IN RE: KUSUM PRODUCTS LIMITED v. . — 1996 DIGILAW 414 (CAL)

SHYAMAL KUMAR SEN, J. ( 1 ) THIS is an application under Sections 391 and 394 of the Companies Act, 1956, for sanction of a scheme of amalgamation between the petitioners, Kusum Products Ltd. and Kusum Agrotech Ltd. , (hereinafter referred to as "katl"), whereby and whereunder the entire undertaking of petitioner No. 2, Kusum Agrotech Ltd. , together with all the assets and liabilities as a going concern will be transferred to and vested in petitioner No. 1, Kusum Products Ltd. , on the terms and conditions fully mentioned in the scheme of amalgamation being annexure A to the petition. ( 2 ) BY an order dated June 28, 1995, direction was issued for holding separate meetings of the equity shareholders of the petitioner-companies to be held on August 4,1995, for the purpose of considering and if thought fit approving with or without modification the scheme of amalgamation and appointing a chairperson to convene and hold the said meetings and to report the results thereof to this court, ( 3 ) THE meeting of the equity shareholders of the transferee-company, petitioner No. 1, Kusum Products Ltd. , was held on August 4, 1995. The said meeting was attended by 26 equity shareholders holding 39,15,936 equity shares which constitutes 99. 50 per cent. of the total value of the issued share captial of petitioner No. 1. All the equity shareholders present in the meeting and holding equity shares voted in favour of the said scheme being adopted and carried into effect without any modification. No shareholder voted against the scheme. In the premises, the said scheme was approved without any modification both in number and value by the requisite majority of the equity shareholders of the transferee company. The report of the chairman of the said meeting has been annexed and marked "g" to the petition. ( 4 ) THE meeting of the equity shareholders of the transferor-company Kusum Agrotech Ltd. was held on August 4,1995, at 3 p. m. The said meeting was attended by 369 equity shareholders holding 43,79,900 equity shares, which constitutes 50. 34 per cent. of the total value of the issued equity shares of petitioner No. 2. Eight equity shareholders holding only 3,800 equity shares abstained from voting. 354 equity shareholders present in the said meeting holding 43,74,300 equity shares, i. e. , 99. 94 per cent. 34 per cent. of the total value of the issued equity shares of petitioner No. 2. Eight equity shareholders holding only 3,800 equity shares abstained from voting. 354 equity shareholders present in the said meeting holding 43,74,300 equity shares, i. e. , 99. 94 per cent. of the total value of the equity shareholders present in the meeting voted in favour of the scheme being adopted and carried into effect without any modification. Seven equity shareholders present in the meeting holding only 2,800 equity shares, i. e. , 0. 60 per cent. of the total value of the equity shareholders present in the meeting voted against the said scheme being adopted and carried into effect. In the premises, the said scheme was approved without any modification both in number and value by the requisite majority of the shareholders of the transferor-company under Section 391 of the Companies Act. A copy of the report of the chairman of the said meeting has been annexed and marked annexure H to the petition, ( 5 ) NONE of the said seven shareholders who voted against the scheme at the said meeting, however, came forward at the final hearing of this application to oppose the scheme. ( 6 ) NOTICE convening the meeting of the shareholders of petitioner No. 2, Kusum Agrotech Ltd. , was published in the newspapers on July 6, 1995. One Tamal Kumar Majumdar, who purchased 100 equity shares of petitioner No. 2 and lodged the same for registration of the transfer on July 22, 1995, has come forward to oppose this application. It appears that on the date of the meeting, i. e. , on August 4, 1995, Tamal Kumar Majumdar was not a registered shareholder of petitioner No. 2 and, therefore, did not attend the said meeting. His application for registration of the transfer was approved after the meeting on August 4, 1995. ( 7 ) SINCE the scheme of amalgamation has already been approved by the shareholders of the petitioner-companies an application was thereafter made under Section 391 (2) for confirmation of the said scheme on the basis of the reports filed by the chairman. His application for registration of the transfer was approved after the meeting on August 4, 1995. ( 7 ) SINCE the scheme of amalgamation has already been approved by the shareholders of the petitioner-companies an application was thereafter made under Section 391 (2) for confirmation of the said scheme on the basis of the reports filed by the chairman. The