Introduction
Due to concerns that deficits in corporate freedom and stringent corporate enactments are hindering India’s economic boom, the Companies Act 1956 has been revised[1] to include more relaxed implications and business-friendly policies to foster healthy global competition. An attempt is made in this article to discuss the proposed Companies Bill, 2009 and its possible outcome and implications to India.
Background
The Ministry of Corporate Affairs took up a comprehensive revision of the Companies Act, 1956 in 2004 keeping in view that not only had the number of companies in India expanded from about 30,000 in 1956 to nearly 7 lakhs, Indian companies were also mobilizing resources at a scale unimaginable even a decade ago, continuously entering into and bringing new activities into the fold of the Indian economy. In doing so, they were emerging internationally as efficient providers of a wide range of goods and services while increasing employment opportunities at home. At the same time, the increasing number of options and avenues for international business, trade and capital flows had imposed a requirement not only for harnessing entrepreneurial and economic resources efficiently but also to be competitive in attracting investment for growth. These developments necessitated modernization of the regulatory structure for the corporate sector in a comprehensive manner[2]. In comparison to the existing statute, the proposed framework is more relaxed and has new standards of checks and balances for better commercial prospects. It provides the Indian corporate sector with the latitude it needs for growth in the global economy.
Highlights of the Bill
Together with the existing provisions for private and public limited companies, the new bill proposes a new entity called the ‘one-person company’[3], which will enable a single person to incorporate an entity. This will promote individual entrepreneurship and corporate growth, limiting the personal liability of the owner to the company’s liability. It will also open up better commercial opportunities to promote investments and commercial development in India.
The bill provides that one third of every company’s directors must be appointed as independent directors on the board[4] and at least one of the directors must be an Indian resident.[5] It provides the shareholders and investors with more power to take direct legal action against any fraudulent acts committed by the company and to take part in investor protection activities and class action suits.[6]
The new framework facilitates joint ventures and relaxes restrictions that limit the number of partners in entities (eg, partnership firms and banking companies) by allowing a maximum of 100 people, with no ceiling for professions regulated by special acts.[7]
The bill gives statutory recognition to audit, remuneration and stakeholder grievances committees[8] and recognizes the chief executive officer, the chief financial officer and the company secretary as key managerial personnel.
In the area of protection, the new framework provides that an investor’s claim over a dividend or security not claimed for more than a period of seven years will be transferred to a special government fund for the protection of investors called the Investor Education and Protection Fund, which will be administered by a statutory authority.[9]
The bill provides for a single forum for the approval of mergers and acquisitions, along with the concept of deemed approval in certain situations.[10]
The bill provides for a speedy and effective regime for the investigation of offences and imposes a minimum and maximum standard of levying penalties for any offences, with adequate deterrent provisions for repeating offences. A separate provision for penalty imposition in procedural non-compliances has also been laid down.[11] In addition, it specifically provides for special courts[12] to deal with offences under the bill. Company matters such as mergers and amalgamations, reduction of capital; insolvency (including rehabilitation, liquidation and winding up) will be addressed by the National Company Law Tribunal[13] or the National Company Law Appellate Tribunal[14].
Finally, the bill provides basic principles for all aspects of internal governance of corporate entities and a framework for their regulation, irrespective of their area of operation, from incorporation to liquidation and winding up, in a single, comprehensive legal framework administered by the government. In doing so, the bill harmonizes the company law framework with the imperative of specialized sectoral regulation.[15]
Additional Changes
Additional highlights of the new companies’ framework are as follows:
it lifts the limit on subsidiary lending, giving greater flexibility to structuring ownership;
it is a simpler and more concise piece of legislation;
it envisages shareholder and investor democracy in all aspects of commercialization; and
it acknowledges technological advancements by:
Ø proposing that board meetings be conducted via video conferencing;[16]
Ø recognizing votes cast through email[17]; and
Ø allowing companies to keep their accounting books in electronic form[18].
Checks and Balances
The new Companies Bill 2009 also provides certain checks and balances to govern the scope of its benefits.
The new framework makes it difficult to raise public deposits[19] (except under permission provisions in other special statutes) and treats insider trading between directors as a criminal offence[20]. Any misstatements or misleading facts in offer documents[21] or acts to induce the public into making investments through celebrity endorsements will be treated as non-compoundable offences[22]. Moreover, it also proposes banning issuing shares at discounts.[23]
The new bill proposes detailed disclosure of all company information, including information about directors at the time of incorporation and thereafter through an application for a compulsory director’s identification number issued by the Ministry of Corporate Affairs.[24]
The new bill proposes a strict check on any misuse related to not-for-profit organizations and adherence to all procedural disclosures and compliances, thereby limiting the scope for tax evasion and black money transactions.
The new framework recognizes audit and accounting standards[25] and specifically defines the role, rights and duties of auditors[26] in order to maintain the integrity and independence of the auditing process.
The new framework also proposes to incorporate international best practices based on models prescribed by the United Nations Commission on International Trade Law, for the efficient regulation of companies undergoing insolvency, rehabilitation, winding-up and liquidation proceedings.
Finally, the bill proposes establishing an insolvency fund[27] from which companies can draw money and a National Company Law Tribunal[28] for resolution of issues related to the rehabilitation, winding up and liquidation of companies.
