D.C. Gheewala, J.
1. The present petition filed by the petitioner, Alembic Chemicals Works Co. Ltd., is for obtaining the sanction of the court to the scheme of amalgamation of Neomer Ltd. with the petitioning company. The short history of the petitioing company is that it was incorporated in 1907. The authorised capital of the petitioning company is Rs. 8,00,00,000 (rupees with crores) which is divided into equity shares and redeemable cumulative preference shares. The issued and subscribed capital of the company is Rs.3,45,92,000. The petitioning company is engaged in pharmaceutical industry. The petitioning company had promoted Neomer Ltd. and in accordance with the policy of the Government of India, it had set up a plant to manufacture poll-propylene staple fiber (PSF) in a backward area at village Panalav,District Panchmahals, which is notified as a backward district in the State of Gujrat
2. Right from the inception, Neomer faced a number of difficulties and it appears that the production of RSF after the commissioning of the Newcomer plant in 1977 never proved to be a profitable proposition on account of numerous reasons. Against the installed capacity, the actual production remained at a much lower level and Neomer incurred heavy losses. As on May 31,1985, its liabilities were Rs.721.82 lakhs as against tangible assets of Rs.537.01 lakhs. Thus the liabilities far outweighed the assets. Under these circumstances, the financial institutions who were secured creditor of Neomer submitted a proposal for amalgamating Neomer Ltd. with the petitioning company, that is, Alembic. It was hoped that the proposed amalgamation would enable Neomer to engage in diversified of activities and apart from manufacturing PSF, the production of multifilament yarn and non-woven products, can conveni-ently be undertaken with the existing infrastructure of Neomer. the financial institutions have also agreed if the proposed amalgamation is seen through, certain other conessions like waiving of compound and penal interest and phased out repayment of terms loans can be provided to the petitioning company. Is is also averred in the petition that under section 72A of Income-tax Act, if the specified authority approves of the scheme of amalgamation, the benefit of the carried forward losses would be available to the company with which another company merges, and the said specified authority has approved the scheme of amalgama-tion. That letter of the said authority is annexed with the petition at anexure-2. The Central Government has approved the scheme under section 23(2) of the Monopolies and Restrictive Trade Practices Act which approval is annexed at anexure3. The approval for amalgama-tion was granted by the Central government after considering the grievances of the shareholders and the workers. The report of the official liquidator is also on the record which does not indicate any imprdiment to the sanctioning of the scheme of amalgamation.
3. The main advantage which might result on account of the proposed amalgamation, according to the petitioner, would be that Neomer can be revived with the support of the petitioner, that there would be optimum capacity utilisation, the petitioner's long-term profitability can be improved, that unemployment of the Neomer personnel would be pre-vented because Neomer, if amalgamation is not permitted, will have to be closed down; and some industry could be developed in a backward area, which would be in consonance with the declared object of the Government and finally the shareholders and the creditors of Neomer will stand to benefit by the proposed amalgamation.
4. By an order dated December 6, 1983, the petitioning company was directed to convene a meeting of the equity shareholders, preference shareholders, depositors,trade creditors, debenture-holders and secured creditors of the company for the purpose of considering and if thought fit for approving the said scheme of amalgamation. Notice of the meeting was sent individually to members of each of the above stipulated classes together with the copy of the scheme of amalgamation and the state-ment required by section 393 of the Companies Act as also the form of proxy. Notice of the meeting was also advertised as directed by the court and on January 23, 1986, a meeting of the above persons was held in accordance with the said order. The result of the said meeting has been reported to the High Court be chairman Shri Ramanbhai B. Amin and the said report is at anexure A. 1,414 equity shareholder of the comp-any attended the meeting either in person or by proxy and the total of their shares was 2,05,191 equity shares of the nominal value of Rs.2,05,19,100. At the said meeting, the scheme of amalgamation was read and explained by chairman, Shri Ramabvhai Amin, and Mr.Chirayu Amin, managing director of the company, and by a majority vote of 99.78% the said proposed scheme of amalgamation was approved. At the meeting of the preference shareholders, 62 shareholders voted in favour of the scheme and at meeting of the depositors, out of 785 depositors who were present, 779 depositors voted in favour of the said scheme of amalgamation. The meeting of the trade creditors of the company was attended by 103 creditors either in person or by proxy and all of them voted in favour of the proposed scheme. Similarly, at the meeting of debenture- holders, all the 36 debenture-holders voted in favour of the scheme and at the meeting of the secured creditors attended by three persons, all the three voted in favour of the scheme. In view of the above circumstances, the petitioning company has prayed that the said scheme of amalgamation be sanctioned.
