Order Sheet
IN THE HIGH COURT OF SINDH KARACHI
J. Misc. No. 21 of 2012
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Date |
Order with signature of Judge |
1. For hearing of main petition :
2. For hearing of C.M.A. No.178/2012 :
Petitioners : King’s Food (Pvt.) Ltd. and Hilal Confectionery (Pvt.) Ltd., through M/S A. H. Mirza and S. Nauman Zahid Ali, advocates.
Mr. Waqas Asad Sheikh, advocate, for Securities & Exchange Commission of Pakistan.
Date of hearing : 02.09.2013.
O R D E R
NADEEM AKHTAR, J. – This petition has been filed under Section 284 read with Sections 285 to 288 of the Companies Ordinance, 1984 (‘the Ordinance’), and Rule 60 of the Companies (Court) Rules, 1997, for the sanction of the Scheme of Arrangement for amalgamation of King’s Food (Private) Limited (petitioner No.1) and Hilal Confectionery (Private) Limited (petitioner No.2), with the following prayers :-
“ That the Petitioners therefore humbly pray that, after the members of the Petitioner No.1 and the members of the Petitioner No.2 have approved, agreed and adopted the Scheme by the requisite statutory majority at their respective meetings to be convened under the Order of this Hon’ble Court requests in the interlocutory application aforesaid of the Petitioners, this Hon’ble Court may be pleased to make the following Order ;
(a) an Order under Section 284(2) of the Companies Ordinance, 1984 sanctioning the Scheme of Arrangement as set forth in “Annexure P-7” hereto so as to make the Scheme binding on the Petitioner No.1 and its members and its creditors and on the Petitioner No.2 and its members and its creditors ;
(b) the following Orders under Section 287 of the Companies Ordinance, 1984 so as to take effect at the same time as the Order sanctioning the Scheme takes effect in accordance with Section 284(3) of the Companies Ordinance, 1984 namely ;
(i) an Order under Section 287(1)(a) of the Companies Ordinance, 1984 transferring to and vesting in the Petitioner No.2 the entire undertakings and businesses of the Petitioner No.1 together with all its properties (specifically defined in Para 6(b) of the Scheme), assets, rights, liabilities and obligations of every description as more particularly described in paragraph 6 of the Scheme, as subsisting immediately preceding the Effective Date as defined in the Scheme.
(ii) an Order under Section 287(1)(b) of the Companies Ordinance, 1984 directing the Petitioner No.2 to issue at par 2,181,096 ordinary shares of Rs.100/- each credited as fully paid up of the aggregate nominal value of Rs.218,109,600/- to the existing shareholders of the Petitioner No.1 within 90 days of the Completion Date.
(iii) an Order under Section 287(1)(c) of the Companies Ordinance, 1984 directing that all suits, appeals, arbitrations, governmental investigations and other legal proceedings instituted by or against the Petitioner No.1 which may be pending shall be continued by or against the Petitioner No.1 which may be pending shall be continued by or against the Petitioner No.2.
(iv) an Order under Section 287(1)(f) of the Companies Ordinance, 1984 directing that as regards debts and liabilities of the Petitioner No.1 transferred to and vested in the Petitioner No.2 in respect of which the creditors concerned were provided a security interest over assets of the Petitioner No.1, the same securities thus held by such creditors shall on and from the Completion Date (as defined in the Scheme) stand released by such creditors to the extent and for the purposes of those debts and liabilities and shall be substituted by securities of a similar nature which the Petitioner No.2 shall provide over the assets of the Petitioner No.2.
(v) an Order that the Petitioner No.1 shall stand dissolved without winding up on the date on which the shares of Petitioner No.2 are issued to the Shareholders of Petitioner No.1 in accordance with the Scheme (Annexure P-7 to the Petition).
(vi) an Order that the authorized share capital of Rs.750,000,000/- of Petitioner No.1 shall be merged and combined with the authorized share capital of Rs.200,000,000/- of Petitioner No.2 without any further act or deed and that the authorized share capital of Petitioner No.2 stand increased to Rs.950,000,000/- divided into 9,500,000 Ordinary shares of Rs.100/- each.
(c) such further or other Order or Orders as may seem just and proper to this Hon’ble Court.”
2. Along with the main petition, C.M.A. No.178 of 2012 was filed by the petitioners under Section 281(1) of the Ordinance read with Rule 953 of the Sindh Chief Court Rules (O.S.) and Rule 55 of the Companies (Court) Rules, 1997, praying for a direction that separate meetings of the members of both the petitioners be ordered to be convened for the purpose of considering and, if though fit, approving, agreeing and adopting the Scheme as set forth in annexure P-7 to the main petition. It was further prayed that the Chairmen of the meetings of the members of each petitioner be directed to report the results thereof to this Court within seven days after holding the meetings. Vide order passed on 06.07.2012, the petitioners were allowed to convene separate meetings as prayed, and the Chairman of each meeting was directed to report the result thereof to this Court within seven days of holding the meeting.
