Mukand Sumi Metal Processing Limited Vs

P.N. Deshmukh, Member Judicial

This bench is convened through video conference.

Heard the learned counsel for the Petitioner Companies. No objector has come before the Tribunal to oppose the Petition and nor any party has controverted any averments made in the Petition.

The sanction of this Tribunal is sought under Sections 230 to 232 of the Companies Act, 2013, to the Scheme of Arrangement amongst Mukand Sumi Metal Processing Limited, Petitioner No.1 and Mukand Sumi Special Steel Limited, Petitioner No.2 and their respective Shareholders and Creditors.

Petitioner No.1 is engaged in manufacturing, purchase, refinement, preparation, import, export, sale and generally to deal in iron & steel in all forms, and/or by-products thereof. It is engaged in the business of (i) special alloy steel cold finished bars and wires and (ii) stainless steel cold finished bars and wires. Petitioner No.2 is engaged in the rolling & finishing of Alloy Steel blooms/billets into bars & rods under an arrangement with Mukand Limited and marketing of alloy steel products. The equity shares of Petitioner No.1 are not listed on any stock exchanges in India. The equity and preference shares of Petitioner No.2 are not listed on any stock exchanges in India.

The Learned Counsel for the Petitioner Companies states that the Scheme of Arrangement is presented under Section 230 to 232 and other applicable provisions of the Companies Act, 2013 and the rules and regulations made thereunder, for the demerger of the alloy steel cold finished bars and wires business of Petitioner No. 1 into Petitioner No. 2.

The Learned Counsel for the Petitioner Companies further submits the Introduction and Rationale for the Scheme (demerger) is as follows:-

a. That the proposed Scheme is expected to enable better realisation of potential of the businesses, yield beneficial results and enhanced value creation for the Petitioner Companies, their respective shareholders, creditors, lenders, consumers and employees. The rationale for the Scheme is set out below:

b. The proposed Demerger will result in consolidation of Alloy Steel Business of Petitioner No.1 in a single entity, Petitioner No.2, resulting in alignment of interest of all shareholders, concentrated management focus, integration of business operations, greater financial strength and to maximise overall shareholders’ value;

c. the Scheme will enable Petitioner No.1 to focus on and enhance its remaining business operations by streamlining its operations;

d. the Scheme will help in achieving and sustaining competitiveness and development of internal core competencies of the Petitioner Companies in the long term;

e. Synergies in operational processes arising from the proposed Demerger are expected to bring greater productivity & cost savings in marketing, selling and distribution expenses, resulting in benefit of economies of scale to Petitioner No.2.

The Counsel for the Petitioner Companies submits that the Board of Directors of both the Petitioner Companies in their respective meetings held on 13th February, 2020 have approved the Scheme of Arrangement with the Appointed Date as 1st April, 2020, the copies of the Board resolutions are annexed to the Company Scheme Petition.

The Learned Counsel for the Petitioner Companies submits that the Company Scheme Petition is filed in consonance with sections 230 to 232 of the Companies Act, 2013 along with the Order passed in the connected Company Scheme Application Nos. C.A.(C.A.A.)/1123/MB/2020 by this Tribunal.

By Order dated 26th April 2021 passed by the National Company Law Tribunal, Mumbai Bench in C.A.(CAA)/1123/MB/2020, the meetings of Equity Shareholders of the Petitioner Companies was dispensed with in view of the fact that, the respective Equity Shareholders of the Petitioner Companies had given their consent to the Scheme and for dispensing with the convening and holding of the meeting of the Shareholders by way of consent affidavits which were produced before this Hon’ble Tribunal.

The Learned Counsel further states that pursuant to the directions contained in the said Order dated 26th April 2021, that the convening and holding of the meeting of the Preference shareholder of the Petitioner No. 2 was dispensed with in view of the fact that there is only one Preference Shareholder of the Petitioner Company No. 2 who had provided his consent to the Scheme by way of consent affidavit.

The Learned Counsel further states that pursuant to the directions contained in the said Order dated 26th April 2021 the meeting of the Secured Creditors of the Petitioner Companies was dispensed with in view of the undertaking that the Petitioner Companies would serve individual notices on their Secured Creditors. The Petitioner Companies had on 10th June, 2021 and 18th June, 2021 respectively dispatched notices to all their Secured Creditors.

