THE HON’BLE SRI JUSTICE N.V. RAMANA C.P. No. 138 of 2009 O r d e r: M/s. Utkal Manufacturing & Services Limited, has filed this Company Petition under Sections 391 to 394 of the Companies Act, 1956, seeking sanction of the modified Scheme of Arrangement, so as to be binding on all the Equity Shareholders, Creditors and Employees of the Transferor Company as well as the Transferee Company. The petitioner-transferor company was incorporated as a Public Limited Company under the provisions of the Companies Act, 1956 (herein referred to as ‘the Act’) with the Registrar of Companies, on 07.11.1990 with its Registered Officer situated at 50-40-19, II Floor, T.P.T. Colony, Visakhapatnam – 530 013. The main objects of the company, as set out in its Memorandum of Association, is to carry on the business of manufacturing ferro alloys, silicon metal, iron, steel, special steels, cast iron, pipes and castings and all other products incidental to and connected with the said products, to carry on the business of metallurgists, mine owners, importers, manufacturers of and dealers of all types of metallurgical, mineral, industrial and other articles and preparations and to carry on the business of traders in consumable and non-consumable goods of al kinds and to undertake selling agency and export and import business in respect of all kinds of goods etc. The authorized share capital of the petitioner-transferor company as on 31.03.2009 is Rs. 150,000,000/- divided into 15.000,000 equity shares of Rs.10/- each. The issued, subscribed and paid up capital is Rs. 8,00,73,500 /- divided into 80,73,500 shares of Rs.10 each. The entire share capital of the petitioner-transferor company is held by Panda Family and its associates. M/s. Indian Metals and Ferro Alloys Limited (hereinafter referred to as “the transferee company”), was incorporated as a Public Limited Company on 20.11.1961 with its Registered Office at Bomikhal, P.O. Rasulgarh, Bhubaneswar, Orissa – 751 010. The transferee company is promoted by Panda Family. The authorized share capital of the transferee company is Rs.220,000,000/- divided into 22,000,000 equity shares of Rs.10/- each, Rs.4,000,000/- divided into 40,000 redeemable 9.5% cumulative preference shares of Rs.100/- each and Rs.26,000,000/- divided into 260,000 2nd series redeemable cumulative preference shares of Rs.100/- each. The issued, subscribed and paid-up capital is Rs.213,147,650/- divided into 2,13,14,765 equity shares of Rs.10/- each and Rs.1,16,000/- forfeited shares (amount originally paid up). The main objects of the transferee company, as set out in its Memorandum of Association, is to carry on the business of manufacturing ferro alloys, iron, steel, special steels, cast iron and other pipes and castings and all other products incidental to an connected with ferro alloys, iron and steel, ferrous and non-ferrous alloys and to obtain leases of mines anywhere to work the mineral therein for processing and for sale; to generate electricity by thermal or hydro or any other process and for sale and distribution thereof; to import and export the same or similar articles or their parts and to purchase, assemble, sell, distribute or deal in any way with the goods or merchandise etc. With a view to consolidate ferro alloys business into one company, the promoters of the Group have decided to demerge Ferro Alloys Division of the petitioner-transferor company into the transferee company, which has proposed to acquire, as it would help the transferee company to have incremental expansion in its production capacity of ferro chrome and would give better margins as compared to ferro silicon, and the acquisition will strengthen the financial base of the transferee company. The management is of the view that the acquisition by the transferee company is in the best interest of both the transferor and transferee companies, their shareholders and creditors and does not in any way prejudice the interest of its shareholders. The petitioner-transferor company states that the exchange ratio of the equity shares of the transferor company and the and the equity shares of the transferee company under the Scheme of Arrangement has been made on fair and reasonable basis and on the basis of the report dated 11.05.2009 of M/s. SSPA & Co. Chartered Accountants. The audit of the accounts of the petitioner-transferor company as well as the transferee company have been made. The audit of the accounts of the petitioner-transferor company has been done as a whole including the accounts of Ferro Alloys Division and separate audit of accounts of Ferro Alloys Division is not done as it is not required under the provisions of the Act. However, the provisional/unaudited balance sheet and profit and loss account of Ferro