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By Pradeep K Mittal B,LLB,FCS PKMG Law Chambers

By Pradeep K Mittal B.com,LLB,FCS PKMG Law Chambers. CORPORATE RE-STRUCTURING – IMPORTANT ISSUES.

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By Pradeep K Mittal B,LLB,FCS PKMG Law Chambers

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  1. By Pradeep K Mittal B.com,LLB,FCS PKMG Law Chambers CORPORATE RE-STRUCTURING – IMPORTANT ISSUES

  2. 2. In case, the Scheme of Arrangement/Merger postulates various compliances and for which separate permission/approval is envisaged, the question then arises, as to whether the petitioner, after obtaining the order sanctioning the Scheme of Arrangement/Merger, is required to obtain each of the separate permission from the functionaries of the Central Government. The obvious answer is NO. SINGLE WINDOW CLEARANCE

  3. In the case of PMP Auto Industries Ltd. 1994 (80) Company Cases page 289 Bombay High Court has observed as under Not only is Section 391 a complete code, but it is intended to be in the nature of a "single window clearance" system to ensure that the parties are not put to avoidable, unnecessary and cumbersome procedure of making repeated applications to the court for various other alterations. The Gujarat High Court in the case of Mekaster Valves & Engg Services (P) Ltd MANU/GJ/0354/2008 has observed as under:-

  4. 21.The approval granted by the shareholders at the meeting to the scheme as a whole amounts to approval to all such incidental proposals and no separate procedure is required to be followed as envisaged by Sections 17, 31, 94, 97, 81(1A), 100 and 149(2A) respectively. It goes without saying that when this Court sanctions the scheme, the scheme is sanctioned as a whole with all its clauses and proposals. The Gujarat High Court in the case of Safal Realty (P) Ltd 2008(146)Company Cases 34 has observed as under:-

  5. The scheme of arrangement/amalgamation can be sanctioned even if it involves doing acts for which the procedure is specified in other Sections of the Act. It is also stated that on the issue of payment of stamp charges/registration fees, it has been held by various High Courts that since the transferor company has already paid due registration fees at the relevant point of time, it is not necessary for the transferee company to pay the same fees/charges again on amalgamation of transferor company to the transferee company. It is permissible and not necessary to follow the procedure under Section 94/97 of the Act, read with Sections 391 and 394 of the Act, under which the scheme has to be sanctioned.

  6. 6. The Bombay High Court in the case of ICICI. Bank Limited (2002) 112 Company Cases 291, has held that since the Scheme itself provided for amendment to the Articles of Association of the petitioner Company as regards number of Directors and the Scheme had been approved by an overwhelming majority of Equity Shareholders, INCREASE IN NUMBER OF DIRECTORS

  7. there was no justification for requiring the Company to follow the procedure all over again for increasing the number of Directors. However, Section 259 of the Act required the sanction of the Central Government for increasing the number of directors above 21. The Central Government had already been served and had responded to the notice through Registrar of Companies. Even otherwise, there was no reason for the Central Government not to accord approval for the increase in the number of directors.

  8. 7. In case of Mekaster Valves & Engg Services (P) Ltd , the Hon’ble Gujarat High Court has further observed as follows:- “The certified copy of the order sanctioning the scheme by this Court, when filed with the Registrar of Companies, shall be treated as intimation to the Registrar of Companies and it shall take note of all the changes proposed and sanctioned by the Court. In view of the same, no separate compliances of aforesaid provisions of the Companies Act, 1956 are, therefore, necessary. NO SERPATE RETURS TO BE FILED TO ROC

  9. 7.1 The Karnataka High Court in the case Mphasis Limited 2008(141)Company Cases 558 has observed as under:- A certified copy of the order of the Court is to be filed before the Registrar within 30 days from the said order, which would operate as a notice contemplated under Sub-section (1) of Section 95 and 97 of the Act.

  10. 8. The Calcutta High Court in the case of Tata Tea Limited 2008(144)Company Cases 236 has observed as under:- With regard to the first objection, it has been submitted that avoidance of capital gains can be no reason for not sanctioning a scheme which is otherwise lawful or valid as held in A.W. Figgis and Co. P. Ltd., In re [1980] 50 Comp Cas 95 (Cal) and the unreported decision in C.P. No. 288 of 2007-- since reported as SREI Infrastructure Finance Ltd. In re [2008] 144 Comp Cas 109 (Cal). TAX SAVING/TAX AVOIDANCE

  11. 9. The Calcutta High Court in the case of A W Figgis & Co (P) Ltd MANU/WB/0139/1978 has held as under:- Avoidance of capital gains is not material as these are commercial matters and are best left to the wisdom of the shareholders who are astute businessmen, and can be no reason for non-sanctioning the scheme of arrangement. It is a matter of revenue and will attract the provisions of the Income-tax Act.

  12. MERGER OF AUTHORIZED CAPITAL OF TRANSFEROR COMPANY TO TRANSFEREE COMPANY. 10. At the time of filing of Affidavit, invariably, the Regional Director raises an objection that the Transferee company be called upon to pay the fees upon merger of authorized capital of the transferor company with the transferee company. The answer lies in the judgment of Division Bench of the Madras High Court in the case of Regional Director Vs. Kevin Plastic & Chemicals (P) Ltd 2008(141)Company Cases 475 Madras wherein it has been observed as under:-

  13. The issue is not whether the fee, which is already paid by the Transferor company would automatically be transferred to the Transferee company. But, what is intended by Section 391 of the Act is to reconstitute the company without the company being required to make a number of applications under the Companies Act for various alterations. Not only is Section 391 of the Act is a complete code in itself, but it is intended to be in the nature of a "single window clearance".

