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Ansal Properties and Industries Ltd. and anr. Vs. Company - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtDelhi High Court
Decided On
Case NumberCompany Petition Appeal No. 50 of 1976
Judge
Reported in[1978]48CompCas184(Delhi); ILR1977Delhi444; 1977RLR179
ActsCompanies Act, 1956 - Sections 394
AppellantAnsal Properties and Industries Ltd. and anr.
RespondentCompany
Advocates: R.C. Beri,; H.S. Bhatia and; S. Jain, Advs
Cases ReferredUnion of India v. Asia Udvog Private Limited and
Excerpt:
.....of the two companies were also esential to consider the proposed amalgamation:; (1) that creditors meetings were not necessary in law;; (2) that the absence of a provision requiring the creditor to have a say in the matter of total merger and extinction of a company does not constitute a lacuna in the act;; (3) that the legislature has obviously cast a duty on the court to find out whether the scheme affects the interests of the creditors to such an extent that their meeting is essential;; (4) that it is essential to see whether it would be necessary to call a meeting of the creditors of the transferor company or of the transferee company or it may be necessary to call meetings of both sets of creditors. though it is difficult to hypothetically formulate the circumstances in..........to see that the act does not envisage any notice being issued to the creditors. the effect of a scheme of merger between two companies is to make the creditors of the transferor company the creditors of the transferee company instead of the transferor company. this may in some cases effect their interest adversely and the court would have to find out how their interest can best be protected. this question has to be considered now in the context of the two companies which are before me in these two company petitions. i directed a list of creditors being filed so as to be able to consider what material effect the merger of the two companies would have on their interest. in the case of ansal steels private limited, the major creditor is the transferee company itself. the only other.....
Judgment:

D.K. Kapur, J.

(1) There are two Company Petitions before the Court for considering a scheme

(2) Notices of this petition were published in newspapers under the directions of this Court, and also, issued to the Central Government and the Registrar of Companies. The Official Liquidator was also directed to scrutinise the books of Ansal Steels Private Limited for the purpose of making a report under the second proviso to Section 394(1) of the Act and he has made a report. A representation, or reply has been filed by the Central Government, Mr. H. S. Bhatia, Assistant Registrar of Companies has submitted that the Court may consider whether the scheme sufficiently safeguards the creditors of the two companies and, whether it is fair on the share-holders. I have examined the scheme from the point of view of the share-holders. As they have approved the scheme unanimously, I do not think that it is necessary to comment on the reasonableness of the allotment of the shares proposed. I had also considered this matter before directing the meetings.

(3) Turning now to the more formidable question put forward by Mr. Bhatia, it is necessary to see that the Act does not envisage any notice being issued to the creditors. The effect of a scheme of merger between two companies is to make the creditors of the transferor company the creditors of the transferee company instead of the transferor company. This may in some cases effect their interest adversely and the Court would have to find out how their interest can best be protected. This question has to be considered now in the context of the two companies which are before me in these two Company Petitions. I directed a list of creditors being filed so as to be able to consider what material effect the merger of the two companies would have on their interest. In the case of Ansal Steels Private Limited, the major creditor is the transferee company itself. The only other creditor is a firm in Bengal having a credit of Rs. 1,660 only. On the other hand, the creditors of the transferee company amount to over Rs. 50,00,000. I cannot say that their interest can be said to be directly effected by the merger. I have to examine now the legal question whether a scheme of amalgamation also requires a meeting of the creditors to be held.

(4) It may be noted that a scheme of amalgamation is really an arrangement between the company and its members. As it effects the creditors of the two companies also, it may be said to also effect the creditors, in the sense that in the case of the transferor company the identity of the debtor is altered from being Ansal Steels Private Limited to Ansal Properties and Industries Limited. This point has very little effect in the present case, because there is only one creditor and the value of that credit is Rs. 1,660. The other creditor for Rs. S, is the transferee company itself. Assuming that a meeting of the creditors was called, it obviously has the support of the transferee company which is the petitioner itself, the scheme had to be automatically passed by an over-whelming majority even if the other creditor opposed the merger or amalgamation. thereforee, in practice, the result of such a meeting would be a foregone conclusion. However, I still have to consider whether the holding of such a meeting is an essential step before the scheme can be sanctioned by the Court. I am of the view that it is not necessary at all on the facts of this case.

(5) In examining this question, it is interesting to note that when a company has to alter its memorandum, and this is a much smaller event than merging the company in another company, a notice has to be issued to the creditors if the Court (now the Company Law Board) thinks that their interest would be effected. Similarly, when there is a reduction in the share capital, Section 101 of the Companies Act. 1956. requires the Court to issue notice to the creditors in order to obtain their consent. This notice can be dispensed with 'in the discretion of the Court in special circumstances; but, the intention of the Section is that the creditors should have a say in the matter of reduction of capital. Keeping this in mind, I think, that the Act does contemplate that the Court should very carefully consider the question of the creditors' interest when deciding to confirm a merger of the company whereby the company ceases to exist altogether and its assets and liabilities are to merge in a different company. When the Legislature contemplated that in a comparatively minor matter like an alteration in the memorandum, or in a somewhat more serious matter like the reduction of share capital, or return of capital, etc., the creditors should have a say, it follows that the creditors should have a say also in the matter of a total merger and extinction of a company by amalgamation with another company. It has been pointed by H. L. Anand J. of this Court in Union of India v. Asia Udvog Private Limited and others, (1974) Comp. Cas. 359. that there is a lacuna in the Act, which should be rectified by suitable amendment so as to protect the interest of the creditors. I do not quite agree with this view that there is a lacuna in the Act. I am of the view that the creditors have to be protected by the Court itself. No scheme of merger can be put into effect without the sanction of the Court, even if it is unanimously passed by the share-holders. If the Court is of the view that the interests of the creditors are adversely effected by the merger, it can insist on refusing to sanction the scheme unless the consent of the creditors has also been obtained. For this purpose. the Legislature has obviously cast a duty on the Court, to find out whether the scheme effects the interests of the creditors to such an extent that their meeting is essential.