Impact of Bill
As the bill is yet to come into force, its impact on India’s corporate stability can only be assumed. Major business players are eagerly awaiting its enactment as it will relax the stringent investment scenario established by the existing act and facilitate economic opportunities such as mergers and acquisitions, joint ventures and amalgamations. On the one hand, it will empower investors to keep an eye on a company’s operations through class action suits and the Investor Education and Protection Fund, making the process more transparent. On the other hand, it will simplify the lengthy incorporation process, dispute resolution policies and approval requirements for management, with a positive inclination towards better internal company operations. The bill also stresses the level of quality of corporate governance, while maintaining quantitative development. It regulates better audit standards and also provides for appointing valuers for raising quality control.
By allowing one-person companies to be incorporated, India will attract a new breed of democratic investors and a wave of entrepreneurs, which may have been previously afraid of taking such investment risks due to concern over the extent of personal liability in a proprietorship.[29]
However, there is concern among small and medium-sized companies about the strict compliances and heavy penalties likely to be imposed on any ambiguous propaganda. According to the proposed provisions, the offence of inducing the public to invest through the use of celebrity names or making misleading statements about the functioning or financial status of the company will attract a penalty of Rs5 million, in comparison to the existing penalty of Rs100,000. The celebrities endorsing the wrongful commitments may also be imprisoned for up to three years. It is hoped that this will reduce the number of immoral marketing agendas employed by ‘get-rich-quick’ companies.
With an eye on non-profit organizations, there is also less scope for companies to commit tax evasion and escape end consumer liabilities. This will provide leverage for investors and stakeholders.
Establishing special courts to decide purely company law cases, including compliances, permissions and approvals, will promote a speedy and justifiable disposal of investor grievances. In addition, a single forum for approval in merger and acquisition cases with a provision for deemed approval in certain cases will prove to be an economically productive step.[30]
Conclusion
It is hoped that the new Companies Bill 2009 will be enacted soon and bring about a number of key changes to the existing Companies Act 1956, satisfying major stakeholders and start-up entrepreneurs by proposing investor awareness initiatives as a mandatory provision. It will definitely create a solid platform for a democratic growth in investments in the market.[31]
[1] The Companies Act, 1956, was amended 25 times before the government decided to have an altogether new Bill.
[2] http://pib.nic.in/release/release.asp?relid=42061 visited on 30-11-08
[3] Clause 3© of the Bill
[4] Section 132(3) in case of listed companies
[5] Section 132(2)
[6] See Statement of Object and reason, Para 6, XV.
[7] See Clause 422
[8] Clause 158
[9] Sections 111 and 112.
[10] The provisions relating to merger and amalgamation have been provided in Chapter XV from section 201 to 211.
[11] Section 413(3)
[12] Section 396
[13] under section 369
[14] section 371.
[15] Adhiraj Suana, New Companies Bill, 2008, available at www.internationallawoffice.com
[16] Clause 154(2)
[17] Clause 97
[18] Clause 116
[19] Clause 66
[20] Clause 173.
[21] Clause 29 and 30
[22] Clause 31
[23] Clause 47(1)
[24] Clauses 132 to 135
[25] Clause 119
[26] Clause 126
[27] Clause 244
[28] Clause 369
[29] Adhiraj Suana, New Companies Bill, 2008, available at www.internationallawoffice.com
[30] Ibid.
[31] ibid
Thursday, September 10, 2009
THE APPLICATION AND IMPLICATION OF THE LAW ON MERGER AND AMALGAMATION
All over the world, the process of economic liberalization and globalization has created its own impetus, due to which, business environment has become highly competitive. In response to competitive market forces, the corporate sector has been restructuring and repositioning itself. The underlying object of corporate restructuring is efficient and competitive business operations by increasing the market share, brand, power and synergies. Accordingly, most of the diversified multi product companies are restructuring their corporate operations into more homogeneous units to achieve synergy in operations. This entails transfer of business units from one company to other.[1]
This article is an attempt to critically examine the manner in which companies have been given the operational freedom to reorganize and restructure themselves into more efficient economic entities, under the supervision of an independent agency i.e., the Tribunal. Emphasis is also given on the stamp duty payable in such circumstances.
MEANING
An application[2] lies with the Tribunal to seek sanction for a compromise or arrangement, either in connection with or for the purpose of a scheme for reconstruction or amalgamation of two or more companies.
However, none of these terms have been defined under the Companies Act, 1956 except the definition of the term 'arrangement' under section 390(b)[3].
According to Palmer, arrangement and reconstruction may be regarded as describing any form of internal reorganization of the company and its affairs as well as schemes for the merger of two or more companies[4].
Compromise means an amicable settlement of differences by mutual concessions by the parties to the dispute or the difference. In Sneath V. Valley Gold Ltd[5], the Court defined 'compromise’ as ‘an agreement terminating a dispute between parties as to the rights of one or more of them, or modifying the undoubted rights of a party, which he has a difficulty in enforcing. The result of this case and all subsequent cases on this point is that there can be no compromise unless there is a dispute.’
‘Amalgamation’ has been defined as an arrangement whereby the assets of two or more companies become vested in, or under the control of, one company, which may or may not be one of the original two or more companies[6]. It is a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company, which is to carry on the blended undertakings. There may be amalgamation either by transfer of two or more undertakings to a new company or by the transfer of one or more undertakings to an existing company[7].
The term ‘amalgamation’ contemplates not only a state of things in which two companies are joined to form a new company but also the absorption and blending of one by the other. When two such companies are merged and so joined to form a third company or one is absorbed into other or blended with another, the amalgamating company looses its entity.[8]
Grower in his 'Modern Company Law’[9] says, "under an amalgamation two or more companies are merged: either de jure by a consolidation of their undertaking or by de facto by the acquisition of a controlling interest in the share capital of one by the other, or of the capital of both by a new company."