Alloys Division are available. The Board of Directors of the petitioner-transferor company and the transferee company have passed resolutions approving the Scheme of Arrangement in their meetings, subject to approval by the High Court of Andhra Pradesh and High Court of Orissa. The transferee company has already filed company petition seeking approval of the High Court of Orissa to the proposed Scheme of Arrangement, and the same is pending adjudication. It is stated by the petitioner-transferor company that the proposed Scheme of Arrangement does not affect prejudicially the interest of any creditors, secured or unsecured in any manner because no sacrifice/waiver is sought and that post demerger also their interests will not be affected as they will be transferred to the transferee company and that upon demerger there will be sufficient assets available for making payment of their debts as and when the same become payable in the course of business. The meeting of the equity shareholders, secured creditors and unsecured creditors of the petitioner-transferor company for considering the Scheme of Arrangement, as directed by this Court on 25,06,2009, was convened on 31.07.2009 under the Chairmanship of an Advocate Commissioner appointed by this Court, by issuing notices of the meetings by way of paper publications. In the meeting of the shareholders, secured creditors and unsecured creditors, as reported by the Chairman of the meeting, eight shareholders, who hold 100% of the equity shares, have voted in favour of the Scheme; Insofar as meeting of the secured creditors is concerned, the Chairman reported that from out of eights secured creditors, six secured creditors who are entitled to a debt of Rs.46,91,34,718/- have voted in favour of the Scheme of Arrangement, while two secured creditors, namely SREI Equipment Finance Private Limited and Reliance Capital Limited, who are entitled to a debt of Rs.1,18,74,389/-, though attended the meeting through proxies, but their votes were declared invalid as there was no proper authorization; and in the case of unsecured creditors, as is evident from the report of the Chairperson, all the 21 unsecured creditors who are entitled to a debt of Rs.75,15,810/- have voted in favour of the Scheme of Arrangement. Thus it is clear that all the persons interested in the Scheme of Arrangement, namely the shareholders, secured creditors and unsecured creditors have voted in favour of the Scheme of Arrangement. Pursuant to the notice ordered by this Court, the Registrar of Companies, Andhra Pradesh, Hyderabad, filed affidavit while the Official Liquidator filed report. In the affidavit filed by the Registrar of Companies, he stated that the Regional Director, Ministry of Corporate Affairs, Chennai, who is the competent authority, had examined the scheme carefully with reference to the material papers made available to him and upon such examination, it was decided not to make any objection against the Scheme of Arrangement and leave the same to the decision of this Court and that the Scheme of Arrangement is subject to approval of the Hon’ble High Court of Orissa. However, the Official Liquidator has filed report taking two objections to the Scheme of Arrangement, namely (1) that the audit of the accounts of the transferor company is done as a whole including the accounts of the demerged Ferro Alloys Division and no separate audit of the accounts of the said Unit is done and; (2) that the transferor company has not declared any divided for the last three years for the period from 2005-06 to 2007-08 even though the transferor company has made huge profit, and the transferor company has not given any reason for retention of the profits in the respective annual reports, and as a result thereof, the transferor company’s net worth has shown significant increase which has ultimately reflected in calculation of the Share Exchange Ratio and significant increase in the value of the shares of the transferor company. That by virtue of that the Exchange Ratio tilted in favour of the promoters of the transferor company resulting in getting more shares of the transferee company. This apart, the reason for transferring the shares allotted in consideration of the demerged unit directly to the promoters of the transferor company in lieu of the said company ought to be substantiated by the transferor company. Answering the first objection taken by the Official Liquidator, the learned counsel for the petitioner filed reply stating that the account of the petitioner-transferor company as a whole, including the Ferro Alloys Division was made, and there is no provision in the Act, which requires audit of accounts of each Division, and in fact, the accounts of the company have been certified by