T. Durairajan and Others vs Waterfall Estates Ltd. and Others

Veeraswami, C.J.—Original Side Appeal No. 9 of 1971 is from a judgment of Palaniswamy J., allowing certain company petitions under

Sections 391(2) and 394 of the Companies Act, 1956, to accord sanction to the scheme of amalgamation of Adoni Spinning and Weaving

Company Ltd., Balmadies Plantations Ltd., Blue Mountain Estates and Industries Ltd., Kothari Textiles Ltd. and Waterfall Estates Ltd., with

Kothari (Madras) Ltd. The requisite majority in respect of each of the amalgamating companies had agreed to the amalgamation. The meetings of

shareholders of each of these companies were held under the directions of the court, and the voting position in this regard has been set out in a

tabulated form by Palaniswamy J., in paragraph 10 of his judgment which shows the number of persons who voted in person or by proxy for the

resolution, the number of votes, the percentage of votes for amalgamation in relation to the total votes polled, and the percentage of voting for the

scheme in relation to the paid-up capital. The dissentient shareholders in Waterfall Estates Ltd. opposed the related petition for sanction of the

scheme of amalgamation on certain grounds which the learned judge declined to accept as valid. In respect of the other amalgamating companies,

no objection to the petitions would appear to have been raised before him. The Regional Director, Company Law Board, in an affidavit filed by

him had pointed to the provisions of Section 23 of the Monopolies and Restrictive Trade Practices Act, 1969, and to the necessity of notice to the

official liquidator u/s 394 of the Companies Act for his report as to the affairs of the company. On a consideration of the fact that the authorised

capital of the new company will be Rs. 5,00,00,000 the learned judge found that Section 23 of the Monopolies and Restrictive Trade Practices

Act, 1969, did not stand in the way of the proposed amalgamation and the affidavit of the Regional Director, Company Law Board, did not also

bring out any ground to withhold sanction to the scheme. The appeal before us has been filed in respect of Waterfall Estates Ltd. which has

reiterated at the hearing the first two objections which did not find favour in the first instance.

In the judgment under appeal, the facts relating to each of the amalgamating companies have been noticed in extenso, and we do not think it

necessary to reiterate them. Adoni Spinning and Weaving Company Ltd. and Kothari Textiles were incorporated respectively in 1954 and 1937

for the primary objects of carrying on the business of ginning, spinning, weaving or manufacturing or dealing in cotton or other fibrous substances.

The other three amalgamating companies were incorporated in 1943, and their main objects were to acquire, by purchase or otherwise, and to

carry on the business of estate owners, cultivators, planters, growers and manufacturers, sellers and dealers in all kinds of coffee, tea, cardamom,

etc. Blue Mountain further engaged itself in the business of manufacture, import, export and sale of fertilisers of all kinds, including chemical and

natural fertilisers and mixtures thereof. Almost all the amalgamating companies have been sound. The new company, Kothari (Madras) Ltd., has

been incorporated in July, 1970, with its registered office at Madras. Its nominal capital is Rs. 5,00,00,000 divided into 5,00,000 redeemable

cumulative preference shares of Rs. 10 each of the total face value of Rs. 50,00,000 and 45,00,000 equity shares of Rs. 10 each of the total face

value of Rs. 4,50,00,000. The memorandum and articles of association are stated to have been prepared with the privity and approval of the

board of directors of each of the amalgamating companies. The memorandum and articles of association of the new company include provision for

appointment of its first directors and as to rights and conditions of redemption of the redeemable preference shares to be issued by the new

company. Provision has been made in the scheme for the transfer of the entire undertakings, businesses, properties, rights, powers, claims and

liabilities of each of the five amalgamating companies and vesting the same in the new company pursuant to Section 394 of the Companies Act,

1956. Accordingly all assets including properties of all kinds, all agreements and claims will be transferred to and vest in the new company, subject

to all mortgages, debentures, charges, hypothecations and all charges whatsoever affecting the said properties and the new company will discharge

all liabilities of the amalgamating companies including taxes and public charges. The new company will also take over the services of all employees

of all grades in the service of the amalgamating companies without interruption and on the same terms and conditions of their existing service and

comply is all respects with the requirements of the proviso to Section 25FF of the Industrial Disputes Act. Provision also has been made in the

scheme that in consideration of the transfer to the new company, the latter will allot fully paid-up shares in its capital to the existing members of the

amalgamating companies in the manner set out in the statement in compliance with Section 393 of the Companies Act. The new company will by

payment in cash redeem the redeemable preference shares of Waterfall Estates Ltd. by paying capital paid thereon with a premium of 50 paise per

share of Rs. 10 as provided in terms of the issue of the said shares, together with all the arrears of dividend up to the date of the scheme and all the

preference shares of Balmadies Plantations Ltd., at par with all arrears of dividend up to the date of the scheme, and all the preference shares of

Adoni Spinning and Weaving Company Ltd. by payment at par together with all arrears of dividend up to the date of the scheme. Such payment is

to be made within two months from the date of the scheme together with interest at the rate of 6 1/2% per annum for the said period of two

months on the face value of the said shares. Such payment will be made against surrender to the new company of the relative share certificates. On

the scheme coming into effect, the amalgamating companies will be dissolved without winding up. The new company is to carry on the business on

its own account of the relative amalgamating companies on their cessation. The advantages of amalgamation have been detailed in the said

statement made in compliance with Section 393 in which disclosures have also been made of the interest of the board of directors of all the

companies.