PROCEDURAL ASPECT
Sections 391-394 of the Companies Act, 1956 provide for a reference to the Tribunal. The procedure envisaged under these provisions operates at two levels.
First, an application is filed before the Tribunal to order a meeting of the affected class of members or creditors;
Second, once the approval from the affected class of members or creditors is obtained, the Tribunal has to sanction the scheme.[10]
The entire process involves a considerable delay. The Companies (Court) Rules, 1959[11] are indicative of how much time it would take for a scheme of amalgamation to come through. The Tribunal, under Section 391, orders a meeting when an application is moved before it by the company or a member or a creditor or by a liquidator during winding up. It is not necessary that it is only the liquidator who can move application to call a meeting during the winding up of the company. Every one entitled to move an application can do so.[12] This application is usually heard exparte, but if the company is not an applicant, then notice has to be served on the company for period of not less than 14 days.[13] The court then fixes the date of meeting for which a notice of 21 clear days has to be given[14]. Once the meeting is held and the requisite majority of three fourths is obtained, the chairman of the meeting has to submit a report and a petition under section 394 praying the scheme of amalgamation. However, any member or creditor of the company can move an application[15] and say that scheme of amalgamation cannot be sanctioned. The Tribunal, then, issues a summons to all the concerned parties, hears them and issues appropriate orders. The abovementioned procedure results in substantial delay. The final sanctioning of the scheme will take at least a minimum of two moths from the date of moving the application to call a meeting under section 391. This time period is calculated without providing for the substantial judicial delays by adjournments.[16]
MANNER OF VOTING
According to rule 77 of the Companies (Court) Rules, 1959, voting in a meeting under section 391 has to take place only by poll. This has significant implication. At any general meeting, voting is done by a show of hands at the first instance[17]. However, voting can be done by poll if specifically demanded by the requisite majority[18]. When voting is done by show of hands, it is implied that there is equality in the value of a vote between the persons voting. But the position under section 391 is different as voting would have been in proportion to the paid up share capital (in case of member)[19], or in proportion to his claims (in case of a creditor). For example, if there are 100 members voting of whom one member holds 901 shares and the reminder hold one each, the 99 share holders holding one share each cannot enforce a scheme against the vote of the holder of 901 shares. This is due to the fact that they do not muster three fourth in value.[20] Hence a situation of this kind leaves ample scope for majority shareholders to override the will of the minority shareholders. The same would be in the case of creditors.[21]
Another point provided under section 391 contemplates a three fourth majority in the members or creditors present and voting and does not use the term "special resolution". One of the implications that flow from this provision is that, the contents of the special resolution cannot be changed when the meeting takes place. Therefore, the wording and effect of the resolution has to be the same as that of the notice. However, in section 391, since the term 'special resolution' is absent, the resolution might be modified at the meeting of the company.[22]
In Union of India V. Ambalal Sarabhai Enterprises[23], a meeting took place under section 391 in which the proposed date of amalgamation was advanced from 1st July 1981 to 1st July 1980. This was challenged before the Gujarat High Court on the ground that the statutory requirements in the notice calling the meeting had not been complied with. A decision of the Chancery Division was cited, in re Moorgate Mercantile Holdings Ltd[24], in support of this contention. In this case, the Chancery Division held that since there was a variation in the special resolution from what had been actually set out in the notice, the special resolution so passed was bad. The Gujarat High Court approved this decision, but distinguished, on the facts, on the ground that Section 391 does not contemplate a special resolution.
APPLICATION FOR SANCTIONS TO BE MADE BY BOTH COMPANIES AND THE CONSEQUENT ISSUES
For an amalgamation, under Section 394, an application is required to be made to the Tribunal under Section 391(1). This section applies to both the amalgamating companies, the transferor company and the transferee company, requiring each of them to apply to the Tribunal as to the meetings of the share holders and creditors, and finally, for sanction under Section 394 by each of these companies. It has been asserted that a common petition in this regard is not acceptable and that the transferee and the transferor company must file two separate petitions, though it is for the same purpose.[25]
The requirement of four applications in all by two different parties and in two different Tribunals definitely leaves a great possibility of uncertainty and also unnecessary delay due to litigation on the aspect, which would indeed defeat the purpose of this ‘Mini-Code’, to expedite proceedings by doing away with numerous applications required under the Act generally.[26]
However, where two different Tribunals are moved for appropriate orders under Section 391 and 394 for sanction and approval, the problem arises when one Tribunal sanctions the scheme and the other does not. Though the Court in Bank of Baroda V. Mahindra Ugine Steel Co. Ltd[27] evolved a formula to resolve such an impasse[28], the provision in this regard are vague in nature and it was emphasised in Miheer H. Mafatlals v. Mafatlals Industries[29] that the law in this regard is to be revisited and made to contain some specification.
ENSURING DISSEMINATION AND DISCLOSURE OF INFORMATION
For the Tribunal to sanction the scheme, all material facts relating to the company such as its latest financial status, the latest auditor’s report on its accounts, pending proceedings pending against the company under Section 235 to 251 of the Companies Act, 1956, have to be presented before the Tribunal, sworn in an affidavit.[30] Under Section 393, after getting sanction, detailed notice, explaining the terms and conditions of arrangement, the material interests of the directors and the effect of those interests on the rights etc of the parties, has to be issued to the concerned creditors or members.
