~ 1 ~ IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY PETITION NO.300 OF 2009 CONNECTED WITH COMPANY APPLICATION NO.404 OF 2009 Laxmi Udyog Components Private Limited ........Petitioner/Transferor Company WITH COMPANY PETITION NO.301 OF 2009 CONNECTED WITH COMPANY APPLICATION NO.405 OF 2009 Laxmi Agni Components & Forgings Private Limited …...Petitioner/ Transferee Company In the matter of the Companies Act I of 1956 AND In the matter of Section 391 to 394 of the Companies Act, 1956 AND In the matter of the Scheme of Amalgamation of Laxmi Udyog Components Private Limited with Laxmi Agni Components & Forgings Private Limited Mr. Hemant Sethi i/b Hemant Sethi & Co. Advocates for Petitioner Mr. R. Ramarao, Official Liquidator in Company Petition No.300 of 2009, present. Ms. Heena Shah and Mr. M. K. Vardhan i/b S. K. Mohapatra for Regional Director in both the Petition. 2 Ms. Madhuri Gaikwad with Mr. Kishore V. Tembe for Rupee Co-op. Bank Ltd., a Secured Creditor. CORAM: S. J. KATHAWALLA, J DATE : 11th SEPTEMBER, 2009 PC: 1. Heard learned counsel for parties. 2. The sanction of the Court is sought under Section 394 of the Companies Act, 1956 to the Scheme of Amalgamation of Laxmi Udyog Components Private Limited, the Transferor Company with Laxmi Agni Components & Forgings Private Limited, the Transferee Company. 3. The Transferor Company is 100% subsidiary of the Transferee Company. 4. Counsel appearing on behalf of the Petitioners have stated that they have complied with all the requirements as per directions of this Court and they have filed necessary affidavits of compliance in the Court. Moreover, Petitioner Company also undertakes to comply with all statutory requirements, if any, as required under the Companies Act, 1956 and the rules made thereunder. 5. Ms. Madhuri Gaikwad, Advocate appears for Rupee Co-operative Bank Limited, a Secured Creditors of the Transferor Company and object to the Scheme. The Learned counsel appearing for the Petitioner states that the Transferor Company has arrived at One Time Settlement (OTS) with Rupee Co-operative Bank Limited. The Rupee 3 Co-operative Bank Limited has favourably considered OTS proposal and agreed to settle the entire dues for an amount of Rs.620 lacs. The learned counsel on instructions states that a sum of Rs.243.25 lacs has already been paid to Rupee Co-operative Bank Limited as per OTS. The Petitioner through counsel undertakes that the balance amount will be paid by the Transferee Company as per the agreed terms. The said undertaking is accepted. 6. The Regional Director has filed affidavit stating therein that the scheme is not prejudicial to the interest of shareholders and public. However in paragraph 6 of the said affidavit, the Regional Director has stated as per clause 10.6 of the Scheme excess if any of the value of the net assets of the Transferor Company over its liabilities, shall be credited by the Transferee Company to the General Reserve Account. This Accounting Treatment is not proper and in conformity with generally accepted accounting principles. The excess of the value of the net assets of the Transferor Company over its liabilities should be credited to Capital Reserve Account and not to Free Reserve/General Reserve, as the Transferee Company proposes to record the assets and liabilities of the Transferor Company in its books at their respective fair values. 7. In response to the said objection, the Counsel appearing on behalf of the Petitioner submits that the accounting for Amalgamation is prescribed in Accounting Standards (AS-14) issued by Institute of 4 Chartered Accountants of India, provides for treatment of Reserves on Amalgamation in paragraph 16, 17, 18 and 23 thereof. 8. It is further submitted that there are 2 main methods of accounting for amalgamation, (i) the pooling of interests method, under which the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts and (ii) the purchase method under which the Transferee Company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the Transferor Company on the basis of their fair values at the date of amalgamation. In short the identity of re- serves is not preserved. 9. The counsel appearing for the Petitioner further invites my attention to para 23 of the said Accounting Standards which envisage that in some cases (as in the present case), the Scheme of Amalgamation sanctioned may prescribe a different treatment to be given to the reserves of the Transferor Company after amalgamation. In such cases the Transferee Company needs to disclose in the first financial statements following the amalgamation: (a) A description of the accounting treatment given to the reserves and the reasons for following the treatment different from that prescribed in this Statement. 5 (b) Deviations in the accounting treatment given to the reserves as prescribed by the scheme of amalgamation sanctioned under the statute as compared to the requirements of this Statement that would have been followed had no treatment been prescribed by the scheme. (c) The financial effect, if any, arising due to such deviation. 10. The counsel appearing for the Petitioner also refers to provisions of Section 211 sub-section (3A) of the Companies Act, 1956 which envisage that every profit and loss account and balance-sheet of the Company shall comply with the accounting standards. Sub-section (3B) provides that where the Profit and Loss Account and Balance Sheet of the Company did not comply with the accounting standards, the said Company shall disclose in its profit and loss account and balance sheet, the deviation from the accounting standards, reasons for such deviation and financial effects, if any, arising due to such deviation. 11. Reliance is placed on the judgment of this Court (Khanwilkar, J) in Company Petition No.293 of 2009 in the matter of Hindalco Industries Limited, wherein similar issue was raised by some of the shareholders who had opposed the Petition inter-alia on the ground of violation of Accounting Standards. Para 15 of the said Judgment reads as follow: 6 15. The next question is: whether there would be violation of accounting standards. The objection will have to be answered keeping in mind provisions of Section 211 of the Act. Sub-section (3A) thereof stipulates that every profit and loss account and balance-sheet of the Company shall comply with the accounting standards. Sub-section (3B) provides that where the Profit and loss account and the balance sheet of the company did not comply with the accounting standards, the said Company shall disclose in its profit and loss account and balance sheet, the deviation from the accounting standards, reasons for such deviation and financial effects, If any, arising due to such deviation. On conjoint reading of sub-section (3A) and (3B) of Section 211, it necessarily