notice of the said petition was duly advertised in the newspapers and no shareholder or creditor of either of the two companies has come forward to oppose the sanction of the scheme, except one Ghanashyam Das Daga, a shareholder of Kusum Agrotech Ltd. , who subsequently withdrew his objection and the said Tamal Kumar Majumdar who purchased 100 equity shares for a total sum of Rs. 1,500 after the scheme had been propounded and is now seeking to oppose the said petition for sanction of the scheme, ( 8 ) IT has been submitted on behalf of the petitioner that all the statutory formalities have duly been complied with. In other words, the meetings have been duly convened and held and the scheme was approved by the requisite majority. ( 9 ) IT has been further submitted that the chairman of the respective meetings duly issued or caused to be issued the individual notices to the members of the petitioner-companies, issued or caused to be issued the advertisements, convening the meetings and presided over the meetings and submitted their reports to this court on the results of the meetings. ( 10 ) IT has been further submitted that the notices of the meeting and the explanatory statement under Section 393 were duly settled by the Assistant Registrar (Companies) of this court. The individual notices were sent to all the members of the petitioner-companies and the notice was also duly advertised in the Economic Times and Janasatta on July 6, 1995. No shareholder of either of the companies has complained of non-receipt of notice or any defect in the explanatory statement. The explanatory statement under Section 393 disclosed all the relevant facts. The ratio of exchange was also stated in the scheme but the details of calculation are not required to be given. No shareholder of either of the companies has complained of non-receipt of notice or any defect in the explanatory statement. The explanatory statement under Section 393 disclosed all the relevant facts. The ratio of exchange was also stated in the scheme but the details of calculation are not required to be given. ( 11 ) IT has been submitted that no shareholder has complained of the insufficiency or non-receipt of the notice or any defect in the explanatory statement under Section 393, and the statutory provisions have been duly complied with. Moreover, the notices and the explanatory statement having been settled by an officer of this court, no exception can be taken to the same. In this connection, the learned advocate for the petitioner has relied upon the judgment and decision in the case of Hindustan Lever Employees' Union v. Hindustan Lever Ltd. [1994] 4 Comp LJ 267, 289 (SC) ; [1995] 83 Comp Cas 30. ( 12 ) IT has further been submitted that the chairman himself scrutinised the votes cast in favour or against the resolutions and satisfied himself that the scheme had been approved by the requisite majority. With regard to the value of the votes it has been submitted that the chairman had to obtain information from the management and Sri Promode Dugar, a common director of the petitioner-company furnished the necessary particulars from the records of the company and the chairman relied upon the said information believing the same to be true. Accordingly, it has been submitted that no exception can be taken to the report of the chairman and no shareholder has raised any objection with regard thereto except Tamal Kumar Majumdar who was not even a shareholder of the company when the meeting was held. ( 13 ) IT has accordingly been submitted on behalf of the petitioners that in the instant case all the statutory formalities have been complied with and the petition under Section 391 (2) of the Companies Act has been properly made in this court for sanction of the scheme. ( 14 ) THE contention of the learned advocate for the petitioners is that if the statutory formalities have been complied with and the scheme is fair and reasonable and not fraudulent, the court would normally proceed to sanction the scheme and give effect to the business decision of the shareholders of the companies concerned. ( 14 ) THE contention of the learned advocate for the petitioners is that if the statutory formalities have been complied with and the scheme is fair and reasonable and not fraudulent, the court would normally proceed to sanction the scheme and give effect to the business decision of the shareholders of the companies concerned. ( 15 ) IT has further been submitted that in the event there is any opposition to the sanction of the scheme the onus lies heavily on those opposing to satisfy the court that the scheme is unfair or unreasonable or fraudulent. In this connection the learned advocate for the petitioners has relied upon the following decisions : (i) Hindustan General Electric Corporation