High Court of Calcutta

Areva T and D India Ltd., In re

Sanjib Banerjee, J.

C.P. No. 95 of 2007

with C.A. No. 29 of 2007

July 5, 2007

Section 394, read with section 611, of the Companies Act, 1956 - Amalgamation - Whether when a scheme seeks merger of authorised capital of a transferor-company into that of transferee, there is neither any merger sought, nor is any merger of such kind possible; it is indeed a term of scheme or an application to Court sanctioning scheme for an increase in authorised capital of transferee-company by extent of authorised capital of transferor-company - Held, yes - Whether single-window clearance that sanction of a scheme affords to applicants is as to procedure and so as to avoid several applications being made in respect of several matters and for all of them being combined into one, such abridged or facilitating procedure cannot affect right of revenue, to receive fees that would otherwise be payable in respect of any part of approval or for purpose of giving effect to approval - Held, yes - Whether, therefore, transferee-company is liable to pay additional fee for consequential increase of its authorised capital following sanction of a scheme of amalgamation - Held, yes - Whether right accrued to a company as to its authorised share capital upon payment of requisite fees, is not ‘property’ as defined under section 394(4)(a); it is a right unique to each company and is incapable of being transferred - Held, yes

Section 394 of the Companies Act, 1956 - Amalgamation - Transferee-company filed petition for sanction of proposed scheme of amalgamation of two transferor-companies with it - Central Government objected to one of clause of scheme, which laid down that difference between amount recorded as additional share capital issued by transferee-company upon amalgamation and amount of share capital of transferor companies in lieu whereof such additional share capital was to be issued, would be adjusted against and reflected in general reserves and/or such other reserves of transferee-company as its board of directors would determine - According to Central Government, difference arising out of scheme of amalgamation should not be treated by transferee-company as amalgamation reserve, which should not be free for distribution to shareholders in form of dividend or bonus shares - Whether inasmuch as Accounting Standard 14 (AS-14), which deals with treatment of accounts upon amalgamation, does not specifically require treatment of such surplus or deficit in manner that Central Government suggested, such onerous condition could not be foisted upon petitioner - Held, yes

Facts

The transferee-company filed petition for sanction of the proposed scheme of amalgamation of the transferor-companies with it. Clause 11.7 of Part II of the scheme laid down that consequent to and as part of the amalgamation, the authorised share capital of the transferor-companies would stand merged into and combined with the authorised share capital of the transferee-company pursuant to the scheme without payment of any registration or filing fee under section 611 on such combined authorised share capital, the transferor-companies and the transferee-company having already paid such fees thereon. The Central Government objected to that provision and submitted that as proposed scheme would result in increase of authorised capital of transferee-company, it was liable to pay requisite fee in accordance with Schedule X to the Act. The Central Government also objected to the clause 12.3 of Part II of the scheme, which laid down that the difference between the amount recorded as additional share capital issued by the transferee-company upon amalgamation and the amount of share capital of the transferor-company, in lieu whereof such additional share capital was to be issued, was to be adjusted against and reflected in general reserve or other reserve of the transferee-company. It was submitted by the Central Government that the surplus, arising out of transfer of share capital, should be treated by the transferee-company in its books of account as amalgamation reserve. The Regional Director also suggested in his affidavit that such amalgamation reserve was of capital nature and could not be free for distribution to the shareholders in the form of dividend or bonus shares. As regards first objection, the petitioner contended that a company’s right to increase its paid-up capital up to the limit of its authorised capital, that vests in a company upon it having paid the requisite fees on the basis of its authorised capital, is likewise a property that the definition found under section 394(4)(a) recognizes and is capable of being transferred to and vesting in the transferee- company without the transferee-company being required to pay additional fees for the consequential increase. As regards second objection, the petitioner referred to Accounting Standard 14 (AS-14) issued by the Council of the Institute of Chartered Accountants in India, that deals with treatment of accounts upon amalgamation, and asserted that an amalgamation in the nature of merger does not require the surplus or deficit to be made part of the capital.

