SECTION
42
MEMBERSHIP
OF HOLDING COMPANY
[1996] 8 SCL 172 (
v.
Himachal
Futuristic Communications Ltd.
VIJENDER JAIN, J.
FEBRUARY 29, 1996
Section 394, read with section 42, of the
Companies Act, 1956 - Amalgamation of Companies - Whether provisions of section
42 would be applicable to scheme of amalgamation and an objection can be raised
to scheme of amalgamation on ground that it violates section 42 - Held, no
FACTS
The petitioner-company filed a petition under
sections 391 and 394 for sanction of scheme of amalgamation between it and
another company which was duly approved by the equity shareholders as well as
all classes of creditors of both the companies and had already been approved by
the High Court. It was contended by the petitioner that sections 391 to 394 are
sufficient code to take into consideration any eventuality which crops up after
the scheme of amalgamation has been presented to the court and if the court is
satisfied that the scheme does not adversely effect the interest of
shareholders or otherwise does not affect the public interest, the court has
plenary as well as residuary power of the Act to sanction the scheme. It was
further contended that while dealing with the provisions of sections 391 and
394, the Legislature has invested wide amplitude of power to the court.
The Department of Company Affairs objected the
proposed scheme of amalgamation on the ground that it was hit by section 42 and
was inconsistent with the provisions of section 77.
HELD
In the plain language of section 394, the court
cannot permit one to read further condition which has not been intended in the
section. Rule of interpretation of a statute is that statute has to be read
harmoniously. If there is no controlling provisions in
the subsequent sections of the Act, then no other meaning can be assigned to
the language of a section. Section 42 falls in that part of
the Companies Act, which deals with incorporation of company and matters
incidental thereto. This part deals with Memorandum of Association,
names of the companies, articles of association, change of the registration of
companies and sections 41 and 42 deal with membership of the company. From the
plain reading of section, it cannot be said that this section is intended to be
read with section 391, 392 or 394 at the time when the scheme of amalgamation
is pending before the court for approval and when the shareholders and the
creditors have approved the same and the respondent had also filed an affidavit
that the affairs of the company were not conducted in a manner prejudicial to
the shareholders or prejudicial to public interest. Therefore, section 42 would
not be applicable to the scheme of amalgamation.
Therefore, sanction to the scheme of amalgamation was
to be granted.
CASES REFERRED TO
S.K. Gupta v. K.P. Jain AIR 1979 SC 734, Mansukhlal v. M.V. Shah, Official Liquidator, Liquidator of
Hathisingh Mfg. Co. Ltd [1976] 46 Comp. Cas. 279 (Guj.),
Mehtab Chand Golcha v. Official Liquidator, Golcha
Properties (P.) Ltd. [1981] 51 Comp. Cas. 103 (Raj.) and PMP
Auto Industries Ltd., In re [1994] 80 Comp. Cas. 289 (Bom.).
Dr. A.M. Singhvi
and A. Das for the Petitioner. Rakesh
Tikku for the Respondent.
JUDGMENT
Jain, J. — This is a petition under sections 391
and 394 of the Companies Act, 1956 ('the Act') to sanction the scheme of
amalgamation between Himachal Telematics
Limited (Transferor Company) and Himachal Futuristic
Communications Ltd. ('Transferee Company'). The main object which is sought to
be achieved by the proposed scheme of amalgamation is the combining of the
multifarious activities presently being carried out by the two companies under
separate umbrellas with a view to enable them to have greater control over the
production and marketing function. The amalgamation scheme is for better and
profitable utilisation of combined resources of both
the companies and to present a consolidated projection to the investors. The
scheme of amalgamation was approved by the equity shareholders as well as all
classes of creditors, i.e., secured and unsecured creditors of the transferor
as well as transferee company. The scheme has already been approved by the High
Court of Himachal Pradesh at Shimla
vide order dated 10-1-1996 subject to scheme finally approved by this Court. No
objection for scheme of amalgamation has been received from any shareholders or
any class of creditors.
