In this petition, filed under Sections 391 and 394 of the Companies Act, 1956, the petitioner-transferor company prays that the scheme of amalgamation, as approved by the respective Board of Directors of the transferor and transferee companies, be sanctioned and confirmed by this Court so as to bind all members, creditors and employees of the petitioner, for an order that the petitioner be dissolved without the process of winding up, for an order that the petitioner shall, within thirty days of its receipt, cause a certified copy of the order to be delivered to the Registrar of Companies for registration, that on such certified copy being delivered, the Registrar of companies should take necessary consequential action in respect of the petitioner including its dissolution, and that the parties to the scheme, or other persons interested, be at liberty to apply to the High Court for any direction that may be necessary to carry out the scheme of amalgamation. The petitioner was incorporated in the State of Andhra Pradesh on 18.10.1999 with its registered office in Hyderabad. Its share capital as on 31st March, 2006 was Rs.15,00,000/- divided into 1,50,000 equity shares of Rs.10/. The entire share capital is fully issued, subscribed and paid up and is entirely held by the transferee company. Its main objects are to carry on the business of manufacture, import, export and to otherwise deal in all kinds of computers, calculators, micro processors, electronic and electrical apparatus, software equipment, etc. The petition gives details of the provisional financial summary of the transferor company as on 31.12.2006 according to which the value of the current assets is Rs.1,00,12,261/-, the current liabilities and provisions are for Rs.17,03,712/- and its profit and loss account shows a profit of Rs.83,08,541/-. The Transferee company was initially incorporated as a private limited company on 14.10.1997 under the name and style of M/s. Zeus Software Private Limited. Its name was later changed to M/s Magnaquest Technologies Private Limited. Its registered office is in Hyderabad. The authorized share capital of the transferee as on 31.03.2006 was Rs.1,00,00,000/- divided into 10,00,000 equity shares of Rs.10/- each and the entire share capital is issued, subscribed and fully paid up. The main objects of the transferee is also to manufacture, import, export and otherwise deal in all kinds of computers, calculators, micro processors etc., Details of the audited balance sheet of the transferee as on 31.03.2006 are furnished which reflect that, while its current assets, loans and advances are Rs.6,05,58,332/-, its current liabilities and provisions are Rs.87,49,540/-.

The petitioner submits that the Board of Directors of the transferor and the transferee companies, in their respective meetings held on 29.01.2007, had approved the scheme of amalgamation of the transferor with the transferee with effect from 01.04.2007 subject to approval/consent of the High Court. The Petition details some of the salient features of the scheme of amalgamation. The scheme, among several features, also provides that, upon sanction by the High Court under Section 394 of theand on its becoming effective, the transferor company would be dissolved without the process of winding up with effect from the appointed date or such other date as may be fixed by the Court. This Court, by order dated 09.03.2007, directed publication of the petition in Andhra Jyothi (telugu daily) and New Indian Express (English Daily) (Hyderabad editions), and directed notice to the Central Government as well as to the Official Liquidator. A brief reference can usefully be made to the relevant provisions of the and the Rules. Under Section 391 (1) of the Companies Act, while examining a proposal of compromise or arrangement (a) between a company and its creditors or any class of creditors or (b) between a company and its members or any class of members, the Court has the power, to order that a meeting of the creditors or class of creditors or of the members or class of members be held and to issue directions on the manner in which such a meeting should be conducted. Under Section 391(2), if a majority of the creditors or class of creditors, or members or class of members, representing three-fourth in value of the persons voting in the meeting, approve the compromise or arrangement it would, on its being sanctioned by the Court, bind all the creditors, all the members and the company. Before sanctioning a scheme of compromise or arrangement, the proviso to Section 391(2) requires the Court to satisfy itself that the company has disclosed all relevant material facts, such as its latest financial position, the latest auditors report on its accounts, pendency of investigation proceedings under Sections 235 to 251 etc. A certified copy of the order passed by the Court, sanctioning the compromise or arrangement, is required to be filed with the Registrar of Companies until which the order would have no effect. Under Section 394(1), when a compromise or arrangement has been proposed in connection with a scheme for the amalgamation of two or more companies, and there under the whole or any part of the undertaking, property or liabilities of the transferor company is to be transferred to a transferee company, the court may, by the order sanctioning the compromise or arrangement, make provision for (i) the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of the transferor company; (ii) the allotment or appropriation by the transferee company of any shares in that company which, under the compromise or arrangement, are to be allotted by that company to or for any person; (iii) the continuation by or against the transferee company of any legal proceedings pending by or against the transferor company; (iv) the dissolution without winding-up of the transferor company; (v) provision to be made for any person who, within such time and in such manner as the court directs, dissents from the compromise or arrangement; and (vi) such incidental, consequential and supplemental matters as are necessary to ensure that the amalgamation is fully and effectively carried out. Under the second proviso, no order of dissolution of any transferor company under Clause (iv) shall be made by the Court unless the official liquidator has, on the scrutiny of books and papers of the company, made a report to the court that the affairs of the company have not been conducted in a manner prejudicial to the interest of its members or to public interest. Under sub-section (2), where an order made under Section 394 provides for the transfer of any properties or liabilities that property shall be transferred to and vest in and the liability shall be transferred to and become the liabilities of the transferee company. Sub-section (4) (a) of Section 394 defines "property" to include property, rights and powers of every description and "liabilities" to include duties of every description. Under clause (b), while a transferee company does not include any company, other than a company within the meaning of the Companies Act, the transferor company includes any body corporate whether a company or not. Section 394- A requires the Court to give notice of every application made to it, under Sections 391 or 394, to the Central Government and take into consideration representations, if any, made to it by that Government before passing any order.