The Learned Counsel further states that pursuant to the directions contained in the said Order dated 26th April 2021 the meeting of the Unsecured Creditors of the Petitioner Companies was dispensed with in view of the undertaking that the Petitioner Companies would serve individual notices on their Unsecured Creditors. The Petitioner Companies had on 10th June, 2021 and 23rd June, 2021 dispatched notices to all their Unsecured Creditors as on 31st March, 2021.

The Counsel appearing on behalf of the Petitioner Companies further states that the Petitioner Companies have complied with all the requirements as per the directions of the Hon’ble Tribunal and they have filed necessary affidavits of compliance in the Hon’ble Tribunal. Moreover, the Petitioner Companies, through their Counsel, undertake to comply with all statutory requirements if any, as required under the Companies Act, 2013 and the Rules made there under whichever is applicable. The said undertakings given by the Petitioner Companies are accepted.

Regional Director (Western Region), Ministry of Corporate Affairs, Mumbai, has filed his report dated March 30, 2022 inter alia stating therein that save and except as stated in paragraph IV of the said report, it appears that the Scheme is not prejudicial to the interest of shareholders and public. In response to the observations made by the Regional Director, the Petitioner Companies have filed their combined affidavit dated 11th April, 2022. The observations of the Regional Director and the Petitioner Companies’ response to the said observations are summarised below:

Sl.

No. (Col.1)

RD   Observation   via RD Report dated  30th March, 2022(Column 2)

Reply Via Consolidated RD Reply dated 11th April, 2022

(Column 3)

IV(a)

In compliance of AS-14 (IND     AS-103),     the

Petitioner     Companies shall        pass        such accounting          entries which  are  necessary  in connection    with    the scheme to comply with other             applicable Accounting    Standards such as AS-5(IND AS-

8) etc.

The Petitioner Companies undertake that in compliance with the said AS 14 (now IND- AS   103),   accounting   entries   which   are necessary in connection with the Scheme to comply  with  other  Accounting  Standards such   as   AS-5   (now   IND   AS-8)   etc,   if applicable, will be duly passed by them.

IV(b)

As per Definition of the

Scheme,

“Appointed          Date” means  1st  April,  2020 or such other date as the National Company Law Tribunal           (defined hereinafter)             may decide/  approve  being the   date   with   effect from which the Scheme shall  become  operative and  /  or  be  deemed  to have become operative;

And

“Effective Date” means the last of the dates on which all the conditions and  matters  as  referred to  in  Clause  22  of  the Scheme  occur  or  have been fulfilled, obtained or          waived          in accordance    with    this Scheme.  References  in this  Scheme  to  date  of ‘upon     this     Scheme becoming  effective’  or ‘upon     this     Scheme

coming     into     effect’

The  Petitioner  Companies  submit  that  the

Appointed  Date  in  present  Scheme  is  in

compliance with the requirements of circular no. F. No. 7/12/2019/Cl-1 dated 21.08.2019 issued by the Ministry of Corporate Affairs (“said Circular”).

It   is   submitted   that   the   Scheme   was approved  by the  Board  of  Directors  of  the Petitioner   Companies   on   13th   February, 2020  and  the  Company  Application  was presented  on  20th  October,  2020,  which  is less than a year prior to the “appointed date” under   the   Scheme,   i.e.   1st   April,   2020. Consequently,  the  present  case  is  squarely covered by the said Circular.

means    the    Effective Date;

In   this   regard,   it   is submitted  that  Section

232      (6)      of      the Companies   Act,   2013 states  that  the  scheme under this section shall clearly     indicate     an appointed    date    from which     it     shall     be effective       and       the scheme shall be deemed to   be   effective   from such  date  and  not  at  a date  subsequent  to  the appointed               date. However,   this   aspect may be  decided  by the Hon’ble           Tribunal taking  into  account  its inherent powers. Appointed      date      is antedated  for  2  years, therefore, the petitioner company      may      be directed  to  amend  the

appointed   date   which

shall not be earlier than 1 year.

Further,  the  Petitioners may be asked to comply with   the   requirements as clarified vide circular no. F. No. 7 / 12 / 2019

/ CL-I dated 21.08.2019 issued  by  the  Ministry of Corporate Affairs.

