KAMALA SUGAR MILLS LIMITED Vs. STATE

JUDGEMENT

(1.) C. P. No. 70 of 1978 has been filed by Kamala Sugar Mills ltd. , Coimbatore (hereinafter referred to as " the transferee-company "), and C. P. No. 71 of 1978 has been filed by Tirumurti Mills Ltd. , coimbatore (hereinafter referred to as " the transferor-company "), under ss. 391 (1) and 394 of the Companies Act, 1956, for sanction being accorded to a scheme of arrangement and amalgamation of the said two companies which has been approved by the members of the two companies. The transferor-company was incorporated under the Indian Companies Act, 1913, on july 23, 1935. Its authorised capital is Rs. 30 lakhs made up of 26, 000 equity shares of Rs. 100 each and 4, 000 preference shares of Rs. 100 each of which 14, 635 equity shares of Rs. 100 each were issued and all the shares were fully paid up. The company was formed to carry on the business of ginning, spinning, weaving and manufacturing or dealing in cotton or other fibrous substances and the preparation of dyeing or colouring of any other said substances and the sale of yarn, cloth and other manufactured products. The transferee-company was incorporated under the Indian Companies Act, 1913, on May 15, 1946. The nominal capital was Rs. 50 lakhs divided into 30, 000 equity shares of Rs. 100 each and 40, 000 10% redeemable cumulative preference shares of Rs. 50 each of which 10, 000 equity shares of Rs. 100 each were issued and all of them fully paid up. The object of the company was to carry on the business in the manufacture of industrial products, food products, namely, starch and glucose, pharmaceutical and other chemical preparations, food products, industrial chemical products, etc.

(2.) IT is stated in C. P. No. 71 of 1978 that the transferor-company has virtually become a sick textile mill since the last few years. The machinery became outdated and it had to be replaced. They could not modernise the machinery on account of the paucity of finance. Up to 1974, the transferor-company was able to spend a sum of Rs. 24. 07 lakhs in modernising its plant and machinery. To meet the further financial demands it borrowed a sum of Rs. 45. 97 lakhs from the Industrial Development Bank of India under the deferred payment guarantee scheme and the borrowing was made on very stringent conditions. In spite of this, the modernisation programme could not be completed. The transferor-company began to run into losses. The power cut at that time contributed further to decrease in the quantum of production of the transferor-company. On account of the electricity cut imposed by the Tamil Nadu state Electricity Board, the transferor-company had to instal generators at a cost of Rs. 10, 67, 320. This increased further the loss sustained by the transferor-company. The transferor-company was not in a position to meet the increased demand in the categories of statutory wages, dearness allowance, ESI contribution, gratuity, etc. The report submitted on February 21, 1978, by the south India Textile Research Association, Coimbatore, discloses that if certain changes were effected in the existing frames and if some plant and machinery were modernised, the quality of the yarn produced by the transferor-company could be improved and it would be in a position to operate as a viable unit. This programme would need Rs. 8 lakhs which the transferor-company was not in a position to find. On the other hand, the transferee-company has been working on a profitable basis for a number of years. IT has surplus income available with it. In the circumstances, the directors of the two companies felt that if the transferor-company is amalgamated with the transferee-company the surplus money available with the transferee-company could be utilised for the modernisation of the plant and machinery of the transferor-company and it could be converted into a viable unit. Accordingly, a scheme of amalgamation of the two companies was drawn up. Applications Nos. 1601 and 1603 of 1978 were filed for directions of this court for convening meetings of the respective shareholders of the transferor and the transferee-companies for the purpose of considering if thought fit with or without modification the said scheme of amalgamation. Nainar Sundaram J. by his order dated July 21, 1978, directed that the meetings of the shareholders be duly convened on 8th September, 1978, at 12-30 p. m. for the purpose of considering the scheme of amalgamation. Sri R. Venkataswamy naidu was appointed chairman of the meeting. Pursuant to the order of this court dated July 21, 1978, a meeting of the equity shareholders of the transferor-company was held on September 8, 1979, at 10 a. m. at the registered office of the transferor-company in Coimbatore. Due notice for the holding of the meeting had been served on all the shareholders of the transferor-company and notice was also given by publication in the Mail on August 3, 1978, Nava india on August 6, 1978, and in the Tamil Nadu Gazette on August 16, 1978. The meeting was attended by 65 shareholders either in person or by proxy and holding 7, 552 equity shares. The value of the shares held by them came to Rs. 7, 55, 200. One shareholder holding 10 equity shares of the value of Rs. 1, 000 voted against the resolution.