Rules 67 to 87 of the Companies (Court) Rules, 1959 are the rules relating to compromise or arrangement under Sections 391 to 394. Under Rule 69, upon hearing of the summons, the judge shall give such directions as he may think necessary in respect of (1) determining the class or classes of creditors and/or of members whose meeting or meetings have to be held for considering the proposed compromise or arrangement; (2) fix the time and place of such meeting (3) appoint a chairman for the meeting (4) fix the quorum and the procedure to be followed at the meeting including voting by proxy; (5) the procedure for determining the value of the creditors and/or the members, or the creditors or members of any class whose meetings have to be held; (6) notice to be given of the meeting or meetings and advertisement of such notice; and (7) the time within which the chairman of the meeting is to report to the Court the result of the meeting. The order, made on the summons, should be in Form No.35 with such variations as may be necessary. Rule 73 requires notice of the meeting to be given to the creditors and/or members or to the creditors or members of any class as the case may be, to be in Form No.36 and to be sent to them individually by the Chairperson appointed for the meeting not less than 21 clear days before the date fixed for the meeting. The notice is required to be accompanied by a copy of the proposed compromise or arrangement and the statement required to be furnished under Section 393. Rule 74 relates to advertisement of the notice of the meeting. Rule 75 requires every creditor or member entitled to attend the meeting to be furnished by the company, free of charge and within 24 hours of a requisition being made, with a copy of the proposed compromise or arrangement together with a copy of the statement required to be furnished under Section 393. Rule 77 requires that a decision in the meeting, held in pursuance of the order under Rule 69, on all resolutions be ascertained by taking a poll. Rule 79 provides that where a compromise or arrangement is agreed to, with or without modification, as provided by sub- section (2) of Section 391, the company shall within 7 days of the filing of the report by the Chairman, present a petition to the court for confirmation of the compromise or arrangement. Where a compromise or arrangement is proposed for the purpose of, or in connection with, a scheme for the amalgamation of two or more companies, the petitioner is required to pray for appropriate orders or directions under Section 394. Under Rule 80, the Court is required to fix a date for the hearing of the petition and the notice of hearing is required to be advertised in the same newspapers in which the notice of the meeting was advertised or in such other papers as the court may direct, not less than 10 days before the date fixed for hearing. Under Rule 81, where the Court sanctions the compromise or arrangement, the order shall include such directions in regard to any matter and such modifications that the Judge may think fit. A certified copy of the order is required to be filed before the Registrar of Companies within 14 days or within such other time as may be fixed by the Court. The order is required to be filed in Form-41 with such variations as may be necessary. Rule 83 relates to directions at the hearing of the application and, there under, upon hearing of the summons, the Court may make such order or give such directions as it may think fit as to the proceedings to be taken for the purpose of reconstruction or amalgamation as the case may be including, where necessary, an enquiry as to the creditors of the transferor company and the securing of the debts and claims of any dissenting creditor, in such manner as the Court may deem just. Rule 84 requires the order under Section 394 to be in Form-42 with such variations as the circumstances may require.

APPROVAL OF THE SCHEME OF AMALGAMATION BY THE COURT: SCOPE OF ENQUIRY:

Before sanctioning a scheme of arrangement the Court must be satisfied that the statutory provisions are complied with, that in case a meeting, of the members or a class of members or of the creditors or a class of creditors, is called for, the class is fairly well represented and that the scheme of arrangement is such as a man of business would reasonably approve. It is the commercial wisdom of the parties to the scheme, who have taken an informed decision about the usefulness and propriety of the scheme supporting it by the requisite majority vote that has to be kept in view by the Court. The Court would not act as a court of appeal and sit in judgment over the informed view of the parties to the compromise as it has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the scheme by the requisite majority. The Company Courts jurisdiction to that extent is peripheral and supervisory and not appellate. The supervisor cannot ever be treated as the author or the policy-maker. The propriety and the merits of the compromise or arrangement has to be judged by the parties who, as sui juris with their open eyes and fully informed about the pros and cons of the scheme, arrive at their own reasoned judgment and agree to be bound by such a compromise or arrangement. The Court cannot scrutinise the scheme to find out whether a better scheme could have been adopted by the parties. (Miher H. Mafatlal Vs. Mafatlal Industries Ltd (1997(1) SCC 579). In the present case, the scheme of arrangement is between the transferor company and its members. The scheme of arrangement envisages amalgamation of the transferor, a wholly owned subsidiary of the transferee, with the transferee company. While sanction of the scheme of amalgamation is, ordinarily, sought for both by the transferor and the transferee companies by way of separate petitions, before the High Court, within whose territorial jurisdiction the registered offices of the respective companies are situated, in the present case, the petition seeking sanction of the Scheme of arrangement has been filed only by the transferor company and not by the transferee. That, in cases where a wholly owned subsidiary is sought to be amalgamated with its holding company, no separate petition need be filed by the transferee-holding company is well settled. (In Re Nebula Motors Ltd (2003(5) ALD 327); Andhra Bank Housing Finance Limited, Hyderabad Vs. M/s. Andhra Bank ((2003) 3 ALD 654 [LQ/TelHC/2003/422] )

Since the scheme of arrangement is between the transferor company and its members, Section 391(1) requires the Court to direct that a meeting of the members be called for. This Court, by order in C.A.289 of 2007 dated 20.2.2007, had dispensed with the requirement of holding a meeting of the shareholders as all shareholders had submitted their affidavits/letters of consent to the proposed scheme of amalgamation.

SCHEME OF ARRANGEMENT BETWEEN THE COMPANY AND ITS MEMBERS:

SHOULD A MEETING OF THE CREDITORS BE HELD While the sole secured creditor of the transferor company, M/s Centurian Bank of Punjab, for Rs.44,021/- and its unsecured creditors for Rs.93,98,865/- have given individual letters of consent to the scheme of amalgamation, the sundry creditors, as reflected in the Balance sheet under the head "current liabilities", have not.

