COMP/147/2006 1/64 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY PETITION No. 147 of 2006 With COMPANY PETITION No. 148 of 2006 with Company Application No. 572 of 2006 In Company Petition No. 147 pf 2006 with Company Application No. 573 of 2006 In Company Petition No. 148 of 2006 For Approval and Signature: HONOURABLE MR.JUSTICE M.R. SHAH ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= NARMADA CHEMATUR PETROCHEMICALS LTD. - Petitioner(s) ========================================================= Appearance : Mr. Saurabh Soparkar, with MRS SWATI SOPARKAR for Petitioners MR YN RAVANI for Central Government. ========================================================= CORAM : HONOURABLE MR.JUSTICE M.R. SHAH Date : 09/1/2007 JUDGMENT COMP/147/2006 2/64 JUDGMENT Company Petition No. 147 of 2006 is filed by the petitioner, Narmada Chematur Petrochemicals Limited [hereinafter referred to as 'Transferor Company'] for an appropriate order of sanctioning the Scheme of Arrangement in the nature of amalgamation with Gujarat Narmada Valley Fertilizers Company Limited [hereinafter referred to as 'Transferee Company']. 1.1. Company Petition No. 148 of 2006 is filed by the Transferee Company for sanctioning of the Scheme of Arrangement in the nature of amalgamation of Transferor Company with Transferee Company under Section 391 to 394 of the Companies Act, 1956. Company Applications No. 572 of 2006 and 573 of 2006 are filed in aforesaid Company Petitions by the applicants, i.e., Narmada Chematur Petrochemicals Limited Staff Union on behalf of employees of Transferor Company opposing COMP/147/2006 3/64 JUDGMENT the aforesaid scheme of amalgamation of Transferor Company with Transferee Company. 2. It has been submitted on behalf of the Transferor Company that the Transferor Company is a listed Public Limited Company and was promoted as a joint venture between GNFC, the Transferee Company, Chematur Engineering AB of Sweden and its Indian Associates, IBI Chematur [Engineering & Consultancy] for the manufacture of TDI and Aniline. It is further submitted that amongst others, one of the reasons for incorporating the Transferor Company, as a separate company was to facilitate the Technical Collaborator, i.e., Chematur Engineering AB Sweden to participate in the project through equity investment. The Technical Collaborator for NCPL having divested its holding in NCPL and Chematur Group Directors on the Board of NCPL having thereafter resigned it has ceased to be a Joint Venture Company. It is COMP/147/2006 4/64 JUDGMENT submitted that the Transferor Company is mainly engaged in the business of manufacturing and selling of chemicals and the turn-over of NCPL Transferor Company during the last financial year, i.e., 2004-2005 was Rs. 441.77 Crores and it has made net profit of Rs. 30.53 Crores. It has built up Reserves and Surplus of more than Rs. 109.28 Crores. GNFC, the Transferee company has an equity stake of 56.45% in the Transferor Company, i.e., NCPL and as such the Transferor Company NCPL is subsidiary company of Transferee Company. It has been further submitted that the present trend in corporate world is of consolidation, greater scale of operations, wider product base, global competitiveness leading to growth in top and bottom line. When GNFC the Transferee Company and NCPL, the Transferor Company are merged, the merged entity will be well poised to implement these concepts more effectively than the two company companies doing it separately. It is submitted that both the Transferor and Transferee COMP/147/2006 5/64 JUDGMENT Companies belong to same group of management and the Transferee Company is a holding company for the Transferor Company. It has been further submitted that the Board of Directors of both the companies have thought it appropriate to amalgamate them for the purpose of achieving synergic advantages. It is thought fit to combine all the operations under one company and the same would make administration easy and control systems more efficient. The amalgamated company would have a larger market presence. It would be in a position to maximize its profits through optimum utilization of its resources and minimize the administrative and operative costs. The increased capital in case of the amalgamated company will strengthen its capital adequacy. Thus, the amalgamation would be to the mutual advantage of both the Transferor and Transferee Companies. It is further submitted that the Transferee Company has the core competence in the marketing and selling of industrial chemicals. Since the COMP/147/2006 6/64 JUDGMENT Transferor Company NCPL is also engaged in manufacture and selling of industrial chemicals post merger synergies could be available and the merger will open up new avenues for product planning and product development as also effective marketing etc. It is further submitted that both the companies are located on the same campus and the complimentary strength of both the companies will enable the merged entity to visualize growth plans with a larger resources base and the marketing network of GNFC, the Transferee Company and its other strengths will now freely flow into the merged entity. The advantages of the merger of Transferor Company with Transferee Company are set out in Para 7.3. of the petition. 