But Section 393(1) (a) requires not only that the terms and conditions of the schemes be explained, but also that the effect be specified. But the meaning of the term ‘effect’ has been subject to wide judicial interpretation.
An explanatory statement has been made for this purpose in Carrron Tea Co. Ltd[31]. But this was held to be insufficient. In this case, the members were not told that the ordinary rule of valuation i.e., the stock exchange evaluation basis was not taken into account in the valuation on the net asset basis; it was also not shown that only the 1959-63 records were taken into account in proceedings to value on the income basis. This was looked upon as failure to ‘explain the effect’ under the provision. If the term ‘effect’ were to mean only the net result, it is impossible to comprehend how the notice would ensure that the persons proposing the scheme are compelled to find their conclusions and projections on the real circumstances. This is perhaps best reflected from from the facts of the Carrron Tea Co case. Then, would it be sufficient to merely state the effect of a scheme and not how that particular projection has been reached?[32]
Unfortunately in Jitendra R. Sukhadia V. Alembic Chemicals[33], the Gujarat high Court has ruled that the statement of effect of scheme is enough to discharge the burden under Section 393(1) (a) and nothing more is required. It was said that the requirement was to state and explain the effect and not the details or particulars of the consequence.[34]
BINDING NATUREOF MERGER AND RIGHT TO DISSENT
If in pursuance of a meeting held under Section 391(2), three fourths majority passes a resolution, the scheme becomes binding on that class. Therefore, if there were creditors or members who voted against the merger, then by virtue of this provision, it would still be binding on them. However, under Section 394, the Tribunal in its discretion may make a provision for persons who dissent from the merger. Therefore, subject to this, the dissenting persons would be bound by the scheme.[35] In addition to this, under Section 395(1), the transferee company can acquire the shares of the dissenting share holder.[36] This would again lead to much hardship to the dissenting persons as they have to accept the scheme against their will.
ABSENCE OF POWER TO AMALGAMATE IN THE MEMORANDUM OF ASSOCIATION
In the case of Re Oceanic Steam Navigation Co. Ltd[37], it was held that a compromise or arrangement should be within the powers of the company and nor ultra vires. If it was beyond the object or powers of the company, such amalgamation or restructuring would be beyond the jurisdiction of the court to sanction.
This view has been disregarded in Re EITA India Ltd[38], where a scheme of amalgamation was opposed by the central government among other grounds for the reason that the amalgamation clause in the memorandum did not permit the present amalgamation. The Court stated that the power to amalgamate is a statutory power and this power may be exercised notwithstanding the fact that the memorandum of association of a particular company may not contain express power to amalgamate.
POSITION OF EMPLOYEES
A conjunct reading of sections 391 to 394 makes it clear that the workmen of the transferor company have no legal or statutory right of holding a meeting and express their opinion on the question of amalgamation.[39] They also do not have locus standi to challenge the amalgamation on the basis of their apprehended transfer or retrenchment or payment of lower bonus on account of likely reduction of profits.[40] But this seems to be not a correct view. But it was later held by the court that the employees of amalgamating company have a locus standi to object to the proposed scheme. The court has to consider their representations because the court is duty bound to protect their interests.[41]
Further, it was held that the employees have a right to say ‘no’ to being transferred to the transferee company but they do not have the right to raise any objection to the proposed amalgamation so long as they are given the same status or position in all respects in the transferee company which they enjoyed in the transferor company.[42]
SANCTION OF THE SCHEME AND STAMP DUTY
An instrument liable to be stamped under the Stamp Act, 1899[43] includes every document by which any right or liability is, or purports to be created, transferred, limited, extended, extinguished or recorded. Section 394(2) of the Companies Act, 1956 provides that the properties and liabilities of the transferor company, in a scheme of amalgamation, stand transferred to the transferee company by virtue of the order of the Tribunal under Section 394(1). The Tribunal’s order under Section 394(2) provides for the passing of the consideration from the transferee company to the share holders of the transferor company. The well settled law is that the property belongs to the company and the company belongs to the share holders. That means the owners of the company receive the consideration. Therefore, a transaction under Section 394 of the Companies Act has all the trappings of a sale. The consideration for such a sale is shares of the transferee company.
“Conveyance” under the Stamp Act includes every instrument by which property whether movable or immovable is transferred inter vivos. A company is a living person under the Transfer of Property Act, 1882.[44] A document creating or transferring a right is an instrument. An order effectuating a transfer is a document. Under an amalgamation transfer is effectuated by an order of the Tribunal and such an order is an instrument. Consequently, it is a conveyance and hence liable to be stamped under the Stamp Act, 1899.[45]
CONCLUSION
Section 391 of the Companies Act thus operates at two levels. The role of the Tribunal in ordering the meeting of the members or creditors is lengthy and involves substantial delay. Also, at this stage the Tribunal will not look into the merits of the scheme. It is submitted that section 391 should be amended so that the company is under the duty to call the meeting of respective classes of members or creditors. The role of the court should just be confined to sanctioning of the scheme. This would help in reducing the delays.[46]
Another suggestion is that rule 77of the Companies (Court) Rules, 1959 and Section 391(2) should be modified. Voting, in the first instance, should be by hand as is envisaged for a general meeting. Sections 391-394 should also be amended to include a right to dissent. Any member or creditor who is unhappy with the scheme should be given an option to opt out of the scheme. Under the prevailing circumstances, the Tribunal has discretion to provide an alternative arrangement for dissenting members or creditors under Section 394.[47]
[1] Naresh Kumar, “Amalgamation, Merger and Demerger Problematic Areas”, Jan 3 2005, Vol-57, SEBI and Corporate Laws, pp. 72-83
[2] Under Section 394 of the Companies Act, 1956.