A creditor, who has a debt due from the transferor company, would, on the scheme of amalgamation being sanctioned, be required to look not to the transferor for repayment of his dues but to the transferee with whom he neither had any dealings in the past nor privity of contract prior to its substitution in the place of transferor. In a given case, the transferee company may have negative assets or may not have sufficient liquidity to repay the creditor, as per the original terms agreed between him and the transferor company. Whether he would be adversely affected by being required to deal with the transferee, in substitution of the transferor, is a matter of perception of the creditor. (Zee Interactive Multi Media Ltd., In re ((2002) 3 Comp Cas 733 (Bomb)), Mayfair Limited and Zodiac Clothing Co. Ltd In re ((2002) 3 Comp Cas 733 (Bomb)), Union of India Vs. Asia Udyog Pvt. Ltd ((1974) Vol.44 Com. Cases 359 (Delhi)).

On the question whether a meeting of the creditors is statutorily required to be called for, even in a scheme of arrangement between the company and its members, one view is that the creditors are not entitled, as of right, to participate in the process of consideration of sanction of the scheme, as the Companies Act does not contain a specific provision for notice being given to the creditors at any stage either prior to the making of the order or subsequent thereto, except in so far as the creditors may have notice of it by public advertisement, (Asia Udyog Private Limited), and that the legislature has cast a duty on the Court to ascertain whether the Scheme affects the interests of the creditors to such an extent that holding of their meeting is essential and, if the Court were of the view that the interests of the creditors are adversely affected, it could refuse to sanction the scheme unless their consent has been obtained. (Ansal Properties and Industries Ltd., In re ((1978) 48 Comp Cas 184 (Delhi)).

Another facet of this view is that, under Section 391 of the Act, a compromise or arrangement is either between a company and its creditors or between a company and its members. An arrangement, in the nature of amalgamation, is the result of an agreement between the amalgamating company and its members, as well as a corresponding agreement between the transferee company and its members, and there is, therefore, no provision for the participation of persons other than the members of the two companies to vote on an arrangement of amalgamation proposed between a company and its members. (Nav Bharat Ferro Alloys In re ((A.P.) Vol. 89 (1997) CC 285); Mafatlal Industries Ltd., In re ((1995) 84 Comp Cas 231 (Guj)); Coimbatore Cotton Mills Ltd and Lakshmi Mills Co. Ltd., In re ((1980)50 Comp Cas 623 (Madras)); Telesound India Ltd., In re ((1983) 53 Comp Cas 927 (Delhi)) and Nav Chrome Ltd., In re (Vol. 89 1997 CC 285 (AP))

A slightly different view was taken by D.G. Karnik. J of the Bombay High Court, in Re: ICICI Bank Limited ((2002) 104 BomLR 399). To quote:-

".....I have my own doubt about the view taken by the Delhi High Court in expressing that the creditors have no right to participate in the process of consideration of the Scheme of Arrangement between the Company and its members.

Section 391(1) gives discretion to the Court to convene a meeting of the creditors or any class of them. The Court would exercise the discretion by convening a meeting of creditors if the creditors are likely to be adversely affected by an arrangement between the Company and its members. Attending the meeting and voting are steps of participation in the process of consideration of the Scheme. ............I am of the firm view that while considering any Scheme of Arrangement or Compromise proposed under Sections 391 to 394 of the Companies Act the Court is duty-bound to consider the interests of all the creditors. What importance should be given to the fact that the creditors are likely to be affected would vary from case to case but the Judge would certainly treat whether the creditors are adversely affected or not as the relevant circumstance How then Court is to ascertain as to whether the creditors are adversely affected If the creditors have no right of hearing at the time of hearing of the petition under Section 391 as held by Delhi High Court and this Court, (I have my own doubts bout the correctness of this view) the only way of ascertaining whether the creditors are affected or not would be through the wishes of the creditors which may be expressed by them in a meeting which the Court undoubtedly is entitled to convene under Sub-section (1) of Section 391. Therefore, the Court would exercise discretion as a matter of course to convene meeting of the creditors of the Company under Sub-section (1) of Section 391 unless the Court is prima facie satisfied that the interests of the creditors are not likely to be adversely affected by the Scheme. I am of the opinion that if an anomaly, as pointed out in Telesound India Limited, by the Delhi High Court exists in Section 391, the Courts would not fold their hands and wait for the Legislature to provide a cure, but would exercise their discretion under Sub-section (1) of Section 391, almost in every case in which creditors are likely to be affected, and convene a meeting of the creditors and ascertain their wishes by looking not only at the Resolutions passed in their meeting but looking at the entire report of the Chairman of the meeting which is expected to contain the details of the proceeding in brief and the views expressed by the creditors in the meeting........."

(emphasis supplied)