Ltd. and (ii) Sussex Brick Co. Ltd. , In re [1960] 30 Comp Cas 536 ; [1961] 1 Ch. 289. ( 16 ) THE main objections to the sanction of the scheme raised by Tamal Kumar Majumdar are as follows : (i) The ratio of exchange is unfair to the equity shareholders of the transferor-company, Kusum Agrotech Ltd. (ii) The valuer has not taken into account the details mentioned in the respective balance-sheets, viz. , auditor's remarks, directors' reply thereto, etc. (iii) The valuer has not followed the guidelines issued by the Central Government regarding valuation of shares. ( 17 ) IT is the contention of the learned advocate for the said Tamal Kumar Majumdar that the valuer's report dated May 12, 1995, being annexure F to the petition is vague and not up to the mark which has been done only to serve the purpose of the promoters and as such is not maintainable in law. ( 18 ) WELL-KNOWN methods of valuation of shares as mentioned by the Central Government guidelines, namely :-- (a) net asset value (NAV) ; (b) profit-earning capacity value (PECV) ; (c) market value (MV) in the case of listed shares ; have not been followed, All India financial institutions and banks have been following these guidelines uniformly and as such the procedure laid down in these guidelines is followed by the corporate sector and is in vogue. ( 19 ) IN this connection he has referred to the following : (Al) Corporate Mergers, Amalgamations and Takeovers-Dr. J. C. Verma, 2nd Edition-1995, page 207, para 9 and Page 208, Part II. ( 19 ) IN this connection he has referred to the following : (Al) Corporate Mergers, Amalgamations and Takeovers-Dr. J. C. Verma, 2nd Edition-1995, page 207, para 9 and Page 208, Part II. (A2) Hindustan Lever Employees' Union v. Hindustan Lever Ltd. [1994] 4 Comp LJ 267 (SC) ; [1995] 83 Comp Cas 30 (para. 43 ). ( 20 ) IT has been submitted on behalf of the objector that the valuation has been done pn the basis of unaudited figures of both petitioner-companies as at March 31, 1995, by taking average of book value without considering contingent liabilities and other items. Market value has been taken for a day, i. e. , April 1, 1995, in case of both companies. This procedure is in conflict with the Central Government guidelines. ( 21 ) IT has further been submitted that contingent liabilities mainly on account of income-tax, surtax, excise duty, sales tax and purchase tax and turnover tax amounting to Rs. 5 crores (approx.) and also non-provision for doubtful disputed debts and customs duty amounting to Rs. 1. 5 crores (approx.) has not been considered in the valuer's report and as such no judgment was given so far as the contingent liabilities and non-provisioning of doubtful debts are concerned. ( 22 ) THE learned advocate for the respondent has contended that petitioner No. 1 has been holding 11,64,000 equity shares of petitioner No. 2 which comes to 13. 37 per cent. of paid-up capital of petitioner No. 2. At the time of valuation it has not been considered. ( 23 ) THE further contention of the learned advocate for the respondent is that the revaluation reserve has been considered by the valuer for purpose of share valuation in respect of petitioner-company No. 1. This procedure is in conflict with the Central Government guidelines, ( 24 ) MR. Das Adhikary, the learned advocate for the respondent has further submitted that the scrutineer has not been appointed in terms of Section 184 of the Companies Act, 1956. ( 25 ) IT has been submitted by Mr. Das Adhikary that the court appointed chairperson has based her judgment upon information received from Shri Promod Dugar who is a director of both the companies and nothing but an interested person, which is contrary to the accepted principle of law and highly illegal. ( 26 ) THE further contention of Mr. Das Adhikary that the court appointed chairperson has based her judgment upon information received from Shri Promod Dugar who is a director of both the companies and nothing but an interested person, which is contrary to the accepted principle of law and highly illegal. ( 26 ) THE further contention of Mr. Das Adhikary, is that the auditor's report is full of qualification/adverse comments. ( 27 ) THE audited accounts of petitioner No. 1 is not at all acceptable and so far as petitioner No. 2 is concerned the report was made on the basis of the certificate by the management for the purpose of completion of accounts. ( 28 ) FURTHER contention of the learned advocate for the respondent is that it appears from the verification of records with the Registrar of Companies that the transferee-company, Kusum Products Ltd. , has only 30 shareholders out of which seven are minors. It was further revealed that six companies situated at No. 6, Royd Street, Calcutta-16, are holding 96. 