3. In pursuance of the aforesaid order dated 06.07.2012, separate meetings of the members of petitioner No.1 King’s Food (Private) Limited and petitioner No.2 Hilal Confectionery (Private) Limited were held on 06.08.2012, and a joint report of such meetings was submitted by the Chairman before this Court on 09.08.2012. As per the said report, the requisite quorum, as ordered by this Court and as provided in Section 284(2) of the Ordinance, was present in the said meetings ; the Scheme of Arrangement dated 30.04.2012 for amalgamation by way of merger of petitioner No.1 King’s Food (Private) Limited and its members with and into petitioner No.2 Hilal Confectionery (Private) Limited and its members, was unanimously approved, agreed and adopted ; and, the members of petitioner No.1 and petitioner No.2 voting in favour of the above resolution represented 100% members present in person and voted at the meeting.
4. Thereafter, when the matter came up before this Court for consideration, two objections were raised on behalf of the Securities and Exchange Commission of Pakistan (‘SECP’). The first objection was that no objection certificates from all the secured creditors had not been obtained by any of the petitioners. After hearing the learned counsel for the petitioners and SECP, this objection was overruled by this Court vide order passed on 27.05.2013, as the no objection certificates from all financial institutions were already on record, except from one financial institution which held only around 8% of the outstanding financial obligations of the petitioner. The second objection was that the merger of authorized capital of both the petitioner companies cannot take place without payment of appropriate differential amount of fee as per the VIth Schedule of the Ordinance. On 27.05.2013, it was ordered that this objection shall be taken up subsequently, but in order to allow the Scheme of amalgamation to go through, let the petitioners deposit the differential amount of fee with the Nazir of this Court, who was directed to deposit the amount in some profit bearing scheme ; and, upon deposit of the amount, the Nazir was directed to issue the appropriate certificate and also to send the same to SECP under cover of his letter. It was further ordered that upon issuance of the certificate by the Nazir, the Scheme of Amalgamation may go through as per terms as prayed, but the disposal of the amount deposited by the petitioners shall remain pending subject to a determination of the objection raised by SECP. The record shows that an amount of Rs.2,250,000.00 was deposited by the petitioners with the Nazir on 04.06.2013 in compliance of the order passed on 27.05.2013.
5. After passing of the aforementioned orders, this matter has now come up for hearing of the objection raised by SECP regarding payment of appropriate differential amount of fee as per the VIth Schedule of the Ordinance. In support of the objection, two main arguments were advanced by Mr. Waqas Asad Sheikh, the learned counsel for SECP. His first submission was that, since the petitioner companies are desirous of merging the authorized share capital of Rs.750,000,000.00 of the petitioner No.1 company with the authorized share capital of Rs.200,000,000.00 of the petitioner No.2 company without any further act or deed, this Court has to first decide as to whether such merger can be allowed or not as it will result into increasing in the authorized share capital of the surviving company / petitioner No.2. He further submitted that the share capital of a company can be altered only under the provisions of Section 92 of the Ordinance, and the authorized share capital of a company can be increased only as provided in Section 94 of the Ordinance. It was urged that because of the merger of the share capital of the petitioner companies, they will be altering their share capital and the surviving company / petitioner No.2 will be increasing its authorized capital without complying with the requirements of Sections 92 and 94 ibid. It was further urged that there is nothing in Sections 284 to 287 of the Ordinance which provides exception to the procedure contemplated in Sections 92 and 94 ibid. The second leg of the argument of the learned counsel for SECP was that authorized share capital of a company is a limit imposed by the company to issue paid-up capital ; it is not tangible, but is an imaginary figure of notional value which is incapable of being transferred ; it cannot be termed as “property” or “liability” within the ambit of Section 287(4) of the Ordinance ; and, hence the authorized capital of the petitioner No.1 company cannot be allowed to be merged / amalgamated with and into the petitioner No.2 company. In view of his above submissions, the learned counsel urged that the petitioner No.2 company, who is increasing its authorized share capital from Rs.200,000,000.00 to Rs.950,000,000.00 by way of the proposed merger, is liable to pay the requisite differential amount of fee on the proposed increase in its authorized share capital as per the VIth Schedule of the Ordinance. In support of his submissions, learned counsel for SECP relied upon an unreported order passed on 24.09.2012 by the learned Company Judge of this Court in J. Misc. No.48 of 2011 in the matter of M/S Feroze 1888 Mills Limited, Feroze Textile Industries (Pvt.) Ltd., UTI Industries (Pvt.) Ltd., and Frienship (Pvt.) Ltd., and the case of Amalgamation of Shaily V/S Unknown, 2003 (2) Bom CR 514, 2003 (2) MhLj 22 of the Bombay High Court, India.