2. The main objects of the
petitioner/transferor company are primarily to manufacture of digital microwave
Radios and also to carry on the business
of designers, developers, manufacturers, sellers, buyers, importers, exporters,
stockists and distributors and/or other dealers in
telecommunication equipment and/or mass consumption terminal equipment etc. The
authorised capital of the petitioner/transferor
company as on 31-3-1995 was Rs. 50,00,00,000 divided
into 5 lakh equity share of Rs.
10 each and the paid up capital as on 31-3-1995 was Rs.
24,23,07,000 divided into 2,42,50,000 equity shares of Rs.
10 each.
3. The
transferee company was incorporated on 11-5-1987 as a public limited company
and is primarily engaged in the business of designers, manufacturers,
assemblers, sellers, buyers, importers, exporters, stockists
and distributors and/or otherwise dealers in telecommunication equipment like
electronic rural automatic, electronic private automatic branch exchange,
transmission equipment, modems, integrate digital network systems, component,
sub-system, wireless telephone, cellular radios, multi access rural radio
telephone system with their accessories and associated equipment, all types of
speech secrecy equipment, using various techniques, suitable for telephones,
and radio communication equipment, fascimile systems,
teleprinters, teletext and
videotext systems, electronic typewriters and copying machines and subscriber
carrier systems etc.
4. A
copy of the scheme of amalgamation has been filed as Annexure 'E' to this
petition. The petitioner/transferor company filed an application bearing C.A.
No. 587 of 1995 under section391 seeking a direction from this Court to convene
and hold the meetings of the equity shareholders and secured and unsecured
creditors for the purpose of considering and if thought fit approving with or
without modifications the proposed scheme of amalgamation and to put it into
effect. It is also mentioned in the petition that pursuant to the orders dated
21 -8-1995 the Himachal Pradesh High Court, Shimla, had directed the transferee company - HFCL to
convene the meetings of their equity, preferential shareholders, secured and
unsecured creditors for the purpose of considering and if thought fit approving
with or without modifications the proposed scheme of amalgamation and to put it
into effect.
5. This
Court appointed Chairmen for conducting the meetings of the equity
shareholders, secured and unsecured creditors of the Applicant Company. On
11-10-1995 clubbed meetings of the shareholders and secured and unsecured
creditors of the Applicant Company were duly held in accordance with the order
of this Court.
6. The
Chairperson submitted the report. It is stated that the scheme of amalgamation
as modified in the meeting of creditors was unanimously approved by the
shareholders and the creditors of the transferor company in the meetings held
for this purpose.
7. The Official Liquidator has also given its report and it has been stated that the affairs of the transferor company have not been conducted in a manner prejudicial to the interests of its members, creditors or of public interest. However, objection has been raised by the Regional Director, Northern Region, Department of Company Affairs, invoking the aid of sections 42 and 77 of the Companies Act.
8. According to Mr. Tikku, the learned counsel appearing for the Department of Company Affairs, the proposed scheme of amalgamation is hit by section 42 of the Act. Section 42 reads as under:
"42. Membership of holding company.—(1) Except
in the cases mentioned in this section, a body corporate cannot be a member of
a Company which is its holding Company and any allotment or transfer of shares
in a Company to its subsidiary shall be void."
9. Another objection which has been raised
by the learned counsel for the respondent is that the scheme of amalgamation is
also inconsistent with the provisions of section 77 of the Act. Section 77 is
as under:
"77. Restrictions on purchase by company, or loans by company for
purchase, of its own or its holding company's shares. –
(1) No company limited by shares, and no
company limited by guarantee and having a share capital, shall have power to
buy its own shares, unless the consequent reduction of capital is effected and
sanctioned in pursuance of sections 100 to 104 or of section 402.
