Bombay High Court · 2011

Mr.Sakhardande appearing on behalf of the petitioner submitted that the petitioner has complied with all requirements of law. They have also in the petition pointed out as to how the equity shareholders have given their consent. The petitioner is a profit making entity. There are no secured creditors. As far as the unsecured creditors are concerned, it has been stated that due compliance will be made with the statements that have been recorded by this Court and particularly, in paras 14 and 15 of this petition. 4 It has been also pointed out that the scheme is just, fair and 3 reasonable to the equity shareholders and creditors and same may be sanctioned. My attention is invited by Mr.Sakhardande to paras 14 to 21 of this petition and it is submitted that as far as the transferor company is concerned, it has its registered office in Delhi. The transferor company has filed a company petition seeking sanction to the scheme of amalgamation in the High Court of Delhi and that petition is pending. 5 Mr.Sakhardande submits that upon notice being issued, the Regional Director has filed an affidavit raising therein a objection and particularly by pointing out that as far as clause 4.5.1 of the scheme is concerned, that clause states that the Reserves remaining in the transferor company subsequent to adjustments, shall be transfered to the general reserves of the transferor company and the same shall be treated free reserves for all purposes in the books of the transferee company, as per the Act. The Regional Director has submitted that the reserves arising out of the scheme shall not be utilised for purpose of declaring dividend by the transferee company. In the submission of Mr.Sakhardande, this is nothing but a deviation from the accounting standards as 4 approved and such a deviation is permissible in law. He invites my attention to the view taken by the two learned single Judges of this Court in the case of Hindalco Industries Ltd (Company Petition No. 293 of 2009 alongwith Company Application No.234 of 2009) decided on 22nd June 2009 and in the case of Laxmi Agni Components and Forgings Pvt Ltd (Company Petition No.300 of 2009 connected with Company Application No.404 of 2009) decided on 11th September 2009. 6 Alternatively, Mr.Sakhardande submits that should the Regional Director’s objection be upheld and the apprehension as expressed therein needs to be taken care of, then, he has taken instructions to submit and state before this Court that the petitioner shall comply with the provisions of the Companies Act, 1956 in the event it decides to release or pay dividend out of the amounts transferred as free reserves in the books of the transferee company, which is the petitioner before this Court. 7 Mr.Mehta, appearing on behalf of the Regional Director submits that the objection raised by the Regional Director should 5 not be understood as a mere grievance in relation to deviation from the accounting standards, but, there are far more serious issues inasmuch as if the amounts are utilised as free reserves in the Books of Account of the transferee company, then, they should not be utilised for payment of Dividend. If at all, they have to be utilised as such, the company has to comply with the procedure prescribed by sections 100 to 102 of the Companies Act, 1956. He submits that dividends have to be paid out of profits earned and there is no question of same being released or paid from the reserves. Mr.Mehta submits that the controversy that has been dealt with in the aforereferred petitions is distinct and the learned single Judges had no occasion to consider such an objection. For all these reasons, he submits that the company petition be allowed and the scheme be approved but subject to such conditions which are in consonance with the object and purpose of the Act. 8 With the assistance of Mr.Sakhardande and Mr.Mehta, I have perused the petition, the annexures and the affidavits so also the two orders brought to my notice and the relevant statutory provisions. I am in agreement with Mr.Mehta that the controversy 6 which has been raised before me are not dealt with in the two orders delivered by the two learned single Judges of this Court. While deviating from accounting standards subject to relevant statutory provisions, the scheme has been approved by this Court. That is permissible under the Act, as mere deviation from accounting standards has not been visited with any consequences as would permit this Court to withhold its sanction or approval to the scheme of amalgamation. As is well settled, such schemes have to be approved if the Court concludes that they do not oppose or contravene any provisions of law or public policy. Similarly, they can be approved by upholding the commercial and business wisdom of the shareholders within the parameters prescribed and if they are not contrary to the interest of the shareholders, creditors and general public. In the instant case, Mr.Mehta has invited my attention to section 78 of the Companies Act, 1956 which reads thus: “78. Application of premium received on issue of shares.