Evolution of jurisdiction in sanctioning schemes of merger and amalgamation

By December 10, 2018 December 20th, 2019 No Comments

Corporate restructuring is one of means that
can be employed to meet the challenges and problems which confronts businesses.
The law should be slow to retard or impede the discretion of corporate
enterprise to adapt itself to the needs of changing times and to meet the
demands of the increasing competition. The law as evolved in the area of
mergers and amalgamations has recognised the importance of the court not
sitting as an appellate authority over the commercial wisdom of those who seek
to restructure business.
” – Justice Dr. Dhananjay Chandrachud, in the case
of Ion Exchange (India) Limited., [In
re (2001) 105 Comp Cas 115 (Bom)]
The Companies
Act, 2013 (the “Act”) has streamlined
the complete process of conducting corporate restructuring in India, in terms
of simplifying the procedure, making it transparent, more efficient and effective.
Transparency under the new law has been ensured by aligning the implementation with
laws, such as income tax laws and exchange provisions, to give it an effective
The National
Company Law Tribunal (the “Tribunal”)
is a specialized tribunal created by the Central Government under Section 408
of the Act w.e.f. June 01, 2016. The Tribunal, which has been created via an
amendment in the law, was constituted for the purpose of speedier and effective
regulation of the affairs of the companies and in terms of Section 434 of the
Act, was also assumed to take-over the jurisdiction of the company law board, in
context of restructuring schemes of the companies. The Tribunal has been given
the discretionary powers to take up the cases, pending with company law board,
from any stage they want.
Recently, in the case of Gabs Investments Private Limited and Others
[CSP Number 995 of 2017] the Tribunal refused to sanction a scheme of
amalgamation and arrangement between Ajanta Pharma Limited (the “APL”) and Gabs Investment Private
Limited (the “GIPL”) solely on the
ground that the scheme was principally designed for avoidance of tax and
consequently, was against public interest. According to the facts of the case, merger
between the two companies was approved almost unanimously by shareholders of
both the companies on October 10, 2017. It was proposed under the scheme that
the merger between the two companies would result in direct shareholding of
shares by the promoter group of GIPL in APL, and as a result, while the total
promoter shareholding in APL would remain the same (pre and post merger) the
shareholding of the individual promoters would increase. Pursuant to the scheme
becoming effective, APL would issue 83,92,262 (Eighty Three Lacs Ninety Two
Thousand Two Hundred Sixty Two) fully paid up equity shares of Rs. 2 (Rupees
Two only) to the equity shareholders of GIPL, in proportion of their
shareholding in the latter company. 
In the instant case, the companies had complied
with Section 230 (5) of the Act, according to which, notice of the scheme was required
to be given to sectoral regulators and/ or authorities that are likely to be
affected by the scheme. Pursuant to the notice, the regulators are allowed a
statutory period of 30 (thirty) days to make their representations (if any)
with respect to the proposed scheme, failing which, they are deemed to have no
such representations to make on the scheme. It is under this requirement that
the income tax authorities (the “Department”)
objected to the said scheme stating that if the instant scheme receives the
Tribunal’s sanction, it would cause huge loss of amount to the Government
It is imperative to note that it is through
this additional step in the law that increases the chances of scrutiny of such
schemes by the regulatory authorities.
The central objection of the Department was
that since, GIPL is a private limited company, it shall be considered as a separate
legal entity under law and consequently, any “assets” of the private limited
company cannot be transferred and distributed directly, without paying a Dividend
Distribution Tax (the “DDT”), calculated
@ 20% (twenty percent) and accordingly, the DDT payable would have been Rs.
134.16 Crores (Rupees One Hundred Thirty Four Point One Six Crores only), which
would be lost, if the scheme is approved by the Tribunal. Furthermore, primarily
GIPL is an investment holding company, in the business of investment and deals in
equity shares of APL. Once the equity is sold in the market, the business
profit would be acquired by GIPL, on which income tax, calculated @ 30% (thirty
percent), i.e., Rs. 287.50 crores (Two Hundred Eighty Seven Point Fifty Crores
only) would become payable to the Department. It is in view of the above
computation, that the scheme was objected to by the Department, claiming that approximately,
a total of Rs. 421.66 crores (Four Hundred Twenty One Point Sixty Six Crores
only) would be lost, if the said scheme is approved by the Tribunal and that
the central objective of the scheme is avoidance of tax, which would otherwise
be payable, if the companies had not prepared a scheme of amalgamation and
The Department further contended that in
view of the General Anti Avoidance Rule (the “GAAR”) provisions, the said scheme is a deliberate measure to avoid
tax and that this scheme is purely an Impermissible Avoidance Agreement, an
arrangement between companies, whose main purpose is to avoid tax and obtain
tax benefits, and such arrangements should not be approved by the Tribunal. It
was contended that the said arrangement had no alternate commercial substance
or consideration, other than avoiding tax that was due and payable. This object
of the scheme was strenuously objected by the Department.   
