In Re: Asian Investments Ltd. and others

Lakshmanan, J.—These petitions were filed by the transferors and transferee-companies to sanction a scheme of amalgamation whereby the

petitioner-company in Company petitions Nos. 50, 51 and 53 of 1991 (hereinafter called ""transferor-companies""), would get merged with the

petitioner-company in Company Petition No. 52 of 1991, the transferee-company.

Asian Investments (petitioner in C.P. No. 50 of 1991) was registered as a limited company on August 20, 1981. It carries on a business in

investments and leasing. This company is the holding company of the transferee-company (Petitioner in C.P. No. 52 of 1991.)

The transferor-companies, viz., Asian Investments and Crescent Investments Limited and Ruby Investments Limited, are the promoter

companies of South Asian Financial Exchange Limited. The directors of the three transferor-companies were of the view that the amalgamation

would enable the transferee-company to carry on the combined business very economically and efficiently and that the amalgamation would result

in enlarging the activities or the transferee-company which would be conducive to avoidance of duplication and reduction in administrative and

other overhead expenses and also would result in optimum utilization of the management and other resources. According to them, the

amalgamation would, therefore, be in the best interest of all shareholders and creditors and also be in the best interest and welfare of the

employees.

The salient features of the scheme of amalgamation of the three transferor-companies and the transferee-company have been fully set out in

paragraph 10 of the respective petitions.

The scheme is to be effective from April 1, 1990, and all undertakings, properties, rights and powers, investments, inventories, and all assets of

whatsoever nature including all properties movable and immovable and assets of whatsoever nature such as industrial and other licences and quota

rights, trade marks and industrial property, rights, leases, tenancy rights, benefits of all contracts, etc., of the three transferor-companies shall stand

transferred to and vested in the transferee-company.

Likewise, all debts, liabilities, duties and obligations of the transferor-companies shall stand transferred without further act or deed to the

transferee-company so as to become the debts, liabilities and obligations of the transferee-company.

In consideration of the transfers, every member of the three transferor-companies shall, in respect of every equity share of Rs. 10 each credited

as fully paid and held by him or her in the three transferor-companies, be entitled as of right to be issued, allotted and to receive from the

transferee-company one equity shares in the capital of the transferee-company of Rs. 10 each credited fully paid. The shares in the transferee-

company held by Asian Investment, one of the transferor-companies shall stand extinguished.

The scheme is conditional upon and subject to :

(a) any requisite consent, approval or permission of the Central Government or any other authority which, by law, may be necessary, for the

implementation of this scheme;

(b) the necessary resolution by the transferee-company u/s 81 of the Companies Act, 1956;

(c) the necessary resolution to increase the authorised capital of the transferee-company u/s 94 of the Companies Act;

(d) The consent of the Controller of Capital Issues under the Capital Issues (Control) Act, 1947, to the issue of shares in the transferee-company

to the shareholders of the transferor companies pursuant to the scheme of amalgamation.

(e) the necessary sanctions and order of the High Court of Judicature at Madras under sections 391 and 394 of the Companies Act, 1956, as

aforesaid for the amalgamation of all the transferor-companies without any exception with the transferee-company"".

Upon this scheme being effective as aforesaid, the three transferor-companies shall stand dissolved without winding up as and from such date as

this court may direct.

Pursuant to the decision of the board, the transferor-companies and the transferee-company filed Company Applications Nos. 281 of 1991,

280 of 1991, 279 of 1991 and 278 of 1991 on the file of this court for necessary directions regarding the publication, convening and the conduct

of the meetings of its equity shareholders to consider the scheme of amalgamation. This court, by order dated March 1, 1991 directed the

transferor-companies to convene a meeting of the equity shareholders on April 8, 1991, at 9:00 a.m., 10 a.m., 11 a.m. and 12 noon for the

transferee-company at No. 34, Victoria Crescent, Egmore, Madras-105. Notices of the above meeting were sent individually to the equity

shareholders of the companies with a copy of the scheme of amalgamation. The meetings were convened on that date in accordance with the

directions of this court.