follows that deviation from the accounting standards is permissible subject, however, to compliance of the requirement of disclosure in the profit and loss account and balance sheet of such deviation and the reasons for such deviation and financial effects thereof. In other words, deviation of accounting standards is not wholly prohibited, but is regulated by the provisions of section 211 of the Act. The Petitioner assures to abide by the said regime. So long as such disclosure is made, the Company cannot be faulted with regard to the Profit and Loss Account and balance sheet being in deviation from the accounting standards. Even the guidelines issued by the Institute of Chartered Accountants of India, copy whereof was produced at the time of hearing, restates this position. The same reads thus: “Announcement on Disclosures in cases where a Court/Tribunal makes an order sanctioning an accounting treatment which is different from that prescribed by an Accounting Standard ======================================= Paragraph 4.2 of the 'Preface to the Statements of Accounting Standards' (revised 2004) provides as under: 7 "4.2 The Accounting Standards by their very nature cannot and do not override the local regulations which govern the preparation and presentation of financial statements in the country. However, the ICAI will determine the extent of disclosure to be made in financial statements and the auditor's report thereon. Such disclosure may be by way of appropriate notes explaining the treatment of particular items. Such explanatory notes will be only in the nature of clarification and therefore need not be treated as adverse comments on the related financial statements." In the case of Companies, Section 211 (3B) of the Companies Act, 1956, provides that "Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following, namely:- the deviation from the accounting standards; the reasons for such deviation; and the financial effect, if any, arising due to such deviation." In view of the above, if an item in the financial statements of a Company is treated differently pursuant to an Order made by the Court/Tribunal, as compared to the treatment required by an Accounting Standard, following disclosures should be made in the financial statements of the year in which different treatment has been given: A description of the accounting treatment made along with the reason that the same has been adopted because of the Court/Tribunal Order. 8 Description of the difference between the accounting treatment prescribed in the Accounting Standard and that followed by the Company. The financial impact, if any, arising due to such a difference. It is recommended that the above disclosures should be made by enterprises other than companies also in similar situations. 16. A priori, it is not as if deviation of the accounting standards per se can be a ground to reject the scheme propounded by the Petitioner company. In the present case, it is noticed that the scheme is the product of conscious act of the shareholders. It is their commercial wisdom or business decision. In their wisdom, they have approved the proposed scheme which bestows complete discretion in the Board in which they have full confidence. As aforesaid, there is no law which prohibits adjustment of loss by spreading it out including that of the subsidiary companies. There is no manifest unfairness to the shareholders in any manner. No creditor is affected by the proposed scheme. 12. Reliance is also placed upon judgment of the Allahabad High Court reported in (2006) 2 Company Law Journal 455 (All) where the Regional Director had in paragraph 7 thereof had taken similar objection. The objections raised by the Regional Director were rejected and the Scheme was sanctioned. 13. The Counsel appearing on behalf of the Petitioner Company submits that the Scheme of Amalgamation in the present case is in nature of purchase and hence para 18 & 23 of Accounting Standards 9 (AS-14) are relevant since para 10.6 of Scheme provides that excess, if any of the value of the net assets of the Transferor Company over its liabilities, shall be credited by the Transferee Company to the General Reserve Account. The Petitioner through their Counsel undertakes that the Transferee Company shall make necessary disclosures as contemplated in para 23 of Accounting Standards (AS-14) issued by Institute of Chartered Accountants of India. The said undertaking is accepted. 14. The Official Liquidator has filed report stating that all the affairs of the Transferor Company have been conducted in a proper manner and that the Transferor Company may be ordered to be dissolved without winding up. 15. Upon perusal of the entire material on record and the judgment of and Allahabad High Court where similar issue was raised by the Regional Director have been decided and in view of the fact that 100% of the shareholders of the Transferor and Transferee Company have accorded their consent to the proposed Scheme of Amalgamation, the objection raised by the Regional Director is not tenable. In my opinion the Scheme appears to be fair and reasonable and is not violative of any provisions of law and is not contrary to any public policy. None of the parties concerned have come forward to oppose the Scheme. Moreover, the Regional Director has stated that the scheme as proposed is not prejudicial to the interest of shareholders and the 10 public save and except stated in paragraph No.6 above and The Official Liquidator has also stated that the affairs of the Transferor Company have been conducted in a proper manner and that the Transferor Company may be ordered to be dissolved without winding up. 16. There is no objection to the Scheme, save and except as stated in paragraph 5 and 6 herein and since all the requisite statutory compliances have been fulfilled Company Petition No.300 of 2009 is made absolute in terms of prayer clause (a) to (c) and Company Petition No.301 of 2009 is made absolute in terms of prayer clauses (a) and (b). 17. The Transferee Company to lodge copy of this order and the Scheme authenticated by the Company Registrar, High Court, Bombay with the concerned Superintendent of Stamps for the purpose of adjudication of stamp duty, payable, if any, on the same within 60 days from the date of this order. 18. The Petitioner in both the Company Petitions to pay costs of Rs.7,500/- each to the Regional Director. Petitioner in Company Petition No.300 of 2008 to pay cost to the Official Liquidator, High Court, Bombay a sum of Rs.7,500/-. Costs to be paid within four weeks from today. 19. Filing and issuance of the drawn up order is dispensed with. 11 20. All concerned authorities to act on a copy of this order along with scheme duly authenticated by Company Registrar, High Court, Bombay. (S. J. KATHAWALLA, J)