The Tribunal in the instant judgment
has heavily relied on the case of Wiki
Limited and Others v. Regional Director, South East Region and
[Company Appeal Number 285 of 2017] wherein the National Company Law
Appellate Tribunal (the “Appellate
”) had refused to sanction the scheme on the premise that the said
scheme was only beneficial to the common promoters of both the companies, and
that there was no public interest being served, as was envisaged in the scheme.
The following principles were decided at length by the Appellate Tribunal:
(a)      It was observed that the disclaimer in the valuation report
of the shares provided by the independent chartered accountant stated that the
valuation of the shares was calculated on the information and documents
provided by the management of the two companies. Since these documents came
from the management of the companies itself, it could not be said that the
report was “independent” in any sense. It was argued before the Appellate
Tribunal that the share exchange ratio was computed accurately and that by
denying its sanction to the said scheme, the Tribunal has over-looked the
settled principle of law, that the courts should not supplement their wisdom
with the commercial wisdom of the stakeholders.
(b)      That a scheme should be fair, reasonable, in the best interest
of all the shareholders, and not just a few among them.
It was clarified that even if the
requirement under Section 230 (5) of the Act was complied with, and no adverse
observation was received by the statutory regulators, even then the scheme
would not qualify to be in public interest.
The importance of ‘public interest’ was
upheld and was observed that essentially, a scheme ought to be beneficial to
each and every class of members and shareholders. And if on a broad examination
of the scheme, without resorting to mathematical examination, it is apparent
that there is no public interest involved or the scheme is only beneficial to a
particular class of persons, the amalgamation scheme can be rejected.
In the case of Shankarnarayana Hotels (P) Ltd. v. Official Liquidator [(1992)74
Comp. Cas 290 (Kar)] it was held by Karnataka High Court that, amalgamation
should not only be beneficial to the companies, but should also be in the
interest of the creditors and members of both the transferor and transferee
companies and should be in public interest. It is this jurisprudence that was
upheld by the judiciary in the aforementioned cases. Moreover, the Tribunal is
comprised of both judicial members and technical members and hence, contains
the necessary power, knowledge and expertise to scrutinize and examine a
scheme, based on an analysis of the documents and information of the companies
involved in the transaction.     
These two judgments are
a departure from the landmark judgment of Supreme Court of India (the “SC”), Miheer H. Mafatlal v.
Mafatlal Industries Ltd.
[AIR 1997 SC 506] wherein the jurisprudence
relating to the scope of a court’s jurisdiction while sanctioning schemes of
mergers and amalgamation was discussed at length. It was held that the courts
act like umpire in a game of cricket, who are responsible to ensure that both
teams play their games according to the rules, by not overstepping their
limits. But the subject as to how best the game is to be played by each team is
left to be determined by the players and not by the umpire.
Following contains
brief points that were decided in Mafatlal’s
case, that determined the contours of a court’s jurisdiction while dealing
with sanctioning of such schemes:
The sanctioning
court has to ensure compliance with the requisite statutory procedure, in terms
such as the meetings contemplated under Section 391(1)(a) of the Companies Act,
1956 (the “Old Act”) have been duly held,
the scheme has received the requisite majority vote under Section 391(2) of the
Old Act.
Furthermore, the
court has to ensure that the creditors or members or any class of them (acting
in bona fide) were enabled easy access to the relevant material, as
contemplated under Section 391 (1) of the Old Act, to make an informed decision
while consenting to the scheme in question. This majority decision of the concerned
class of voters should be just, fair and not adverse to the dissenting voters.
That all the
requisite material contemplated by the proviso of Sub-section (2) of Section
391 of the Old Act is placed before the sanctioning court by the concerned
applicant seeking sanction for such a scheme and the court gets satisfied about
the same.
That the sanctioning
court has to ensure that the proposed scheme does not violate any provision of
law and is not contrary to public policy. It was held in the case, that for
ascertaining the real purpose underlying the scheme, the court if necessary,
can pierce the veil of apparent corporate purpose underlying the scheme and can
judiciously x-ray the same.
That the scheme as a
whole should be 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.