Mr. K. S. Narayanan, Mr. V. Guruswamy, Mr. M. A. Alagappan and Mr. S. Ramanujachari who were appointed as chairmen for the

meetings presided over meetings and submitted the results of the meetings in their report dated April 8, 1991. Copies of the said reports were filed

in these proceedings.

The meetings were attended by the following persons :

Asian Investments (C.P. No. 50 of 1991) :

21 equity shareholders entitled together to 4,99,998 equity shares of Rs. 10 each aggregation to Rs. 49,99,980.

Crescent Investments (C.P. No. 51 of 1991) :

20 equity shareholders entitled to 4,99,994 equity shares of Rs. 10 each aggregation to Rs. 49,99,940.

Ruby Investments (C.P. No. 53 of 1991) :

18 equity shareholders of the company entitled together to 4,99,994 equity shares of Rs. 10 each aggregating to Rs. 49,99,940.

Crimson Investments (C.P. No. 52 of 1991) :

Four shareholders entitled together to Rs. 3,28,002 equity shares of Rs. 10 each aggregating to Rs. 32,80,020 and two preference shares of Rs.

100 each aggregating to Rs. 200.

The salient features of the scheme of amalgamation were read out and explained by the respective chairmen of the above meetings to the

members present at the meetings. The scheme of amalgamation was then put to vote and all the shareholders of the above four companies present

at the meetings unanimously approved the scheme of amalgamation. No votes were cast against the scheme of amalgamation. A resolution was

passed unanimously by all the four companies.

These four petitions were filed praying for sanction of the scheme of amalgamation as approved by the shareholders of the respective

companies so as to bind all members of the transferor and transferee-companies and to dissolve the three transferor-companies without winding

up.

I have heard the arguments of Mr. T. Raghavan, learned senior advocate on behalf of petitioners and Mr. A. S. Venkatachalamoorthy,

Additional Central Government standing counsel on behalf of the Regional Director of Companies Affairs, Madras.

The Regional Director of Company Affairs, Madras, has filed his representation. Though various objections were taken in regard to the

scheme of amalgamation, at the time of hearing on December 3, 1991, the following objection mentioned in paragraph 2 of the representation

alone was pursued and argued by Mr. A. S. Venkatachalamoorthy.

Paragraph 2 of the representation is reproduced hereunder :

I state from the various returns filed by the transferee-company, viz., Messrs. Crimson Investments Limited, that it is seen that Asian Investments

Limited, one of the transferor-companies, is holding 2,68,002 equity shares out of the total 3,28,002 equity shares which works out to more than

50% of the issued share capital. In fact, the said company is also holding 2.11% cumulative redeemable preference share of Rs. 100 each issued.

Accordingly, the transferee-company is the subsidiary company of the Asian Investments Limited (transferor-company). Clause 8 of the scheme

while providing for the exchange ratio also provides that the shares held in the transferee-company by Asian Investments Limited shall stand

extinguished. After the shares held by the transferor-company (Asian Investments Limited) are extinguished, the share capital of the transferee-

company will be reduced to Rs. 6,00,000 divided into 60,000 equity shares of Rs. 10 each. In short, the capital of the company will be reduced

without following the procedure laid down in the matter of reduction of capital in sections 100 to 105 of the Companies Act, 1956. Judicial

decisions have held that whenever a scheme involved reduction of share capital, the special provisions relating to the said reduction have to be

strictly followed before the scheme is approved. As the present scheme involves reduction of the share capital of the transferee-company, it has to

comply with the procedure as to reduction of capital and obtain the approval of the High Court u/s 100 of the Act for the said reduction.