(2) No public company, and no private company
which is a subsidiary of a public company, shall give, whether directly or
indirectly, and whether by means of a loan, guarantee, the provision of
security or otherwise, any financial assistance for the purpose of or in
connection with a purchase or subscription made or to be made by any person of
or for any share in the company or in its holding company:
Provided that nothing in this sub-section shall be taken to prohibit—
(a) the lending of money by a banking company in the ordinary course of its business; or
(b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully paid shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company, including any director holding a salaried office or employment in the company; or
(c) the making by a company of loans, within
the limit laid down in sub section (3), to persons (other than directors,
managing agents, secretaries and treasurers or managers) bona fide in the
employment of the company with a view to enabling those persons to purchase or
subscribe for fully paid shares in the company or its holding company to be
held by themselves by way of beneficial ownership.
(3) No
loan made to any person in pursuance of clause (c) of the foregoing proviso
shall exceed in amount his salary or wages at that time for a period of six
months.
(4) If
a company acts in contravention of sub-sections (1) to (3), the company, and every
officer of the company who is in default, shall be punishable with fine which
may extend to one thousand rupees.
(5) Nothing
in this section shall affect the right of a company to redeem any shares issued
under section 80 or under any corresponding provision in any previous companies law."
10. The
sum and substance of the arguments advanced by the learned counsel for the
respondent before me is that the transferee company has got a subsidiary HFCL
Trade Invest Ltd., which is holding shares of the transferor company and after
the scheme of amalgamation is sanctioned by this Court, the transferee company
will be holding the shares of its subsidiary company which is not in confirmity with the provision of section 42. Similar
objection has been raised pursuant to the effect of section 77.
11. On
the other hand, the learned counsel for the petitioner, Dr. Singhvi,
has contended that dealing with the argument regarding violation of section 77,
no violation would result as a result of sanctioning the scheme of
amalgamation. Dr. Singhvi has contended that there is
no share which is being bought of its own by the transferee company and on this
short ground itself the objection regarding section 77 is untenable in law.
12. Dr.
Singhvi has contended that sections 391 to 394 are
sufficient code to take into consideration any eventuality which crops up after
the scheme of amalgamation has been presented to the Court and if the Court is
satisfied that the scheme does not adversely effect the interest of share holders
or otherwise do not effect the public interest, the Court has plenary as well
as residuary power of the Act to sanction the scheme. In support of his
contention Dr. Singhvi has cited S.K. Gupta v. K.P.
Jain AIR 1979 SC 734, Mansukhlal v. M.V. Shah, Official
Liquidator, Liquidator of Hathisingh Mfg. Co. Ltd.
[1976] 46 Comp. Cas. 279 (Guj.) and Mehtab Chand Golchav. Official Liquidator, Golcha Properties
(P.) Ltd. [1981] 51 Comp. Cas.
103. Dr. Singhvi has further contended that as a
matter of fact while dealing with the provisions of sections 391 and 394, the
Legislature has invested wide amplitude of power to this Court and has also
cited PMP Auto Industries Ltd., In re [1994] 80 Comp. Cas.
289 (Bom.), wherein the learned judge of Bombay High
Court has used the phrase 'Single Window Clearance' as in PMP Auto Industries
Ltd. 's case (supra).
13. I have given my careful consideration to
the submissions made by learned
counsel for both the parties. There is no doubt that the powers given to the
Court under sections 391 to 394 pursuant to Chapter V which starts with
arbitration, compromise, arrangements and reconstructions, are of wide
amplitude for carrying out of compromise and/or arrangement and also the
consequential power to make the supervision effective by removing obstacles.
The very heading of Chapter V suggests that the powers which are invested in
Courts not only deals with power of compromise, but it also deals with power
where arbitration has taken place, arrangements have been entered into between two
or more corporate entities or any scheme of reconstruction has been placed
before the Court. Obviously the Legislature was mindful of the fact that in
relation to these kinds of arrangements where two distinct corporate bodies
would like to enter into an agreement, arrangement for the purpose of
reconstruction or for any purpose which is conducive to the interest of
shareholders, there has to be no obstacles and that is why section 394 provides
with wide amplitude of powers to the Court section 394 is as follows:
"394.