5. From the above, it would appear that the depositors, creditors, shareholders, the income-tax authorities and the competent authority under the Monopolies and Restrictive Trade Parties act have not raised any voice of dissent against the proposed scheme of amalgamation, but there is a lone voice of discord raised by Mr.Jitendra R. Shukhadia, objector, who has filed his objection on numerous grounds.
6. Mr. Pujara, learned advocate appearing for the objector, raised the following objections to the scheme of amalgamation.
(1) The history of Neomer shows that it was always been a losing concern; was never a financially viable; and the scheme seems to have been engineered because the financial institution are to prepared to advance even a naya paisa to Neomer.
(2) The report of the chartered accountants who have arrived at a break-up value of the shares of Neomer have not taken into considera- tion various factors which they ought to have and the report does not indicate any reasons as to why the break-up value of the Neomer share has been arrived at Rs.4.62 per share.
(3) Apart from the shares prices, dividends, writing off of loans by Alembic to Neomer is not taken into consideration. According to Mr.Pujara, this particular fact was enclosed with the notice of the meeting. This, according to Mr.pujara, would compel Alembic to take over contingent liability without corresponding benefit, either to the shareholders of Alembic to its employees.
(4) The voting at the meeting was not proper, according to Mr.Pujara, and positive efforts were made by the managing, director and directors of Alembic to collect proxies from the employees. this, according to Mr.Pujara, shows an undue keenness on the part of the management of the Alembic which incidentally has very great share in Newcomer. in para-graph 15 of his affidavit, the objector has alleged fraud and, according to the objector, there is no shareholder of the name of Geetaben B.Patel. This would suggest that the voting done at the meeting was not proper.
(5) Mr.Pujara also urged that apart from the material non-disclo-sure in the explanatory statement at the meeting of the shareholders of the Alembic, it can be seen that this is a scheme for revival of Neomer and no benefit is likely to result to Alembic by the proposed scheme of amalgamation. The scheme in short is not workable.
(6) Mr.Pujara has urged that the persons present at the meeting were not true representatives of the body of the shareholders of Alembic and hence even if a large majority have voted for the scheme of amalgamation, it cannot be considered to be the true voice of the shareholders.
(7) Lastly, Mr.Pujara urged that as per the proposed scheme, the shareholders of Neomer will be getting dividend from 1983 as effective date of amalgamation is from 1983 and when there was not profit in Neomer undertaking, they cannot get such benefit. If neomer had made any such profit, then it that case they would be getting double dividend for the same period. In short, Mr.Pujara argued that there is no provi-sion for retrospective membership of the company.
As against the above contentions raised by Mr. Punjara, Mr. G. N. Desai, appearing for the petitioning company, urged that the objections raised are not tenable for the following reasons.
(1) That the scheme of amalgamation has been necessitated by a compulsion of circumstances inasmuch as if Neomer were to be closed down, about 200 persons would be rendered jobless and an industry which can revived in a backward area would snuffed out. Mr. Desai also urged that no shareholder has come forward to file an affidavit support-ing the objector and this will go to show that all the objections raised regarding conduct of the meeting as also regarding non-disclosure of the material facts, are totally baseless. Mr.Desai further urged that the objector himself was present and was given all the opportunity to con-vince the members present and despite that the members had voted by an overwhelming majority in favour of the amalgamation. As figures show, there was a negligible opposition, namely, 22% equity shareholders were against the amalgamation. Mr. Desai drew my attention to anexure B which is an explanatory speech of Mr. Amin wherein every mate-rial fact was disclosed; and, lastly.
(2) Mr.Desai urged that while sanctioning a scheme of amalgamation, what the court is required to look into is, as to whether by the proposed scheme of amalgamation a fraud is sought to be perpetrated upon the shareholder or the creditor or as to whether the proposed scheme of amalgamation is likely to work to the detriment of the transfer com-pany for all time to come. According to Mr. Desai, the proposed scheme, on the contrary, tries to revive a failing unit by providing resuscitation through the use of the resources of the petitioning company, and the pro-duction can be diversified and those who were in danger rendered jobless will now be retaining their job and be part and parcel of the transfer company which is on a very sound financial footing.