-(1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account, to be called 7 “the (securities) premium account”; and the provisions of this Act relating to the reduction of the [securities] capital of a company shall, except as provided in this section apply as if the [securities] premium account were paid-up [securities] capital of the company. The [securities] premium account (2) may, notwithstanding anything in sub-section (1), be applied by the company- (a) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares; (b) in writing off the preliminary expenses of the company; (c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; or (d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company. (3) Where a company has, before the commencement of this Act, issued any shares at a premium, this section shall apply as if the shares had been issued after the commencement of this Act: Provided that any part of the premiums which has been so applied that it does not at the commencement of this Act form an identifiable part of the company’s reserves within the meaning of Schedule VI shall be disregarded in determining the sum to be included in the [securities] premium account.” 9 A bare perusal of the same would indicate that where a company issues shares at a premium, whether for cash or 8 otherwise, the sum that has been specified in sub-section 1 or value of the premium on those shares shall be transferred to an account, to be called securities premium account and the provisions of this Act relating to reduction of securities shall except as provided in this section apply as if the securities premium account were paid up capital of the company. The provision has been amended by substituting the word “share” with “securities” with effect from 31st October 1998. The term “securities” has been defined in section 2(45AA) to mean securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 and includes hybrids. Thus, what the section contemplates is transferring the sums or values to an account to be called securities premium account and sub-section 2 permits application by the company of this account for the purposes enunciated in clauses (a) to (d). Sub-section 3 provides that even before commencement of the Act, if any shares are issued at a premium, this section shall apply as if shares had been issued after commencement of this Act. 10 It is not the case before me that the Regional Director has any objection to the accounting standards but what has been pointed 9 out is that clause 4.5.1 of the scheme which must be read in its entirety enables the transfer of Reserves remaining in the transferor company subsequent to adjustments to the general reserves of the transferee company and the same shall be treated for all purposes as free reserves in the Books of Account of the Transferee company. 11 Thus, aggregate of the accumulated losses appearing in the books of accounts of the transferor company at the close of business on the day preceding the appointed date shall be adjusted against the Securities Premium Account of the transferor company, to the extent required and the adjustments resulting in reduction in the Securities Premium Account of the transferor company, shall be effected as an integral part of the scheme and all other provisions so also the orders of the Court sanctioning the scheme shall be deemed to be for the purpose of confirming the reduction. The reserves remaining in the company subsequent to adjustment mentioned shall be transferred to the general reserves of the transferee company and the same shall be treated for all purposes as free reserves as per the Act. The apprehension of the Regional 10 Director is that the amounts which are treated as free reserves in the books of transferee company may be utilised for payment of dividends to shareholders and that would have to abide by sections 100 to 102 of the Companies Act, 1956. The clause should not be read as dispensing with this requirement and permitting utilisation contrary thereto. 12 It is this aspect, which according to me distinguishes this case from the two orders that have been passed by this Court. In these circumstances, while approving and sanctioning the scheme, it will have to be clarified that the free reserves in the transferee company’s books may be utilised for payment of dividends, but, strictly, after complying with the Companies Act, 1956 including sections 100 to 102 thereof. In other words, this payment shall not be made without complying with these provisions and other applicable laws. The direction as issued, would take care of the apprehension of the Regional Director as expressed in his affidavit in reply. Save as aforenoted, the other objection, viz., filing of petition by the transferor company stands complied with. 13 Equally, correction of the names of the transferor and transferee has also been effected. 11 14 In the light of the aforestated discussion, the scheme is sanctioned and approved and the petitioner-company shall be permitted to utilise the sums transferred as free reserves in its books for payment of dividend if it deems so, but, all such payments shall be made only after compliance with the provisions of the Companies Act, 1956 and particularly, the aforenoted provisions. 15 Company petition is made absolute in terms of prayer clauses (a) to (f) subject to above. 16 The petitioner-company to lodge a copy of this order and the Scheme Petition duly authenticated by the Company Registrar with the concerned Superintendent of Stamps, for purposes of adjudication of stamp duty payable, if any, on the same within 60 days from the date of the order. 12 17 The petitioner company to pay costs of Rs.10,000/- to the Regional Director, Western Region, Mumbai, within a period of four weeks from today. 18 Filing and issuance of the drawn up order is dispensed with. 19 All authorities concerned to act on a copy of this order alongwith Scheme attached thereto, duly authenticated by the Company Registrar of this Court. (S.C.DHARMADHIKARI, J)