The Public Collapse of the Merger Scheme of Zee Entertainment Enterprises Ltd. with Culver Max Entertainment Pvt. Ltd. (Sony Pictures Network India) has prompted discussions on the “Basic Fabric” of the scheme of merger or amalgamation after the Former Chief Justice of India UU Lalit gave a legal opinion that in the absence of appointment of Mr. Puneet Goenka as the Managing Director and / or Chief Executive officer of the transferee company, the scheme cannot be implemented without the fresh approval of the shareholders nor can the board of directors of the concerned companies amend or modify the integral part of the scheme. His opinion comes after the Securities appellate tribunal’s order dated 30.10.2023 quashed the ex-parte ad-interim order passed by SEBI that Mr. Goenka shall cease to hold the position of director or key managerial personnel of any listed entity or its subsidiary. Initially, the SEBI had passed restraining order in view of the transactions that indicated round tripping of funds from ZEEL to ZEEL in that Rs. 200 Crore was paid by ZEEL to the seven entities and ZEEL received 143 crores as per the order to the detriment of its shareholders.
Once the Scheme is sanctioned by the tribunal, as per Section 231 of the companies act, 2013 the tribunal can modify the scheme as it may consider necessary for its implementation. Tribunal can also make an order for winding up if its implementation cannot be done with or without the modification. This provision has only removed the words “on application or suo moto” from the erstwhile section 392 of the 1956 act.
Any Modification is subject to the basic fabric of the scheme.
The modification includes omission and additions to the scheme solely for the purpose of making it workable so far as it does not change basic fabric. The Supreme Court in SK Gupta v. KP Jain expounded on “modification” that there is no justification of for cutting down its meaning to whittle down the power of the court (tribunal) for the purpose of making it workable since the word is not preceded by “unless the context otherwise requires” in the section. The tribunal must first determine what modification are necessary to make the scheme workable and it is necessary to show that it has become unworkable in its entirety or in a portion.
The Supreme Court in Reliance Natural Resources Ltd. V. Reliance Industries Limited explained the fabric as implying both the result and the processes, procedures and steps taken to weave the fabric of the scheme. During ‘weaving’, decisions could be taken to leave out certain aspects as unacceptable to the Board or the shareholders and stakeholders or the court. Further, those processes necessarily involve certain steps in obtaining shareholders permissions. Such processes are the very essence of the fabric and not just some technicalities that are to be consigned to history and ignored in making modifications. Whatever changes are made can only be minor ones which would not tamper with the essence of the scheme.
Courts have cautiously used their powers of modification.
In the case of Associated Aluminum Industries Ltd. v. Registrar of Companies, Mumbai, 2018 the Bombay High Court dismissed the application for modification of scheme of demerger. It held that just because of tax benefits have been lost does not mean that the scheme is not workable. The Application is not for minor modification of the scheme, and should modification be done, its net effect would be of recalling the order sanctioning the scheme to the extent of windmill business. The Basic Fabric of the scheme would change and will go beyond the confines of what the court. The scheme was sanctioned by the High Court. As per the Clause 2 (e) of the scheme, transferor demerged its Windmill Business. The Transferor was enjoying tax benefits since it was undertaking set up for generation and distribution of power under clause IV of Section 80IA of the Income Tax Act, but it could not get extended since the section provides that such an undertaking should not be a reconstruction of an existing business nor be formed by splitting up. Further, the Section 80IA (12A) clarifies that no deductions shall be available to the amalgamated company when the enterprise is transferred on or after 1st April 2007 in the demerger scheme.
In the case of Real Lifestyle Broadcasting Pvt. Ltd. V. Turner Asia Pacific Ventures Inc. The Delhi High Court in 2013 held that powers of court are not wide enough to rewrite the scheme or introduce new clauses in the scheme. The prayer by RLB that turner was obligated to transfer the distribution network to RLB goes beyond mere modification of the scheme. The factual matrix was that RLB and RGB entered a scheme of arrangement. RLB prayed for necessary orders to ensure the scheme of arrangement is workable or if not then cancel the scheme and pass a winding up order against RGB. As per RLB, the central feature of the scheme was the transfer of business of RGB to RLB as a ‘going concern’. It included transfer of all the movable assets, permits and licenses. However, the encryption code was not transferred without which property in the STBs cannot pass in terms of the scheme, therefore, alleged that distribution network was never transferred to RLB. The petition for sanction was jointly filed without mentioning these facts which the court thereafter ordered the sanction. Turner (held 50% shares in RGB) filed a contempt petition stating that RLB failed to comply with the scheme. RLB replied in affidavit that due to recent developments and acts of maladministration there are bona fide counter claims against turner, giving rise to his civil and criminal liability. However, the court passed a direction against RLB to deposit the due amount. Hence, the present application was filed by RLB before the Division Bench of this court. RLB contented that it made no business sense to have agreed to a mere transfer of the STBs without transfer of decryption key since the real asset was distribution network. And that, turner had destroyed the commercial viability. As per the decision in Reliance Case, real intention of the parties had to be examined by the court and it was within the power under section 392. Per Contra, turner denied that it had the sole control over decryption keys. Contended that court cannot add to the scheme any obligation that did not already exist when the scheme was sanctioned. As per the same judgment in Reliance, it was contended that court cannot introduce any new clause.
The prayer by RLB demanded restoration of distribution network and tax losses as would have been the ordinary consequence of a complete transfer of an undertaking as a going concern.
The Court while dismissing the present application held that between entering scheme and its sanction more than seven months had elapsed so there was no necessity for RLB to have sought the sanction jointly. There is no specific mention of the transfer of distribution network and such omission cannot be accidental. No obligation can be read into the scheme.
The Appointment of Mr. Puneet Goenka as the MD / CEO of transferee company cannot be modified.
The Sony – Zee Merger Scheme stated that it will become effective upon fulfillment of certain conditions including approval from the Ministry of information and broadcasting and government for appointing Mr. Goenka as Md/Ceo. Hence, it was an integral part of the scheme since the implementation of the whole scheme hinged on this condition. The decision that Mr. Goenka is willing to let go of the position of MD was still rejected by the Sony. The NCLT Mumbai order dated August 10, 2023 held that scheme cannot be halted however did not approve the appointment since it was sub-judice. As recently, the SAT as per paragraph 123 has quashed the ad interim order and the confirmatory order. The scheme can either be enforced as it is or must follow the procedure under section 230 for such a substantial modification pertaining to the position of MD.
Conclusion
The doctrine of basic fabric reinstates the principle that the opinion of shareholders and creditors are to be given due consideration before modifying the schemes. Although, it might be compliance burden to redo the general meetings and circulate the modified drafts and get it sanctioned, it reflects on a principled corporate governance.
– Srujan Nirkhee, Fourth Year student at Maharashtra National Law University, Mumbai
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