7. We shall, therefore, now consider the objections raised by Mr.Pujara.
8. At the outset, it must be stated that Mr.Pujara argued the matter with effortless and with abundant ability. Mr.Punjara could assail the scheme ungainly on may aspects; but the only shortcoming was that he had tried to present only a very gloomy said and had conveniently been oblivious to advantages which might be gained not only by the petitioning company but also by the employees of Neomer.
9. Before entering into a discussion of the contentions raised by Mr.Pujara even at the outset, it may be stated that there are certain settled principle of law which are to be borne in mind by the court when its sanction is sought for a scheme of amalgamation. Chapter V of the Companies Act deals with arbitration, compromises, arrangements and reconstructions. Section 319 stipulates that where a compromise or arrangement is proposed between a company and its creditors or between a company and its members, the court has order a meeting of the class of creditors or members, as the case may be. The meeting is to be called and if a majority representing three-fourths in value of the creditors or class of creditors, or members or class members as the case may be, present and voting either in person or be proxy, vote in favour of such a scheme, the court may sanction the same provided it is satified that true and correct facts have been disclosed to the court. section 393 of the Companies act provides that with every notice calling such meeting, there shall be sent also a statement setting forth the terms of the compro-mise or arrangement and explaining its effect.
10. Mr.Pujaaa's contention is that despite the fact that 99 per cent. of the shareholders and creditors had voted for the scheme of amalgamation, the said vote in favour of the scheme never represented a correct picture inasmuch as the explanatory statement sent with the notice of the meeting never contained the details which ought to have been incorporated therein in order that the shareholders and the creditors may properly comprehend the ramifications of the scheme. It also appears to by the contention that the provisions of section 205 have been violated inasmuch as the dividend is sought to be paid to the shareholders of Neomer for the earlier years when they were not members of the Alembic, that is, the transfer company.
11. While sanctioning a scheme such as the present one, a duty is case upon the court to find out whether the statutory requirement have been complied with. But even if the statutory requirements have been complied with, the sanction of the court would not automatically follow. A duty is cast upon the court to find out whether the proposed scheme is for the benefit of the company as a whole. The court is not supposed to set seal upon a decision of the majority and while the courts not supposed to scrutinies the scheme with a fine-toothed comb to find out flaws and then to view them through a magnifying glass, the court must be satisfied before the section is accorded that the majority vote was honestly obtained, that the majority acted honestly, that no financial or arithmetical juggler was perpetrated either upon the creditors or upon the shareholders to cajole them or coax them into voting in favour of the scheme. However, the scheme is not to be scrutinished by the court with the eye of an expert or the exactness of an accountant but if the scheme is, broadly speaking, calculated to benefit the company as a whole, it would be entitled to the section of the court. In the instant case, the explanatory statement which was sent along with the notice of the meeting is very much on the record and while falls can found in the said statement, it does appear on a perusal of the same that all the necessary material which would have enabled the shareholder and the creditors to contribute their instructed judgment over the merits or demerits of the scheme were incorporated in the statement. Again, the speech of Mr. Chirayu, managing director of the transfer company, made at the meeting shows that the cons, merits and demerits were fully and truly disclosed to be shareholders and the creditors before they exercised their right of vote. No mischief at the meeting was permissibed in case much as a high officer of this court has presided over the meeting. This particular contention of Mr.Pujara, therefore, shall have to be rejected.
12. Mr.Pujara's contention that proxies were collected by unfair methods is also not born out by the affidavits and the affidavit-reply of Mr.Kapadia is clear on the said point. the allegations that one Geetaben Patel was never a shareholder of the company has been accepted by Mr.Kapadia and she had voted only as a creditor and not as a shareholder.
13. The next contention of Mr.pujara is that the break-up value of shares of Neomer as arrived at by the chartered , M/s. Dalal end Shah, has no nexus with reality and the report of the chartered accoun-tants on that score is of a dubious character inasmuch as no reasons for arriving at the said value have been given. There are various methods for arriving at a break-up value, but it is universally accepted that the quotation of a share on the stock market would usually provide a largely reliable index. While the quotation on the stock market is not the be-all and end-all, it can very well be a springboard for arriving at a correct conclusion. The break-up value arrived at by the charted accountants is Rs.4 per share and as the quotation on the stock market for the particular period suggests, the said value arrived at by the chartered accountants cannot in any way be considered to be very munificent or overgeneous. There are some well- know method for arriving at a break-up value. The valuation can be made on the basis of the earning capacity of the shares. The dividends declared in the past years may be taken into consideration and may be compared with the normal yield on the said amount if invested elsewhere. judges by this method, Neomer had never declared any dividend and hence this method would no be of any importance in the present case.