Held

The application for sanction of a scheme, whether one of amalgamation or of compromise or reconstruction is, in effect, a combined application to obtain a single-window approval in respect of various matters, that would otherwise have required multiple applications being made. A scheme of amalgamation may provide, for instance, for the alteration of the objects clause in the memorandum of association of the transferee-company; the reduction of the transferee-company’s paid-up capital; and the alteration of one or more of its articles, in addition to the transfer for which the imprimatur of the Court is sought. In the usual course, the transferee-company would have to apply to the Company Law Board for the addition of further objects clauses or the deletion of any existing clause, and apply to the Court under section 100 for the reduction of its share capital and obtain approval of its shareholders separately for effecting any alteration to its articles of association. The multiple steps need not be taken if all the aforesaid three changes are proposed by way of a scheme approved by its shareholders and the sanction of the scheme by the Court will be suffice. [Para 13]

The judgments in PMP Auto Industries Ltd., In re [1994] 80 Comp. Cas. 289 (Bom.) and Rangkala Investments Ltd., In re [1997] 89 Comp. Cas. 754/[1995] 4 SCL 28 (Guj.), also recognize that the provisions found under sections 391 to 394 constitute a complete code and such provisions obviate additional applications being made for amending the objects clause of the memorandum of association of the transferee-company. Indeed, the Court receiving a petition for sanction of a scheme becomes, at the same time, the window that can receive an application for reduction of share capital, the window that can entertain a plea for amendment of the memorandum of association of one or more of the companies involved, and the authority to accord sanction to the scheme, all rolled into one. The Courts have repeatedly frowned upon suggestions by objections for duplication of procedure. Though it is accepted that the provisions in the Act relating to divers approvals need to be complied with, yet as to whether they have been complied with, need to be tested only at the one window at which approval of the scheme is sought. There is good reason for recognition of such single-window clearance. It is the Court sanctioning the scheme, that has to sanction every bit of it and a part of it may involve alteration of the memorandum of association of one or more of the companies involved or the reduction of share capital of one or more of the applicants. The statutory pre-requisites of alteration of memorandum and of reduction of share capital must necessarily be complied with for the scheme to be made fit for sanction. It would be unnecessary for two sets of proceedings to be instituted for approval of the same scheme being facilitated as the Court, that may approve the scheme, can also conveniently enquire as to whether the other provisions, whether for alteration of memorandum or reduction of capital or any other matter, have been complied with. [Para 16]

If the Act were to require that a fee would be payable for the alteration of the memorandum of association of a company, the facts that a scheme involved such alteration, and that the statutory pre-conditions thereof were met, would not relieve the company seeking such alteration from its liability to pay the fee. The sanctioning Court’s right to receive requests that would otherwise have been directed under different provisions of the Act, would not result in the company’s obligation to pay fees, if applicable, being obliterated. The answer to this issue may be found more in Schedule X to the Act than in Chapter V of Part VI of the Act. It is irrelevant as to whether such fee, as the one payable for increase in authorised capital, is regulatory or compensatory and it is enough that a fee is recognized to be payable upon increase of the authorised capital of a company. [Para 17]

The petitioner argued that if the abstract right under a licence enjoyed by a transferor-company can become the property of the transferee-company upon the transferor’s merger, there should be no difficulty in the right to increase the authorised capital of the transferor-company and the fee paid in that regard being vested in the transferee-company upon amalgamation, for the transferee-company to enjoy the benefit of such fee already paid. Though such analogy appeared attractive, yet there are some other factors that differentiate the two situations. Licence, however, personal it may be to the grantee, is a more tangible right than the notion that authorised capital denotes and the right that accrues to a company to increase its paid up capital to its authorised capital upon deposit of the requisite fee for the authorised limit. [Para 18]

Rights under a licence and rights of similar nature are somewhat capable of being assessed in value. Similar rights as copyright, trademark and patent certainly stand transferred upon merger and vest in the transferee-company. However, abstract such rights, the goodwill relating thereto can be assessed by accountants and there are measures therefor. The right to increase the paid-up capital of a company to a part or the outer limit of its authorised capital, cannot be assessed and there is no need to assess it. Such right cannot be equated to the quantum of the fee paid in that regard by a company and in any event, payment of fees is a different matter altogether. The goodwill in a registered trademark is not weighed by the quantum of the fixed fee paid by the trader. The goodwill, in an unregistered mark, is not diluted only by the owner not having had the mark registered or on not paying the registration fee. [Para 19]