Thus, according to Mr. A. S. Venkatachalamoorthy, section 100 of the Act has to be strictly complied with. In other words, since the present

scheme involves reduction of the share capital of the transferee-company it has to comply with the procedure as to reduction of capital and obtain

the approval of this court u/s 100 of the Act for the said reduction. In support of his contention, Mr. A. S. Venkatachalamoorthy strongly relied on

the Division Bench decision of the Calcutta High Court in Hindusthan Commercial Bank Ltd. v. Hindusthan General Electric Corporation [1960]

30 Comp Cas 367, which in turn followed Bengal Bank Ltd. v. Suresh Chakravarthy [1951] 21 Comp Cas 315 .

Mr. T. Raghavan, learned senior advocate, in reply to the argument, contended that, for the reduction of capital involved u/s 391 read with

section 394 of the Companies Act, 1956, the procedure laid down under sections 100 to 105 of Companies Act need not be followed. He also

relied on my judgment, dated September 5, 1991, in C.P. Nos. 55 to 60 of 1991.

Paragraph 1 of the affidavit of N. Srinivasan, dated November 12, 1991, filed in reply to the representation is also reproduced hereunder :

With reference to paragraph 2 of the representation of the Regional Director, I state that the investments of the transferor and transferee-

companies are correctly set out. I state that though in terms of the scheme of amalgamation, the shares in Crimson Investment Limited, the

transferee-company, held by Asian Investments Limited, one of the transferor companies, shall stand extinguished yet after this scheme is approved

by this honourable court, the transferee-company has to make allotment to the shareholders of the transferor-companies and by virtue of this

allotment the share capital of the transferee-company shall stand increased. I have been advised that for the reduction of capital involved u/s 391

read with section 394 of the Companies Act, 1956, the procedure laid down under sections 100 to 105 of the Companies Act, 1956, need not be

followed. I am also advised that this hon''ble court in Company Petitions No. 55 to 60 of 1991 by its order dated September 5, 1991, has held

that for the reduction of capital involved u/s 391, read with section 394 of the Companies Act, 1956, the procedure laid down under sections 100

to 105 of the Companies Act, 1956, need not be followed.

The only point that may arise for consideration is whether the procedure contemplated u/s 100 of the said Act has to be complied with as the

present scheme involved reduction of share capital of the transferee-company as contended by Mr. A. S. Venkatachalamoorthy or such a

procedure need not be followed as urged by Mr. T. Raghavan.

In this connection, clause 8 of the scheme is to be noticed. The same is reproduced under :

Every member of AIL, CIL and RIL, shall in respect of every equity share of Rs. 10 each credited as fully paid held by him or her in AIL, CIL,

RIL on the completion of procedures date (as hereinafter defined) be entitled as of right to be issued, allotted and to receive from the transferee-

company within 30 days of the date of completion of the procedures, one equity share in the capital of the transferee-company of Rs. 10 each

credited as fully paid. The shares in the transferee-company held by Asian Investments Limited, one of the transferor-companies, shall stand

extinguished.

It is seen from the above clause that the shares in Crimson (transferee-company) held by Asian Investments (transferor-company) shall stand

extinguished. This clause has become necessary in view of the statutory prohibitions contained in section 42 and section 77 of the Act. The object

of section 42 is to maintain the separate operational identity of a holding company and its subsidiaries and thereby preserve the respective

shareholders'' control over them.

Section 77 imposes a restriction on purchase by a company of its own shares. It is not necessary that extinguishment of shares in all cases

should necessarily result in reduction of share capital. Section 100 will not come into to play where the scheme of amalgamation contemplates the

transfer of the entirety of assets and liabilities of the transferor-company to the transferee-company. In such a case, in my view, there is no release

of assets. The assets of the transferor-company, on amalgamation, stand transferred to and vested in the transferee-company.

