1 mss CSP-380 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY SCHEME PETITION NO. 380 OF 2011 CONNECTION WITH COMPANY SUMMONS FOR DIRECTION NO. 327 OF 2011 In the matter of Companies Act, 1956 (I of 1956); In the matter of Section 391 to 394 of the Companies Act, 1956; In the matter of Scheme of Amalgamation of AGFA INDIA PRIVATE LIMITED; WITH AGFA HEALTH CARE INDIA PVT. LTD. AGFA INDIA PRIVATE LIMITED .. PETITIONER COMPANY Mr. Naushad Engineer a/w Z. H. Pardiwala, K. D’souza, J. S. Pillai i/b Dudhat Pareira & Ass. For the petitioner in CSP 380/11 a/w CSP 381/11/ Mrs. Rupa Sutar, Asstt. O.L. Mr. A. S. Kamat i/b Crawford Bayley & Co. for the petitioner in CSP 459/11 a/w CSP 460/11 Mr. Shyam Mehta with C. J. Joy for Regional Director. 2 mss CSP-380 CORAM: S.C.DHARMADHIKARI, J. DATED: 1/12/2011 P.C. This Company Scheme Petition No. 380 of 2011 connected with Company Petition No. 381 of 2011 is under Section 391 to 394 of the Companies Act, 1956 seeking sanction to the scheme of amalgamation by the petitioner and AGFA Healthcare India Pvt. Ltd. 2. The petitioner is incorporated on 30th September, 1993 as a private limited company. Its name was changed to that of the present name w.e.f. 29th March, 2000. It is carrying on business inter alia of trading and third party manufacturing of imaging products and providing maintenance and and/or support services to its customers. 3. After referring to its main objects what has been set out is the share capital of the petitioner, its position emerging from the audited accounts and the copy of the audited accounts is sought to be relied upon. It is then, contended that the petitioner company has discontinued its business from 28th February, 2010. The Transferee Company was incorporated on 19th June, 2007 under the name and style of “Agfa Healthcare India Private 3 mss CSP-380 Limited” It carries on business of trading and technical services for imaging products. After referring to the main objects, the share capital and the financial position of the Transferee Company, it is stated that the petitioner and the Transferee Company are under the same group of companies. The management is of the opinion that the merger of the same will lead to several benefits and particularly as set out in paragraph 14 of the petition. It would result in proper coordination and promoting efficiency in the business operations. That is how the scheme which envisages transfer and vesting of the entire undertaking of the petitioner to the Transferee Company is referred to and its salient features are set out in the petition. It is stated that all statutory compliances have been made and reference is made to the orders of this court and the Board Resolutions. As far as Transferor is concerned there are no secured and unsecured creditors. It is in these circumstances and after setting out the necessary particulars, giving the relevant undertakings and stating that the scheme is in the interest of all concerned that the sanction is sought from this court. 4. There is an affidavit which has been filed by the Regional Director in which what has been pointed out is that the whole of the shareholding of the Transferor and Transferee Company is held by the Foreign Body Corporate. 4 mss CSP-380 Hence both companies may be directed to comply with Foreign Exchange Management Act (FEMA)/RBI Regulation while giving effect to the scheme. As far as this aspect is concerned, the counsel appearing for the petitioners on instructions makes a statement that compliance with these statutes enabling a foreign body corporate to carry on its business affairs in India would be duly made. The statement made on instructions is accepted as undertaking to this court. 5. It is contended by the Regional Director that clause 16.5 of the scheme states that, the difference, if any between the amount recorded as share capital issued pursuant to clause 13.1 of the scheme and the amount of the share capital of the transferor company shall be adjusted in the general reserves of the Transferee Company. In this connection what the Regional Director apprehends is that the Reserves arising out of this scheme may be utilized for the purpose of declaring dividend by the Transferee Company. That, according to the Regional Director, is not permissible in law. 6. On the other hand it is argued by the learned counsel appearing for the petitioner that the law does not prohibit any such declaration. It is not that the petitioner would not comply with the relevant pre-requisite, 5 mss CSP-380 enabling them to declare dividend from the General Reserves but it is not as if there is absolute bar or a prohibition in law. It is in such circumstances that it is stated that there is no merit in this objection and it is required to be overruled. 7. It is contended that there is no merit in the contention of Mr. Mehta, learned Senior Counsel appearing on behalf of the Regional Director that the order of this court in the case of Mahindra Sona Limited dated 20 th August, 2011 in Company Scheme Petition No. 299 of 2011 would operate even qua this scheme. Although Mr. Mehta urged that it has not been so observed by this court in the said order, Section 205 of the Companies Act, 1956 does not permit declaration of dividend other than from the profits, what is contended is that even that reading of the instant scheme and the provisions of the Companies Act is improper. Therefore, this court should not uphold the objection. 