There are certain things that do not move upon merger of a company with another and the ipso facto transfer thereupon of all the properties and liabilities of the transferor to the transferee. For one, the name of the transferor is left behind. After all, the transferee cannot have two names. The name and the goodwill in it, of the transferor-company is left with the shell, to borrow the Telesound expression, that remains to be pronounced dead upon the dissolution of the transferor-company without winding up. For another, the memorandum and articles of the transferor-company or the rights of the transferor-company qua the members thereunder and the corresponding rights of the members of the transferor-company, inter se, do not vest in the transferee-company. The memorandum and articles of association of the transferor-company are abandoned and attach, meaninglessly, with the same shell that remains and is ultimately declared dead. The articles of a transferor-company may give it certain rights as regards procedure in dealing with certain matters, that the Companies Act leaves a company free to choose. The articles may give special rights to all or a class of shareholders qua the company or qua other members. Such rights are not carried over by the group of shareholders of a transferor-company once such shareholders become members of the transferee-company, nor can the additional rights that they had thereto before enjoyed under the articles of the transferor-company, be carried forward. Such matters again attach to the useless shell that is left behind. [Para 20]

Every company is required to pay a fee for its registration and such fee gives a right to the company or its shareholders through the company to carry on business. Upon the merger of a company with another, the registration fee paid by the transferor-company, and the rights corresponding thereto, are not carried forward to the transferee-company. The transferee-company had already paid a fee upon its registration and such fee would permit it to continue its business, receive assets under any scheme from another company or give up assets under any scheme to another company. The registration fee paid by the transferor-company is lost to the transferor-company upon the merger of its properties with another. There is no reason as to why the fee paid for the authorised capital of a transferor-company should not be similarly lost. Conceptually, there is nothing that requires the fee paid for the authorised limit of capital to be treated on a higher pedestal than the fee paid by a company for its registration. If one can be lost upon merger and dissolution, so can the other. [Para 21]

It must be understood that authorised capital, notional as it is, is an imaginary capital, the right relating to it being more intangible than other, but somewhat assessable, rights under any licence or on account of any intellectual property. A notional right such as this is incapable of being transferred. What has been described, in a number of decisions as a merger of authorised capitals, is not a merger in fact. The authorised capital of a transferor-company does not ipso facto vest in the authorised capital of the transferee-company. True, that upon the shareholders of the transferee-company approving a proposed scheme of amalgamation which provides for merger of authorised capitals, there is implicit approval that can be culled out for the authorised capital of the transferee-company to stand increased by the quantum of the authorised capital of the transferor-company upon merger. It is equally possible that the shareholders of the transferee-company may require the authorised capital of the transferee to be maintained. It is also conceivable that the scheme makes no mention of the merger of authorised capitals or of any increase in the authorised capital of the transferee-company. If there were to be an automatic transfer of the authorised capital of a transferor-company into the authorised capital of the transferee-company, the right of the shareholders of the transferee-company to maintain its authorised capital at the prevailing level or to increase it by an amount which is greater or less than the combined authorised capitals of the companies involved, has to be overlooked or not recognized. A scheme of amalgamation may be completely silent as to the merger of authorised capitals or as to any change in the authorised capital of the transferee-company consequent upon the merger. In such a case, the right in respect of the authorised capital of the transferor-company, if it is a right at all, does not come into the transferee-company and remains with the transferor-company, that is capable of being abandoned upon its dissolution. The matter would be different if the right were to be a more tangible right. Say, the shareholders of a transferee-company do not approve of the transfer of one of the immovable properties of the transferor-company in the proposed scheme of merger. The effect of that would be that there would be no merger at all, as in merger nothing is left behind in the transferor-company. [Para 23]

What is commercially known as merger of one company into another is legally speaking, the merger of the properties and liabilities of the transferor-company with the transferee-company. Companies do not merge, their assets and liabilities may. The shell of the transferor-company is left behind to be ultimately discarded. The shell retains the name of the transferor-company, its memorandum and articles, and the right relating to fees of such nature as may have been paid by the transferor-company, under Schedule X to the Act. [Para 24]

