In Re: Mohan Exports India Ltd. vs. Tarun Overseas Pvt. Ltd.

CITATION: 54 (1994) DLT 513

DECIDED ON: 21.04.1994

FACTS

Transferor Company (M/s. Mohan Exports India Ltd.) entered into scheme of arrangement with the Transferee Company (M/s. Tarun Overseas Pvt. Ltd.) which was incorporated for the purpose of taking over the export division of the transferee company. A petition wad filed under Section 391 & 394 of the Companies Act, 1956 for approval of the scheme of arrangement so that the same becomes binding on all the shareholders and the creditors of the transferor and the transferee companies. According to the scheme of arrangement all the assets and liabilities mentioned in the scheme were to be transferred to the Transferee Company. In the scheme there was no reference to transfer of export business of the transferor company to the transferee company. Although, the scheme mentioned that all the employees of the transferor company would become the employees of the transferee company on the same terms and conditions on which they were working with the transferor company, the scheme was silent on how many employees were working with the transferor company and out of which how many employees were functioning in such export business international merchandise. Also, in the scheme there was no reference to the four trading units of the transferor company.

Furthermore, when the Judges Summons were taken, Schedule I, which comprised the assets of the transferor company which were to be transferred to the transferee company under the scheme and Schedule II, were not even filed. It was only when the present petition was filed and opposition was raised by Central Govt. that Schedule I was filed.

ISSUE:

Whether the Scheme of Arrangement was with the ulterior motive to only transfer the valuable immovable properties of the transferor company to the transferee company and therefore was against public interest.

CONTENTIONS

Central Government (CG)

  1. A notice was required to be served on the Central Government in the proceedings initiated initially in C.A. 753/91 when “Judges Summons” had been taken out for holding the meetings of the creditors and the shareholders of the two companies. Since no such notice was served at that stage, the present petition (filed after the receipt of the reports of the Chairman concerned of the result of the said meetings), is not maintainable.
  2. A joint petition by the two companies i.e. transferor and the transferee companies was not competent, and two separate petitions should have been filed.
  3. The scheme was not in public interest and was framed so as to avoid payment of government revenue in the shape of stamp duty, registration charges. The real intent and purport of the scheme was to transfer very valuable immovable assets of the transferor company to the transferee company.

Petitioner

  • It was a bona fide and genuine scheme of arrangement and as the same was duly approved by the members and the creditors of the two companies, this court should sanction the scheme as the scheme only contemplates taking over of one business unit of one company by the other company and the transfer of immovable assets of the transferor company was only incidental.
  • The scheme proposed to transfer International Merchandising Division and Handicapped Division of the transferor company to the transferee company for better management of the affairs and in the interest of better business.
  • The members of the two companies and the creditors of the two companies as shrewed businessmen had thought it fit to separate the export business of the transferor company and vest it in this transferee company so that it could be managed efficiently and in a better way and thus, there was no public interest which was being violated by such bona fide and genuine scheme of arrangement.
  • Scheme proposed for issuance of paid-up shares in favor of the members of the transferor company as a consideration for transfer of the Export Unit of the transferor company to the transferee company which would not only transfer the assets of the said Export Division but would also transfer the liability of that Division to transferee company and the workers of the said Division of the transferor company would become the workers of the transferee company on the same terms and conditions on which they were functioning with the transferor company.

HELD

Contention 1 (CG): In an application to the court under Section 394 of the Companies Act, 1956 for sanctioning of an arrangement, notice to the Central Government is not required to be given at the initial stage before the Court makes an order on an application under Section 391. (In re: W.A. Beard shell & Co.(P)Ltd. and Mettur Industries Ltd., (1968) 38 Com Cas 197).

Contention 2 (CG): Neither, the Company Act, 1956 nor the Company Court Rules prohibit filing of a joint petition by the two companies when the subject-matter is the same and common questions of fact and law would arise for decision. A joint petition by the transferor and the transferee companies would, therefore, be maintainable vide Order I Rule 1 of the Code of Civil Procedure.

Contention 3 (CG) & Petitioner’s Contentions:  It was quite evident that the main and real purport of the scheme was to transfer very valuable, immovable assets of the transferor company to the transferee company which was just a paper/shell company. If such a scheme is approved, it would not be in public interest because by way of such device the immovable assets are sought to be transferred without payment of the Government dues. Furthermore, it was only in the petition that it was averred that a particular export division of the transferor company was sought to be transferred to the transferee company for better management but no facts were provided as to what that particular export unit of the transferor company comprised of, whether the immovable assets sought to transferred were being used for the said export unit of the transferor company and how many workers were functioning in the so-called export unit of the transferor company. A bare perusal of the Scheme and its Schedule l shows that the real purpose and the intent of the scheme was to only transfer the valuable immovable properties of the transferor company to the transferee company. Such a scheme was, thus, not in public interest.

KEY TAKEAWAYS

In case the proposed scheme is bona fide and genuine and is not against public interest then mere fact that certain immovable properties or right to recover debts etc. are transferred to the transferee company would not mean that they are in violation of any provisions of the Transfer of Property Act. However, if such scheme is only with the ulterior motive to transfer the immovable properties without payment of Government or statutory dues, then the same would be against the public interest and the Court will not approve the scheme. 

Author: Vivek Verma

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