[3] Arrangement includes reorganization of the share capital of the company by consolidation of the shares of different classes, or their division.
[4] Palmer's Company Law, Volume II, Part 8 (W. Green, London: Sweet and Maxwell, 1994) at 12009.
[5] (1893) 1 Ch 447
[6] Cf. Takeovers and Amalgamation by M.A. Weinberg.
[7] HALSBURY'S LAWS OF England, 4th Edn. Vol. VII, Para 1539 (page 855). See also Baytrust Holding Ltd V. I.R.C., (1971) 1 WLR 1333; Brooklands Selangor Holdings Ltd. V. inland Revenue Commissioners, (1970) 2 All ER 76 (Ch D).
[8] Saraswati Industrial Syndicate Ltd. V. CIT, Haryana, (1991) 70 Com Cases 184, 188
[9] (2nd Edn., page 550)
[10] Ananth Lakshman, “Merger Routes Under the Companies Act, 1956”, Sep. 2004, Vol- 03, Issue – 03, Company Law Journal, pp. 105-112.
[11] Rules 67-87 of the Companies (Court) Rules, 1959 deal with compromises or arrangements under Sections 391 to 394.
[12] Alagiri Raja and Co. V. N. Guruswami (1987) 1 Comp LJ 265 (Mad)
[13] Rule 68
[14] Rule 73. 21 clear days means that the date of service of notice and the date of meeting will be excluded for the purpose of calculation of 21 days.
[15] Under Rule 82.
[16] Supra note 8
[17] Section 177 of the Companies Act, 1956.
[18] Under Section 179 of the Companies Act, 1956.
[19] Section 87 of the Companies Act, 1956 provides that, in case of a company limited by shares, voting rights shall be in proportion to the paid up share capital of the company. There can be no derogation from this statutory provision except if the company is one that is not limited by shares.
[20] S. Ramanujam, “Mergers et al”, 4th Reprint, 2000, Tata McGraw- Hill Publishing Company Limited, New Delhi, p. 16-17.
[21] Supra note 8
[22] Supra note 8
[23] ((1985) 1 Comp LJ 405 (Guj)
[24] (1980) 2 All ER 40
[25] Kanika Agarwal, “Role of Courts in Mergers and Amalgamation”, 2005, Vol-57, SEBI and Corporate Laws, pp. 72-83.
[26] Supra note 21.
[27] (1976) 46 Comp Case 227
[28] In this case, the Central Government raised an objection that since the scheme would affect rights of members of the transferee company as between themselves, unless it took steps to receive similar sanction, it could not be granted to the transferor company. The Court decided that it would accord sanction to the scheme, but reserved right of giving any orders under Section 394(1) until after the proceedings initiated by the transferee company has been completed successfully under Section 391(1) and 394(1).
[29] (1996) 4 Comp. LJ 124 (SC)
[30] The proviso to Section 391(2). This proviso came o be inserted on the recommendation of the Daphtary Shastri Committee, by the Companies (Amendment) Act, 1965.
[31] (1966) 2 Comp LJ 278 (Cal)
[32] Supra note 26.
[33] (1987) Comp LJ 141 (Guj)
[34] Supra note 26.
[35] Supra note 11.
[36] Section 395(5) (a) says ‘dissenting share holder includes a share holder who has not assented to the scheme or contract and any share holder who has failed or refused to transfer his shares to the transferee company in accordance with the scheme or contract.
[37] (1939) 9 Comp. Cas 229 (Ch.D)
[38] AIR 1977 Cal 208
[39] Gujarat Nylons Ltd V. Gujarat State Fertilizers Co. Ltd., (1992) 8 Corpt LA 166 (Guj)
[40] Jitendra R. Sukhadia V. Alembic Chemicals Works Co. Ltd., (1988) 64 Com Cases 206, 223 (Guj).
[41] KEC International Ltd. V. Kamani Employees Union (2000) 1 Comp LJ 351.
[42] Bengal Tea Industries V. Union of India, (1988-89) 93 CWN 542 (Cal).
[43] Under Section 2(14)
[44] Under Section 5.
[45] Jehangir M. J. Sethna, “Indian Company Law”, 2005, 11th Edn, Vol-3, Modern Law Publications
[46] Supra note 11
[47] ibid
This article is an attempt to critically examine the manner in which companies have been given the operational freedom to reorganize and restructure themselves into more efficient economic entities, under the supervision of an independent agency i.e., the Tribunal. Emphasis is also given on the stamp duty payable in such circumstances.
MEANING
An application[2] lies with the Tribunal to seek sanction for a compromise or arrangement, either in connection with or for the purpose of a scheme for reconstruction or amalgamation of two or more companies.
However, none of these terms have been defined under the Companies Act, 1956 except the definition of the term 'arrangement' under section 390(b)[3].
According to Palmer, arrangement and reconstruction may be regarded as describing any form of internal reorganization of the company and its affairs as well as schemes for the merger of two or more companies[4].