14. When the company has not earned any profit for some time, an alter- native method would be to scrutinise the balance-sheet. In this method,the actually realisable value of the assets may be ascertained and from this amount all the liabilities including will have to be deducted. The net amount thus arrived at would be the break-up value of the assets representing the capital of the shareholders as increased by the accretion of profit or diminished by losses. This amount divided by the number of shares will give the value of each share. Judged by this method also, it can very well be stated that the liabilities of Neomer far outweighed its assets. But can it then be said that the value of the Neomer shares would be nil or minus or will it not be necessary to evaluate the infrastructure established by Neomer? The prospect of reviving the unit and making it financially viable cannot be totally disregarded. Moreover, the court also cannot be oblivious to the fact that a industry started in a backward area and generating employment in such a back-ward area does not require to be obliterated if it can be resusacitated with assistant from a magna corporation like the transfer company. If would be trite to say that when two alternative courses are presented to the court, and while following one, an established would be wiped out and by following the other it can be revived, the court would lean in favour of the second alternative. The court would be chagrined to follow a course whereby a industry established in a backward area and generating employment in the said area would obliterated and snuffed out and would rather select a course whereby it can rejuvenated and resuscitated. The only method which could be available for arriving at a break-up value under such circumstances would be the quotation of the Neomer share on the stock market, and where a large majority of shareholder have approved of a valuation, the burden would be upon the objector to prove that the break-up value either inadequate or that it is overrated. While at a valuation of a particular share even of a consistently losing concern, neither stock market quotation nor the intangible assets can be overlooked and the court would usually accept a valuation accepted by the majority as fair and reasonable unless the contrary is proved and merely because a different method of valuation could have been adopted that would be no reason for the court to dub the valuation as unfair. I, therefore, feel that the break-up value arrived at by the chartered accountants is not which can be termed as grossly exaggerated and the contention of Mr. Pujara that the transfer company is only taking over a contingent liability without any corresponding benefit either to the shareholders of the Alembic or the employees of the Alembic is not sustainable.
15. Mr. Pujara's contention that this is a scheme largely for revival of Neomer is partially true but when mr.Pujara contends that it is not likely to result in any corresponding benefit to the Alembic, it does not appear to be convincing. Diversification of the production lines and exploration of new avenues with the aid of the established infrastructure of Neomer can be summed up as an advantage which is likely to result to the transfer company. Apart from this, a seizable amount of almost three crores of rupees by way of tax benefit also result to Alembic.I, therefore, do not feel that this contention of Mr. Punjara can persuade then court to snuff out the scheme. It may also be noted that the objector was present at the meeting. he had made a speech giving out his views against the scheme of amalgamation and hence it cannot be said that the shareholders and/or creditors were led by the nose to vote in a particular way. The voters had an opportunity of seeing the aforesaid picture as presented by the objector and yet they had accepted the other alterna-tive. The court, therefore, cannot sit in judgment over their own assess-ment as to was best for them. The court would undoubtedly not follow the majority if cogent grounds are made out which in this case to may mind are singularly absent. No shareholder has even come before the court to file an affidavit supporting the objector. Mr.Pujara's contention was that the provisions of section 205 would be violated inasmuch as the shareholders of Neomer to whom shares of Alembic are going to be allotted, will be getting from 1983, that is, from the effective date. In short, Mr.Pujara contended that they will be getting a share in the profit of the transfer company for the years in which they were not members of the transfer company. According to Mr.Punjara, there is no provision for retrospective membership of the company. This con- tention loses sight of the fact that the shareholder of the Neomer are not being made members with restrospective effects but they will be made members, from a particular date, namely, the effective date, and once the scheme is sanctioned, the scheme of amalgamation will relate back to the effective date and hence they would be entitled to all the benefits of being members of Alembic from the effective date just as they would be subjected to the disadvantages, if any, of being members of the transfer company from the said effective date. The provisions of section 205, therefore, cannot be said to have been violated by making a provision for payment of dividend from the effective date. A scheme of amalgamation whenever proposed takes a long time to get sanctioned on account of procedural requirement.