6. In reply to the above objection argued by the learned counsel for SECP, Mr. A. H. Mirza, the learned counsel for the petitioners, submitted that both the petitioner companies have already paid the prescribed fee on their respective share capitals, and if the objection raised by SECP is sustained and the petitioner No.2 company is directed to pay fee on the authorized share capital of the petitioner No.1 company after merger of the authorized share capital of both the companies, it will tantamount to payment of fee for the second time on the same share capital. The learned counsel contended that reliance in the instant case by SECP on Sections 92 or 94 of the Ordinance is misconceived and misplaced, as this case for merger / amalgamation is governed by the provisions of Sections 284 to 287 of the Ordinance. He further contended that reliance by SECP on the unreported case of M/S Feroze 1888 Mills Limited etc. supra, is also misconceived, as the facts of the said case were clearly distinguishable with those of the instant case. He pointed out that in the said case, there was no prayer for merger of the authorized capital of the transferor company into the transferee company ; the relevant assets of the transferor company were to be divided and transferred to and vested in other companies ; it was a simple case of enhancement of authorized capital ; and the transferee company had offered to pay additional fee on the enhanced capital. In support of his submissions, the learned counsel for the petitioner cited and heavily relied upon the cases of Messrs Omer Iqbal Solvent (Pvt.) Ltd. and another, 2010 CLD 1802 and Mahmood Power Generation Limited and Mahmood Textile Mills Limited V/S Joint Registrar of Companies and others, 2006 CLD 1364. He submitted that in both the cited cases, there was a similar situation and the identical objection was raised by SECP that has been agitated in the present case, which was rejected. The learned counsel also cited and relied upon an unreported case of OBS Pakistan (Private) Limited and Merck Sharp & Dohme of Pakistan Limited, decided by the learned Company Judge of this Court in J. Misc. No.19 of 2008.
7. I have heard the learned counsel and have also examined the relevant provisions of the Ordinance and the law cited at the Bar by the learned counsel. It is to be noted that the Scheme of Amalgamation of the petitioner companies has already been allowed by this Court vide order passed 27.05.2013 as per the terms prayed by them ; and, as per the said order, the only issue that still remains to be decided is regarding payment of the differential amount of fee as per the VIth Schedule of the Ordinance on account of merger of authorized
capital of the two petitioner companies. It is also to be noted that the said order was not challenged by SECP, and as such the same has attained finality. As a result of the grant of the Scheme of Amalgamation of the petitioner companies by this Court as per the terms prayed, their authorized share capitals stood automatically merged resulting into automatic increase in the authorized share capital of the petitioner No.2 / surviving company without recourse to Sections 92 or 94 of the Ordinance. As such, the petitioner No.2 / surviving company was/is not obliged to take any step for enhancement of its authorized capital, or to do any further act or deed as argued by the learned counsel for SECP. Therefore, the contention of the learned counsel for SECP that this Court has to first decide as to whether merger of the petitioner companies can be allowed or not, is without any force. However since the above objection was raised on behalf of SECP with much emphasis, I would like to clarify the position as per my humble understanding in order to set the controversy at rest.
