Merger schemes have to be meticulously planned and carefully executed. Often aggrieved stakeholders of the company including members, shareholders, creditors, workmen, landlords etc. challenge the proposed schemes in Court.
The Courts have a duty to scrutinize restructuring schemes under Sections 391-394 of the Companies Act in public interest even though approved by the statutory majority and even when there is no opposition to the scheme in Court. However, the Courts have refused to interfere with a scheme unless it is patently unfair or extremely burdensome and oppressive causing grave injustice to the stakeholders.
If it appears that the purpose behind the scheme is to defraud the creditors or revenue or tax authorities or it is for any fraudulent purpose, then the Court rejects such scheme.
In Kamal Plastics Industries vs. Roxy Enterprises Private Limited reported in 3 Company Law Journal 183 (Delhi) a scheme of arrangement proposed was disallowed by the Court. State Bank of India, the only secured creditor had objected to the scheme on the ground that its purpose was to delay the winding up petitions and scuttle the recovery proceedings pending against the defaulter company. In view of the above objections, the Court did not find the scheme sustainable.
In Duncan Agro Industries Ltd. vs. Secretary, Department of Industrial Development reported in 144 ITR 94 the specified authority under Section 72A of the IT Act had turned down the proposed amalgamation scheme on the ground that not only the merging company was manufacturing cigarettes, which is not an essential item but also but also majority of the workers would be thrown out of employment. Further, it was observed that since the two companies would virtually have common directors, there would not be infusion of any new management for rejuvenation.
The Court upheld the specified authority’s rejection and declined to interfere with the same.
In KEC International Limited the Courts vs. Kamani Employees Union reported in Company Law Journal 351 (Bombay) the Court rejected a scheme on account of default in compliance of mandatory statutory formalities under Section 391-394 of the Companies Act including failure to present latest financial position, irregular notice convening meetings etc.