Provisions for facilitating reconstruction and amalgamation of companies.—(1)
Where an application is made to the Court under section 391 for the sanctioning
of a compromise or arrangement proposed between a company and any such persons
as are mentioned in that section, and it is shown to the Court—
(a) that the compromise or arrangement has
been proposed for the purposes of, or in connection with, a scheme for the
reconstruction of any company or companies, or the amalgamation of any two or more
companies; and
(b) that under the
scheme the whole or any part of the undertaking, property or liabilities of any
company concerned in the scheme (in this section referred to as 'transferor
company') is to be transferred to another company (in this section referred to
as 'the transferee company');
The Court
may, either by the order sanctioning the compromise or arrangement or by a
subsequent order, make provision for all or any of the following matters:
(i) the transfer to the transferee company of the whole or any
part of the undertaking, property or liabilities of any transferor company;
(ii) the allotment or appropriation by the
transferee company of any shares, debentures, policies, or other like interests
in that company which, under the compromise or arrangement, are to be allotted
or appropriated by that company to or for any person;
(iii) the continuation
by or against the transferee company of any legal proceedings pending by or
against any transferor company;
(iv) the dissolution,
without winding up, of any transferor company;
(v) the provision
to be made for any persons who, within such time and in such manner as the
Court directs, dissent from the compromise or arrangement; and
(vi) such incidental,
consequential and supplemental matters as are necessary to secure that the
reconstruction or amalgamation shall be fully and effectively carried out:
[Provided
that no compromise or arrangement proposed for the purposes of, or in
connection with, a Sscheme for the amalgamation of a
company, which is being wound up, with any other company or companies, shall be
sanctioned by the Court unless the Court has received a report from the Company
Law Board or the Registrar that the affairs of the company have not been
conducted in a manner prejudicial to the interests of its members of to public
interest:]"
14. So vast are the powers under sections 392
and 394, according to Supreme Court which dealt with in detail to the following
effect in S.K. Gupta's case (supra):
"When a
scheme is being considered by the Court, in all its ramifications, for
according its sanction, it would not be possible to comprehend all situations,
eventualities and exigencies that may arise while implementing the scheme. When
a detailed compromise and/or arrangement is worked out, hitches and impediments
may arise and if there was no provision like the one in section 392, the only
obvious alternative would be to follow the cumbersome procedure as provided in
section 391(1), viz., again by approaching the class of creditors or members to
whom the compromise and/or arrangement was offered to accord their sanction to
the steps to be taken for removing such hitches and impediments. This would be
unduly cumbersome and time consuming and, therefore, the Legislature in its
wisdom conferred power of widest amplitude on the High Court under section 392
not only to give directions but to make such modification in the compromise
and/or arrangement as the Court may consider necessary, the only limit on the power
of the Court being that such directions can be given and modifications can be
made for the proper working of the compromise and/or arrangement. The purpose
underlying section 392 is to provide for effective working of the compromise
and/or arrangement once sanctioned and over which the Court must exercise
continuous supervision, and if over a period there may arise obstacles,
difficulties or impediments, to remove them, again, not for any other purpose
but for the proper working of the compromise and/or arrangement. This power
either to give directions to overcome the difficulties or if the provisions of
the scheme themselves create an impediment, to modify the provisions to the
extent necessary, can only be exercised so as to provide for smooth working of
the compromise and/or arrangement. To effectuate this purpose the power of
widest amplitude has been conferred on the High Court and this is a
basic departure from the scheme of the U.K. Act in which provision analogous to
section 392 is absent. The sponsors of the scheme under section 206 of the U.K.