IV(c)

The   Hon’ble   Tribunal may   kindly   seek   the undertaking    that    this Scheme is approved by the requisite majority of members  and  creditors as per Section 230(6) of the   Act   in   meetings duly  held  in  terms  of Section    230(1)    read with  subsection  (3)  to

(5) of Section 230 of the Act   and   the   Minutes thereof are duly placed before the Tribunal.

The  Petitioner  Companies  submit  that  the Hon’ble  Tribunal  was  pleased  to  dispense with  the  meetings  of  the  shareholders  and creditors    of    the    respective    Petitioner Companies as set out in the order dated 26th April    2021    passed    in    the    captioned Company   Scheme    Application    for    the reasons set out therein. As such, there is no question of placing minutes of meetings of shareholders    and    creditors    before    this Hon’ble NCLT in this regard.

IV(d)

Clause-16.2.4             of Accounting   Treatment of   the  scheme;   stated that  the  excess,  if  any, between   the   carrying value    of    assets    and liabilities transferred to the Resulting Company and   the   consideration discharged  by  way  of issuance      of      equity shares   as   per   Clause

16.2.3.   above,   to   the shareholders     of     the Demerged     Company, upon  Demerger  of  the Demerged Undertaking shall    be    credited    to capital  reserve  account in   the   books   of   the Resulting Company.

In   this   regard   it   is submitted   that   as   per Accounting     Standard 14,    such    surplus    / deficit if any arising out of the scheme should be

credited/debited  to  the

Capital      Reserve      / Goodwill arising out of demerger. Such Capital Reserve,  arising  out  of the  demerger  shall  not be  considered   as  free reserve        and not available for distribution of dividend.

The Scheme, inter alia, provides as follows:

“16.2    In    the    books    of    the    Resulting Company:

16.2.4.The   excess,   if   any,   between   the carrying   value   of   assets   and   Liabilities transferred  to  the  Resulting  Company  and the   consideration   discharged   by   way   of issuance  of  equity  shares  as  per  Clause

16.2.3.  above,  to  the  shareholders  of  the Demerged Company, upon Demerger of the Demerged Undertaking shall be credited to capital reserve account in the books of the Resulting Company.

16.2.5.The   deficit,   if   any,   between   the carrying   value   of   assets   and   Liabilities transferred  to  the  Resulting  Company  and the   consideration   discharged   by   way   of issuance  of  equity  shares  as  per  Clause

16.2.3.  above,  to  the  shareholders  of  the Demerged Company, upon Demerger of the Demerged  Undertaking shall be debited to securities premium account in the books of the  Resulting  Company  in  terms  of  Clause 19 of Part IV of the Scheme.”

The  Petitioner  Companies  submit  that  the Scheme   duly   provides   that,   the   deficit/ surplus,  if  any,  arising  out  of  the  Scheme, will   be   debited   to   securities   premium account or credited to capital reserve of the Resulting Company, as the case may be.

The capital reserve, if any, created pursuant to the Scheme shall not be considered as free reserve   and   will   not   be   available   for distribution of dividend.

IV(e)

It  is  submitted  that  the petitioner Company has stated that the scheme is in       compliance       of Section    2(19AA),    in this   regard,   petitioner company      may      be directed   to   place   on record  that  as  to  how this     scheme     is     in compliance  of  Section 2(19AA) of the Income Tax Act, 1961.

The  Petitioner  Companies  submit  that  the Scheme   is   in   compliance   with   Section 2(19AA) of the Income-tax Act, 1961, inter alia, since

(i)   the  properties  and  liabilities  pertaining and/or    relatable    to    the    Demerged Undertaking,        being        transferred, becomes the properties and liabilities of the Resulting Company upon demerger;

(ii)  consideration  for  the  above  transfer  is discharged in the form of issue of equity shares by the Resulting Company  on a proportionate  basis  to  shareholders  of the  Demerged  Company,  holding  not less  than  three-fourths  in  value  of  the shares  in  the  Demerged  Company  and such     shareholders      shall      become shareholders of Resulting Company;

(iii) the  property  and  the  liabilities  of  the Demerged         Undertaking         being transferred by the Demerged Company are transferred at values appearing in its books  of  account  immediately  before the demerger; and

(iv) transfer of Demerged Undertaking is on- going concern basis.