Compromise means an amicable settlement of differences by mutual concessions by the parties to the dispute or the difference. In Sneath V. Valley Gold Ltd[5], the Court defined 'compromise’ as ‘an agreement terminating a dispute between parties as to the rights of one or more of them, or modifying the undoubted rights of a party, which he has a difficulty in enforcing. The result of this case and all subsequent cases on this point is that there can be no compromise unless there is a dispute.’
‘Amalgamation’ has been defined as an arrangement whereby the assets of two or more companies become vested in, or under the control of, one company, which may or may not be one of the original two or more companies[6]. It is a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company, which is to carry on the blended undertakings. There may be amalgamation either by transfer of two or more undertakings to a new company or by the transfer of one or more undertakings to an existing company[7].
The term ‘amalgamation’ contemplates not only a state of things in which two companies are joined to form a new company but also the absorption and blending of one by the other. When two such companies are merged and so joined to form a third company or one is absorbed into other or blended with another, the amalgamating company looses its entity.[8]
Grower in his 'Modern Company Law’[9] says, "under an amalgamation two or more companies are merged: either de jure by a consolidation of their undertaking or by de facto by the acquisition of a controlling interest in the share capital of one by the other, or of the capital of both by a new company."
PROCEDURAL ASPECT
Sections 391-394 of the Companies Act, 1956 provide for a reference to the Tribunal. The procedure envisaged under these provisions operates at two levels.
First, an application is filed before the Tribunal to order a meeting of the affected class of members or creditors;
Second, once the approval from the affected class of members or creditors is obtained, the Tribunal has to sanction the scheme.[10]
The entire process involves a considerable delay. The Companies (Court) Rules, 1959[11] are indicative of how much time it would take for a scheme of amalgamation to come through. The Tribunal, under Section 391, orders a meeting when an application is moved before it by the company or a member or a creditor or by a liquidator during winding up. It is not necessary that it is only the liquidator who can move application to call a meeting during the winding up of the company. Every one entitled to move an application can do so.[12] This application is usually heard exparte, but if the company is not an applicant, then notice has to be served on the company for period of not less than 14 days.[13] The court then fixes the date of meeting for which a notice of 21 clear days has to be given[14]. Once the meeting is held and the requisite majority of three fourths is obtained, the chairman of the meeting has to submit a report and a petition under section 394 praying the scheme of amalgamation. However, any member or creditor of the company can move an application[15] and say that scheme of amalgamation cannot be sanctioned. The Tribunal, then, issues a summons to all the concerned parties, hears them and issues appropriate orders. The abovementioned procedure results in substantial delay. The final sanctioning of the scheme will take at least a minimum of two moths from the date of moving the application to call a meeting under section 391. This time period is calculated without providing for the substantial judicial delays by adjournments.[16]
MANNER OF VOTING
According to rule 77 of the Companies (Court) Rules, 1959, voting in a meeting under section 391 has to take place only by poll. This has significant implication. At any general meeting, voting is done by a show of hands at the first instance[17]. However, voting can be done by poll if specifically demanded by the requisite majority[18]. When voting is done by show of hands, it is implied that there is equality in the value of a vote between the persons voting. But the position under section 391 is different as voting would have been in proportion to the paid up share capital (in case of member)[19], or in proportion to his claims (in case of a creditor). For example, if there are 100 members voting of whom one member holds 901 shares and the reminder hold one each, the 99 share holders holding one share each cannot enforce a scheme against the vote of the holder of 901 shares. This is due to the fact that they do not muster three fourth in value.[20] Hence a situation of this kind leaves ample scope for majority shareholders to override the will of the minority shareholders. The same would be in the case of creditors.[21]
Another point provided under section 391 contemplates a three fourth majority in the members or creditors present and voting and does not use the term "special resolution". One of the implications that flow from this provision is that, the contents of the special resolution cannot be changed when the meeting takes place. Therefore, the wording and effect of the resolution has to be the same as that of the notice. However, in section 391, since the term 'special resolution' is absent, the resolution might be modified at the meeting of the company.[22]
In Union of India V. Ambalal Sarabhai Enterprises[23], a meeting took place under section 391 in which the proposed date of amalgamation was advanced from 1st July 1981 to 1st July 1980. This was challenged before the Gujarat High Court on the ground that the statutory requirements in the notice calling the meeting had not been complied with. A decision of the Chancery Division was cited, in re Moorgate Mercantile Holdings Ltd[24], in support of this contention. In this case, the Chancery Division held that since there was a variation in the special resolution from what had been actually set out in the notice, the special resolution so passed was bad. The Gujarat High Court approved this decision, but distinguished, on the facts, on the ground that Section 391 does not contemplate a special resolution.
APPLICATION FOR SANCTIONS TO BE MADE BY BOTH COMPANIES AND THE CONSEQUENT ISSUES
For an amalgamation, under Section 394, an application is required to be made to the Tribunal under Section 391(1). This section applies to both the amalgamating companies, the transferor company and the transferee company, requiring each of them to apply to the Tribunal as to the meetings of the share holders and creditors, and finally, for sanction under Section 394 by each of these companies. It has been asserted that a common petition in this regard is not acceptable and that the transferee and the transferor company must file two separate petitions, though it is for the same purpose.[25]
The requirement of four applications in all by two different parties and in two different Tribunals definitely leaves a great possibility of uncertainty and also unnecessary delay due to litigation on the aspect, which would indeed defeat the purpose of this ‘Mini-Code’, to expedite proceedings by doing away with numerous applications required under the Act generally.[26]
However, where two different Tribunals are moved for appropriate orders under Section 391 and 394 for sanction and approval, the problem arises when one Tribunal sanctions the scheme and the other does not. Though the Court in Bank of Baroda V. Mahindra Ugine Steel Co. Ltd[27] evolved a formula to resolve such an impasse[28], the provision in this regard are vague in nature and it was emphasised in Miheer H. Mafatlals v. Mafatlals Industries[29] that the law in this regard is to be revisited and made to contain some specification.