3. It is further submitted that Board of Directors of the Transferor Company resolved at the Board Meeting held on 28th February 2006, that subject to such approvals of shareholders, and subject to such sanctions of appropriate Courts, COMP/147/2006 7/64 JUDGMENT as may be required in law, and subject to such consents and permissions of the Central Government and other authorities as may be necessary the Scheme of Amalgamation/Arrangement be made between the Transferor Company and the Transferee Company on the broad basis referred to in the Scheme of Amalgamation. It is further submitted that the learned Single Judge of this Court by order dated 1st May 2006 passed in Company Application No. 224 of 2006 [Annexure 'D' to the petition] directed the Transferor Company to convene separate meetings of the equity shareholders, secured creditors and unsecured creditors of the company for the purpose of considering and if thought fit approving with or without modifications in the said Scheme of Amalgamation. It is further submitted that on 29th June 2006, the said meetings of the equity shareholders, unsecured creditors and secured creditors of the company were duly convened in accordance with the aforesaid order passed by this Court and the result of the COMP/147/2006 8/64 JUDGMENT meetings is also produced at Annexure 'E' to the petition. 3.1. It is submitted that out of 58 equity shareholders who attended the meeting, 2 ballots representing 220 shares were found to be invalid, and out of 56 valid votes cast representing Rs. 34,79,00,480/-, 55 votes representing Rs. 34, 78,98,480/- were found to be in favour of the proposed Scheme of Amalgamation whereas one vote cast representing Rs.2000/- was found against the proposed Scheme. Thus, the resolution approving the scheme is carried by requisite statutory majority of 98.21% in number and 99.999% in value. 3.2. It is further submitted that the meetings of secured creditors of the Transferor Company was attended by 3 creditors through their authorized persons and the total value of the debt is Rs. 4805.31 lacs. It is submitted that all the 3 secured creditors who attended the meeting voted COMP/147/2006 9/64 JUDGMENT in favour of the proposed scheme of amalgamation and the resolution approving the scheme has been passed unanimously, i.e., 100% in number and 100% in value. 3.3. It is submitted that meeting of the unsecured creditors of the Transferor Company was attended by 23 unsecured creditors and the total value of their debt is Rs. 16,85,24,502, and the resolution approving the scheme is carried unanimously by the valid votes cast at the said meeting, and the decision of the Chairman of the meeting is in consonance with Rule 70 of the Company Court Rules, 1959. It is further submitted that in order to avoid any controversy at a future date about the correctness of the decision of the Chairman and the validity of the resolution, it was thought appropriate to abandon the result of the said meeting and to call a fresh meeting of only unsecured creditors of the Transferor Company to consider, and if thought fit COMP/147/2006 10/64 JUDGMENT approve with or without modifications the said Scheme which was put before them at the meeting held on 29th June 2006 and an application being Company Application No. 387 of 2006 was therefore moved to seek necessary directions and seek additional time to file necessary petition after 21 days from the date of conclusion of the said meeting. The learned Single Judge of this Court, vide order dated 21st July 2006 [Annexure 'F'] permitted the petitioner to abandon the outcome of the meeting of the unsecured creditors convened on 29th June 2006 and directed the petitioner company to convene a fresh meeting of only unsecured creditors of the Company on 19th August 2006, and accordingly a fresh meeting of the unsecured creditors was convened on 19th August 2006 and the said meeting of the unsecured creditors of the Company was attended by 68 unsecured creditors; the total value of their debt is Rs. 17,36,53,809; and all the unsecured creditors present for voting at the meeting voted in favour of the resolution COMP/147/2006 11/64 JUDGMENT approving the proposed scheme. Hence, the resolution approving the proposed scheme has been carried unanimously, i.e., 100% in number and Rs. 100 in value. 