Can failure to hold a meeting of the creditors, in a scheme of arrangement between the company and its members, be justified on the ground that it is always open to the Court, on a bare perusal of the audited financial statements placed before it, to ascertain whether or not their interests are safeguarded Would that not amount to usurping the rights of the creditors to decide for themselves whether or not to approve the scheme In the light of the settled legal position that the Court has no power to usurp the rights of the class of members or creditors to decide whether or not to approve the scheme, if the class whose interests are affected by the scheme, neither assent to nor approve of it in a meeting held in accordance with the statutory provisions and that the Court cannot confirm the scheme even if it considers that the class concerned has been fairly dealt with or that it would have approved the scheme (Palmers Company Law), would the Court be justified in examining the scheme and recording its satisfaction that the interests of the creditors are not affected, when these are matters which the creditors should have been permitted to examine and decide for themselves in a meeting to be called for this purpose If the jurisdiction of the Company Court, in examining a scheme of arrangement, is peripheral, supervisory and not appellate, since it does not have the expertise to delve deep into the commercial wisdom of the members who have ratified the scheme by the prescribed majority, (Miheer H. Mafatlal), on what basis would the Court decide that, in the facts and circumstances of a given case, a meeting of the creditors or a class of them should or should not be held to ascertain whether they approve of the scheme or not Section 391(1), enables the Court, on the application of a company or a creditor or a member of the company, to order a meeting of the creditors/or the members "as the case may be" to be held and conducted in such a manner as the Court directs. Under Section 391(2), if a majority representing 3/4th in value of the creditors/members agree, in the meeting, for the compromise or arrangement, the scheme, on its sanction by the court, would be binding on all the creditors/members "as the case may be" and also on the company. The expression "as the case may be" finds place both in sub-sections (1) and (2) of Section 391. If the words "as the case may be" in Section 391(1) are construed as requiring the Court to order the meeting of only the members, in a Scheme of arrangement between the Company and its members, and only a meeting of the creditors in a Scheme of arrangement between the Company and its creditors, should the expression "as the case may be" in Section 391(2) then not be read as to bind only the members where a meeting of the members is held and only the creditors where a meeting of the creditors is held The safeguard in the provision, of 3/4 the members or creditors in value voting in the meeting to approve the scheme, is that the wishes of a majority of the class should prevail, and the dissenting minority of 1/4th or less of the class should not be permitted to derail the scheme of arrangement unless, of course, the Court, on examining the scheme, finds that the objection of the minority is justified. If no meeting of the creditors is required to be held, in a scheme of arrangement between the Company and its members, then, in the absence of ascertaining whether 3/4th in value of the creditors approve the scheme or not, would the Court be justified in statutorily imposing such a scheme of arrangement on the creditors, even though their consent has not been obtained or their wishes ascertained If it was held that not holding the meeting, and ascertaining the wishes of the creditors, would result in the scheme of arrangement not to bind them, would the very purpose of sanctioning the scheme by the Court not be defeated and approval of the scheme not be an exercise in futility If, on the other hand, the view, that a meeting of the creditors/members must necessarily be held in all cases irrespective of whether the scheme of arrangement is between the Company and its members or the creditors, is accepted would that not render the words "as the case may be" in Section 391(1) mere surplusage These are several questions which need answers.

LIFTING THE CORPORATE VEIL: PERMISSIBLE IN CASES WHERE A HOLDING COMPANY AND ITS SUBSIDIARY ARE INVOLVED:

It is, however, not necessary for us to seek answers to the aforesaid questions in the present case, as a wholly owned subsidiary is sought to be amalgamated with its holding company. Under Section 4(1)(a) and (b)(ii) of the Companies Act, a company shall be deemed to be the subsidiary of another only if that other controls the composition of its Board of Directors or where the other company holds more than half, in nominal value, of its equity share capital. In the present case, the entire nominal value of the equity share capital of the transferor is held by the transferee. The legal entity of the Corporation is separate from that of its shareholders; it bears its own name and has a seal of its own; its assets are separate and distinct from those of its members; it can sue and be sued exclusively for its own purpose; its creditors cannot obtain satisfaction from the assets of its members; the liability of the members or shareholders is limited to the capital invested by them. Similarly, the creditors or the members have no right to the assets of the Corporation. However the doctrine, that the Corporation or a Company has a legal and separate entity of its own, has been subjected to certain exceptions by the application of the fiction that the veil of the Corporation can be lifted and its face examined in substance. The doctrine of the lifting of the veil has been applied in five categories of cases: where companies are in the relationship of holding and subsidiary (or sub-subsidiary) companies; where a shareholder has lost the privilege of limited liability and has become directly liable to certain creditors of the company on the ground that, with his knowledge, the company continued to carry on business six month after the number of its members was reduced below the legal minimum; in certain matters pertaining to the law of taxes and stamps, particularly where the question of "controlling interest" is in issue; in the law relating to exchange control; and in the law relating to trading with the enemy where the test of control is adopted. (Tata Engineering and Locomotive Co. Ltd Vs. The State of Bihar (AIR 1965 SC 40 [LQ/SC/1964/50] ); Palmers Company Law) In DHN Food Distributors Ltd. Vs. London Borough of Tower Hamlets ((1976)3 All ER 462), Lord Denning quoted with approval the statement in Gowers Company Law that:-

"There is evidence of a general tendency to ignore the separate legal entities of various companies within a group, and to look instead at the economic entity of the whole group", and observed that "this group is virtually the same as a partnership in which all the three companies are partners". He called it a case of "three in one" - and, alternatively, as "one in three.......

Goff, L.J. said :

"This is a case in which one is entitled to look at the realities of the situation and to pierce the corporate veil." The observations of Shaw, L.J. were:

"Why then should this relationship be ignored in a situation in which to do so does not prevent abuse but would on the contrary result in what appears to be a denial of justice" Similarly in Harold Holds worth & Co. (Wakefield) Ltd. Vs. Caddies ((1995) 1 All ER 725) it was argued that the subsidiary companies were separate legal entities each under the control of its own board of directors, that in law the board of the holding company could not assign any duties to anyone in relation to the management of the subsidiary companies, and that, therefore, the agreement cannot be construed as entitling them to assign any such duties to the respondent. The argument was rejected by Lord Reid with the observation:

"This is too technical an argument", "This is an argument in re mercatoria, and it must be construed in the light of the facts and realities of the situation."