16. The last contention of Mr.Pujara was that the scheme of amalgamation, if it is sanctioned, is likely to result in material disadvantage to the employees of Alembic. This seems to be real grievance of the objector as he is the secretary of the workers union of the Alembic and the appre-hension which the objector seems to be harboring is that perhaps to work at the site where Neomer is located may ential the transfer of some employees. It may also be his apprehension that some of the workers of the Alembic may have to be retrenched as the personnel of Newcomer would now be in the employment of the transference company. the apprehen-sions, to say the least, are not justified on any score. the activities of the two units would be in totally different fields and on behalf of the Alembic a statement was made that the transfer company has no intention of utilising the services of any employee of the transferor company at the unit of the transfer company. No employee of Alembic is going to be retrenched on account of the amalgamation and the apprehesion which was not voiced by the objector but which can very well be envisaged is that after the scheme of amalgamation is sacntioned and the Newcomer shareholders get benefit of the scheme of amalgamation, the pious platitudes which have been voiced by the transfer company that it will be running a unit backward area may not be fulfilled and after deriving benefit, the said unit may be closed. On this score, Mr. G.N. Desai made a statement that for a period of 10 years from the effective date, Neomer shall not be closed down except in accordance with law.
17. From the above, it appears that none of the contentions raised by the objector merits any consideration.
18. The learned single judge of this court, P.D.Desai J. (as he then was) in a case reported in [1976] 46 COMP CAS 227 (Bank of Baroda Ltd. V. Mahindra United Steel Co. Ltd>) observed (headnote).
'That in exercising its discretion in according sanction, the court will consider first, whether the statutory provisions have been complied with; secondly, whether the classes were represented by those who attended the meeting and whether the majority were acting bona fide; and, thirdly, whether the scheme is such as a man of business would reasonably approve.'
19. Judged from the above criteria, this court finds that the statutory provisions were complied with, that the majority was acting bona fide, that the class of creditors and shareholders were fairly that the scheme was sacntioned by an overhauling majority, that they had voted as men of business in favour of the scheme and their votes were not obtained by perpetrating any fraud upon them. The scheme was scrutinised from various angles by the authority constituted under the MRTP Act as well as the income-tax authorities. Over above this, this court finds that an industry in a back was area and generating employment in such backward area requires to be resuscitated and rejuvenated rather than annihilated and obliterated because the only alternative out come of not granting sanction to the scheme would be that Neomer will have to be wound up. So far as it is practical, the court would always be in favour of reviving an industry rather then closing it down.
20. In view of the above, the following order is passed:
The court hereby sanctions the scheme of amalgamations set forth in para 23 of the petition and at anexure to the affidavit of Shri R. M. Kapadia dated November 28, 1985.
21. It is further ordered that all the property, rights and powers of the transferor company specified in the first, second and third part of Schedule II hereto and all other property, rights and powers of the transferor company are transferred without further act or deed to the transfer company and accordingly the same shall, pursuant to section 394(2) of the Companies Act, 1956, be transferred to and vest in the transfer company for all the estate and interest of the transferor com-pany therein but subject nevertheless to all charges now affecting the same and.
It is further ordered that the liabilities and duties of the transferor company are transferred without further act or deed to the transfer company and accordingly the same shall, pursuant to section 394(2) of the Companies Act, 1956, be transferred to and become the liabilities and duties of the transfer company ;and
It is further ordered that all proceedings now pending by or against the transferor company are continued by or against the transferee company and
It is further ordered that the transferee company shall without further application allot to the members of the transferor company the shares in the transferee company to which they are entitled under the said compromise or arrangement ; and
It is further ordered that the transferor company within 14 days after the date this order cause a certified copy of this order to be delivered to the Registrar of Companies for registration and on such certified copy being so delivered, the transferor company shall be dissolved without being could up and place all dominates relating to the transferor company and the files relating to the said two companies shall be consolidated accordingly; and
That the above scheme of amalgamation is sectioned subject to the condition that no employee of the transferee company, that is, Alembic shall be transferred from the place where he is working to the place where the Neomer unit is situated; and
It is further ordered that the transferee company shall not close down the Neomer unit which now stands transferred to It for a period of ten Years, except in accordance with law.
It is further ordered that Neomer P, Ltd shall stand dissolved and amalgamated with the Alembic Chemical Works Co. Ltd. without being wound up.
22. That any person interested shall be at liberty to apply to this court in the above matter for nay direction that may be necessary.
23. There shall be no order as to costs.