3.4. Since the proposed Scheme of Amalgamation has been duly approved by the requisite majority of the equity shareholders, secured creditors and unsecured creditors present at the meetings duly convened and held as per the directions of this Court, the petitioner company has preferred the present company petition for sanction of the Scheme of Arrangement in the nature of Amalgamation. 4. Company Petition No. 148 of 2006 is filed by Transferee Company, for sanction of amalgamation of Transferee Company with the Transferor Company. It is submitted that the Transferee Company is a listed Public Limited Company and the company is mainly engaged in the COMP/147/2006 12/64 JUDGMENT business of manufacturing and selling of fertilizers and chemicals as also in the business of Information Technology related service. The Turnover of the Company during the last financial year, i.e., 2004-2005 was Rs. 1935.53 Crores and it had made net profit of Rs. 224.02 crores. It is further submitted that it has built up Reserves of Rs. 807.07 Crores. It is submitted that the Transferee Company has equity stake of 56.45% in the Transferor Company, i.e., NCPL, and as such the Transferor Company is the subsidiary company of the Transferee Company within the meaning of Section 4 of the Companies Act, 1956. By making the same submissions which are made by the Transferor Company for the proposed Scheme of Amalgamation/Arrangement, it has been emphasized that both the Transferor and Transferee Companies belong to the same group of management and therefore the Board of Directors of both the Companies have thought it appropriate to amalgamate them for the purpose of achieving COMP/147/2006 13/64 JUDGMENT synergic advantages. It is further submitted that amalgamation would be to the mutual advantage of both the Transferor and Transferee Companies. The advantages due to amalgamation/arrangement have been enumerated in Para 7.3 of the Company Petition. 4.1. It is submitted that the Board of Directors of the Transferee Company resolved at the Board Meeting held on 28th February 2006 that subject to such approvals of shareholders, and subject to such sanction of appropriate courts as may be required in law, and subject to such consents and permissions of the Central Government and other authorities as may be necessary the Scheme of Amalgamation/Arrangement should be made between the Transferor Company and the Transferee Company on the broad basis referred to in the Scheme of Amalgamation. 5. It is further submitted that pursuant to the order passed by the learned Single Judge of COMP/147/2006 14/64 JUDGMENT this Court dated 1st May 2006 in Company Application No. 223 of 2006, the Transferee Company was directed to convene the meeting of equity shareholders for the purpose of considering and if thought fit approving with or without modifications in the said Scheme of Arrangement, and accordingly on 29th June 2006 the meeting of equity shareholders of the Transferee Company was duly convened in accordance with the said order and the Chairman of the said meeting has reported about the result of the said meeting to this Court by Affidavit dated 8th July 2006 [Annexure 'E']. It is further submitted that out of 152 shareholders representing 6,48,06,448 shares of Rs. 10/- each present for voting at the meeting, 125 votes representing the value of Rs. 64,80,27,140/- being 6,48,02,714 shares of Rs.10/- each were found in favour of the Scheme and 4 votes representing value of Rs. 9000 being 900 shares of Rs. 10/- each were found against the scheme. It is submitted that the resolution COMP/147/2006 15/64 JUDGMENT approving the scheme has been carried by requisite statutory majority of 96.899% in number and 99.999% in value. 6. Since the proposed Scheme of Amalgamation/Arrangement has been duly approved by requisite majority of equity shareholders at the meeting duly convened and held as per the directions of this Court, the Transferee Company has preferred the Company Petition No. 148 of 2006 to approve the proposed Scheme of Amalgamation/Arrangement under the provisions of the Companies Act, 1956. 7. As stated above, Company Application No. 572 of 2006 and Company Application No. 573 of 2006 are filed by Narmada Chematur Petrochemicals Limited Staff Union opposing the Scheme of Arrangement/Amalgamation of Transferor Company with Transferee Company and has requested not to sanction the said Scheme. COMP/147/2006 16/64 JUDGMENT 8. Heard Shri Saurabh N. Soparkar, learned Senior Advocate appearing with Mrs. Swati Soparkar, learned advocate appearing on behalf of the respective petitioners and Shri Shalin N. Mehta, learned advocate appearing on behalf of the Employees Union of Transferor Company. Before considering the rival submissions made on behalf of the respective parties, the objections raised by the Staff Union are required to be referred to, dealt with and considered. Following objections are raised on behalf of the Staff Union of NCPL opposing the proposed Scheme of Amalgamation; (1) Important issues concerning service conditions