CS. Bilu Balakrishnan, Founder, CIER
Its known to all that the law of amalgamation, mergers & acquisition is little bit complicated and cumbersome. In this write-up an attempt is made to ease the law to reach the readers and to highlight the beauty of the relevant legal provisions.
The law relating to amalgamation is dealt with under Chapter V – Section 390 to 396A of Companies Act, 1956 and Rules 67 to 87 of Companies (Court) Rules, 1959. The term “amalgamation” or “merger” is not defined in the Companies Act 1956, thus we may define it as “transfer of assets and liabilities of one company (called as “transferor” company) to another company (called as “transferee” company) and the life of Transferor Company is usually ended with “dissolution without winding-up”. The term “merger” refers to the end result of amalgamation.
Major Steps involved in Amalgamation – to be done by Transferor & Transferee companies:
1. There should be a scheme of amalgamation;
2. An application is to be made to the High Court (where the regd. Office of the companies are situated) for seeking directions to convene the meeting of members and creditors;
3. The Court may order meetings (with details of Chairman of meetings, whether proxies are allowed or not, quorum, report filing due date etc.);
4. Conducting meeting as per Court’s direction;
5. At the meeting the members and or creditors shall approve the scheme of amalgamation with 3/4th in value representing majority in number [3/4th in value & 51% in number, thus more stringent than special resolution];
6. Another petition has to be made to the High Court for sanctioning the approved scheme;
7. The Court may sanction the scheme;
8. The sanctioned scheme shall be binding on all concerned;
9. File e-form 21 with the RoC within 30 days of the Court Sanction attaching the Court Sanction Order (the filing date will be considered as the “Effective Date of Amalgamation”)
10. The Court’s Order is appealable.
In addition to the above step the transferee company shall have to allot shares (as per the agreed exchange ratio) to the members of the erstwhile transferor company.
Court petitions should be filed separately by both the companies:
The Court petitions and application stated above has to be usually done by both the companies separately especially when the registered office of the both the companies are situated under the jurisdiction of two different High Courts. This legal position has been changed by BAHRI. J of the Delhi High Court in Mohan Exports India Ltd. Vs. Tarun Overseas Pvt. Ltd. (1999) 95 Com Cas 53, wherein the learned Judge followed the decision in W.A Beardsell & Co. P. Ltd and Mettur Industries Ltd., Re, (1968) 38 Com Cases 197 (Mad)and concluded that a joint petition by the transferor and transferee company would be competent. Neither the Companies Act 1956 nor the Companies (Court) Rules prohibit filing of a joint petition by the two companies when the subject matter is the same and common question of fact & law would arise for decision.
Role & Duties of Court in Amalgamation:
As it is evident from the above steps that the authority competent to sanction the Amalgamation is the High Court (In the case of Govt. Companies instead of “Court” the term “Central Government” (now MCA) has to be used vide Notification No. GSR 238 dt. 02.02.1978). But, there are many judgments which clearly spell out the role and duties of the Court. Being corporate professionals and specialist in corporate laws, we company secretaries must have to look into such major judgments.
v It is the duty of the court to approve an amalgamation where the resolution was passed by the statutory majority, the scheme was reasonable and fair, and was not adverse to the interest of creditors, members or employees, and further all the formalities had been complied with. [Mohta Investments (P.) Ltd., In Re, (1990) 1 Comp LJ 285, 288 (Del)]
v The court will not sanction an amalgamation simply because it is recommended by the Board of Directors and approved by the shareholders. The court will have to see for itself whether the scheme is reasonable and fair to all parties. [Shankaranarayan Hotels P. Ltd. Vs. Official Liquidator (1992) 74 Com Cases 290 (Kar); Carron Tea Co. Ltd, (1966) 2 Comp LJ 278 (Cal)]
v It is not the function of the court to examine whether there is scope for a better scheme. Business reasons and hypothetical considerations need not be considered while sanctioning a scheme. [All India Blue Star Employees Federation Vs. Blue Star Ltd., (2000) 27 SCL 265 (Bom-DB)]
v Consideration of public interest must not be ignored while sanctioning a scheme. [Union of India Vs. Ambalal Sarabhai Enterprises Ltd. (1984) 55 Com Cases 623, 645 (Guj.)]
v The court should not interfere in the matter of share exchange ration unless there is something patently wrong [KEC International Ltd. Vs. Kamani Employees Union (2000) 1 Comp. LJ 351 (Bom); Reliance Petroleum Ltd., In re, 2003 CLC 326 (Guj); ICICI Bank Ltd., Re, (2002) 112 Com Cases 291 (Guj); Alstom Power Boilers Ltd Vs. State Bank of India (2002) 112 Com Cases 674 (Bom)]
For more detailed discussion about the role & duties of Courts in sanctioning amalgamation scheme I request the readers to refer Supreme Court Judgment in Miheer H Mafatlal Vs. Mafatlal Industries Ltd. (1996) 87 Com Cases 792; AIR 1997 SC 506.
