R SIVAKUMAR Vs. SRP TOOLS LIMITED

JUDGEMENT

(1.) THE appellant is a minority shareholder and the objector to the Scheme of arrangement between the respondents, SRP Tools Limited (Transferor Company) (TC1 in short) and Subramanian Engineering Limited (Transferee Company) (TC2 in short ). TC1 originally had two undertakings one at Ranipet and the other at chennai. TC1 decided to demerge the Chennai Undertaking with TC2. TC1 and TC2 filed C. P. Nos. 38 and 39 of 2005 respectively under Sections 391 and 394 of the companies Act, seeking sanction of the scheme of arrangement. The details of the scheme of arrangement was arrived at in the Extraordinary General Meeting held on 05-02-2005. The Chennai Undertaking of TC1 which had to be demerged from TC1 was defined in the scheme of arrangement. The details of the assets were also set out. The net assets had to be transferred at the book value as a going concern and after demerger the rest of the business and assets of TC1 would continue to vest with it. As a consideration for a transfer and vesting of the demerged company with TC2, the Scheme provided for allotment of one equity share of Rs. 10/- value in TC2 to the shareholders of TC1 for every five shares held by them in TC1. This scheme also provided that the shareholding pattern of the TC2 will be in the same proportion as the TC1 in respect of all the shareholders including the promoters. The main reason for demerger was that the demerged company intended to manufacture automobile components as it had sufficient space at Chennai. The Scheme of Arrangement was passed by the overwhelming majority of the shareholders. The newspaper publication was effected on 17-02-2005. In March 2005, the Regional Director, Central Government filed the report stating that both the companies have their registered office at Chennai and the shareholders of TC1 had approved the scheme by overwhelming majority. The Regional Director also enclosed the objections raised by the appellant herein. This shareholder holding 3200 shares attended the meeting and voted against the scheme and yet, the scheme was approved by a overwhelming majority. The learned Single Judge on a consideration of the materials ordered both the petitions has prayed for.

(2.) THE learned counsel appearing for the appellant submitted that for demerger, valuation report is a vital document and there are three methods of valuation a)yield, (b) Market price, (c) Net Asset Value of the Company. This should be done by an expert Auditor. Whereas in the present case, the Auditor had not valued both the companies but only TC1 and the details of land is not known. The auditor's report itself is carefully worded and it shows that "the report is based on the information received from the sources mentioned in this report. The information has not independently been verified by us. " It is on the basis of this cursory and inadequate report that the order had been passed. According to the learned counsel, the latest financial position of TC1 should have been filed along with the company petition and the book value cannot be taken. The learned counsel submitted that the scheme was against the interest of the minority shareholders and TC2 itself was constituted only with the intention to take away the valuable assets of TC1. The learned counsel submitted that the Auditor should be independent of the Board of Directors of the Company and he should play a role of watch-dog on behalf of the shareholders of the company vide 83 comp. Cases 30 (Hindustan Lever Employees' Union Vs. Hindustan Lever Ltd. and others ). The Auditor in this case does not appear to have done this role.

(3.) THE learned counsel appearing for the respondents would submit that the word "demerger" is not defined in the Companies Act. But only in Section 2 (19aa) of the Income Tax Act and the Explanation to this Section clearly says that the valuation appearing in the books of account immediately before the date of demerger should be taken into account. The learned counsel submitted that otherwise they will not get the benefit under the Income Tax Act. There was no concealment of the real value of the property. The valuation report has taken into account all the relevant factors. The learned counsel also submitted that the overwhelming majority of the shareholders had approved of the scheme of arrangement. The Scheme cannot be rejected on account of one object.