  14. In the case of Jaypee Greens Ltd. (2006) 134 Comp. Cases 542, a Learned Single Judge of the Allahabad High Court has reiterated the same principle holding that where a combined authorized capital of the amalgamated company does not exceed the authorized capital of the transferor and the transferee, no separate procedure for such merger of authorized share capital is required to be followed nor is any further fee liable to be paid. The judgment of the Punjab and Haryana High Court in the case of Motorola India (P) Ltd. (2006) 73 CLA 1 follows the same principle.

  15. APPREHENSION OF CREATION OF MONOPOLY BY TRANSFEREE At the time of consideration of approval of the Scheme, many a time, the competitor instigates the workers and/or put up some other person to raise objection that upon sanction of the scheme of merger of transferor company, it would create monopoly of the transferee company in the products in which the transferee company is dealing. The Supreme Court in the case of Hindustan Lever Employees Union Vs. Hindustan Lever Limited 1995(83)Company Cases 30 has observed as under:-

  16. An argument was also made that as a result of the amalgamation, a large share of the market will be captured by HLL. But there is nothing unlawful or illegal about this. The court will decline to sanction a scheme of merger, if any tax fraud or any other illegality is involved. But that is not the case here. A company may, on its own, grow to capture a large share of the market. But unless it is shown that there is some illegality or fraud involved in the scheme, the court cannot decline to sanction a scheme of amalgamation

  17. DETERMINATION OF EXCHANGE RATIO BY CHARTERED ACCOUNTANTS: 13. In many cases, the shareholders, by majority, have passed resolution sanctioning the Valuation Report containing Exchange Ratio, yet, the Regional Director raises objection about the authenticity of the Exchange Ratio as envisaged in the Scheme. The Punjab & Haryana High Court in the case Max Estates Ltd Vs. Malsi Estates Ltd 2008(141)Company Cases, 342 has observed as under:-

  18. : I am of the opinion that the valuation of shares following the book value method is accepted as a proper mode of valuation of shares. The concept of book value is an accepted accountancy concept of valuation and that it cannot be said to be illusory. The exchange ratio has been determined by an experienced firm of Chartered Accountants on the basis of known and accepted method of valuation. Therefore, I do not find any justifiable and reasonable ground to reject the said valuation.

  19. : Therefore, this Court will not act as a Court of Appeal. This Court has no commercial wisdom exercised by the Chartered Accountants and the members of the company who have consented to the Scheme. • 14. The Calcutta High court in the case of Bengal Tea Industries Ltd Vs. UOI 1989(93) CWN 542 has observed as under:- • With regard to objection No. 3 the valuation report has not been challenged by any shareholder and the same cannot be challenged by the Central Government.

  20. AMALGAMTION RESERVE – ITS USES AS PER ACCOUNTING STANDARDS ISSUED BY ICAI. • 15. The Regional Director, in their Affidavit, raised a very interesting issue about the treatment of Reserve. The Punjab & Haryana High Court in the case of Motorola India (P) Ltd 2007(141)Company Cases 26 has observed as under:-

  21. 31. The objection that the surplus arising out of the scheme of amalgamation i.e. "amalgamation reserves" is of capital nature and cannot be considered as General Reserve as the General Reserve, is free for distribution to the share holders of a Company in the form of dividends, bonus shares, whereas amalgamation reserve cannot be utilized for distribution to the share holders. In respect of the said objection of the Regional Director, it is pointed out that the Accounting Standard issued by the Council of Institute of Chartered Accountants of India specifically provides for a treatment in respect of such amalgamation reserves in terms of Clause 23 of the Accounting Standard 14. Therefore in terms of the Scheme,it is deemed to specify the user of Amalgamation Reserve.

  22. NO SEPARATE METING OF CREDITOR TRANSFEROR COPANY (WHICH IS SUBSIDIARY) NECESSARY UPON ITS MERGER WITH ITS HOLDING COMPANY • 17. On the above a very interesting and vital issue, the A P High Court in the case of Magnaquest Solutions (P) Ltd2007(80)SC 496 has held as under:-

  23. Lifting the corporate veil, in cases where a wholly owned subsidiary is amalgamated with its holding company, would establish that the creditor is, and has always been, dealing with the transferee company de-facto though he is the creditor of the transferor company de-jure. In such limited cases of amalgamation, as the creditors' rights cannot be said to be affected, holding of a meeting to ascertain their views, and obtain their consent to the scheme of amalgamation, may not be necessary.

  24. VALUATION OF ASSETS & LIABILITIES • The Calcutta High Court in the case Joonktollee Enterprises Ltd 2008(145)Company Cases 159 has observed as under:-

  25. It has been specifically stated that the assets and liabilities shall be taken as per the book value. The explanatory statement has specifically informed all the shareholders that the valuation report was open for inspection along with other documents. Therefore, no complaint can be made with regard to the valuation report or non-furnishing of details of properties, their market value or book value.

  26. PAYMENT OF STAMP DUTY ON ASSETS OF TRANSFEROR COMPANY VESTING IN TRANSFEREE COMPANY. On a very important, significant issue of as to whether payment of stamp duty is required to be paid upon vesting of immoveable assets of the transferor company with the transferee comkpany, the Division Bench of the Calcutta High Court in the case of Madhu Intra Ltd 2005(58) SCL 160 has observed as under:-

  27. Even if the order under Section 394 is to be taken to be a 'conveyance' or an 'instrument' the transfer of assets and liabilities effected thereby is purely by operation of law which on account of Section 2(d) of the Transfer of Property Act also excludes the operation of Section 6(e) thereto. We agree with the view expressed by the Division Bench of this Court in New Central Jute Mills Co. Ltd. (supra), that the transfer of assets and liabilities from the transferor company to the transferee company takes place by virtue of subsection(2) of Section 394, without any further act or deed.

  28. Thank You

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