr. Soparkar that in no amalgamation matters the share capital of transferee company is increased beforehand; that exercise is conducted after the scheme is sanctioned. In support of his submission he argues that if authorised capital is increased and the scheme is not sanctioned that would create an anomolous situation. According to his submission as on today the transferee company has required authorised capital for issuing the shares as per the scheme of amalgamation. In practice the shares are being allotted after the schemes are being sanctioned. They are never allotted beforehand. According to his submission as on today the transferee company has required authorised capital for issuing the shares as per the scheme of amalgamation. In practice the shares are being allotted after the schemes are being sanctioned. They are never allotted beforehand. Amplifying the anomolous situation that might arise he further submitted that during the intervening period between the appointed day set out in the scheme of amalgamation and the date on which the scheme is sanctioned the shareholders of transferor company might have entered into transactions of transfer of shares, and accordingly the shareholders might change. As against this, it is the submission that if the authorised capital is not increased no allotment can be made. Therefore, the increase of authorised capital is always contingent upon the scheme being sanctioned. The provision of sec. 391 (2) and (3) read with Sec. 394 (1) and (2) of the Companies Act, 1956 do not contemplate increase in the authorised share capital beforehand. The test in this respect would be the capacity of the transferee company to issue shares upon amalgamation. The amalgamation is a blending of two or more existing undertakings into one undertaking. The true effect and character of the amalgamation highly depend upon the terms of the scheme of amalgamation proposed. In this view of the matter and particularly bearing in mind the statement made at the bar by Mr. Soparkar that the authorised capital has already been increased so as to give effect to the scheme of amalgamation by following due procedure of law, there is no reason why the sanction be not accorded. It is no doubt true when Mr. Jayant Patel, learned Addl. Standing Counsel for Central Government submits that authorised capital has got to be increased so as to give effect to the scheme of amalgamation and if authorised capital is not increased it is obvious that the scheme cannot be given effect to. Therefore, if in fact the authorised capital of the transferee company is not increased the transferee company would obviously be under the direction to increase the authorised capital so as to give effect to the scheme of amalgamation. Unnecessary confusion is brought to surface by the aforesaid objection. ( 11 ) IN above view of the matter, the objection raised by the Central Government would not stand. Unnecessary confusion is brought to surface by the aforesaid objection. ( 11 ) IN above view of the matter, the objection raised by the Central Government would not stand. ( 12 ) IN the facts and circumstances emerging from the record of these three petitions and in view of what is stated above, it is ordered that the transferor companies be amalgamated with the transferee company with effect from 1-4-1993 as per the proposed scheme of amalgamation placed on record a Annexure-C in all these petitions. Consequently, all the rights, liabilities and duties of the transferor companies shall stand transferred to and vested in the transferee company, namely, the Mahavir Weaves Pvt. Ltd. without any further act or deed, and all the liabilities and duties of the transferor companies shall also become the liabilities and duties of the transferee company and the transferor companies shall stand dissolved, wihout winding up, in view of the Scheme of amalgamation as per Annexure-C being sanctioned. ( 13 ) THE petitioners are directed to file the copy of the order with the Registrar of Companies, within a period of thirty days and the Registrar of Companies shall treat the transferor companies as dissolved, with effect from 1st April, 1993. It is also clarified that any person interested shall be entitled to apply to this Court for any appropriate direction that may be necessary. ( 14 ) THE petitioner shall bear the cost of respective petitions and shall also pay the fees of the learned Additional Standing Counsel appearing on behalf of the Central Government, which is quantified at Rs. 3,000. 00 (Rupees three thousand only) in each of these three petitions. All these three petitions would stand disposed of accordingly. .