33 per cent. of the total capital. ( 29 ) MR. Das Adhikary has submitted that there is violation of the statutory requirement so far as the minimum number of shareholders in respect of petitioner No. 1 is concerned. ( 30 ) IN terms of the recommendations of the High Powered Committee on Stock Exchanges, the Government, vide its Circular No. F. 14 (2)/se/85 dated September 23, 1985, has taken a decision that a listed company should be de-listed after giving six months' notice if the number of public shareholders falls below five for every Rs. 1 lakh of capital offered to the public. As per the audited accounts for the year 1994-95 in respect of petitioner No. 1-company, the issued and subscribed capital consists of 39. 20 lakhs of equity shares of Rs. 10 each valued Rs. 3. 92 crores which requires a minimum of 1960 shareholders whereas there are only 30 shareholders which has been admitted by Mr. Promod Dugar, chairman and managing director of Kusum Products Ltd. , petitioner No. 1, as reported in the Statesman dated February 19, 1996. ( 31 ) IN this connection he has referred to the press report which appeared in various newspapers. He has also submitted that the petition suffers from suppression of material facts. Promod Dugar, chairman and managing director of Kusum Products Ltd. , petitioner No. 1, as reported in the Statesman dated February 19, 1996. ( 31 ) IN this connection he has referred to the press report which appeared in various newspapers. He has also submitted that the petition suffers from suppression of material facts. ( 32 ) IT has been contended that the said Tamal Kumar Majumdar is a bona fide shareholder of the company and a respected accounts analyst in the corporate sector as well as in the media circle. Reports in many newspapers published from Calcutta, Mumbai and Delhi showing the analysis of Sri Majurndar, have been referred to in the course of hearing. ( 33 ) IN support of his several contentions urged in this application opposing the sanction of the scheme Mr. Das Adhikary, the learned advocate for the respondent, has relied upon the following decisions : (i) Sugarcane Growers Association v, Sakthi Sugars Ltd. [1995] 6 SCLR 155, 158 ; [1998] 93 Comp Cas 646 (Mad) ; (ii) Jitendra R, Sukhadia v. Alembic Chemical Works Co. Ltd. [1988] 64 Comp Cas 206 (Guj), page 213, last paragraph. (iii) In the matter of Carron Tea Co. Ltd. [1966] 2 Comp LJ 278 (Cal ). ( 34 ) S. K. Kundu, the learned advocate for the Central Government, has submitted that the share valuation report is not fair. He has referred to the balance-sheet and the profit and loss account and the auditor's report. The said valuation report is set out below : ( 35 ) VALUATION of shares of KATL ; As on March 31, 1995, the share capital of KATL is Rs. 8. 70 crores divided into 87,00,000 equity shares of Rs. 10 each. After considering the credit balance of Rs. 61, 19,562 in the profit and loss account and miscellaneous expenditure to the extent not written off Rs. 53,30,384 the net shareholders fund of KATL is Rs. 8,77,89,178. The book value of shares of KATL is, therefore, approximately Rs. 10 per share. ( 36 ) HE has submitted that it would not be proper and correct to come to a conclusion in respect of book value of shares of the transferor-company (KATL) to be approximately Rs. 10 per share. 8,77,89,178. The book value of shares of KATL is, therefore, approximately Rs. 10 per share. ( 36 ) HE has submitted that it would not be proper and correct to come to a conclusion in respect of book value of shares of the transferor-company (KATL) to be approximately Rs. 10 per share. ( 37 ) HE has further submitted that in the first place, it appears from the annual report and accounts for 1994-95 of KATL that the share capital is Rs. 8,66,35,000 and not Rs. 8,70,00,000 as stated in the valuation report. Secondly, he has submitted that the miscellaneous expenditure to the extent not written off to the tune of Rs. 53,30,384 as stated in the report appears to be incorrect also. In schedule M to the said balance-sheet, a sum of Rs. 47,72,357 and not Rs. 53,30,384 can be found on that count. Thirdly, he has submitted that the sum of Rs. 61, 19,562 as credit balance as stated in the valuation report cannot be found in the profit and loss account. Instead a sum of Rs. 52,50,483 has been stated to be the surplus. Therefore, the valuation report in respect of KATL is wrong as it is based on wrong premises as stated hereinabove. The basis being wrong, the conclusion has become wrong. ( 38 ) THEREFORE, according to him, the valuation report of the transferor-company is not correct as it is based on the wrong terms. ( 39 ) IT has also been submitted by Mr. Kundu that it would appear that the annual report for 1993-94 of KATL does not contain the "profit and loss account for the year ended at