(6) To illustrate the lines on which the Court might act. I would put forward two or three hypothetical examples, to examine what the Court might do in a given situation. If the transferor company happens to be an insolvent company with few assets and great liabilities. the effect of the merger is likely to be adverse to the creditors of the transferee company as the credit-worthiness of their debtor would be adversely effected by such a merger. In such a case. it would be necessary to call a meeting of the creditors. It would not at all be necessary to call a meeting of the creditors of the transferor company whose position would be improved by such a merger. Taking another instance there might be a merger of a financially strong company with another company whose position is not so good. In such a case, the creditors of the transferor company would be adversely effected, because the credit-worthiness of their new debtor would be worse than that of their original debtor. It would not at ail be necessary to call a meeting of the creditors of the transferee company in such a case. because their interest would not be adversely effected by the merger of a financially strong company with their debtor. Thus. it would have to be seen in every case by the Court whether a meeting of the creditors of either or both the companies is necessary. In some cases it may be necessary to call a meeting of only one set of creditors and in some cases no meeting may be necessary. In some cases, it might be necessary to call meetings of both sets of creditors. Though it is difficult to hypothetically formulate the circumstances in which meetings of both sets of creditors are necessary, I think, this may be necessary when the Court is unable to find out the credit-worthiness of the two companies. For example, in a given case a company may have a strong balance sheet in the sense that it might be financially strong on paper and yet its business might not be too good in terms of future profitability. In such a case, it would be a moot point whether the company considered in the light of future prospects is an asset or a liability. These are some examples of situations in which the Court may have to insist on meetings of the creditors or some of them being called.

(7) I may also notice that in the first proviso to Section 394(1) of the Companies Act, 1956, there is a provision relating to a scheme of amalgamation of a company which is being wound up with another company. This is an obvious case in which there may be a heavily indebted company which is to merge with a solvent company. In such a case a report has to be received from the Company Law Board or the Registrar concerning the affairs of the company in question. It is equally clear that the merger of a going concern with one which is being wound up is, in most circumstances, likely to be detrimental to the interest of the creditors of the going concern. In such a case, the Court would have to insist on a meeting of the creditors of the transferee company being called.

(8) These are general observations relating to the manner in which Sections 391 and 394 of the Companies Act, 1956, can be worked together as they are. I have already dealt with the facts of this case, where it is clear that the interests of the creditors of Ansal Steels Private Limited are not adversely effected, because the major creditor; who may be described as being almost the only creditor is. Ansal Properties and Industries Limited itself. Turning now to the creditors of Ansal Properties and Industries Limited. I have to find out whether the merger is adverse to their interest before I can sanction the scheme. In this respect, I find that the transferor company is a new company having been set up only in 1974. It has not gone into production. In fact, its factory is under construction and an examination of the balance sheet shows that it has a small carry forward loss. I cannot say that the merger of the assets and liabilities of this company in the transferor company will be adverse to the creditors of the transferee company. In fact, the major liability of over Rs. 8,75,000.00 is owed by Ansal Steels Private Limited to the transferee company itself. This factor, I think is really a point in favor of the merger, because the major creditor will in fact be acquiring the entire interest of its debtor. This will not in any way be a disadvantage to the creditors of the Ansal Properties and Industries Limited; rather, it may be in their interest because the steel project of Ansal Steels Private Limited will, after the amalgamation, become the property of Ansal Properties and Industries Limited itself. thereforee, I do not think that a meeting of the creditors of the transferee company is necessary in the instant case. I do not think that the merger will effect the credit-worthiness of the transferee company; rather, it will strengthen it. Hence, there is no impediment to the sanction of the scheme, I accordingly sanction the scheme.

(9) Turning now to the question of passing an order under Section 394 of the Act, the report of the Official Liquidator is available. It states that on a scrutiny of the books of accounts and papers of the transferor company, the Official Liquidator is of the view that the affairs of the company have not been conducted in a manner prejudicial to the interest of its members or to public interest. It has been suggested that some clause be incorporated in the scheme regarding possible income-tax or sales-tax liability. However, it has also been indicated that there do not seem to be any income-tax or sales-tax liability. The scheme as passed by the share-holders of the two companies contains some superfluous terms which have been suitably amended. A provision has also been made for possible income- tax or sales-tax liability. I have approved a draft of the formal order to be passed in forms Nos. 41 and 42. The petition is decided


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