The aforesaid judgments, in which the corporate veil was lifted, were quoted with approval by the Supreme Court in Delhi Development Authority Vs. Skipper Construction Co. (P) Ltd ((1996) 4 SCC 622 [LQ/SC/1996/940] ) and New Horizons Limited Vs. Union of India ((1995)1 SCC 478) [LQ/SC/1980/184] . In State of U.P. Vs. Renusagar Power Co. ((1988)4 SCC 59) [LQ/SC/1994/215] the Supreme Court lifted the veil to hold that Hind Alco, the holding company, and Renusagar Power Co., its subsidiary, should be treated as one concern and the power plant of Renusagar must be treated as the own source of generation of Hind Alco and Hind Alco would be liable to payment of electricity duty on that basis. It was observed :

".......It is high time to reiterate that in the expanding horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation. ... The horizon of the doctrine of lifting of corporate veil is expanding......" (emphasis supplied)

Lifting the corporate veil, in cases where a wholly owned subsidiary is amalgamated with its holding company, would establish that the creditor is, and has always been, dealing with the transferee company de-facto though he is the creditor of the transferor company de-jure. In such limited cases of amalgamation, as the creditors rights cannot be said to be affected, holding of a meeting to ascertain their views, and obtain their consent to the scheme of amalgamation, may not be necessary. Along with C.A.1420 of 2007, the audited Balance Sheet of the transferor company, as at 31.3.2007, is filed. Sri V.S. Raju, learned counsel for the petitioner would submit that the audited Balance Sheet of the transferee company as at 31.3.2007 has not yet been finalised and that the latest available audited balance sheet is only as on 31.3.2006. The audited balance sheet of the transferee, as at 31.3.2006, would show that its current assets exceed its current liabilities by Rs.5,18,08,792/-. While its profit for the year after taxes is Rs.98,01,565, the profit and loss a/c balance brought forward from the previous year is Rs.1,27,99,324 and the balance carried to the Balance sheet as Reserves and Surplus is Rs.2,26,00,889/-. The Reserves and Surplus of the transferee company as at 31.3.2006 is Rs.4,40,83,653/-.

The Balance sheet of the transferor company, as at 31.3.2007, would show that its carry forward losses, as on that date, is Rs.8,19,478/-. While the transferor companys profits before tax, for the year ending 31.03.2007, is Rs.34,14,373/- the loss carried forward from the previous years is Rs.39,72,350/- resulting in a loss of Rs.8,19,478/- being carried forward to the Balance sheet. Though the transferor company has made profits for the year ending 31.3.2006 and 31.3.2007, its profits are not significant enough to wipe off its accumulated losses. While the net current assets of the transferor company, as on 31.03.2007, is Rs.25,22,747/-, the fact that its accumulated losses as at 31.03.2007 stands at Rs.8,19,478/-, as compared to the profits made by, and the Reserves and Surplus of, the transferee company, would show that its financial position is not as strong as that of the transferee. It cannot, therefore, be said that the creditors of the transferor company, (which is yet to wipe off its accumulated losses), would be adversely affected on amalgamation with the transferee. Viewed in the light of the aforementioned facts, the submission of Sri V.S. Raju, learned counsel for the petitioner, that the net worth of the transferee company is more than adequate to protect the interests of the creditors of the transferor company cannot be said to be without basis. RELEVANT DATE UPTO WHICH INFORMATION REGARDING THE LATEST FINANCIAL POSITION AND THE LATEST AUDITED BALANCE SHEET, SHOULD BE DISCLOSED. Under the proviso to Section 391(2), the petitioner-company must disclose all material facts, including its latest financial position and the latest auditors report on its accounts. The words "latest auditors report" connote the latest auditors report available or which should normally be available at the time of filing of the petition. There will always be a time gap between the date on which the auditor audits the accounts and prepares his report, the date on which the company petition is filed and the date on which the petition is actually heard. The statutory requirement of submission of the latest auditors report, stipulated in the proviso to sub-section (2) of section 391, would mean the latest auditors report for the period for which the accounts are audited or ought to have been audited. In a given case the Court is not powerless to ask for further details of the latest financial position as on the date of the hearing of the petition, or as near to the date of the hearing of the petition, as is reasonably practicable. This is especially necessary when there is a long gap between the date of filing of the petition and the date of its hearing. (Zee Interactive Multimedia Ltd., In re 4). The petitioner - transferor company has submitted its audited Balance Sheet as at 31.03.2007, and the audited Balance Sheet of the transferee company as at 31.3.2006 along with its schedules. Accepting the submission of Sri V.S. Raju, learned Counsel for the petitioner, that the audited Balance sheet and profit and loss account of the transferee company, for the year ending 31.03.2007, has not as yet been finalized, the requirement of furnishing the latest financial position, and latest auditors report on the accounts of the company, must also be held to have been complied with. In the Petition, it is specifically stated that there is no investigation pending under the Companies Act. As such all the requirements of the proviso to Section 391(2) must be held to have been satisfied. REPORTS OF THE OFFICIAL LIQUIDATOR UNDER THE SECOND PROVISO TO SECTION 394(1) AND THE CENTRAL GOVERNMENT UNDER SECTION 394-A. The Official Liquidator, in his report submitted under the second proviso to Section 394(1), states that he had called for the statutory books from the transferor company which were furnished, that Clause 25 of the objects clause, incidental and ancillary to the attainment of the main objects of the Memorandum of Association of the transferor company, enables it to amalgamate, that adequate provision has been made for protecting the services of the employees, as the employees of the transferor company would now become the employees of the transferee company as provided under Clause (5)(ii) of the Scheme, that under Clause 8(c) of the Scheme the unsecured loans extended by the transferee to the transferor stand cancelled, that the relevant provisions under the Companies Act have been complied with by the transferor and that, on verification of the material papers, books and records made available to him by the petitioner, he is of the opinion that the affairs of the transferor company do not appear to have been conducted in a manner prejudicial to the interests of its members or to public interest. As such the requirement of the second proviso to section 394(1) is also satisfied. The Registrar of Companies has filed an affidavit, on behalf of the Central Government under Section 394-A, raising two objections to the scheme of amalgamation (1) that the transferee had not approached the High Court seeking dispensation of the meeting of the creditors and that the scheme may be considered subject to production of consent letters of the secured creditors of the transferee company, and (2) that Clause (10) of the Scheme, which contemplates combining the authorized capital of the transferor with the transferee, is impermissible since the authorized capital is the notional limit upto which the company can increase its paid up capital, that two notional limits cannot be clubbed together, that, since the authorized capital of the company is a liability, unlike other liabilities to be returned or refunded, it would not come under the purview of transfer of liabilities under the scheme of amalgamation, that the transferor and transferee companies are separate legal entities and, on amalgamation, it is only the transferor company which would be dissolved and the transferee company would continue to exist, that at this stage if the transferee, on account of the scheme of arrangement, increases its authorized capital it has to comply with the provisions of Sections 94 and 97 of the Companies Act, 1956 by filing the relevant returns with the Registrar of Companies with registration fee/filing fee, that the Companies Act does not specifically exempt the transferee company, on account of the scheme of arrangement, from payment of registration fee for increase of its authorized capital, that if the transferee company was allowed to increase its authorized capital, on clubbing the authorized capital of the transferor company without any further act or deed as contemplated in the Scheme, it would not only be against the provisions of the Companies Act, 1956 but would also involve substantial loss to central government revenue, that clubbing of the authorized capital of the transferor with that of the transferee cannot be a part of the Scheme since Section 97 of the Companies Act, 1956 requires compliance by payment of the registration fee with the Registrar of Companies and does not require permission of the Court. As noted above, the secured creditors and the creditors under the head "unsecured loans" of the Transferor have given their consent to the scheme of amalgamation. The question regarding obtaining consent of the creditors under the head "current liabilities" has already been dealt with earlier in this order. It is only the second objection of the Central Government which needs to be examined.