ENSURING DISSEMINATION AND DISCLOSURE OF INFORMATION
For the Tribunal to sanction the scheme, all material facts relating to the company such as its latest financial status, the latest auditor’s report on its accounts, pending proceedings pending against the company under Section 235 to 251 of the Companies Act, 1956, have to be presented before the Tribunal, sworn in an affidavit.[30] Under Section 393, after getting sanction, detailed notice, explaining the terms and conditions of arrangement, the material interests of the directors and the effect of those interests on the rights etc of the parties, has to be issued to the concerned creditors or members.
But Section 393(1) (a) requires not only that the terms and conditions of the schemes be explained, but also that the effect be specified. But the meaning of the term ‘effect’ has been subject to wide judicial interpretation.
An explanatory statement has been made for this purpose in Carrron Tea Co. Ltd[31]. But this was held to be insufficient. In this case, the members were not told that the ordinary rule of valuation i.e., the stock exchange evaluation basis was not taken into account in the valuation on the net asset basis; it was also not shown that only the 1959-63 records were taken into account in proceedings to value on the income basis. This was looked upon as failure to ‘explain the effect’ under the provision. If the term ‘effect’ were to mean only the net result, it is impossible to comprehend how the notice would ensure that the persons proposing the scheme are compelled to find their conclusions and projections on the real circumstances. This is perhaps best reflected from from the facts of the Carrron Tea Co case. Then, would it be sufficient to merely state the effect of a scheme and not how that particular projection has been reached?[32]
Unfortunately in Jitendra R. Sukhadia V. Alembic Chemicals[33], the Gujarat high Court has ruled that the statement of effect of scheme is enough to discharge the burden under Section 393(1) (a) and nothing more is required. It was said that the requirement was to state and explain the effect and not the details or particulars of the consequence.[34]
BINDING NATUREOF MERGER AND RIGHT TO DISSENT
If in pursuance of a meeting held under Section 391(2), three fourths majority passes a resolution, the scheme becomes binding on that class. Therefore, if there were creditors or members who voted against the merger, then by virtue of this provision, it would still be binding on them. However, under Section 394, the Tribunal in its discretion may make a provision for persons who dissent from the merger. Therefore, subject to this, the dissenting persons would be bound by the scheme.[35] In addition to this, under Section 395(1), the transferee company can acquire the shares of the dissenting share holder.[36] This would again lead to much hardship to the dissenting persons as they have to accept the scheme against their will.
ABSENCE OF POWER TO AMALGAMATE IN THE MEMORANDUM OF ASSOCIATION
In the case of Re Oceanic Steam Navigation Co. Ltd[37], it was held that a compromise or arrangement should be within the powers of the company and nor ultra vires. If it was beyond the object or powers of the company, such amalgamation or restructuring would be beyond the jurisdiction of the court to sanction.
This view has been disregarded in Re EITA India Ltd[38], where a scheme of amalgamation was opposed by the central government among other grounds for the reason that the amalgamation clause in the memorandum did not permit the present amalgamation. The Court stated that the power to amalgamate is a statutory power and this power may be exercised notwithstanding the fact that the memorandum of association of a particular company may not contain express power to amalgamate.
POSITION OF EMPLOYEES
A conjunct reading of sections 391 to 394 makes it clear that the workmen of the transferor company have no legal or statutory right of holding a meeting and express their opinion on the question of amalgamation.[39] They also do not have locus standi to challenge the amalgamation on the basis of their apprehended transfer or retrenchment or payment of lower bonus on account of likely reduction of profits.[40] But this seems to be not a correct view. But it was later held by the court that the employees of amalgamating company have a locus standi to object to the proposed scheme. The court has to consider their representations because the court is duty bound to protect their interests.[41]
Further, it was held that the employees have a right to say ‘no’ to being transferred to the transferee company but they do not have the right to raise any objection to the proposed amalgamation so long as they are given the same status or position in all respects in the transferee company which they enjoyed in the transferor company.[42]
SANCTION OF THE SCHEME AND STAMP DUTY
An instrument liable to be stamped under the Stamp Act, 1899[43] includes every document by which any right or liability is, or purports to be created, transferred, limited, extended, extinguished or recorded. Section 394(2) of the Companies Act, 1956 provides that the properties and liabilities of the transferor company, in a scheme of amalgamation, stand transferred to the transferee company by virtue of the order of the Tribunal under Section 394(1). The Tribunal’s order under Section 394(2) provides for the passing of the consideration from the transferee company to the share holders of the transferor company. The well settled law is that the property belongs to the company and the company belongs to the share holders. That means the owners of the company receive the consideration. Therefore, a transaction under Section 394 of the Companies Act has all the trappings of a sale. The consideration for such a sale is shares of the transferee company.
