Ritemed Pharma Retail Private Limited vs The Official Liquidator

1

NATIONAL COMPANY LAW APPELLATE TRIBUNAL NEW DELHI COMPANY APPEAL(AT) NO.60 OF 2018 (Arising out of order dated 05.01.2018 passed by the National Company Law Tribunal, Hyderabad Bench, Hyderabad in CP No.(CAA) No.98/230/HDB/2017).

BEFORE BEFORE NCLT NCLAT IN THE MATTER OF: 1. Ritemed Pharma Retail Private Limited, H.No.11-6-56, survey No.257 & 258/1, Opposite to IDPL Railway Siding Road, Moosapet, Kukatpally, Hyderabad-500037 Telengana Petitioner Appellant No.1

2. Optival Health Solutions Private Ltd H.No.11-6-56, Survey No.257 & 258/1, Opposite to IDPL Railway Siding Road, Moosapet, Kukatpally, Hyderabad-500037. Telengana. Petitioner Appellant No.2

Vs

1. The Official Liquidator, Corporate Bhawan, 1st Floor, Bandlaguda, Nagole, Tattiannaram village, Hayat Nagar Mandal, Ranga Reddy District, Hyderabad-500068. Respondent Respondent

2. The Regional Director (SER) Ministry of Corporate Affairs, Corporate Bhawan, 3rd Floor, Bandlaguda, Nagole, Tattiannaram Village, Hayat Nagar Mandal, Ranga Reddy district, Hyderabad. Respondent Respondent

Present: For Appellant:-Mr Praveen K. Mittal, Advocate.

For Respondents: - None.

Company Appeal (AT) No.60/2018 2

JUDGMENT

BALVINDER SINGH, MEMBER (TECHNICAL)

01.The present appeal has been preferred under Section 421 of the

Companies Act, 2013 by the appellants against the impugned order

dated 05.01.2018 passed by the National Company Law Tribunal,

Hyderabad Bench, Hyderabad (hereinafter referred to as the 'Tribunal')

in C.P.(CAA) No.98/230/HDB/2017 wherein the Scheme of

Amalgamation between Appellant No.1 (Ritemed Pharma Retail Private

Limited) and Appellant No.2 (Optival Health Solutions Private Limited)

and their respective shareholders and Creditors was not sanctioned by

the Tribunal.

02.The brief facts of the case are that the appellant No.1 (transferor

company) is a company incorporated under the Companies Act, 1956.

The transferor company is a private limited company. Appellant No.2

(transferee company) is a company incorporated under the Companies

Act, 1956 and is also a private limited company. Both the companies

are subsidiaries of Mediplus Health Services Private Limited. Both the

companies are having their registered office at H.No.11-6-56, Survey

No.257 & 258/1, Opposite to IDPL railway Siding Road, Moosapet,

Kukatpally, Hyderabad-500037. The main business of both the

companies is to establish, run, take on hire or lease, maintain, organize

and promote retail pharmacy stores. To buy, sell, import, export or deal

in any manner in Medical and Pharmaceuticals Products like

intravenous sets, intravenous solutions, all kinds of drugs,

disinfectants, tinctures, colloidal products, injectables and all the

Company Appeal (AT) No.60/2018 3

pharmaceuticals and medicinal preparations, veterinary products

including setting up contract manufacturing facility etc. The Board of

Directors of the appellant companies vide their respective resolutions

dated 6th March, 2017 approved the Scheme of Merger/Amalgamation

of Transferor company with Transferee company. Thereafter, the

appellants filed Company Application No.CA(CAA)

No.29/230/HDB/2017 before the Tribunal under Section 232 read

with Section 230 of the Companies Act, 2013 praying for dispensing the

meetings of equity shareholders and secured creditors of transferor

company and the meetings of the equity shareholders, secured

creditors and unsecured creditors of transferee company. The said

company application was allowed by the Tribunal vide order dated 8th

May, 2017. As per directions of the Tribunal, the appellants filed an

affidavit stating that they got published Newspaper advertisement of

the "Notice of Petition" in English Daily and Telugu Daily and filed the

proof of the same.

03.The appellants filed a joint petition for sanction of the Scheme of

amalgamation between them and their respective shareholders. The

Scheme of Amalgamation provides that the transferee company shall,

without any further act or deed, issue and allot to each member of the

transferor company whose name is recorded in the register of members

of the Transferor Company on the Record Date, equity shares in the

Transferee Company in the ratio of 136 equity shares in the Transferee

Company of the face value of Rs.10/- at a premium of Rs.26/- each

credited as fully paid up for every 100 equity shares of Rs.10/- each

Company Appeal (AT) No.60/2018 4

fully paid up held by such member in the transferor company. Notice

was issued to the Regional Director (South East Region), Ministry of

corporate Affairs, ROC concerned, Official Liquidator and jurisdictional

Income Tax Authorities. The Official Liquidator submitted his report

dated 10.7.2017 stating that the transferor company has not submitted

consent of Trade Payables and other creditors for the proposed Scheme

of amalgamation and except that the affairs of the Company appears to

have not been conducted in a manner prejudicial to the interest of the

members or to public interest.