of employees of NCPL [Transferor Company] ought to have been considered and dealt with while proposing the scheme of amalgamation of Transferor Company with Transferee Company. COMP/147/2006 17/64 JUDGMENT (2) The proposed Scheme of Amalgamation is not in the interests of employees and it is prejudicial to the interests of NCPL [Transferor Company]. (3) The scheme is prejudicial to public policy as the profit making Transferor Company is to be merged and/or amalgamated with the Transferee Company. (4) The issues with regard to employees of the Transferee Company are not dealt with and considered by the companies in support of their objection with regard to non-dealing of important issues concerning the service conditions of the employees of NCPL [Transferor Company]. The following submissions are made in support of the above objections; COMP/147/2006 18/64 JUDGMENT “(A) On amalgamation/merger of NCPL with GNFC, and the employees of GNFC on their absorption in GNFC, parity is required to be maintained between the employees of the erstwhile NCPL and the employees of the GNFC. This is required to be stated because the preamalgamation/merger scenario is that there is a wide difference between the wages/salary payable to the employees of NCPL and wages/salary payable to the employees of GNFC for the same grade or class. An employee of GNFC earns more by way of wages/salary 30% more than what an employee of NCPL would earn for equivalent grade or class. On absorption of NCPL employees in GNFC in the post- amalgamation/merger scenario, this parity between the two groups is required to be abolished. Moreover the pay-revision of GNFC employees is due from 01.07.2006 and on finalization of the same the wage difference will again increase from 30% to that negotiated %. (B) On amalgamation of NCPL with GNFC, NCPL will cease to be an independent entity for all purpose. By this measure, all employees of the erstwhile NCPL would COMP/147/2006 19/64 JUDGMENT necessarily become the employees of GNFC on their absorption in GNFC in the post- amalgamation/merger scenario. Thus, after absorption in GNFC, for eg. Grade S3 or S4 employee of the erstwhile NCPL, on his/her absorption in GNFC should be in grade S3 or S4 employee of GNFC in the post-amalgamation/merger scenario. (C) The absorption of the employees of the erstwhile NCPL in GNFC in the post- amalgamation/merger scenario, ought to be effected in such a manner that no loss in seniority is caused to the concerned employees of the erstwhile NCPL on their absorption in GNFC in the post- amalgamation merger scenario.” 9. Shri Shalin Mehta, learned advocate appearing on behalf of the Staff Union of Transferor Company has submitted that after amalgamation of Transferor Company with Transferee Company, the Transferor Company will not be in existence and all the employees of the Transferor Company will be of the employees of GNFC, the COMP/147/2006 20/64 JUDGMENT Transferee Company and there will be a difference in the pay-scale and other benefits of the Transferee Company, the employees of the Transferee Company will be paid more salary in accordance with the pay-scale and other benefits being paid to the employees of NCPL though they will be treated as employees of GNFC after the amalgamation. It is submitted that the dispute with regard to seniority, fitment, and pay parity with the employees of original Transferee Company would arise and such issues have not been taken into account by the companies while proposing the Scheme of Amalgamation. It is further submitted by him that the scheme is against the public policy as the profit making Transferor Company would be merged with another profit making company and one profit making company is not required to be amalgamated with another profit making company. He has submitted that one can appreciate if a loss making Company proposes for its amalgamation with a profit making company. COMP/147/2006 21/64 JUDGMENT 10. Meeting with the preliminary objections raised on behalf of the petitioner company that the Workers Union has no locus to challenge or oppose the scheme of amalgamation, Shri Mehta, learned advocate on behalf of the Workers Union has submitted that such standing can be found in Section 394(1)(v) of the Companies Act, 1956. Relying upon Section 394(1)(v) of the Act, Shri Mehta has submitted that the words “for any persons who” are wide enough to include the employees of the Transferor Company. There is nothing in Section 394(1)(v) to suggest that the words “for any persons who” are restricted to members and creditors only of the company. It is submitted by him that the words employed in the first part of Section 394(1) “and any such persons as are mentioned in that section (Section 391)” cannot be said to control the words “the provision to be made for any persons who dissent from the compromise or arrangement” used in the latter part