“Conveyance” under the Stamp Act includes every instrument by which property whether movable or immovable is transferred inter vivos. A company is a living person under the Transfer of Property Act, 1882.[44] A document creating or transferring a right is an instrument. An order effectuating a transfer is a document. Under an amalgamation transfer is effectuated by an order of the Tribunal and such an order is an instrument. Consequently, it is a conveyance and hence liable to be stamped under the Stamp Act, 1899.[45]
CONCLUSION
Section 391 of the Companies Act thus operates at two levels. The role of the Tribunal in ordering the meeting of the members or creditors is lengthy and involves substantial delay. Also, at this stage the Tribunal will not look into the merits of the scheme. It is submitted that section 391 should be amended so that the company is under the duty to call the meeting of respective classes of members or creditors. The role of the court should just be confined to sanctioning of the scheme. This would help in reducing the delays.[46]
Another suggestion is that rule 77of the Companies (Court) Rules, 1959 and Section 391(2) should be modified. Voting, in the first instance, should be by hand as is envisaged for a general meeting. Sections 391-394 should also be amended to include a right to dissent. Any member or creditor who is unhappy with the scheme should be given an option to opt out of the scheme. Under the prevailing circumstances, the Tribunal has discretion to provide an alternative arrangement for dissenting members or creditors under Section 394.[47]
[1] Naresh Kumar, “Amalgamation, Merger and Demerger Problematic Areas”, Jan 3 2005, Vol-57, SEBI and Corporate Laws, pp. 72-83
[2] Under Section 394 of the Companies Act, 1956.
[3] Arrangement includes reorganization of the share capital of the company by consolidation of the shares of different classes, or their division.
[4] Palmer's Company Law, Volume II, Part 8 (W. Green, London: Sweet and Maxwell, 1994) at 12009.
[5] (1893) 1 Ch 447
[6] Cf. Takeovers and Amalgamation by M.A. Weinberg.
[7] HALSBURY'S LAWS OF England, 4th Edn. Vol. VII, Para 1539 (page 855). See also Baytrust Holding Ltd V. I.R.C., (1971) 1 WLR 1333; Brooklands Selangor Holdings Ltd. V. inland Revenue Commissioners, (1970) 2 All ER 76 (Ch D).
[8] Saraswati Industrial Syndicate Ltd. V. CIT, Haryana, (1991) 70 Com Cases 184, 188
[9] (2nd Edn., page 550)
[10] Ananth Lakshman, “Merger Routes Under the Companies Act, 1956”, Sep. 2004, Vol- 03, Issue – 03, Company Law Journal, pp. 105-112.
[11] Rules 67-87 of the Companies (Court) Rules, 1959 deal with compromises or arrangements under Sections 391 to 394.
[12] Alagiri Raja and Co. V. N. Guruswami (1987) 1 Comp LJ 265 (Mad)
[13] Rule 68
[14] Rule 73. 21 clear days means that the date of service of notice and the date of meeting will be excluded for the purpose of calculation of 21 days.
[15] Under Rule 82.
[16] Supra note 8
[17] Section 177 of the Companies Act, 1956.
[18] Under Section 179 of the Companies Act, 1956.
[19] Section 87 of the Companies Act, 1956 provides that, in case of a company limited by shares, voting rights shall be in proportion to the paid up share capital of the company. There can be no derogation from this statutory provision except if the company is one that is not limited by shares.
[20] S. Ramanujam, “Mergers et al”, 4th Reprint, 2000, Tata McGraw- Hill Publishing Company Limited, New Delhi, p. 16-17.
[21] Supra note 8
[22] Supra note 8
[23] ((1985) 1 Comp LJ 405 (Guj)
[24] (1980) 2 All ER 40
[25] Kanika Agarwal, “Role of Courts in Mergers and Amalgamation”, 2005, Vol-57, SEBI and Corporate Laws, pp. 72-83.
[26] Supra note 21.
[27] (1976) 46 Comp Case 227
[28] In this case, the Central Government raised an objection that since the scheme would affect rights of members of the transferee company as between themselves, unless it took steps to receive similar sanction, it could not be granted to the transferor company. The Court decided that it would accord sanction to the scheme, but reserved right of giving any orders under Section 394(1) until after the proceedings initiated by the transferee company has been completed successfully under Section 391(1) and 394(1).
[29] (1996) 4 Comp. LJ 124 (SC)
[30] The proviso to Section 391(2). This proviso came o be inserted on the recommendation of the Daphtary Shastri Committee, by the Companies (Amendment) Act, 1965.
[31] (1966) 2 Comp LJ 278 (Cal)
[32] Supra note 26.
[33] (1987) Comp LJ 141 (Guj)
[34] Supra note 26.
[35] Supra note 11.
[36] Section 395(5) (a) says ‘dissenting share holder includes a share holder who has not assented to the scheme or contract and any share holder who has failed or refused to transfer his shares to the transferee company in accordance with the scheme or contract.
[37] (1939) 9 Comp. Cas 229 (Ch.D)
[38] AIR 1977 Cal 208
[39] Gujarat Nylons Ltd V. Gujarat State Fertilizers Co. Ltd., (1992) 8 Corpt LA 166 (Guj)
[40] Jitendra R. Sukhadia V. Alembic Chemicals Works Co. Ltd., (1988) 64 Com Cases 206, 223 (Guj).
[41] KEC International Ltd. V. Kamani Employees Union (2000) 1 Comp LJ 351.
[42] Bengal Tea Industries V. Union of India, (1988-89) 93 CWN 542 (Cal).
[43] Under Section 2(14)
[44] Under Section 5.
[45] Jehangir M. J. Sethna, “Indian Company Law”, 2005, 11th Edn, Vol-3, Modern Law Publications
[46] Supra note 11
[47] ibid
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