PURSUANT TO A SCHEME OF AMALGAMATION THE AUTHORISED CAPITAL OF THE TRANSFEROR AND TRANSFEREE CAN BE CLUBBED:

It is stated in the petition that, upon the scheme of amalgamation being sanctioned, the authorized share capital of the transferor company would be added to the authorized share capital of the transferee company and that it must be deemed that all the necessary requirements had been complied with by the transferee. Section 394(4) defines property to include property, rights, powers of every description and "liabilities" to include duties of every description. The authorized capital, a liability of the transferor company, also stands transferred to the transferee, on an order, sanctioning the scheme of amalgamation, being passed by the Court under Section 391 read with Section 394(1) & (4) (a) of the Companies Act. Section 94(1)(a) enables a limited company having a share capital, if so authorized by its Articles, to alter the conditions of its Memorandum, to increase its share capital by such amount as it thinks expedient. Under Section 97(1), where a company has increased its authorized capital, it shall file with the Registrar a notice of the increase of the capital within 30 days after passing of the resolution authorizing the increase and the Registrar shall record the increase and make any alterations which may be necessary in the Companys Memorandum or Articles or both.

In Telesound India Ltd., In Re. (Delhi) 11, the Delhi High Court observed:

"...........Amalgamation of a company with another or an amalgamation of two companies to form a third is brought about by two parallel schemes of arrangements entered into between one company and its members and the other company and its members and the two separate arrangements bind all the members of the companies and the companies when sanctioned by the court. Amalgamation is, therefore, an absorption of one company into another or merger of both to form a third which is not a mere act of the two companies or their members but is brought about by virtue of a statutory instrument and to that extent has statutory genesis and character, and to that extent it is distinguishable from a mere bilateral arrangement to merge or join in a common Endeavour, an undertaking or enterprise. (J.K.(Bombay) P. Ltd v. New Kaiser-I-Hind Spg. & Wvg. Co. Ltd (1970) 40 Comp Cas 689 (SC). Once the court sanctions the amalgamation, the amalgamation is made effective and binding by virtue of statutory power, inter alia, by the transferor to the transferee-company of the whole or any part of the undertaking, property rights and liabilities of the transferor-company by virtue of the provisions of s.394 of the, which are intended to facilitate the process of amalgamation: Sailendra Kumar Ray v. Bank of Calcutta Ltd. (1948) 18 Comp Cas 1 (Cal). The expression "property" and "liabilities", which can be transferred on amalgamation, under s.394 (1) have been defined in very wide terms by sub-s.(4)(a) of that section, so as to include "rights and powers of every description" and "duties of every description" respectively. The expression "property" would, therefore, be wide enough to include rights under a contract, including a contract of tenancy. These are co-extensive with the property and right which the transferor-company has in relation to its assets, but would not be wider than what the transferor-company was entitled to enjoy. The rights, property, as indeed the liabilities of the transferor-company, become the rights, property and liabilities of the transferee-company by virtue of the order of vesting made by the court consequent on amalgamation. It is neither an assignment of right or property, nor an assignment of property by the company. It is the transfer of rights, property and liabilities along with the company itself and it is only a result of confusion of thought that it could be described as an assignment by the company to another-person, which is independent and distinct from the company. Such a notion ignores the peculiar position of amalgamation in company law and its true legal incident. It is for historical reasons that the device of amalgamation was built into the company law for facilitating the merger of companies, inter alia, with a view to help restoration of sick units to health, better, more effective and economical management of the corporate sector to ensure continued production, increased employment avenues and generation of revenues. Section 72-A of the I.T. Act is one of the incentives for this kind of absorption of one company into another.

On amalgamation the transferor-company merges into the transferee-company shedding its corporate shell, but for all purposes remaining alive and thriving as part of the larger whole. In that sense the transferor -company does not die either on amalgamation or on dissolution without winding up under sub-s(1) of s.394. It is not wound up because it has merged into another. Winding-up is unnecessary. It is dissolved not because it has died, or ceased to exist, but because for all practical purposes, it has merged into another forming part of one corporate shell. The dissolution is the death of its independent corporate shell, because a company cannot have two shells. It is, therefore, dissolved because the independent shell or corporate name is superfluous......"

(emphasis supplied)

On the scheme of amalgamation being sanctioned by the Court, the rights, property and liabilities of the transferor become the rights, property and liability of the transferee company and, as a consequence thereof, the right which the transferor has to issue share capital and the existing liability in the form of its authorized capital stand transferred to and are vested in the transferee company. Since the authorized capital of the transferor, which is transferred to and stands vested in the transferee, has already been subjected to payment of the prescribed fee, absence of a specific provision either in the Companies Act, 1956, or the Rules made there under, requiring the transferor to again seek approval of the Registrar of Companies or to pay fees on such authorized capital, the contention, that approval of the Registrar must again be sought and fees paid all over again, must necessarily be rejected.