It was further
stated that once the aforesaid broad parameters about the requirements of a
scheme getting the court’s sanction are found to have been met, the court will not
any further have jurisdiction to sit in appeal over the commercial wisdom of
the majority of the class of persons, who with their open eyes have given their
approval to the scheme, even if in the view of the court, there could be a
better scheme for the company and its members or creditors for whom the scheme
is framed. The court cannot refuse to sanction such a scheme on that ground as
it would otherwise amount to the court exercising appellate jurisdiction over
the scheme rather than its supervisory jurisdiction.
Scope of interference of sanctioning court
As currently, the Tribunal
(earlier the high courts) has the power vested in it for sanctioning a scheme
of merger and amalgamation, enquiring into the fairness and reasonableness of such
a scheme. Numerous issues have arisen which deal with the extent of the sanctioning
court’s interference while approving the scheme, which are important to be discussed
(a)  Valuation of shares in mergers and
Share valuation meanwhile
being quite technical, requires considerable knowledge, experience and
expertise. It is generally carried out by independent registered valuers, which
is seconded by shareholders of both companies involved in the transaction. In
the aforementioned case of Mafatlal v. Mafatlal,
it was held that once the exchange ratio has been determined by the independent
chartered accountants, and if there exists no apparent mistake in their valuation,
then the courts are not entitled to substitute such exchange ratio. The extent
of the court’s obligation is to determine that the valuation was well in
accordance with law, carried out by an independent body, and was not unfair to
the shareholders of the company which was being merged.  
(b)  Modification by the court in the scheme
of amalgamation
The above subject
was discussed by various high courts of the country, such as in the case of Re. Mankam Investments Limited and Others
[(1995) 4 Comp LJ 330] wherein the single judge of Calcutta High Court had
ruled the commercial benefit of a scheme has to be determined by the shareholders
of the companies and that the sanctioning court is not substantially concerned
about the commercial benefits of the scheme, until and unless the scheme is
manifestly unfair or deliberately has been created just to defraud a few shareholders.
Karnataka High Court
in the case of Ind Telesoft Private Ltd.
v. Jawad Ayaz and Others [(2003) 117
Comp Cas 738 (Kar)]
held that a scheme
can be modified (either suo motu or upon insistence by any person, interested
in the affairs of the company) by the
court, either at the time of making the order or soon after the scheme is
sanctioned. The court can make only such necessary modifications to the scheme which
is sought for and the same is made in good faith, not contrary to the provision
of law and public policy and the same may be essential for the proper,
efficient and smooth functioning of the scheme. Also, in the case of
Ipco Paper Mills Limited [(1984)55 Comp. Cas 281 (Bom)] the
Bombay High Court held that the court has the power to make modifications in
the scheme, if necessary. Such exercise of the powers depends variably on the
facts of each case. It is within the power of the court to examine the scheme,
its effect and not merely act as a rubber stamp approving the scheme. It was
ruled in the said case that the court, in such exercise has to be vigilant, pragmatic
and participative. Moreover, it is within the power of the court to order the winding
up of the company, if the sanctioned scheme is found unworkable and
Jurisdiction of the sanctioning
court while approving or disapproving the scheme
The above subject
was discussed at length in the case of Hindustan
Lever Employees’ Union
v. Hindustan
Lever Limited and Others
[AIR 1995 SC 470], Mafatlal v. Mafatlal and Sidhpur Mills Company Limited [(1980) 50
Com Cases 7 (Guj)] wherein it was
held that a company court does not exercise an appellate jurisdiction but a
jurisdiction which is found on fairness. The court does not have to scrutinize
the scheme minutely and arrive at an independent conclusion, even when the scheme
is approved by majority shareholders, rather look at it from the point of view
of an ordinary reasonable shareholder.
Our view
In view of the
judicial precedents, the Courts have clearly held the length and breadth of
jurisdiction of the courts when it comes to administering a corporate
restructuring scheme. However, in view of the latest cases, it clearly appears
that the Tribunal is hinging the approval of the scheme in question on whether
the scheme results in tax avoidance or is in public interest or not. It has
been held in few cases (AVM Capital
Services Private Limited and Others
[(2012)173CompCas355(Bom)], Vodafone Essar Gujarat Limited v. Department of Income Tax [(2013)176CompCas7(Guj)] that even if a scheme results in tax avoidance, the Department can by all means
avail remedies available to them under the Income Tax laws but to say that the
sole objective of a scheme is to avoid tax will be going beyond the mandate of
the court for sanctioning a scheme. However, it seems that with the Tribunal in
picture, this view is undergoing a change.

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