04.The Regional Director, South East Region, Ministry of Corporate Affairs,

Hyderabad filed an affidavit dated 13.7.2017 stating that the appellants

are regular in filing the statutory returns and no complaints, no

investigation and no inspection are pending against them and to

dispose the petition on merit.

05.No reply was filed by the Income Tax Department.

06.After hearing the parties and perusing the record, the Tribunal passed

the impugned order dated 05.01.2018 thereby recording disinclination

to sanction the Scheme of Amalgamation, as proposed. Relevant

portion of the impugned order is as under:

"13. Upon perusal of the provisions of Section 230 and 232 of the Companies Act, 2013, in the case of merger and amalgamation of Companies, the Act does not provide for allotment of shares at a premium. When the issue was raised, the learned PCS for the Petitioner Companies, submitted a copy of the Order of Hon'ble High Court of Bombay in the matter of Scheme of Amalgamation sanctioned between Rishiroop Rubber International Limited and Puneet Resins Limited under Section 391/394 of the Companies Act, 1956. However, upon perusal of the scheme submitted to the Hon'ble High Court of Bombay, it is observed that shares of both the transferor and transferee companies are listed on Bombay

Company Appeal (AT) No.60/2018 5

Stock Exchange Limited. Therefore, the Bench is of the considered view that the order relied upon by the Petitioners are not of much useful/not in favour of the Petitioners since the facts in hand and of the scheme approved by the Hon'ble High Court are totally different to the extent that the scheme of amalgamation which was earlier sanctioned, both the Transferor and Transferee Companies shares listed/traded on BSE Limited, whereas in the instant scheme of Amalgamation proposed between Ritemed Pharma Private Limited and Optival Health Solutions, both are unlisted/private limited companies. Therefore, in the absence of explicit provision available in the Companies Act, 2013 to issue shares at a premium, the Bench is of the considered view that the scheme is not in compliance with Section 232 of the Companies Act, 2013, therefore, the Bench is not inclined to sanction the scheme of Amalgamation as proposed.

14. The Petitioner Companies are directed to issue newspaper publication with respect to status of Scheme of Amalgamation in the same newspapers in which previous publications were issued in order to ensure transparency/dissemination of complete information to all concerned parties about the same of the Scheme filed with the Tribunal.

15. The Petitioner Companies are directed to serve a copy of this order on the Registrar of Companies within 30 days from the date of receipt of copy of this order.

16. The Petitioner Companies are further directed o strictly adhere to the above directions and liberty is granted to the Petitioner Companies to approach the Tribunal after complying with all the applicable provisions of the Companies Act, 2013."

07.Being aggrieved by the said impugned order the appellants have filed

the present appeal. The appellants have sought the following relief:

a) Set aside the impugned order dated 05.01.2018 passed

by the learned Tribunal in CP (CAA) No.98/230/HDB/2017.

b) To hold that the appellant companies shall not be

required to issue newspaper publications with respect to

the status of Scheme of Amalgamation as required under

the impugned order;

Company Appeal (AT) No.60/2018 6

c) To hold that the Transferee Company, which is a private

limited company, is entitled to issue equity shares at

premium to the shareholders of the Transferor Company

while sanctioning the Scheme of amalgamation;

d) To declare that the provisions of Scheme of

Amalgamation enabling the Transferee Company to issue

shares at a premium of Rs.26/- per share is in due

accordance with the applicable laws including but not

limited to Section 52 of the Companies Act, 2013.

08.On filing the appeal, notices were issued to the Respondents.

Respondents were served property but they did not appear before the

Appellate Tribunal. Therefore, arguments on behalf of the appellants

were heard.

09.The learned counsel for the appellants argued that the Tribunal has

recorded incorrect findings in observing that the 2nd appellant has not

authority or power to issue shares at a premium to the members of the

1st appellant as part of discharging the consideration for the proposed

amalgamation. Learned counsel further argued that there is no legal

embargo or prohibition for issue of shares at a premium for discharge

of purchase consideration in pursuance of a scheme of amalgamation

either by a private company or by a public company under the

provisions of Companies Act, 2013.