8. Mr. Mehta, learned Senior Counsel urges that what the Regional Director apprehends is that contrary to the mandate of the Act and when there is a clear concept defined therein of Free Reserves, it should not be understood that the court has permitted declaration of dividend contrary to 6 mss CSP-380 the said concept and the object and purpose of the Act. In such circumstances even the order passed in the Company Scheme Petition No. 299 of 2011 Mahindra Sona Ltd. cannot be of complete assistance to the petitioner. In that order attention of this court was not invited to Section 205 of the Companies Act,1956 or to the definition of term “Net worth” together with the explanation thereto as per Section 2(29A) of the Companies Act, 1956. For all these reasons it is submitted that the sanction may not be granted because that would not be in accordance with law. No order seeking sanction of the scheme or approval to a scheme of the instant nature can be passed if it contravenes the provisions of any law or is contrary to public policy. In these circumstances, this court should not overrule the objection of the Regional Director, is the submission. 9. As far as this objection is concerned that refers to clause 16.5 of the scheme. 10. The petitioners have annexed a copy of the scheme. After setting out the purpose of amalgamation what has been stated in the scheme is that both companies are part of the same entity. The objectives of the scheme is to consolidate the entities without winding up of the transferor as both the 7 mss CSP-380 companies are part of the same group of companies. That will help the companies to streamline their future activities and operations and minimize costs of operation. The benefits resulting from the scheme are set out in clauses 2.2 to 2.2.10. Thereafter there are several definitions and as far as clause 5 is concerned, that refers to the share capital. Clause 6 provides for transfer and vesting of undertaking. Then comes clause 7 which provides for business and property in trust for transferee company. Clause 8 deals with legal proceedings whereas clause 9 refers to contract, deeds and other instruments. Clause 10 is treatment of taxes and treatment in Clause 11 is “Treatment of Scheme for the purposes of the Income-tax Act, 1961”. Clause 12 deals with Saving of Concluded Transactions. Clause 13 deals with issue of shares. Clauses 14 and 15 are dealing with authorized share capital, the Memorandum of Association and Staff, Workmen and Employees of the Transferor company. Then, comes clause 16 which is entitled “Accounting” and reads as under: “16. ACCOUNTING: 16.1 The Transferee Company shall follow pooling of interest method for accounting of amalgamation as per Accounting Standard – 14 on Accounting for Amalgamation issued by the Institute of 8 mss CSP-380 Chartered Accountants of India, subject to the following; 16.2. With effect from the Appointed Date and subject to the provisions hereof and such other corrections and adjustment as may, in the opinion of the Board of Directors of the Transferee Company be required and except to the extent required by the law, all the assets and liabilities including reserves, if any, of the Transferor Company shall be recorded in the books of the Transferee Company at the book values as recorded in the books of the Transferor Company. 16.3 The credit balance in share premium, of the Transferor Company as on the Appointed Date shall be transferred to the share premium corresponding reserves and profit and loss account in the Transferee Company. In other words, identity of reserves of the Transferor Company shall be preserved. The debit balance in profit & loss account in the books of the Transferee Company as on the Appointed Date shall be transferred to the share premium corresponding reserves and profit & loss account in the Transferee Company. In other words, identity of reserves of the Transferor Company shall be preserved. The debit balance in profit & loss account in the books of the Transferee Company shall be adjusted and reduced from the credit balance in profit & loss account transferred 9 mss CSP-380 from Transferor Company. 16.4 In case of any difference in the accounting policy between the Transferor Company and the Transferee Company, the impact of the same till the Appointed Date will be quantified and adjusted in the reserves to ensure that the financial statements of the Transferee Company reflect the financial position on the basis of consistent accounting policy. 16.5 The difference , if any, between the amount recorded as share capital issued pursuant to Clause 13.1 of the Scheme and the amount of the share capital of the Transferor Company shall be adjusted in the General Reserves of the Transferee Company. 16.6 Upon coming into effect of this Scheme, to the extent that there are inter-company loans, advances, deposits balances or other obligations as between the Transferor Company and the Transferee Company, the obligations in respect thereof shall come to an end and corresponding effect shall be given in the books of accounts and records of the Transferee Company for the reduction of any assets or liabilities as the case may be. For the removal of doubt, it is clarified that in view of the above there would be no accrual of interest or other charges in respect of any such inter-company loans, advances, 10 mss CSP-380 deposits, balances or other obligations. 16.7 Notwithstanding the above, the Board of Directors of the Transferee Company is authorised to account any of the account balances in any manner whatsoever as may be deemed fit, in accordance with the Accounting Standards issued by The Institute of Chartered Accountants of India in consultation with the auditors of the Transferee Company.” 11. A bare perusal of clause 16 would reveal that, firstly the Transferee Company shall follow pooling of interest method for accounting of amalgamation as per Accounting Standard – 14 on Accounting for Amalgamation issue by the Institute of Chartered Accountants of India, subject to what is stated in clause 16.2 onwards. 