In M/s. Saparna Infotech Ltd. Vs. M/s. Relinfo Limited (Judgment in C.P. No. 149 and 150 of 2001 dated 04.01.2002), this Court held:

".......Admittedly, in the present case the transferor company has paid the necessary fee to the Registrar and increase of the share capital insofar as the transferor company is duly recorded by the Registrar as required under Section 97 of the Companies Act.

The learned standing counsel for the Central Government argued that in substance the transfer of the right of the transferor company to issue further share capital would mean that the transferee company would be entitled to enhance its share capital without following the procedure prescribed under Section 94 and 97 of the Companies Act and therefore the same should not be permitted.........

.........In the circumstances, if the transferee company has right to issue further share capital on the date of the amalgamation the same is a legal right in favour of the transferor company and such a right can be transferred in lieu of Sections 394(2) and (4) of the Companies Act......

(emphasis supplied)

A similar view was taken by this Court in M/s Krishnan Products Pvt. Ltd Vs. M/s Krishna Poly Packs Pvt. Ltd (Judgment in C.P.Nos.68 and 69 of 2005 dated 13.8.2007).

In R.K.S. Motors (P) Ltd., In Re ((2004)60 CLA 309 (AP)), this Court observed:

"........Having regard to the objections raised by the learned Registrar of Companies, it is appropriate here to consider sections 95 and 97 of the. A perusal of both the provisions shows that in respect of consolidation of share capital or conversion of shares into stock, notice has got to be issued to the Registrar by the company within 30 days after such consolidation or conversion, in which event the Registrar shall record such notice and make necessary alterations in the memorandum or articles of association. The default entails penal consequences under sub-section (3) of the said section. Similarly, notice in the event of increase of share capital of the members shall be given to the Registrar of Companies within 30 days after passing of the resolution by the Board of directors authorizing the increase and upon receiving such notice, the Registrar shall include the particulars and class of shares affected and conditions if any subject to which the new shares are to be issued. The default on the part of the company again entails penal consequences under sub-section (3) of section 97. The object of sections 95 and 97 seems to be to keep the Registrar informed about the changes and to incorporate the same in the memorandum or articles of association or both of the respective companies.

The present scheme of arrangement or amalgamation if it is sanctioned by this court, the certified copy of the order of this court is required to be filed before the Registrar within 30 days from the date of the order under sub-section (3) of section 394, for the purpose of its registration. The object behind such intimation, which is required under law either under Section 95 or under Section 97 or under Section 394(3), appears to be one and the same. Again the default in not filing certified copy of the order of this court before the Registrar within 30 days entails penal consequences. Well, when the certified copy of the order sanctioning the scheme by this court is required to be filed before the Registrar for the purpose of its registration, there is no reason as to why it shall not be treated as notice to the Registrar as envisaged under sections 95 and 97 of the Companies Act. Inasmuch as, as discussed hereinabove, the object being the same, the necessary changes that are required to be made in the concerned Register by the Registrar of Companies can be effected after receiving the certified copy of the order of this court sanctioning the scheme. The sanction of the scheme by this court has its own effect. It is not a mere act of the parties individually and volitionally. The scheme upon being sanctioned by this court, it becomes operational by virtue of the orders passed by this court. In other words, by operation of law, such changes would come into effect. Therefore, it has statutory genesis and statutory character, but not mere individual acts of the companies. In that view of the matter, no separate notice informing the Registrar under section 95 or 97 of the need to be given, unlike the other cases which do not require the sanctions of the court, in my considered view, inasmuch as the scheme is required to be sanctioned by this court and such sanction is required to be registered with the Registrar of Companies by filing the certified copy of the order of this court. Therefore, I am of the considered view that there has been no infraction of the provisions of section 95 or section 97, as the case may be, in any manner. Having regard to the same, the second objection raised by the learned Registrar of Companies merits no consideration. As regards first objection as to the cancellation of equity investment, the scheme shall be suitably modified by making it conditional by incorporating this objection." ....(emphasis supplied)

In Re Kemira Laboratories Limited (Judgment in O.S.A. Nos. 24, 44 and 46 of 2005 and C.P. Nos. 144, 145 and 146 of 2003 dated 25.01.2007) a Division Bench of this Court held:-

"........Now, all the Judges who have decided that no notice is necessary under Section 97 of the Act, have relied on a judgment of the Delhi High Court reported in Telesound India Ltd., In RE: (1983) 53 Company Cases 926 [LQ/DelHC/1980/502] . On merger, the two Companies seize to exit i.e., to say that neither the transferee Company remains nor the transferor Company remains, but a third Company comes into existence on the basis of the scheme sanctioned by the Court. In such a situation, it is hard to accept that there would be an increase in the share capital of one of the Companies........

.........In view of the Law laid down by this Court and also the judgment of the Delhi High Court in Telesound India2 to which I am in respectful agreement, the order passed in C.P. No. 199 of 2003 to the effect that Clause 10 of the Scheme of Amalgamation would not be part of the approved scheme, is set aside and O.S.A. No. 24 of 2005 is allowed to that extent......"