Introducing The Complete Code:
Sections 390 to 396A of Companies Act, often called as the complete code of Mergers / Amalgamations. Here you will be introduced to the sections.
Section 390 deals with the interpretation of the terms “company”, “arrangement” and “secured creditors”; Section 391 gives the power to the company through its members or creditors to enter into a scheme of amalgamation; Section 392 gives the power to the Court to enforce the scheme of amalgamation; Section 393 directs the company to send an explanatory statement along with the notice of merger meetings to shareholders and creditors, it also stipules companies to disclose the material interests of directors, MD or manager of the company in the scheme; Section 394 deals with the contents of amalgamation sanctioning order and gives vast powers to the court to enforce the scheme; Section 394A stipulates that notice of every application to the court shall also be given to the Central Government; Section 395 pertains to takeover of shares; Section 396 deals with amalgamation of companies by Central Government in national (public) interest; Section 396A states the provisions relating to preservation and disposal of books & paper etc of the amalgamated company.
All the provisions relating to amalgamation are parked under these magical Sections 390, 391, 392, 393, 394, 394A, 395, 396 and 396A of Companies Act, 1956. Even though amalgamation is a matter of great importance and the legal theory is vast, the law maker has nicely made 9 sections to deal with, that’s the beauty of Companies Act – Amalgamation provisions.
The beauty queen – Section 394:
Section 394 is the provision where the law maker explicitly uses the word “amalgamation” and this section stipulates the contents of the amalgamation sanction order by the Court and it gives vast power to the court to implement the scheme. The major contents of the order / powers of the court to enforce amalgamation are detailed below:
v The transfer of undertaking, property or liabilities from the transferor company to the transferee company;
v The allotment of shares, debentures etc. (based on exchange ratio) by the transferee company to the erstwhile transferor company;
v The continuation by or against the transferee company of any legal proceedings pending by or against any transferor company;
v The dissolution, without, winding-up of the transferor company; [Please note that under amalgamation the court has the power to dissolve a company without following the detailed years long winding up / liquidation proceedings; Thus the easiest way of winding up of a company is to merge with any other solvent company];
v Such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.
Few Judicial reviews highlighting the legal beauty:
Section 394(1)(b)(vi) (last clause above) gives vast powers to the court to remove many obstacles for implementing the scheme. In MEKASTER VALVES AND ENGINEERING SERVICES P. LTD., [Decided on 06.05.2008] it was held that separate compliance of provisions of sections 17 (Regd. Office shifting) 21 (Name Change) 94 (Capital Alteration) and 97 of the Companies Act 1956 need not be required, as the court sanctioning the scheme itself has the power.
Similarly in AREVAT & D INDIA LTD. v. UNION OF INDIA [(2008) 87 CLA 58 (CAL)] Pinaki Chandra Ghose & Sankar Prasad Mitra, JJ. [Decided on 18.12.2007] it was held that the Court trying the amalgamation has the power to even waive the registration fee to be paid on the increase in authorized capital of the transferee company.
In JAGRAN TV P. LTD., In re. Sunil Ambwani J. [Decided on 23-9-2008] the Court held that when a demerger scheme is approved by the shareholders, secured & un-secured creditors and where there is no violation of any law, nor the scheme is against public interest, the scheme need not be objected only because of the reason that Accounting Standard 14 (AS 14 deals with amalgamation) is not adopted. It may be noted that AS 14 issued by The Institute of Chartered Accountants of India is not applicable for demergers [Gallops Reality (P) Ltd. (2010) 1 CLJ 351 (Guj) also re-confirmed in Sony India Pvt. Ltd. Vs. Sony India Software Centre Pvt. Ltd (CP No. 137/2012, Dt. of Judgment 06.07.2012 (Del)]
Further, it may be noted that as per the interpretation in Section 394(4) transferor company includes a body corporate, whether a company within the meaning of Companies Act, or not, but a transferee company must be a company within the meaning of Companies Act 1956. Thus partnership firms and other forms of business entities even though not being a company can be amalgamated with a company registered in India. In KIRTILAL DALIDAS DIAMONDS EXPORTS P. LTD., In re [(2009) 148 COMP CAS 607 (BOM)] A.M. Khanwilkar J. [Decided on 29. 02. 2008], it was held that the Courts in India can even amalgamate partnership firm (transferor) with transferee company.