12. Clause 16.2 states that all the assets and liabilities including reserves, if any, of the Transferor Company shall be recorded in the books of the Transferee Company at the book values as recorded in the books of the Transferor Company. That of course is subject to the opinion of the Board of Directors of the Transferee Company and such other course and adjustments and subject to the scheme itself. However, ultimately clause 11 mss CSP-380 16.2. states that the parties will adhere to the law and then only then will record the reserves. 13. As far as clause 16.3 is concerned, it deals with the credit balance in the share premium Account of the Transferor as as on the Appointed Date. It shall be transferred to the share premium corresponding reserves and profit and loss account in the Transferee Company. Even then, identity of reserves of the Transferor Company shall be preserved. The debit balance in profit & loss account in the books of the Transferee Company shall be adjusted and reduced from the credit balance in profit & loss account and to be transferred from Transferor to the Transferor Company. 14. Clause 16.4 states that in case of any difference in the accounting policy between the Transferor Company and the Transferee Company, the impact of the same till the Appointed Date will be quantified and adjusted in the reserves to ensure that the financial statements of the Transferee Company reflect the financial position on the basis of consistent accounting policy. The difference if any between the amounts recorded as share capital issued pursuant to share capital of Transferor Company shall be adjusted in the general reserves of the Transferee Company. 12 mss CSP-380 15. Clause 16.6 states that upon coming into effect of this Scheme, to the extent that there are inter-company loans, advances, deposits balances or other obligations as between the Transferor and the Transferee, the obligations in respect thereof shall come to an end and corresponding effect shall be given in the books of accounts and records of the Transferee for the reduction of any assets or liabilities as the case may be. For the removal of doubt, it is clarified that in view of this there will be no accrual of interest or other charges in respect of any such inter-company loans etc. 16. What the objection of the Regional Director appears to be, is that the difference if any between the amount recorded as share capital issued pursuant to clause 13.1 of the scheme and the amount of share capital of the Transferor Company which shall be adjusted in the general reserves of the Transferee, would be utilized for declaration of dividend by the Transferee Company and that would be impermissible in law. 17. Clause 13.1 deals with the issue of shares. It states that the Transferor Company and the Transferee are part of the same group of companies. The Board of Directors of the Transferor Company and the Transferee had appointed an agency named in clause 13.1 for determination of fair 13 mss CSP-380 exchange ratio for the present Scheme. The shareholders of the Transferor Company and t he Transferee, who are part of the same group of companies are agreeable to the swap of the share holdings in the Transferor Company for equity shares in the Transferee on the basis set out in the scheme and have accepted the recommendation of the Board of Directors of the Transferor Company and the Transferee which is based on the fair exchange ratio issued by the appointed entity. This is with regard to issue of equity shares. In consideration of the transfer of and vesting of the Undertaking of the Transferor Company in the Transferee, in terms of this Scheme, the Transferee Company shall, without any further application or deed, issue and allot to every member of the Transferor Company whose names appear in the Register of Members of the Transferor Company on the Record Date, his/her heirs, executors etc. 42 equity shares of the face value of Rs.10/- of the Transferee credited as fully paid-up at par for every 100 of the face value of Rs.10/- each held in the Transferor Company. Therefore, what clause 16.5 contemplates is that the difference if any, between the amount recorded as share capital issued pursuant to clause 13.1 of the scheme and that of the share capital of the Transferor Company shall be adjusted in the general reserves of the Transferee Company. To this there does not appear to be any disagreement or objection. However, the argument of the 14 mss CSP-380 petitioners is that the order passed in Company Petition No. 299 of 2011 on 20th August, 2011 will not be applicable to this case as ultimately what has been done by the parties is to provide for Accounting post Amalgamation and Take over or vesting of the Transferor company in the Transferee. As far as accounting terms are concerned, they are as per the standards and general practices and particularly in the matter of amalgamation laid down by the institute of Chartered Accounts of India in consultation with the auditors of the Transferee Company, therefore, as long as these standards do not violate the provisions of law, the order passed by this court in the above matter can have no application. These standards are not violative of any provisions of law. The Regional Director can have no objection to the same. 18. As far as the order passed in Company Scheme Petition No. 299 of 2011, there also sanction was sought to the scheme of amalgamation between two entities. After referring to the scheme in that case what was decided was that clause 4.5.1 of the scheme in that case stated that the reserves remaining in the transferor company subsequent to adjustments to the general reserves of the transferee and the same shall be treated as free reserves for all purposes in the Books of Account of the Transferee 15 mss CSP-380 Company. There does not appear to be difference in Clause 16.5 of the instant scheme and clause 4.5.1. of the scheme under consideration of this court, in that order. There also the apprehension was identical. The Regional Director argued that the reserves arising out of the scheme shall not be utilized for the purposes of declaring dividend by the Transferee Company. The arguments of the petitioners before me in that case was that this is nothing but a complaint of deviation from accounting standards and such deviation is permissible in law. Reliance was placed on two orders of this court passed by two learned Single Judges. 