Act have tried to get over the difficulty by taking power in the scheme of
compromise or arrangement to make alterations and modifications as proposed by
the Court. But the Legislature foreseeing that a complex or complicated scheme
of compromise or arrangement spread over a long period may face unforeseen and
unanticipated obstacles, has conferred power of widest amplitude on the Court
to give directions and if necessary, to modify the scheme for the proper
working of the compromise or arrangement. The only limitation on the power of
the Courts, as already mentioned, is that all such directions that the Court
may consider appropriate to give or make such modifications in the scheme, must be for the proper working of the compromise and/or
arrangement." (p. 739)
15. Therefore, where Court is prima facie satisfied from material on record and on the opinion of Company Law Board or Department of Company Affairs that the affairs of the Company have been conducted in a manner which is not prejudicial to the interests of its members or of public interest, Court will sanction such scheme. A compromise or arrangement or a scheme of amalgamation may not be sanctioned by the Court if the affairs of the company are conducted in a manner prejudicial to the interest of its members or public interest.
16. In the case before hand, the stand of the
respondent is not that the affairs of the company are not being conducted in a
manner which is prejudicial to the interests of its members. The stand, as has
been contended before me by Mr. Tikku, is that the
objection raised by respondent regarding sections 77 and 42 would fall in the
category of amalgamation not conducive in public interest. I am afraid, the argument of the learned counsel for the
respondent is not well founded. The objection raised before this Court pursuant
to section 42 is that as a consequence of the scheme of amalgamation, there
would be violation as transfer of shares from subsidiary company to transferee company would result and the same would be hit by
section 42. That objection, which I will deal with later, is not an objection
in public interest. If the scheme of amalgamation is inconsistent with other
provisions of Companies Act, then the Legislature in its wisdom ought to have
added in the proviso to section 394 afterwards 'public interest' or anything
inconsistent with other provision of this Act. That being not the situation, in
the plain language of section 394, the Court cannot permit the respondent to
read further condition which has not been intended in the section. Three
affidavits have been filed by the respondent, except taking objection to the
scheme being hit by provision of sections 42 and 77,
it has not been mentioned how the scheme is against public interest. Rather in
one of the affidavit filed by the respondent, the stand of the respondent is
that scheme is otherwise in public interest.
17. Adverting to the submission of the learned
counsel for the respondent that the scheme, if approved, would hit section 42.
Rule of interpretation of a statute is that statute has to be read
harmoniously. If there is no controlling provisions in
the subsequent sections of the Act, then no other meaning can be assigned to
the language of a section. Where a company is in the process
of incorporation, section 42 falls in that part of the Companies Act, which
deals with incorporation of company and matters incidental thereto. This
part deals with Memorandum of Association, names of the companies, Article of
Association, change of the registration of companies and sections 41 and 42
deals with membership of the company. From the plain reading of the section it
cannot be said that this section is intended to be read with section 391,392 or
394 at the time when the scheme of amalgamation is pending before the Court for
approval and when the shareholders and the creditors have approved the same and
the respondent has also filed on affidavit that the affairs of the company are
not conducted in a manner prejudicial to the shareholders or prejudicial to
public interest.
18. In view of the a foregoing discussions, I
do not find any merit in the contention of the learned counsel for the
respondent that section 42 would be applicable to the Scheme of Amalgamation.
19. It is also stated that no investigation or
proceedings under sections 235 to 251 of the Act, are pending against the
petitioner Company.
20. Considering all the relevant facts and circumstances, the reasons set out by the petitioner in support of the amalgamation, the unanimous approval given by the shareholders and the creditors and in view of the aforesaid discussions and in absence of any objections from the Official Liquidator, I hereby accord sanction to the said scheme of amalgamation Annexure-'E' (to the petition) providing for amalgamation of the transferor company with the transferee company and declare that the said scheme shall be binding on all the members, shareholders and creditors of the petitioner company with effect from appointed date i.e., 1 -4-1995. It is open to any person interested to move this Court for appropriate directions as may be considered necessary in future.
21. The petition, is accordingly, allowed and disposed of. Petition allowed.