10.Learned counsel further argued that the approval from the relevant

stakeholders such as the Board of Directors and creditors of the

appellant for scheme of amalgamation have been taken and the same

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were filed before the Tribunal. Learned counsel also argued that Section

52 of the Companies Act, 2013 specifically provides issuance of shares

at a premium, whether for cash or otherwise.

11.Learned counsel for the appellant argued that the following judgements

pronounced by various Courts permitted to issue shares at a premium

as part of Scheme of Amalgamation or arrangement but the Tribunal

has not accepted these judgements on the plea that the companies in

these judgements are all listed companies and the appellants are

private limited company.

a) Tieto Software Technologies Limited and Tieto ITServices

India Pvt Ltd.

b) Sterlite Technologies Limited and Sterlite Power Technologies

Ltd.

c) Simbhaoli Sugars Ltd and Simbhaoli Spirits Ltd.

d) Moschip Semiconductor Technology L:td and Verasity

Technologies Inc.

e) OCL India Pvt Ltd and or

f) Heritage Foods Retail Ltd and Future Retail Ltd

g) Trident Corporation Ltd and Trident Ltd

12.Learned counsel for the appellants further argued that the Companies

Act, 2013 does not make any distinction between the listed company

and the private company. The Act is applicable to all the companies

whether public or private which are registered under the Companies

Act, 1956/Companies Act, 2013. Therefore, the findings of the

Company Appeal (AT) No.60/2018 8

Tribunal that these judgements are not applicable in the case of private

companies is not acceptable.

13.Lastly the learned counsel of the appellants drew our attention towards

the judgement pronounced by the Hon'ble Supreme Court in the case

of Miheer H. Mafatlal Vs Mafatlal Industries Ltd (AIR 1997 SC 506)

and argued that the appellants have followed the procedure for the

purposes of the Scheme and have complied with all requirements as

laid down by the Hon'ble Supreme Court in the above judgement and

argued that the Tribunal did not have any further jurisdiction to sit in

appeal over the commercial wisdom of the proposed Scheme and

rejected the sanction of Scheme merely upon unfounded belief that

there are not specific provisions providing for issuance of shares at

premium in case of any scheme of amalgamation or arrangements.

14.We have heard the arguments of the learned counsel for the appellants

and perused the record.

15.On careful reading of the impugned order, we have observed that the

Tribunal has recorded disinclination to sanction the Scheme of

Amalgamation as has been proposed on the ground that both the

companies are unlisted/private limited companies, therefore, in the

absence of explicit provision available in the Companies Act, 2013 to

issue shares at a premium, the NCLT Bench is of the considered view

that the scheme is not in compliance with Section 232 of the Companies

Act, 2013, therefore, the Bench is not inclined to sanction the scheme

of amalgamation as proposed.

Company Appeal (AT) No.60/2018 9

16.Section 232(3)(i) also deals with incidental, consequential and

supplemental matters, which is as follows:

"Xxxxx

(i) Such incidental, consequential and supplemental matters as are deemed necessary to secure that the merger or amalgamation is fully and effectively carried out:

Provided that no compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company's auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under Section 133."

17.The above section is applicable to all the companies and does not make

a distinction whether the company is a private or public company or

whether it is listed company or non-listed company. The company

where issues shares at a premium, whether for cash or otherwise, a

sum equal to the aggregate amount of premium received on those

shares shall be transferred to a "securities premium account". Thus

there is no bar that the issues of shares at a premium or otherwise than

cash also be resorted to by the company.

18.It is the prerogative of the company to issue shares at a premium or

otherwise depending upon the facts and circumstances of the situation.

In the present case the shares are being issued by the transferee

company to the transferor company for acquiring the assets of the

company. If the fair value of the assets being acquired by the transferee

company is more than the face value of the shares issued for the same,

Company Appeal (AT) No.60/2018 10

the company has no other alternative but to allot the shares at premium

and the difference being carried to a "securities premium account".

This is what precisely the company has proposed to do.

19.The certificate as required under Section 232(3)(i) of the Companies Act,

2013 from the company's auditor is annexed at Page No.292 of the

Appeal Paper Book filed by the appellants. The Chartered Accountant

in his report dated 17th March, 2017 has observed as under:

"Based on procedures performed by us, and the information

and explanations given to us, in our opinion the accounting

treatment contained in Clause 12 of the Draft Scheme is in

conformity with the applicable Accounting Standards as

mentioned above."

Thus the compliance of Section 232(3)(i) has been made.