March 31, 1994" at all. Although the annual report and accounts for 1994-95 contains "profit and loss account for the year ended as at March 31, 1995", it does not contain the respective figures for the year ended as at March 31, 1994, which is the procedure prescribed by the Companies Act, 1956, in Parts I and II of Schedule VI as provided by Section 211 of the Companies Act, 1956. Therefore, the said accounts of KATL are not in proper form and as such cannot be relied upon. As a result, there is no authentic latest auditor's report on the accounts of the company before the court. ( 40 ) IT has further been submitted by Mr. Therefore, the said accounts of KATL are not in proper form and as such cannot be relied upon. As a result, there is no authentic latest auditor's report on the accounts of the company before the court. ( 40 ) IT has further been submitted by Mr. Kundu, the learned advocate for the Central Government, that unless the ratio of exchange is properly worked out on the basis of a proper balance-sheet, and profit and loss account, the scheme which has been placed before the court containing the ratio which is not based on proper materials cannot be sanctioned and is fit to be rejected. ( 41 ) IN support of his contention, he has relied upon the judgment and decision in N. A. P. Alagiri Raja and Co. v. N. Guruswamy [1989] 65 Comp Cas 758 (Mad) wherein it has been held that (at page 769) ". . . the court will not only have to be satisfied that the meeting was attended by 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, and they have agreed to the compromise of the proposal, but will also have to be satisfied that all the material facts relating to the company such as the latest financial position of the company, the latest audited report of the company,. . . are placed before the court". ( 42 ) HE has further pointed out that the valuers have taken into consideration the quoted rate of the Calcutta Stock Exchange per share in respect of KPL and the market value per share in respect of the transferor-company (KATL ). Both the companies have raised shares in 1994-95, that is, in the year previous to the scheme of amalgamation. The transfer date as per the scheme is April 1, 1995. During 1994-95, KPL has raised the share capital from Rs. 8,00,000 to Rs. 3,92,00,000 and KATL has raised the share capital from Rs. 7,000 to Rs. 8,70,00,000 of which Rs. 3,65,000 is in arrears. Therefore, both the companies are guilty of raising share capital by issuing equity shares of Rs. 10 each. When the value per equity share of Rs. 10 of KPL is quoted at the Calcutta Stock Exchange at Rs. 200 per share it has issued equity shares of Rs. 7,000 to Rs. 8,70,00,000 of which Rs. 3,65,000 is in arrears. Therefore, both the companies are guilty of raising share capital by issuing equity shares of Rs. 10 each. When the value per equity share of Rs. 10 of KPL is quoted at the Calcutta Stock Exchange at Rs. 200 per share it has issued equity shares of Rs. 10 each at par and thereby has tried to make illegal gains against public interest. The same device has been adopted by KATL which is contrary to public interest and mala fide as its share is quoted in the market at Rs. 17. 75 per share. Thereby, the company has tried to make illegal gains. If the shareholders of both the companies sell and transfer their shares they will be able to make huge profits. On the other hand, it has been submitted that the companies should have offered public issue of shares instead of dealing clandestinely. At least the shares should have been valued at the quoted rates while being issued to the shareholders, which would have given an altogether different picture. The result is sought to be achieved by fixing the ratio of value of shares of KPL and KATL at 1 : 10 by taking into account different valuation methods although for practical purposes it is otherwise. The ratio after amalgamation will give a share structure to the transferee-company (KPL) which acts contrary to public interest as the public will be duped to purchase the shares of KPL at Rs. 200 per equity share or even more when the existing shareholders on the transfer date have got the shares at par, namely, equity shares of Rs. 10 each at that value. Therefore, the scheme is against public interest and as such is fit to be rejected. ( 43 ) IT has further been submitted that the valuers in adopting the methods should have taken into consideration the book value of three years or the quoted rate of three years for coming to a proper valuation of the shares as has been done in the case of Hindustan Lever Employees' Union v. Hindustan Lever Ltd. [1995] 83 Comp Cas 30 ; AIR 1995 SC 471. ( 44 ) IN the next place, it has been submitted that it is evident on the face of the valuation report that, while