No good reason has been shown why the two merged companies should be required to pay fees again, on the same authorized capital on which the prescribed fee has already been paid by the transferor Company (Jaypee Cement Ltd (2004 CLC 1031 (Allahabad High Court)). As an order can be passed, under Section 391 of the Companies Act itself, regarding increase of authorized share capital by merger of the authorized capitals of the two companies, (Vasant Investment Corporation Limited Vs. Official Liquidator ((1981)51Com Cas 20 (Bombay HC)), Jaypee Cement Ltd), the objections of the Central Government, to the scheme of amalgamation, are overruled. IS THE SCHEME OF

AMALGAMATION IN PUBLIC INTEREST:

The Court cannot abdicate its duty simply because the statutory majority has approved it and there is no opposition to the scheme of amalgamation in Court. It must scrutinize the scheme to find out whether it is an arrangement which can, by reasonable people conversant with the subject, be regarded as beneficial to those who are likely to be affected by it. In pursuit of such an enquiry the court is not tied down by any rigid principles or strait-jacket formulae. No enumeration contained in judicial decisions of the factors which can be taken into account, howsoever precise, can be treated as exhaustive so as to limit the scope of the inquiry which, having regard to varying circumstances, might differ from case to case. The burden lies on the petitioner-company to show that the scheme of amalgamation is fair, reasonable, and workable and is such that a man of business would reasonably approve. The Court would, of course, take into account the fact that it has been approved by a big majority vote, but it would not shirk its duty to scrutinize the scheme. (Bank of Baroda Ltd. Vs. Mahindra Ugine Steel Co. Ltd. ((1976) 46 Com Cas 227).

Sections 391 to 396 constitute a complete code and the provisions are in a way derogatory to the law of contract. When it exercises the power, conferred on it by section 391(2) to sanction the scheme of compromise or arrangement, the Court by its act is imposing the scheme on dissenting members of that class. Before taking such an action, it would be open to the court to examine the scheme before imposing it on the unwilling/dissenting members of the class. Even if all the statutory formalities are duly carried out, the Court has still the discretion either to sanction or refuse to sanction the scheme. (Bank of Baroda Ltd.26 and Bengal Hotels P. Ltd. In re ((1977) 47 comp Cas 597 (Guj)).

The amalgamation must fulfil some felt need, some purpose, some object and that must have some co-relation with public interest. The Court is charged with a duty to ascertain whether the affairs, of both the transferor and the transferee, have been carried on not only in a manner not prejudicial to its members but also that it is not against public interest. The expression "public interest" must take its colour and content from the context in which it is used. (Union of India Vs. Ambalal Sarabhai Enterprises Ltd ((1984)55 Com.Cas.623). The Indian law, a departure from the English law, enjoins a duty on the Court to examine objectively whether the merger is, or is not, violative of public interest. What would be in public interest cannot be put in a strait-jacket. It is a dynamic concept which keeps on changing. It has been explained in Blacks Law Dictionary as:-

"Something in which the public, the community at large, has some pecuniary interest, or some interest by which their legal rights or liabilities are affected. It does not mean anything so narrow as mere curiosity, or as the interests of the particular locality which may be affected by the matters in question. Interest shared by citizens generally in affairs of local, State or national Government."

It is an expression of wide amplitude. A scheme valid and good may yet be bad if it is against public interest. The basic principle of the satisfaction, that the scheme is not contrary to public interest, is none other than the broad and general principles inherent in any compromise or settlement entered into between the parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, the courts have evolved the principle of "prudent business management test" or that the scheme should not be a device to evade the law. (Hindustan Lever Employees Union Vs. Hindustan Lever Ltd. ((1995) 83 Comp Cas 30 (SC)). No court of law would ever countenance any scheme of compromise or arrangement if it finds that it is an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant.

The fairness of the scheme, qua the disputing minority shareholders or creditors, also has to be kept in view by the Company Court while putting its seal of approval on the scheme. The Company Court should examine whether the proposed scheme of compromise and arrangement is violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously x-ray the same. The Company Court has also to satisfy itself that the members or class of members or the creditors or class of creditors, as the case may be, were acting bonafide and in good faith and were not coercing the minority in order to promote any interest adverse to them. It must also ensure that the scheme as a whole is also just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. (Miheer H. Mafatlal). Unless the scheme is shown to be contrary to any law or is such as to shock the conscience of the court or is patently unfair to the members or creditors or any class of them, or is against public interest or against public policy, the court should not come in the way of business by rejecting a bonafide scheme under Section 391. (Zee Interactive Multimedia Ltd., In re 4). The petitioner-transferor company is presently engaged in the business of global customer management and billing (CM&B) solutions provider to Pay TV, Broadband, Triple-play and IPTV services and in providing integrated billing and customer care solutions and services to video, data and content service providers. The transferor is a wholly owned subsidiary of the transferee company which is also engaged in similar activities. The underlying objects of the scheme is to synergise operations of both the companies and pool its resources to give more thrust and integrate their business facilities and infrastructure under one single unit, which would give them the financial edge necessary to withstand competition and contribute to the business and profitability of the amalgamated company. This would be beneficial and advantageous in the long-term interests of both the companies and its shareholders. The scheme also provides that the employees of the transferor would become the employees of the transferee without interruption in service and on terms and conditions not less favourable than those subsisting with reference to the transferor company. The scheme of amalgamation, by way of transfer of the whole of the undertaking of the transferor, does not affect the rights and interests of the members of the transferee company as their shareholding and other rights, as members of the transferee company, remain unaffected as no new shares are being issued and there is no change in the capital structure. The scheme of amalgamation does not also affect the creditors of the transferee as the net worth of the transferor is positive and its assets exceed its liabilities.

The transferor is a wholly owned subsidiary of the transferee. The scheme of amalgamation involves the entire undertaking of the transferor to be transferred to and vested in the transferee with a view to achieve the aforementioned objects. It cannot be said that, in the present case, the scheme of amalgamation is a device to evade the law, is unconscionable, unfair or unjust to the members/creditors of both the transferor and transferee companies or that it is against public policy or that it shocks the conscience of the Court. It cannot, therefore, be said that the scheme of amalgamation, if approved, would be prejudicial to public interest.

I consider it appropriate, therefore, to sanction the scheme of amalgamation. As required under Section 394(3) of the Companies Act, read with Rule 81 of the Companies (Court) Rules, 1959, the petitioner shall file a certified copy, of the order of this Court, with the Registrar of Companies for its registration within thirty days from the date of the order.