20.Further Section 133 of Companies Act, 2013 prescribes that the Central

Government may prescribe the standards of accounting or any

addendum thereto, as recommended by the Institute of Chartered

Accountants of India, constituted under Section 3 of Chartered

Accountants Act, 1949 (38 of 1949) in consultation with and after

examination of the recommendations made by the National Financial

Reporting Authority (NFRA). The Auditor has certified that the Scheme

has complied with Section 133 of the Companies Act, 2016 read with

Rule 7 of the Companies (Accounts) Rules, 2014 and 2016. Rules 7 of

the Companies (Accounts) Rules, 2014 and 2016 provides as under:-

Company Appeal (AT) No.60/2018 11

"(1) The standards of accounting as specified under

the Companies Act, 1956 (1 of 1956)shall be deemed to

be the Accounting Standards until Accounting

Standards are specified by the Central Government

under Section 133."

Accounting Standard and the treatment prescribed under

it as much as a part of the legal compliance in the amalgamation

of the companies. Accounting Standard 14 deals with accounting

for amalgamation. It deals with various situations of

amalgamation etc. In the present case the Scheme has complied

with the legal requirements on amalgamation.

21.We have noted that Section 52 of the Companies Act, 2013 deals with

the issue of shares at premium which is as follows:-

"Section 52- Application of premiums received on issue of shares-(1) where a company issues shares at a premium whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a "securities premium account" and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the share premium account were the paid-up share capital of the company.

(2)Notwithstanding anything contained in sub-section (1), the securities premium account may be applied by the company-

(a) towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares;

(b) in writing off the preliminary expenses of the company;

(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or of any debentures of the company; or

Company Appeal (AT) No.60/2018 12

(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or

(e) for the purchase of its own shares or other securities under section 68.

(3) The securities premium account may, notwithstanding anything contained in sub-section (1) and (2), be applied by such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133,-

(a) in paying up unissued equity shares of the company to be issued to members of the company as fully paid bonus shares; or

(b) in writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the company; or

(c) for the purchase of its own shares or other securities under section 68."

22.We are not in agreement that the accounting standard have not dealt

with the issues specifically and it cannot be said that there is no legal

provision specified.

23.The Hon'ble Supreme court in the case of Miheer H. Mafatlal Vs

Mafatlal Industries Ltd (AIR 1997 SC 506) has already laid down the

scope and ambit of jurisdiction of the Company Court whilst approving

scheme under erstwhile provisions of Sections 391-394 of Companies

Act, 1956 (Presently Section 230 of Companies Act, 2013). In view of

the settled legal position, therefore, the scope and ambit of the

jurisdiction of the Company Court has clearly got earmarked. The

following broad conours of such jurisdiction have emerged:

a) The sanctioning court has to see to it that all the requisite statutory

procedure for supporting such a scheme has been complied with

Company Appeal (AT) No.60/2018 13

and that the requisite meetings as contemplated by Section 391(1)

(a) have been held.

b) That the Scheme put up for sanction of the Court is backed up by

the requisite majority vote as required by Section 391 sub-section

(2).

c) That the concerned meetings of the creditors or members or any

class of them had the relevant material to enable the voters to

arrive at an informed decision for approving the scheme in

question. That the majority decision of the concerned class of

voters is just and fair to the class as a whole so as to legitimately

bind even the dissenting members of that class.

d) That all necessary material indicated by Section 393(1) (a) is

placed before the voters at the concerned meetings as

contemplated by Section 391 sub-section (1).

e) That all the requisite material contemplated by the proviso of Sub-

section (2) of Section 391 of the Act is placed before the Court by

the concerned applicant seeking sanction for such a scheme and

the Court gets satisfied about the same.

f) That the proposed scheme of compromise and arrangement is not

found to be 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.

Company Appeal (AT) No.60/2018 14

g) That the Company Court has also to satisfy itself that members or

class of members or creditors or class of creditors, as the case may

be were acting bona fide and in good faith and were not coercing

the minority in order to promote any interest adverse to that of the

latter comprising of the same class whom they purported to

represent.

h) That the scheme as a whole is also found to 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.

i) Once the aforesaid broad parameters about the requirements of a

scheme for getting sanction of the court are found to have been

met, the Court will have no further 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 would 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.

24.Therefore, in the light of the Hon'ble Supreme Judgement, we are not

in agreement with the Tribunal's observations for not sanctioning the

scheme.

Company Appeal (AT) No.60/2018 15

25.Therefore, the Appeal is allowed. National Company Law Tribunal,

Hyderabad Bench, Hyderabad is directed to sanction the scheme and

may issue further consequential directions/orders so as to

ensure/enable the Companies to make all other legal compliances as

necessary.

26.No order as to costs.

(Justice A.I.S. Cheema) (Mr. Balvinder Singh) Member (Judicial) Member (Technical)

New Delhi

Dated: 03-05-2018

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Company Appeal (AT) No.60/2018