In Re Elchico Espresso Snacks Bar Private Limited ; In Re Elchico Hotels And Restaurants Private Limited v.

Sunil Ambwani, J.

1. Heard Shri R.P. Agarwal, learned Counsel for the petitioner-companies. The official liquidator, U. P. as well as the Regional Director, Northern Region, Ministry of Corporate Affairs, Noida, have filed their reports.

2. The company petition for approving the "scheme of amalgamation" was advertised in the Hindustan Times (English) published from Lucknow and Amar Ujala (Hindi) published from Allahabad on July 20, 2007. No one, except the official liquidator and the Regional Director, Northern Region, Ministry of Corporate Affairs, Noida, has filed objections to the confirmation petition. An affidavit of service of Shri Naresh Roy, a director of the petitioner-company was filed on July 24, 2007.

3. By an order dated July 12, 2007, made in Company Application No. 9 of 2007, the court had noticed that both the transferor and the transferee companies are closely held by members of the same family, with common business interest and while accepting board resolutions of the companies dated May 26, 2007 and the personal affidavits of all the shareholders of the transferor company and transferee company as well as the consent letters of secured creditors, namely, HDFC Bank and Federal Bank Ltd., and consent affidavit of all the unsecured creditors, the requirement of holding meeting of the shareholders and creditors for considering the "scheme of amalgamation" was dispensed with.

4. The order directed:

1. The matter has come up after nomination by honble the Chief Justice dated July 9, 2007.

2. By this company application the applicant-companies are seeking exemption from holding meetings for considering the scheme of amalgamation. Both the transferee and the transferor companies are private limited companies with four shareholders in the transferee company and eight in the transferor company (out of which four shareholders are common in both the companies).

3. The transferor company has authorised share capital of 50,000 equity shares of Rs. 10 each out of which 4,000 equity shares of Rs. 10 each are issued, subscribed and paid-up with reserve and surplus amount of Rs. 17.40 lakhs. The company has taken secured term loan of Rs. 5.5 lakhs and unsecured loan from the directors, HUF of Rs. 100.62 lakhs. The audited accounts of the transferor company of the financial year ended on March 31, 2007, is annexed to the application as annexure No. 6. The transferor company is running the business of restaurant, catering and confectionery.

4. The transferee company has authorised share capital of 49,000 equity shares of Rs. 100 each and 1,000 preference shares of Rs. 100 each out of which 37,100 equity shares of Rs. 100 each are fully paid-up. The transferee company is primarily engaged in the trading activities with fixed assets of Rs. 154.66 lakhs, secured term loan of Rs. 58.87 lakhs and unsecured loan of Rs. 67.23 lakhs. The audited accounts of the transferee company of the financial year ended on March 31, 2007, is annexed to the application as annexure No. 4.

5. The object of the amalgamation as set out in the scheme and the application is to avoid duplication in the administrative set up, expenses and legal compliances. It is stated that the business operation of the two companies are relatively small. The companies are closely held by members of the same family with common business interest. The maintenance of the juristic character of the two entities is causing drain on human and financial resources of the two companies.

6. The petitioners have annexed the board resolution of both the companies dated May 26, 2007, the consent affidavit of all the shareholders of the transferor company and the transferee company. They have also annexed consent letter of the secured creditors, namely, HDFC Bank and Federal Bank Ltd., dated June 19, 2007 and May 29, 2007, respectively, and consent affidavit of all the unsecured creditors of the transferor company, which are in fact directors of the company.

7. With the consent of all the shareholders and creditors, it is not necessary to hold the shareholders and creditors meetings of both the companies to consider the scheme of amalgamation.

8. In the circumstances, the meetings of shareholders and creditors of the applicant-companies are dispensed with. The necessary requirements of the company petition under Section 79 of the Companies (Court) Rules, 1959, have been complied with and thus the present application will be treated and numbered as company petition.

9. The court hereby directs that the notice for hearing of the petition will be advertised in daily newspapers The Hindustan Times (English) and Amur Ujala (Hindi) published from Lucknow and Allahabad, respectively fixing August 17, 2007, as date of hearing. The steps be taken within three days and publication will be made on or before July 20, 2007.

10. Learned Counsel for the petitioner is permitted to serve copies of the petition both on the Official Liquidator, U. P., and the Regional Director (NR), Ministry of Company Affairs, Noida, by dasti summons within a week. They will submit their reports on or before the date of hearing.

11. List on August 17, 2007. A copy of the order be given to learned Counsel by tomorrow.

5. The company application was directed to be treated as confirmation petition. Let the office number the company petition separately. This however need not detain the court in deciding the matter which is already nominated by the order of the honble Chief Justice dated July 9, 2007.