IV(f)

The Petitioner Companies  be  directed to  place  on  record  of this Tribunal the list of assets  to  be  demerged with complete details of its assets and valuation.

The Petitioner Companies submit the list of assets to be demerged with complete details of  the  assets  and  their  value  are  annexed thereto and marked as Exhibit “A”.

IV(g)

The                Petitioner Company  to  place  on record as to what is the business        left        in

demerged        company after        transfer        of Demerged undertaking

Mukand  Sumi  Metal  Processing  Limited (Petitioner No. 1) is engaged in the business of  (i)  special  alloy steel  cold  finished  bars and wires (“Alloy Steel Business”) and (ii) stainless steel cold finished bars and wires.

Pursuant    to    the    Scheme    being    made effective,   the   Alloy   Steel   Business   of Mukand  Sumi  Metal  Processing  Limited (Petitioner  No.  1)  will  be  demerged  into Mukand    Sumi    Special    Steel    Limited (Petitioner No. 2).

As such, the Stainless Steel Business will be left   in   Mukand   Sumi   Metal   Processing Limited (Petitioner No. 1).

IV(h)

As per Clause-19 of the Scheme,  the  petitioner company  proposes  for reduction  of  securities premium   in   resulting company.       In       this regard,   the   petitioner company      may      be directed to comply with the       provisions       of Section 52 and 66 of the

Companies Act, 2013.

The Petitioner Companies submit that as per the   explanation   to   Section   230   of   the Companies  Act,  2013,  the  provisions  of Section 66 of the Companies Act, 2013 shall not  apply  to  the  reduction  of  share  capital effected pursuant to the order of the Tribunal under    Sections    230-232.    The    relevant explanation   is   extracted   hereinbelow   for easy reference of this Hon’ble Tribunal:

“For  the  removal  of  doubts,  it  is  hereby declared  that  the  provisions  of  section  66 shall  not  apply  to  the  reduction  of  share capital effected in pursuance of the order of the Tribunal under this section.”

Further,  the  Petitioner  Companies  submit that  the  Hon’ble  National  Company  Law Appellate Tribunal (NCLAT) in R. Systems International   Limited   2018   SCC   Online NCLAT 321, had an occasion to deal with the aforesaid issue. It is relevant to note that the Hon’ble NCLAT had held as follows:

“7.  From  the  explanation  below  Section 230,  it  will  be  evident  that  for  passing  an order under Section 230 to compromise or make  arrangements  with  the  creditors  and the  members,  the  provision  of  Section  66 shall   not   apply   for   reduction   of   share capital.  Such  order  can  be  passed  by  the Tribunal under Section 230 of the Act.

In  view  of  the  aforesaid  provisions,  we hold  that  the  Tribunal  failed  to  notice  the

‘Explanation’   below   Section   230,   which makes  it  clear  that  even  for  reduction  of share  capital  effected  in  pursuance  of  the order of the Tribunal under Section 230, the provision of Section 66 shall not apply.

As  noticed  above,  earlier  the  Hon'ble High Courts used to entertain application(s) under  Section  391  for  reduction  of  share capital.   This   will   be   evident   from   the decision of the Hon'ble Bombay High Court

in  “Investment  Corporation  of  India  Ltd.”

(1987)  61  Com  Cases  92  Bom”;  Hon'ble

High  Court  of  Gujrat  in  “Gujarat  Ambuja

Exports      Ltd.”      2003-(CC1)-GJX-0113-

GUJ”;  Hon'ble  High  Court  of  Madras  in

“Panasonic Appliances India Co. Limited”

in  Company  Petition  No.  331  of  2013  and the Hon'ble High Court of Andhra Pradesh

decision  in  “Jyoti  Inraventures  Limited”

Company Petition No. 263 of 2013” decided on 21st April, 2014.