Just as the objects clause of the transferor-company does not get added to the objects clause of the transferee-company upon amalgamation, so will the authorised capital of the transferor-company not attach to the authorised capital of the transferee-company upon the merger. Such right to increase its paid-up capital to its authorised limit, is a right unique to each company and incapable of being transferred, just as the fee paid for registration of a company is also incapable of being transferred. It is not necessary that every company that pays a high fee to have an ambitious authorised capital, extends such right by increasing the paid-up capital to the authorised limit. The company may choose not to do so and the company may legally die, without any merger, without ever having taken, any step for its paid-up capital to match its authorised capital. There can be no goodwill attached to such a right, if it be one. It is not a property at all, that is covered by the definition found under section 394(4)(a). [Para 25]

When a scheme seeks the merger of the authorised capital of a transferor-company into that of the transferee, there is neither any merger sought, nor is any merger of such kind possible. It is, indeed, a term of the scheme or an application to the Court sanctioning the scheme for an increase in the authorised capital of the transferee-company by the extent of the authorised capital of the transferor-company or the authorised capital of the transferor-companies if there be more than one. [Para 26]

Such a term may or may not be found in a scheme of amalgamation and to hold that upon amalgamation, the transferee-company, in its new avatar, has an authorised capital which is the sum of its existing authorised capital and that of the transferor-company, would be unwise. [Para 27]

The single-window clearance that the sanction of a scheme affords to the applicants is as to the procedure, and so as to avoid several applications being made in respect of several matters and for all of them being combined into one. Such abridged or facilitating procedure cannot affect the right of the revenue to receive fees, that would otherwise be payable in respect of any part of the approval or for the purpose of giving effect to the approval. The procedure is simplified, the obligations under the various parts of the Act, that are required to be complied with, are not discharged or exempted and, payment of fees is much more than the compliance with statutory requirements. An order sanctioning a scheme may approve the reduction of share capital of a company, but only upon section 100 or other relevant provisions in that regard being complied with. The Court sanctioning a scheme may permit the memorandum of association of a company being altered, but subject to the requirements of section 17 being met. The single-window clearance does not give a go-by to the requirements under section 100 for reduction or capital or the requirements of section 17 for alteration of the memorandum. Chapter V of Part VI of the Act merely empowers the sanctioning Court to receive one composite application for approval under divers provisions of the Act, and it does not exempt compliance with the applicable substantive provisions found elsewhere in the Act, only the multi-procedure formalities are dispensed with. [Para 28]

A charter received by a company, upon payment of requisite fee to increase its paid-up capital up to a particular limit is not a matter that is capable of being transferred to another company or a property or a right or a power of the kind that the definition of property under section 394(4)(a) takes in its fold. It is personal to the company that has granted it and perishes with such company upon its legal death. [Para 29]

The petitioner insisted that the authorised capital of the transferor-companies get merged into that of the transferee-company consequent upon the sanction of the scheme and there was no increase in the strict sense, that would make the transferee liable to pay additional fees. Such contention was unacceptable. There is no merger of authorised capitals consequent upon a scheme of amalgamation, and that the quantum of increase in the authorised capital of the transferee-company sought is the sum of the authorised capitals of the transferor-companies, is merely a coincidence or made to suit the petitioner’s contention of merger of authorised capitals. [Para 30]

Of the several ministerial duties cast upon the Registrar of Companies under the Act, one is to receive notices in the statutory form as regards certain matters. A company is required to intimate the relevant Registrar, in the prescribed statutory form, upon increase of its authorised capital, or upon increase of its paid-up capital. A company is required to inform the concerned Registrar, again in prescribed form, of the changes in its board of directors. The mailbox at the Registrar’s office is also open to receive divers other intimations from companies within his territory and documents such as annual accounts of such companies. There is a statutory limit prescribed by the Act as to the time within which intimations in such prescribed manner must be deposited. It is one thing for the Act to require intimation to be given and quite another for such intimation to be accorded the status of an application for approval of the matters covered by the intimation. If no intimation in the prescribed form is given, the Court may, in appropriate proceedings, doubt that such decision was taken. A company or its officers may be visited by penal consequences upon a statutory form not being filed, or not being filed within the prescribed time. The failure to file such form will not impinge upon the company’s right to take a decision or to implement it though it is susceptible to challenge, as is usually seen in proceedings under sections 397 and 398. [Para 35]