6. The official liquidator has brought to the notice of the court that the transferor company could not be incorporated on September 4, 2006, with a paid-up capital of Rs. 40,000 only, as Section 3(1)(iii) of the Companies Act, 1956, provides that private company means a company which has minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed ; and, therefore, the paid-up capital of the company may be directed to be increased to atleast Rs. 100,000 so as to enable it to become a private limited company and to cover its proposal of amalgamation under Section 394A of the Companies Act, 1956. The official liquidator has further observed in paragraph 8 of his report No. 247 of 2007 that the company had taken a loan of Rs. 13.77 lakhs from M/s. Ramesh Roy, Hindu undivided family, on the date of its incorporation which was taken over from the firm, namely, M/s. Elchico Espresso Snacks Bar. After incorporation the borrowings by way of unsecured loans covered under the Companies (Acceptance of Deposits) Rules, 1975, which provides that the company could not borrow more than 25 per cent, of its paid-up capital and free reserves. The company has as such contravened Section 58A of the Companies Act, 1956. The official liquidator has also pointed out that the transferor company has advanced Rs. 67.23 lakhs to the transferee company. This amount is very much material for determining the exchange ratio of the allotment of shares and which has not been explained. The company has also advanced Rs. 68 lakhs to B. N. Rama and Co., and BPCL for which lesser interest appears to have been charged.

7. The Regional Director, Northern Region, Ministry of Corporate Affairs, Noida, has on his part raised objections with regard to compliance of "Accounting Standard 14" issued by the Institute of Chartered Accountants of India.

8. The company is a closely held company. Each of the shareholders and creditors have approved the scheme and filed their affidavits. An affidavit of explanation submitted today states therein that loans were taken by the partnership firm before it was incorporated as company. Shri R.P. Agarwal relies upon provisions of Section 35 of the Companies Act, 1956, which gives conclusiveness to the "certificate of incorporation" with regard to the compliance with all the requirements of registration.

The conclusiveness of the certificate of incorporation under Section 35 is a rebuttable presumption. The official liquidator has rightly pointed out that the private limited company could not be registered unless it had minimum paid-up capital of Rs. 1 lakh. He has suggested that the company may be directed to increase its paid-up capital. Shri R.P. Agarwal submits and undertakes that the transferor company is prepared to comply with the provisions of Section 3(1) (iii) of the Companies Act, 1956, and will complete the formality for increasing paid-up capital of Rs. 1 lakh, within one month from the credit balance towards the additional share capital.

9. The explanation, that the deposits were accepted as a partnership firm before the company was incorporated, appears to be a valid explanation and thus the court does not find it necessary to make any direction to the transferee company to refund the unsecured loans.

10. The objection with regard to exchange ratio of shares for amalgamation is answered by the affidavits of all the shareholders and creditors approving the "scheme of amalgamation". There is no such objection or report that the company has committed any serious irregularity or has played fraud and/or the share exchange ratio will, in any manner, affect the interest of the shareholders, creditors or public interest.

11. In Miheer H. Mafatlal v. Mafatlal Industries Ltd. , the honble Supreme Court held that the shareholders are the best judges with regard to the share exchange ratio. Once they have not raised any objection and there is no allegation of fraud, the court will not cause unnecessary enquiries into such objections by the official liquidator.

12. The objection of the Regional Director to follow, accounting treatment as prescribed under Accounting Standard 14, i.e., "accounting for amalgamation" issued by the Institute of Chartered Accountants of India, is not relevant at this stage. The "Accounting Standard 14" is required to be followed after the amalgamation. Shri R.P. Agarwal, learned Counsel for the petitioner has pointed out that such an occasion will arise only after amalgamation and that reference to page 14 is relevant only when the date accounting treatment is published and not otherwise. He submits that the Accounting Standard 14 will be followed by the companies after the amalgamation.

13. The petitioner-company has disclosed all the material facts. No investigation is pending under sections 235 and 351 of the Companies Act, 1956, and conditions of amalgamation have been complied with.

14. The objections to the confirmation of the scheme of amalgamation except to raise paid-up capital of the transferor company to Rs. 1 lakh are not found to be valid. The company application is allowed. The scheme of amalgamation is confirmed and will come into effect from the appointed date given in the scheme subject to conditions that the company will increase its paid-up capital of the transferor company within one month. Thereafter, the transferor company shall stand dissolved without any order of winding up by the court. The office will issue formal order in the prescribed form within four weeks from the date of affidavit of compliance along with proof of increase of paid-up capital of the transferor company.