Now it is not necessary to refer the earlier decisions in view of the ‘explanation’ below Section 230. Having held that the Tribunal failed to notice the aforesaid observations, we have no other option but to set aside the order dated 8th December, 2017 passed in CA      (CAA)-105(ND)/2017      which      is

accordingly set aside.” Emphasis Supplied

Therefore, the Petitioner Companies submit that,   since   in   the   captioned   matter,   the Scheme of Arrangement involves inter-alia capital  reduction  of  the  share  capital  of Resulting    Company,    proposed    to    be undertaken/    implemented    by    way    of sanction obtained through an order from this Hon’ble Tribunal under Sections 230 to 232 of   the   Companies   Act,   2013,   on   the application   of   the   explanation   provided under  Section  230  of  the  Companies  Act, 2013,  and  also  the  ratio  laid  down  by  the

Hon’ble NCLAT, the provisions of Section

66  of  the  Companies  Act,  2013  shall  not apply to the present case.

IV(i)

It  is  observed  that  the Petitioner     Companies are       having       non- residential Shareholders/     foreign shareholders, therefore, petitioner        company may    be    directed    to comply       with       the provisions    of    FEMA and RBI guidelines.

The   Petitioner   Companies   undertake   to comply  with  the  applicable  provisions  of FEMA and RBI guidelines.

IV(j)

The   Hon’ble   Tribunal may     hereby     kindly consider  the  report  of ROC as narrated in Para III(14)  above  and  pass appropriate order.

The   Petitioner   Companies   undertake   to comply with the observations made by ROC Mumbai in its report in accordance with the applicable provisions of law as follows:

(i)       It  is  submitted  that  the  observation made by ROC w.r.t. disagreement between the  Scheme  and  MCA  Mater  data  on  the amount of paid up Share Capital appears to be  incorrect  since  as  per  the  MCA  Master data the paid up Share Capital is reflected as INR  41,58,58,430  which  agrees  with  the Scheme.

It   appears   that   the   ROC   has   wrongly considered the paid up Share Capital as INR 41,58,57,000.

(ii)      Charges  of  the  Demerged  Company forming part of the Demerged Undertaking shall   stand   transferred   to   the   Resulting Company.

(iii)     Charges  of  the  Resulting  Company shall   remain   unaffected   pursuant   to   the effectiveness of the Scheme.

(iv)     ROC  has  given  the  observation  that the  Petitioner  Companies  had  not  filed  e- form MGT-14  with  ROC  office  intimating the  Board  approval  for  the  Scheme  (Sec 179(3)(i)    read    with    Sec    117(3)(g)    of Companies  Act,  2013).  However,  the  said observation appears to be incorrect since the Petitioner  Companies  had  already  filed  e- form    MGT-14    intimating    the    Board approval for the Scheme.

Copy of the e-form MGT-14 as filed by the Petitioner  Companies  is  attached  herewith

and  marked  as  Exhibit  “B”  Colly  for  this Hon’ble Tribunal’s reference.

(v)      The Petitioner Companies undertake

to  deal  with  the  creditors  in  the  ordinary course of business, as per law.

IV(k)

The       Income       Tax Department              has submitted   their   letter dated   02.09.2021   and

06.09.2021,  which  are enclosed         herewith, therefore,  the  Hon’ble tribunal may hear to the Income                    Tax

Department         before consideration    of    the Scheme.   Copy  of   the letters  are  enclosed  as Exhibit-‘E’ colly.

The  Petitioner  Companies  submit  that  the Income  Tax  Department  vide  letter  dated 2nd   September,   2021   addressed   to   the Regional     Director,     Western     Region, requested  Regional  Director  to  direct  the Petitioner   Companies   to   submit   details asked by the Income Tax Department vide their letters dated 20th August, 2021 served separately    on    each    of    the    Petitioner Companies.

The  Petitioner  Companies  submit  that  the requisite information was submitted by each of  them  vide  letters  dated  3rd  September, 2021,   copies   of   the   letters   dated   3rd September  2021  are  attached  herewith  and marked as Exhibit "C" Colly.