Whether one sees the clubbing of the authorised capital of the transferor-company and the transferee-company as a merger of the notional capitals or whether one views it as an increase of the authorised capital of the transferee-company by the amount of the authorised capital of the transferor-company, it is only a question of form and of little practical consequence. But, whether the authorised capital of the transferee-company stands increased by merger of authorised capitals or de hors the merger of authorised capitals, there is an increase, which will require fees for such increase to be paid. [Para 39]

The Central Government objected to the provision, inasmuch as the petitioner sought approval of the Court that no fee was required to be paid upon its authorised capital being increased in the manner provided. The Central Government could not be flawed for objecting to the possible loss of revenue upon sanction of the clause as part of the approved scheme. The petitioner was entitled to increase its authorised capital, even to limits beyond what the combined authorised capitals of the three concerned companies would be. There was no impediment to the increase being made, or to the increase being greater than, equal to or less than the combined authorised capitals of the three concerned companies. The limits set by the authorised capitals of the transferor-companies are completely irrelevant to the issue. If the Central Government was right in seeking fees on the basis of the authorised or notional capital of a company, a matter which was not in issue here, it was equally right, in insisting that the transferee-company must pay the additional fee for the consequential increase of its authorised capital following the sanction of a scheme of amalgamation. The sanction accords the transferee-company the approval to increase its authorised capital, it does not afford it the luxury of enjoying the enhanced limit without tendering the requisite fee. [Para 41]

The Central Government referred to clause 12.3 of Part II of the proposed scheme and submitted that the certain words appearing therein were not in conformity with recognized accounting principles. The said clause provided that :

. . .the difference between the amount recorded as additional share capital issued by the transferee-company upon amalgamation and the amount of share capital of the transferor-companies in lieu whereof such additional share capital is issued shall subject to the other provisions contained herein, be adjusted against and reflected in the general reserves and/or such other reserves of the transferee-company as its board of directors may determine.

According to the Central Government, the surplus or difference arising out of a scheme of amalgamation should be treated by the transferee-company in its books of account as amalgamation reserve. [Paras 44 and 45]

Conventional wisdom and, the Court is no more than a layman in the absence of adequate assistance in such specialized matters from the Central Government would require the difference between the paid-up capital received from a transferor-company and the amount covered by the value of shares issued pursuant to a scheme by a transferee-company, to be treated as part of its share capital. There would be no difficulty in such conventional wisdom being applied if it can be conceived that in every case there would be a surplus that would come into the till of the transferee-company. But it is not necessary that each time there is an amalgamation, there is a surplus on such account that comes into the transferee-company. The shareholders involved may approve of a share exchange ratio, that would lead to a deficit on such account being received by the transferee-company. The Court would ordinarily not interfere with the commercial sagacity of the shareholders concerned in arriving at the share exchange ratio, unless clear prejudice to a group of shareholders or some other legal infirmity therein is demonstrated. Paragraph 35 of AS-14 uses the word ‘difference’ and not surplus. Paragraph 35 also recognizes that a transferee-company may provide for consideration other than shares for receiving the assets of the transferor-company. If, in such case, there is a surplus on account of the difference between the share capital issued by the transferee-company and the amount of the share capital of the transferor-company, a part of such surplus should also be adjusted against the cash or other assets that the transferee-company may have issued as consideration. [Para 50]

The Central Government has not been able to demonstrate that anything in AS-14 requires the surplus or deficit on such account to be treated as part of the transferee-company’s share capital to be made unavailable for issuance of dividend or bonus shares. In fact, in course of hearing, it was merely urged on behalf of the Central Government that the treatment of accounts on such score should be as the Central Government had suggested in its affidavit. It might be so, but as in instant case, the Central Government had not been able to demonstrate as to why it should be so.

In the absence of any assistance from the Central Government in such regard and inasmuch as AS-14 does not specifically require the treatment of such surplus or deficit in the manner that the Central Government suggested, there was no reason to foist such onerous condition on the petitioner. [Para 52]

The scheme was approved subject to clause 11.7 of Part II thereof being modified. [Para 53]

It was also clarified that the increase in the authorised capital of the transferee-company shall be effective only upon the transferee-company paying requisite fees in that regard in accordance with the structure found in Schedule X to the Act. [Para 54]