Further, rule 85 of the Companies (Court) Rules, 1959, which is part of the scheme of section 101 and section 102 of the Act, provides that

where a proposed compromise or arrangement involves reduction of capital of the company, the procedure prescribed by the Act and the rules

relating to reduction of capital shall be complied with before the compromise or arrangement so far as it relates to reduction of capital is

concerned. It is, therefore, evident that section 101 and section 102 and rule 85 would stand attracted only to cases of compromise or

arrangement involving reduction of capital and not to cases of amalgamation simpliciter when the entirety of the assets and liabilities are transferred

and when there is no release of any assets.

The object of asking for confirmation by the court of reduction of capital is to safeguard the interest of the creditors of the company. In the

instant case, the resolution approving the scheme of amalgamation was unanimous. There was no voice of protest from any quarter. The scheme is

a comprehensive and consolidated scheme. It is a peculiar case of amalgamation where a holding company is amalgamated with a subsidiary

company. Therefore, I am clear in my mind that the contention raised by Mr. Venkatachalamoorthy is not well-founded. As already mentioned,

this case on hand is not a case where there is reduction in capital. Further, the procedure prescribed under sections 101 and 102 read with rule 85

do not stand attracted to a case of scheme of amalgamation, where there is no release of assets but which involves transfer of all the assets and

liabilities.

In this connection, support can be derived from a Division Bench judgment of our High Court in T. Durairajan v. Waterfall Estates Ltd. [1972]

42 Comp Cas 563 , where the learned Chief Justice Veeraswami and Justice Raghavan have summarised the position of law very clearly in the

following terms (p. 567) :

The object of asking for confirmation by court of reduction of capital is to safeguard the interests of the creditors of the company, and other

obligations or rights coming into existence in the light, or on the strength of existing capital structure either fully paid up, or realisable at call. The

scheme, in the instant case, involves transfer of the entire assets, rights and liabilities of the amalgamation companies to the new company which

becomes, when the scheme takes effect, liable to the creditors of the amalgamating companies to the fullest extent. To such a case the procedure

for reduction of share capital, as provided for by sections 100, 101 and 102 is hardly applicable, Rule 85, in our opinion, does not contemplate a

compromise or arrangement in the nature of a scheme of amalgamation, such as we have here.

The learned judges observed as follows at page 568 :

The context of the decision makes it inapplicable to the facts before us. It is not every extinguishment of shares, as we are inclined to think, that is

reduction in capital, unless the company continues to exist. Where by the process of arrangement the company itself is dissolved without winding

up, it is hardly a case of reduction in capital as contemplated by the provisions of the Companies Act, 1956. If the object of these provisions is to

safeguard creditors who may rely on the capital structure and take a step in advancing money, or concluding other transactions in the company, the

scheme in the instant case does not, in any way, defeat or affect it, for, the interests of the creditors have been full safeguarded by the terms of the

proposed amalgamation.

Learned counsel for the Central Government would place strong reliance on the judgment of the Calcutta High Court in Hindusthan

Commercial Bank Ltd. v. Hindusthan General Electric Corporation [1960] 30 Comp Cas 367, in support of his contention. The said judgment

relied on by learned counsel does not relate to a scheme of amalgamation, but a scheme of arrangement between the several classes of

shareholders and, as part of the scheme a cancellation, reduction and reorganization of the capital of the company was also recommended. The

principles laid down in the said judgment in my opinion, cannot have application to a case as the present one where there is a scheme of

amalgamation simpliciter.

My order in Company petitions Nos. 55 to 60 of 1991, related to a case where a special resolution as required u/s 100 of the Act was

passed. Therefore, there was no occasion for me to consider the question whether the procedure relating to reduction of share capital has to be

followed in a case of amalgamation where there is transfer of all the assets and liabilities and where there is no release of assets.

In the result, all the company petitions are ordered as prayed for. The official liquidator will submit his report that the affairs of the companies

have not been conducted in a manner prejudicial to the interest of its members or to the public interest. The prayer for dissolution of the transferor-

companies without winding up will be decided after receipt of the report of the official liquidator.