considering the valuation of shares of KPL, the valuers have taken into consideration the share capital and the reserve and surplus including the revaluation reserves of KPL to determine the book value of shares while in the case of KATL it has taken into consideration the share capital, the credit balance and miscellaneous expenditure to the extent not written off. Therefore, it is apparent that the valuers applied double standard in calculating book value of shares of the companies and as such, it is unfair, unjust and unreasonable and, therefore, the share valuation is fit to be rejected. ( 45 ) FURTHER, it has been submitted on behalf of the Central Government that there should have been a meeting of the creditors on the scheme of amalgamation as both the companies have taken substantial amounts by way of loan. KPL has taken secured loans to the tune of Rs. 3,63,29,443 from the Industrial Development Bank and Bank of India as appears from schedule "c". It has also taken unsecured loans to the tune of Rs. 2,08,27,280 as appears from schedule "d". Similarly, KATL has taken secured loans to the tune of Rs. 12,96,96,570 as would appear from schedule "c" to the annual report and accounts for 1994-95. The loans taken from the banks belong to the public whose interest is being neglected. ( 46 ) IN the next place, it has been submitted that both the companies have not made provision for contingent liabilities in their accounts. KPL has not made provision for contingent liabilities as would be available from the notes of auditors at page 36 of the report and accounts for 1994-95. KATL also has not provided for contingent liabilities which will be available from the notes on accounts at page 18 of the annual report and accounts for 1994-95. Most of the items of contingent liabilities are due to the public fund and, therefore, by ignoring the same the directors of the companies have acted mala fide and prejudicial to public interest. Most of the items of contingent liabilities are due to the public fund and, therefore, by ignoring the same the directors of the companies have acted mala fide and prejudicial to public interest. ( 47 ) IT has been submitted on behalf of the Central Government that the scheme of amalgamation as proposed and especially the share ratio which is the basic structure of the scheme is not a bona fide one and is against public interest. Therefore, the scheme is fit to be rejected. In this connection, it has been submitted that simply because the "majority shareholders have voted in favour of the scheme, the company court is not to act as a mere rubber stamp and sanction the same". In support of this submission reliance is placed on the judgment reported in Sugarcane Growers Association v. Sakthi Sugars Ltd. [1995] 6 SCLR 144 ; [1998] 93 Comp Cas 646 (Mad ). It has been submitted on behalf of the respondents that it would appear that the Division Bench of the Madras High Court has taken into consideration various judgments of different High Courts including that of the High Court of Calcutta in Calcutta Industrial Bank Ltd. , In re [1948] 18 Comp Cas 144. ( 48 ) IT has been further contended that the report of the chairman of the meeting of the holders of equity shares of Kusurn Agrotech Ltd. by Ms. Ipsita Sett is to the effect that the meeting of the shareholders held on August 4, 1995, was attended by the holders of 43,79,900 equity shares which constitutes 50. 34 per cent. of the total value of the issued equity shares, namely, 87,00,000 equity shares. Therefore, it is short of majority representing three-fourths in value. Section 391 (2) of the Companies Act, 1956, is set out :"391. 34 per cent. of the total value of the issued equity shares, namely, 87,00,000 equity shares. Therefore, it is short of majority representing three-fourths in value. Section 391 (2) of the Companies Act, 1956, is set out :"391. (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. " ( 49 ) THEREFORE, Section 391 (2) of the Companies Act, 1956, prescribes that 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, agree to any compromise or arrangement, the same will be binding on all, if it is sanctioned by the court. ( 50 ) IT has further been submitted on behalf of the Central Government that in the instant case the majority as required has not sanctioned the compromise or arrangement and, therefore, the scheme fails and the court has no other option but to reject the scheme. Only when the required statutory majority accepts the compromise or arrangement, then the question of the court's discretion to accept or to reject will arise. In this case, there is no question of applying the court's discretion since the arrangement or compromise has not been accepted by the statutory majority and as such the application is fit to be rejected.