the Auditors, and the actual audited figures of assets and liabilities of Ferro Alloys Division were made available to the valuers for calculation of exchange ratio, and as such, the objection taken by the Official Liquidator is untenable. In reply to the second objection taken by the Official Liquidator, it is submitted by the learned counsel for the petitioner-transferor company that the reasons for not declaring the dividend are mentioned in the annual reports submitted by the Director for the years 2006-07 and 2007-08, except for the year 2008-09 as by that time, the same was not ready. At any rate, he submitted that whether to declare dividend or not is entirely the Directors discretion and if no dividend is declared, it is better for the company and if the shareholders are affected, they can company for non-declaration of dividend, but in the present case. He further submitted that as the promoters of the transferor company and the transferee company are one and the same, the increase of shareholding of the promoters in the transferee company from 56.10% to 60.73% would not affect in any manner, more so when the increase has resulted not due to non-payment of dividend but due to allotment of shares in the transferee company to the shareholders of the transferor company. He further submitted that having regard to the provisions of Section 2(19AA) of the Income Tax Act, 1961, the shares should be allotted to the shareholders of the transferor company, and as such, he justified the allotment of shares to the shareholders of transferor company instead of transferee company. Heard the learned counsel for the petitioner, the learned Assistant Solicitor General for Central Government and the learned Official Liquidator. As can be seen from the material placed, and as discussed above, the promoters of the petitioner-transferor company and the transferee company are one and the same. The shareholders of the transferor company, the secured and unsecured creditors, in their respective meetings held on 31.07.2009, as reported by the Chairman appointed by this Court, have approved the Scheme of Arrangement, as proposed by the Board of Directors of the transferor company. The Registrar of Companies, Andhra Pradesh, Hyderabad, has not taken any objection, but left the matter to the decision of the Court. Even though, the Official Liquidator has taken objections to the Scheme of Arrangement, having regard to the reply submitted by the petitioner, justifying the non-declaring of dividend, which according to them is better for the company, and having regard to the fact that assets and liabilities of the transferor company, including the Ferro Alloys Division, were also valued as a whole, and having regard to the fact that the provisions of Section 2(19AA) of the Income Tax Act, 1961 requires allotment of shares to the shareholders of the transferor company upon demerger on proportionate basis. Having regard to the fact that the persons interested in the affairs of the petitioner-transferor company, namely the shareholders, secured creditors and unsecured creditor, by majority vote, have approved the Scheme of Arrangement, as approved by the Board of Directors of the petitioner-transferor company, and having regard to the reply submitted by the petitioner-transferor company to the objections taken by the Official Liquidator, and none of the persons interested in the affairs of the transferor company having made allegations of fraud against the Scheme of Arrangement, and considering the law laid down by the apex Court in Miheer H. Mafatlal v. Mafatlal Industries Ltd.[1], wherein it was held that while considering a Scheme under Sections 391 to 394 this Court should not act as an appellate authority upon the wisdom of the persons interested in the affairs of the company, except to see whether the scheme has been approved by majority, I am of the considered opinion that the Scheme of Arrangement, having been approved by the persons interested in the affairs of the transferor company, there should be no reason for this Court not to approve the Scheme of Arrangement. Hence, the Scheme of Arrangement, as proposed and approved by the Board of Directors, including the shareholders, secured creditors and unsecured creditors, as prayed for is ordered. As a consequence thereof, the Ferro Alloys Division of the transferor company shall stand demerged from the transferor company and merge with the transferee company. The petitioner-transferor company and the transferee company shall pay to the Assistant Solicitor General appearing for the Central Government to pay Rs.2,500/- each towards costs. Accordingly, the Company Petition is allowed. _________________ N.V. RAMANA, J. Dated: November, 2009. KSR [1] AIR 1997 SC 506