19. The petitioner before me argued in the alternative that if this objection of the Regional Directors is upheld then the petitioner shall comply with the provisions of Companies Act, 1956, in the event they decide to release or pay dividend out of the amounts transferred as free reserves in the books of the Transferee company. The argument was that this should not be taken as mere deviation from accounting standards and, therefore, permissible. That argument of the Regional Director was accepted and, therefore, I held that the earlier orders would not be of any assistance to the petitioner in that case. This court referred to the settled principle of law that the schemes have to be approved, if the court concludes 16 mss CSP-380 that they do not oppose or contravene any provisions of law or public policy. While upholding the commercial decision and wisdom of the shareholders within the parameters permitted in law, the court has ensured that the shareholders and general public is not adversely affected by such arrangement and schemes. Ultimately their foundation may be seen as a compromise between parties but that would get approval provided they satisfy the court that the above tests laid down by the Hon’ble Supreme Court in the case of Mihir Mafatlal, AIR 1997 SC 805 is not in any manner violated or not complied with. Therefore, once the clauses in both the matters are identical then it will not be possible to uphold the contention of the petitioners that the order in that case will not apply in the instant case. 20. Further, it is argued by Mr. Mehta that the order passed in the case of Mahindra Sona Ltd. does not take note of Section 205 of the Companies Act, 1956. 21. It is also argued that “Free Reserves” mean all reserves created out of the profits and share premium account but does not include reserves created out of revaluation of assets, write back of depreciation provisions and amalgamation so also such schemes and arrangements must adhere to the 17 mss CSP-380 Companies Act, 1956. Section 205 states that Dividend to be paid only out of profits. Sub-Section (1) thereof states that no dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2) or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with those provision and remaining undistributed or out of both or out of moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government. Then the proviso sets out several aspects which are required to be complied with. Section 205(1C) enables declaration of an interim dividend. Thereafter further aspects with regard to depreciation are provided and failure of the company to adhere to and abide by the provision would mean that the declaration of dividend on the shares is not proper. 22. It is not necessary to enter into any wider controversy because petitioners have argued and relied upon several orders of the other High Courts wherein identical schemes have been referred and sanctioned. Reliance is placed upon an order passed by the Allahabad High Court in the 18 mss CSP-380 case of Highland Distilleries Ltd. & Ors. vs. Shaw Wallace Distilleries Ltd. in Company Application No. 9 of 2005 decided on 9 th January, 2006. In para 10 of the order what has been observed by referring to the scheme before the said court is that amalgamation is in the nature of merger. It is, therefore, directed that resultant reserves being in excess of the value of net asset of the transferor company shall be given same treatment as provided in the Accounting Standard. The reserves which were available for distribution as divided before the amalgamation shall also be available for distribution as divided after the amalgamation. 23. My attention is also invited to a similar order passed by the Rajasthan High Court in the case of Sutlej Industries Ltd., In re, (2007) 135 Comp Cas 394 (Raj) and it is stated that none of these orders take a view that dividend cannot be declared from what is contemplated and covered by the subject clause in the scheme and particularly clause 16.5 of the instant scheme. Therefore, this court should not take any view which would mean that the Transferee Company cannot declared dividend save and except in terms of what has been argued by the Regional Director. It is not necessary to refer to each of these orders. It is not the case of the petitioners that if at all they decide to declare dividend from the free reserves that they would 19 mss CSP-380 not abide by law. In fact my attention is invited to Section 205 of the Companies Act, 1956 and several aspects in relation to the term “dividend”. It is argued that there is no prohibition in law from declaring dividend from out of free Reserves and the Amount of the Reserves of the Transferor Company to the Transferee Company can be utilized for this purpose. Ultimately, Dividend will be declared from the profits only. Reserves are created out of the profits and Share Premium account. Hence, there is no substance in the apprehension of the Regional Director is the Argument of the Petitioners. The view taken consistently is that the expression “dividend” is from the profits of the company which