(3.) SECTION 23 (2) of the MRTP Act requires that the prior approval of the Central Govt. has to be obtained for the scheme of merger or amalgamation of two or more undertakings which would come within s. 23 of the said Act. Mr. S. V. Subramaniam submitted that these two companies have not been engaged in the production of the same goods, that sanction of the Central govt. under s. 23 (1) of the MRTP Act was necessary and that such sanction has already been obtained. The Central Govt. has accorded the necessary approval by its order dated 8th November, 1979. The approval is, of course, subject to the exchange ratio of shares to be determined by the High Court as it thinks fit. It may be noted that before the approval is given under s. 23 of the MRTP Act, the Central Govt. have to bear in mind the principles mentioned in section 28 of the MRTP Act. Mr. U. N. R. Rao, firstly, submitted that the exchange ratio envisaged in the scheme of amalgamation is not proper and the fair exchange ratio should be 1 : 3. The applicants have filed a valuation report from their auditors, P. N. Raghavendra Rao and Co. , Chartered Accountants. According to the said report, the intrinsic value of one share of the transferor-company comes to Rs. 614. 40 and that of the transferee-company comes to Rs. 644. 30. The auditors have stated that the valuation has been arrived at on the basis of the w. T. Rules. According to Mr. U. N. R. Rao, the break-up value of the share of the transferor-company will be nil, while the break-up value of the share of the transferee-company will work out to Rs. 329. He submitted a note on the exchange ratio at the time of hearing. However, it is not discernable from the note how the break-up value has been arrived at or whether any qualified accountant had arrived at the break-up as 1 : 3. It is not disputed that the auditors who have filed the report of the valuation on behalf of the applicants are a recognised firm of chartered accountants. The auditors have adopted the same method of valuation of valuing the shares of both the companies. I do not find any reason to reject the valuation of the auditors who have given their opinion as experts in the field of valuation. Apart from this, Mr. U. N. R. Rao was not in a position to convincingly point out any mistake in the valuation adopted by the auditors. Besides, the exchange ratio has been accepted without demur by the overwhelming majority of the shareholders of the two companies. No shareholder has come forward and objected before me that the ratio fixed in the scheme of amalgamation is neither fair nor reasonable. It cannot be disputed and it was not disputed as a matter of fact by Mr. U. N. R. Rao, that the shareholders are the best judges on the rate of exchange ratio to be fixed in a scheme of amalgamation and once they have accepted it, it is not for the court to say that the shareholders of both the companies in their collective wisdom should not have accepted the exchange ratio arrived at in the scheme of amalgamation on the ground that it was detrimental to their interest. Further, the statement of Mr. S. V. Subramaniam that the value of the shares of the two companies as quoted on the stock exchange is more or less equal was not disputed by the learned counsel for the Central Govt. Mr. U. N. R. Rao then argues that it is not shown that the transferor-company has no potential of making a profit in the future. At the same time, it was not disputed that the transferor-company has been running at a loss. In this context, it may be recalled that the specified authority under section 72a of the I. T. Act, 1961, would not have given sanction under the said section if it was not necessary or feasible that the transferor-company should be amalgamated with the transferee-company. As against this, prima facie evidence showing that the amalgamation is fair and reasonable and not detrimental to the public interest, mr. U. N. R. Rao has not been able to establish that the scheme of amalgamation is on the face of it unfair to the shareholders of either of the two companies. The next contention of Mr. U. N. R. Rao was that it is not shown how the transferee-company would meet the liabilities of the transferor-company which comes to Rs. 45 lakhs and admittedly a sum of Rs. 89 lakhs was needed to modernise the machinery and the scheme of amalgamation did not show how the transferee-company was going to find the funds for it. Mr. U. N. R. Rao further urged that in the circumstances the scheme of amalgamation should be placed before a meeting of the creditors of both the companies. I am not persuaded by this submission of Mr. U. N. R. Rao. Firstly, the court is not concerned with the commercial merits or demerits of the scheme in question. Further, it is not contended that the transferee-company is not solvent enough to meet the liabilities to the transferor-company. Secondly, the scheme itself postulates that all the debts and liabilities of the transferor-company will automatically stand transferred to the transferee-company. As rightly pointed out by Mr. S. V. Subramaniam if any creditor did not accept the scheme of amalgamation, he would have appeared before the court and objected to the scheme being sanctioned in which event the transferee-company would have paid off the said creditor. It is important to note that notwithstanding wide publicity having been given to these company petitions, no creditor has come forward to object to the scheme of amalgamation. Therefore, I do not agree with Mr. U. N. R. Rao that the proposed scheme of amalgamation is not fair to the creditors. In this connection, Mr. U. N. R. Rao cited the decision of the Delhi High Court in ansal Properties and Industries Ltd. , On the facts of this case, I do not think it necessary to consider the question whether in dealing with the application for a scheme of amalgamation of companies under s. 391 of the Companies Act, the court should convene a meeting of the creditors of the two companies. Assuming that the court has got the power to direct the proposed scheme of amalgamation for consideration before the meeting of the creditors of the two companies, I do not think on the facts of this case, it is necessary to direct such a procedure to be followed in this case. As I have already stated, the transferee-company is admittedly a very solvent company and is capable of meeting the liabilities of the transferor-company. For the reasons already stated by me that the interest of the creditors of the transferor-company are amply safeguarded, I do not consider it necessary to accede to the request of mr. U. N. R. Rao, that the scheme of amalgamation should be directed to be placed before the meeting of the creditors. In fact, I am unable to understand why the Regional Director, Company Law Board, comes forward with an objection to the acceptance of the scheme of amalgamation when the Secretary, Department of Company Affairs, Ministry of Law, Justice and Company Affairs, who is one of the members of the specified authority under s. 72a of the I. T. Act, 1961, has approved the scheme of amalgamation.