COMP/147/2006 22/64 JUDGMENT of Section 394(1). According to him, the additional words “as are mentioned in that Section” used in the first part of Section 394(1) are not used in the latter part of Section 394(1), as a result of which it cannot be said that clause (v) of Section 394(1) restricts the meaning of the words “for any persons” to members and creditors of company only. In support of his above submission that employees or workers of the Transferor Company can challenge or raise objections to a Scheme of Amalgamation, he has relied upon the following Judgments; (1) (2000) 1 COMPANY LAW JOURNAL 351 (BOMBAY), at 371 [Para 66]; (2) (1995) 83 COMPANY CASES 30 (SC) at Page 64; (3) (1990) 1 COMPANY LAW JOURNAL 285 (DELHI) at 289 (Para 30); (4) (2006) 134 COMPANY CASES 99 (Madras) COMP/147/2006 23/64 JUDGMENT at 102 (Para 10). 11. Shri Mehta, learned advocate appearing on behalf of employees of the Transferor Company has submitted that the proposed Scheme of Amalgamation is prejudicial to the employees of the Transferor Company inasmuch as the proposed scheme does not deal with various issues of parity, fitment, seniority and placement vis-a- vis, new recruits of the Transferee Company. Clause 12 of the proposed scheme does nothing at all to prevent the future discrimination against the employees of the Transferor Company. According to the employees, Clause 12 gives a carte blanche to the management of the Transferee Company by paying them less than the employees of the Transferor Company even after two entities become one and the employees of the Transferor Company become the employees of the Transferee Company. In Clause 12 of the proposed Scheme, the management of the Transferee Company would be able COMP/147/2006 24/64 JUDGMENT to retain two separate streams or systems in one organization by discriminating between the employees of the Transferor Company and the employees of the Transferee Company. It is further submitted that the companies have never applied their mind to the issues which have been raised by the employees of the Transferor Company. It is submitted that as the companies have openly admitted that they would like to maintain disparity between the employees of the Transferor Company and the employees of the Transferee Company the proposed scheme is highly prejudicial to the employees of the Transferor Company. 12. It is further submitted by the learned advocate appearing on behalf of the Employees Union that the proposed Scheme of Amalgamation is against public policy/interest. It is submitted that both the Companies are profit making entities. It is submitted that the books of accounts of the Transferee Company clearly reveal COMP/147/2006 25/64 JUDGMENT that additional annual burden that would fall on GNFC were to accept the principle of parity between the employees of the Transferee Company and the employees of the Transferor Company can be easily swallowed and absorbed by the Transferee Company. The additional burden works out to be a sum of Rs. 4 Crores annually and the said amount is petty when compared with the profit made by the Transferee Company which is more than Rs. 100 crores. It is averred that by the proposed amalgamation the shareholders of the Transferee Company and the Transferor Company would be benefitted and if the merged entity makes higher profits, obviously the employees of the Transferee Company would stand to benefit, however the proposed scheme does not intend that the employees of the Transferor Company benefit from the better profit expectation that the amalgamation would result in. Relying upon the decision of the Hon'ble Supreme Court in the case of NATIONAL TEXTILE WORKERS'UNION VS. P.R. RAMAKRISHNAN (AIR COMP/147/2006 26/64 JUDGMENT 1983 SC 75), it is submitted by Shri Mehta that the workers/employees occupy very important place in the modern Corporation of today and if the scheme is highly prejudicial to the employees of the Transferor Company it cannot be said that the same is in public interest. 13. Relying upon decision of the Hon'ble Supreme Court in the case of MIHEER H. MAFATLAL Vs. MAFATLAL INDUSTRIES LTD., (1997) 1 SCC 579 at Page 596, it is submitted by Shri Mehta that the litmus test for upholding or sanctioning a Scheme of Amalgamation when such a Scheme is viewed against the objections raised by the employees of the Transferor Company, is not whether the employees of the Transferor Company would be worse after amalgamation. According to him, the litmus test is whether the scheme is fair, just and reasonable to all concerned, which would include the employees of the Transferee Company and the burden to establish this is on the companies. It COMP/147/2006 27/64 JUDGMENT is submitted that, in the present case as the proposed scheme is not just, fair and reasonable to the employees of the Transferee Company, the scheme does not pass muster of the test laid down in the