Section 391, read with section 394, of the Companies Act, 1956

Last updated: 20 September 2007

Court :
HIGH COURT OF PUNJAB AND HARYANA

Brief :
Section 391, read with section 394, of the Companies Act, 1956 - Compromise and arrangement - Whether valuation of shares following book value method is accepted as a proper mode of valuation of shares and it cannot be said to be illusory - Held, yes - Whether valuation of assets or shares of any company is always a matter relating to technicalities and within realm and ambit of jurisdiction of experts - Held, yes - Whether where in scheme of amalgamation, exchange ratio has been determined by an experienced firm of chartered accountants on basis of known and accepted method of valuation, Court will not act as a Court of Appeal - Held, yes - Whether where transferor-company has paid requisite fees to Registrar of Companies and stamp duty to State Government, it is not necessary for transferee-company to pay such stamp duty and fee on account of increase in authorised share capital - Held, yes Facts The petitioning transferor and transferee-companies filed the petition under section 391(2), read with section 394, for sanction of scheme of their amalgamation. It was submitted by them that both the companies were closely-held companies under the same management and their shares were not listed on any stock exchange in India; that with a view to rationalize their business activities and as a part of their corporate restructuring, it had been decided to merge the transferor with the transferee for further growth and expansion, enhanced economies of scale, reduction in overheads, etc. The scheme proposed that all the assets, properties and liabilities of the transferor would be transferred to the transferee at the value appearing in transferor’s books as on the close of business on 31-7-2006. Since the equity shareholders and creditors of both the companies had already given their consent to the scheme, the Company Court dispensed with the requirements of convening their meetings. Thereafter, the notice of the petition was published, but no objections to the same were received. However, the Regional Director filed his objections, that the authorized share capital of a company can be increased only after following the procedure prescribed under the relevant provisions of the Act, payment of requisite fees to the Registrar of Companies and stamp duty to the State Government; and that exchange ratio had been calculated on the basis of a valuation report by the statutory auditors of the company on the net worth method at book value and the market value of the assets had not been ascertained.

Citation :
Max Estates Ltd. v. Malsi Estates Ltd.

The valuation of shares following the book value method is accepted as a proper mode of valuation of shares. The concept of book value is an accepted accountancy concept of valuation and it cannot be said to be illusory. The exchange ratio had been determined by an experienced firm of chartered accountants on the basis of known and accepted method of valuation. Therefore, there was no justifiable and reasonable ground to reject the said valuation. The valuation of the assets or shares of any company is always a matter relating to technicalities and within the realm and ambit of the jurisdiction of experts. Therefore, the Company Court will not act as the Court of Appeal and sit in judgment over the informed view of the expert chartered accountants. The Court has no commercial wisdom exercised by the chartered accountants and the members of the company, who had consented to the scheme. The jurisdiction of the Court is peripheral and supervisory and not appellate. Therefore, there was no substance in such objections raised by the Regional Director. In respect of the objection that the authorised share capital of the company could be increased only after following the procedure prescribed under the relevant provisions of the Act and on payment of requisite fees to the Registrar of Companies and stamp duty to the State Government, since the transferor had paid the requisite fees to the Registrar of Companies and stamp duty to the State Governments, it was not necessary to pay such stamp duty and fee on account of increase in the authorised share capital. In view thereof, even the said objection raised by the Regional Director was not tenable. [Para 10] Thus, the prayer made in the petition deserved to be allowed. Also there was no legal impediment to the grant of sanction to the scheme of the amalgamation. Hence, sanction was to be granted to the scheme of amalgamation under section 391(2), read with section 394. Consequent upon the amalgamation, the transferor would get dissolved without resorting to the process of winding up. [Para 11].