Two of the objections of the dissentient shareholders of Waterfall Estates which we are called upon to consider are, (1) payment of cash

involves reduction in the share capital of the amalgamating companies and without following the procedure prescribed under the Act for such

reduction, the petitions should not be allowed; and (2) payment of preference shares would be invalid except in the case of winding-up, and that

what is asked for in the petitions is but dissolution without winding-up, and so no payment could be made towards preference shares. In our

opinion, neither of these objections has substance. The scheme of Sections 101 and 102 of the Companies Act as well as Rule 85 of the

Companies (Court) Rules, 1959, clearly envisages that reduction in capital is in the context of an existing or continuing company. Where, as in this

case, preference shares of amalgamating companies are paid out by the new company under a scheme of amalgamation by the terms of which the

amalgamating companies go out of existence by a merger of the same in the new company, it will be hardly appropriate to view the process of such

payment as involving reduction of capital of the amalgamating company which, by amalgamation, loses its existence and identity. The object of

asking for confirmation by court of reduction of capital is to safeguard the interests of the creditors of the company, and other obligations or rights

coming into existence in the light, or on the strength of existing capital structure either fully paid up, or realisable at call. The scheme, in the instant

case, involves transfer of the entire assets, rights and liabilities of the amalgamating companies to the new company which becomes, when the

scheme takes effect, liable to the creditors of the amalgamating companies to the fullest extent. To such a case the procedure for reduction of share

capital, as provided for by Sections 100, 101 and 102 is hardly applicable. Rule 85, in our opinion, does not contemplate a compromise or

arrangement in the nature of a scheme of amalgamation, such as we have here. Trevor v. Whitworth, [1887] 12 App. Cas. 409 is no authority in

support of the objection based on reduction of capital. The company in that case having gone into liquidation, a former shareholder made a claim

against it for the balance of the price of his shares sold by him to it before the liquidation and not wholly paid for. Though the articles of the

company authorised it to purchase its own shares, the House of Lords ruled that the company had no power under the Companies Act to

purchase its own shares. In support of that view, Lord Herschell said this :

In my opinion, it also follows that what is described in the memorandum as the capital cannot be diverted from the objects of the society. It is, of

course, liable to be spent or lost in carrying on the business of the company, but no part of it can be returned to a member so as to take away from

the fund to which the creditors have a right to look as that out of which they are to be paid "".

Lord Watson''s observations which warranted the conclusion of the House of Lords is also worth noting :

One of the main objects contemplated by the legislature, in restricting the power of limited companies to reduce the amount of their capital as set

forth in the memorandum, is to protect the interests of the outside public who may become their creditors. In my opinion the effect of these

statutory restrictions is to prohibit every transaction between a company and a shareholder, by means of which the money already paid to the

company in respect of his shares is returned to him, unless the court has sanctioned the transaction. Paid-up capital may be diminished or lost in the

course of the company''s trading ; that is a result which no legislation can prevent ; but persons who deal with, and give credit to a limited

company, naturally rely upon the fact that the company is trading with a certain amount of capital already paid, as well as upon the responsibility of

its members for the capital remaining at call ; and they are entitled to assume that no part of the capital which has been paid into the coffers of the

company has been subsequently paid out, except in the legitimate course of its business.

The context of the decision makes it inapplicable to the facts before us. It is not every extinguishment of shares, as we are inclined to think, that

is reduction in capital, unless the company continues to exist. Where by the process of arrangement the company itself is dissolved without winding

up, it is hardly a case of reduction in capital as contemplated by the provisions of the Companies Act, 1956. If the object of these provisions, is to

safeguard creditors who may rely on the capital structure and take a step in advancing money, or concluding other transactions in the company, the

scheme in the instant case does not, in any way, defeat or affect it, for, the interests of the creditors have been fully safeguarded by the terms of the

proposed amalgamation. We do not think that there is anything in In re St. James'' Court Estate Ltd., [1944] Ch. 6 (Ch. D) to persuade us to take

a different view. The first objection was rightly overruled.

As to the second objection, it may be that payment of preference shares would be valid only in the case of winding-up of the company in

accordance with the provisions of the Act. But it does not follow from it that there is a prohibition anywhere in the provisions of the Act from a

scheme, as we have before us, providing for payment of preference shares in the course of amalgamation, resulting in the transfer of all the rights

and liabilities of the amalgamating companies and the new company undertaking liability to all their creditors. As Palaniswamy J, has rightly

observed, the amalgamating companies are proposed to be dissolved without winding-up and, therefore, the provisions relating to winding-up are

not attracted. In rejecting this objection as not tenable, we entirely agree with what Palaniswamy J. has stated.

The appeal is dismissed.

As the other appeals stand on no different footing, they too are dismissed. Costs in none of them. In view of the dismissal of the appeals, the

stay will stand dissolved.