The  Petitioner  Companies  further  submit that the Income Tax Department submitted observations on the Scheme before Hon'ble Tribunal vide its letter dated 6th September,

2021     against     which     the     following clarification is being made:

(i)       As   far   as   the   observation   of   the Income    Tax    Department    as    stated    in paragraph 4 of the said letter is concerned, the Petitioner Companies submit that as per Clause    9    of    the    Scheme,    all    Legal Proceedings  of  whatsoever  nature,  by  or against,    pertaining    to    the    Demerged Undertaking    shall     not    abate     or    be discontinued or in any way be prejudicially affected by reason of the transfer and vesting of  the  Demerged  Undertaking  or  anything contained  in  this  scheme,  the  said  Legal Proceedings,    whether    pending    and/    or arising on or before the Appointed Date, or which may be instituted any time thereafter, shall  be  continued  and/  or  enforced  by  or against  the  Resulting  Company  after  the Effective    Date,    to    the    extent    legally permissible, in the same manner and to the same   extent   as   if   the   same   had   been instituted and/ or pending and/ or arising by or    against    Resulting    Company.     The Petitioner   Companies   confirm   that   the scheme  shall  be  without  prejudice  to  the

rights of the Income Tax Department and the

Income-tax     Department     may     proceed against    the    Resulting    Company,    w.r.t. litigation       pertaining       to       Demerged Undertaking     transferred     to     Resulting Company pursuant to Demerger, in terms of applicable laws.

(ii)      As far as observation of the Income Tax Department as stated in paragraph 5 of the  said  letter  is  concerned,  the  Petitioner Companies   submit   that   sanction   of   the Scheme  would  not  adversely  impact  the rights of the Income Tax Department for any present or future proceedings.

The observations made by the Regional Director have been explained in Column 2 of table provided in Para 14 above. The clarifications and undertakings given by the Petitioner Companies have been explained in Column 3 of the table provided in Para 14 above. Further, with respect to the response of the Petitioner Companies to the observation made by Regional Director in para IV (a) to (k) in its Report, the Regional Director vide his supplementary report dated 13th April 2022 in paras 3 and 4 has stated that as in respect of reply of the Petitioner company of observation IV(b) of the Report, the Petitioner Company may kindly be directed to amend its Appointed date from 1.04.2020 to 01.04.2021 or thereafter and as regard to reply of observation IV(k) of the report, the Hon’ble NCLT may kindly hear to Income Tax authority before considering the present Scheme.

With regard to the observations made by the Regional Director in para 3 and 4 of his Supplementary Report dated 13.04.2022, the Petitioner Companies state that the Company Scheme Application was filed on 10th October 2020 and the Appointed Date is 1st April 2020 which is within one year from the date of filing of the Company Scheme Application and therefore the Provisions of Circular No. F. No. 7/12/2019/CL-1 dated 21st August 2019 issued by the Ministry of Corporate Affairs, Government of India do not apply. The Petitioner Companies further stated that with regards the observations made in para 4 the Petitioner Companies have confirmed that the scheme shall be without prejudice to the rights of the Income Tax Department and the Income-tax Department may proceed against the Resulting Company, with regard to litigation pertaining to Demerged Undertaking transferred to Resulting Company pursuant to Demerger, in terms of applicable laws. The said undertakings and confirmations are accepted.

From the material on record, the Scheme appears to be fair and reasonable and does not violate any provisions of law and is not contrary to public policy or public interest.

Since all the requisite statutory compliances have been fulfilled, C.P. (CAA)/1123 of 2020 have been made absolute in terms of the prayers of the Petition mentioned therein.

The Petitioner Companies are directed to file a copy of this order along with a copy of the Scheme with the concerned Registrar of Companies, electronically, along with E-Form INC-28, in addition to the physical copy, within 30 days from the date of receipt of order duly certified by the Deputy/Assistant Registrar, of the National Company Law Tribunal, Mumbai Bench.

The Petitioner Companies to lodge a copy of this order duly certified by the Deputy/Assistant Registrar of the National Company Law Tribunal, Mumbai Bench, along with a copy of the Scheme of Arrangement with the concerned Superintendent of Stamps, for the purpose of adjudication of stamp duty payable, if any, on the same within 60 days from the date of receipt of the certified true copy of the order.

All concerned Regulatory authorities to act on a copy of this order duly certified by the Deputy/Assistant Registrar, National Company Law Tribunal, Mumbai Bench along with Scheme.

The Scheme of Arrangement is sanctioned hereby, and the appointed date of the Scheme of Merger by Absorption is 1st day of April, 2020 as defined the Scheme.

Ordered accordingly. Pronounced in open court today.