8. The above aspect was exhaustively dealt with by Mr. Justice Ijaz ul Ahsan of Lahore High Court in the case of Messrs Omer Iqbal Sovent (Pvt.) Ltd. supra cited and relied upon by the learned counsel for the petitioners, wherein a large number of cases from the Indian jurisdiction were thoroughly discussed. It was held inter alia by the learned Single Judge that the provisions of Section 391 of the Indian Companies Act, 1956 (‘the Act’), are peri materia with the provisions of Sections 285 to 287 of the Companies Ordinance, 1984. In the cited case, the case of PMP Auto Industries Ltd., [1994]80 Comp Cas 289 (Bom) was referred to, wherein it was held that it would not be necessary for the company to resort to other provisions of the Act or to follow other procedures prescribed for bringing about the changes requisite for effectively implementing the scheme of amalgamation / arrangement sanctioned by the Court ; and, not only was Section 91 a complete Code as held by the Courts, but it was intended to be in the nature of a single window clearance system to ensure that the parties are not put to avoidable, unnecessary and cumbersome procedure of making repeated applications to the Court for various other alterations or changes which might be needed for effective implementation of the sanctioned scheme. Similar view was taken by the Calcutta High Court in the case of Areva T and D India Ltd., [2007]138 Camp Cas 834. Another Indian case ; namely, Saboo Leasing P. Ltd., [2003] 117 Camp Cas 728 of the Andhra Pradesh High Court was also discussed in the cited case of Lahore High Court, wherein it was held that the scheme upon being sanctioned by the Court becomes operational by virtue of the orders passed by the Courts ; in other words, by operation of law, such changes would come into effect ; and, therefore, it has statutory genesis and statutory character, but not mere individual acts of the companies. The case of Hotline HI Celdings P. Ltd., [2005]127 Camp Cas 165 was also discussed in the cited case of Lahore High Court, wherein it was held that the contention that increase in the authorized share capital of the merged company as a result of the scheme of amalgamation could only be carried out after following the procedure laid down by the Act and payment of fee to the Registrar of Companies, was ill-founded ; and, in case of a merger where it is provided that the share capital of the transferor company will become the authorized share capital of the transferee company, no such payment of fee to the Registrar of Companies or stamp duty to the State, is payable. Similarly, in the case of Jaypee Cement Ltd., [2004]122 Camp Cas 854 ; [2004]62 CLA 329, discussed by the learned Single Judge of Lahore High Court, it was held that such objection by the Government had no force, and no good reason had been shown as to why the two merged companies should be required to pay duty again on the same authorized capital on which duty has already been paid.
9. In view of the above referred cases, it was held inter alia in Messrs Omer Iqbal Sovent (Pvt.) Ltd. supra that Section 287 of the Ordinance was intended to provide a “one-window operation” with respect to matters pertaining to merger and amalgamation, and as such the sanction of scheme of merger by the Court would automatically result in merger of authorized capital of the merging companies without the need for an enhancement of the authorized capital of the surviving company in accordance with Section 92 of the Ordinance ; and, since the authorized capital of transferor company which is transferred to and stands vested in the transferee company had already been subject to payment of the prescribed fee, requiring the transferee company to again seek approval of SECP or to pay fee all over again, was neither logical nor appeared to be the intent of the law. About payment of additional fee, a similar view was taken earlier by Mr. Justice Nazir Ahmed Siddiqui of Lahore High Court in the case of Mahmood Power Generation Limited supra cited and relied upon by the learned counsel for the petitioners.
10. I would modestly agree with the valuable views and well-reasoned findings of the Lahore High Court in the case of Messrs Omer Iqbal Sovent (Pvt.) Ltd. supra. However, I would like to add that the provisions of Sections 92 and 94 ibid, which are contained in Part VI “Share Capital and Debentures” of the Ordinance, are applicable when a company decides to alter its share capital or to increase its authorized capital. In such an event, no other company and/or share capital of any other company, is involved. Whereas, in cases where merger / amalgamation of two or more companies, and their share capital, are involved, Sections 284 to 287, particularly Section 287, of the Ordinance, shall be attracted, which are contained in Part IX “Arbitration, Arrangements and Reconstruction”. There is no other provision in the Ordinance which deals with the merger / amalgamation of two or more companies and/or their share capital. It may be appreciated that both the above scenarios are completely different and distinct from each other. It is an admitted position that this is a case of merger of two companies and their authorized share capital, and as per the Scheme of Amalgamation, which has already been granted by this Court vide order dated 27.05.2013 as per terms as prayed, the authorized share capital of the petitioner No.1 company was to merge with and into the authorized share capital of the petitioner No.2 company. Admittedly, this is not a case where only one company was seeking alteration in its share capital or increase in its authorized share capital. Therefore, the contentions of the learned counsel for SECP that the authorized share capital of the petitioner No.2 company can be increased only as provided in Sections 92 or 94 of the Ordinance, or because of the merger of the share capital of the petitioner companies, they will be altering their share capital and the surviving company / petitioner No.2 will be increasing its authorized share capital without complying with the requirements of Sections 92 and 94 ibid, do not appear to be correct.
11. Section 287(1) of the Ordinance provides that the Court may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the matters enumerated therein in Clauses (a) to (f). I have already held that as a result of the grant of the Scheme of Amalgamation of the petitioner companies by this Court on 27.05.2013 as per terms as prayed, their authorized share capitals stood automatically merged resulting into automatic increase in the authorized share capital of the petitioner No.2 / surviving company without recourse to Sections 92 or 94 of the Ordinance ; and, the petitioner No.2 / surviving company was/is not obliged to take any step for enhancement of its authorized capital, or to do any further act or deed. This view is fully supported by and is very much obvious from a plain reading of Clause (f) of Section 287(1) and Section 287(2) of the Ordinance, which are reproduced here for the sake of convenience and ready reference :
“ 287. Provisions for facilitating reconstruction and amalgamation of companies –
(1) ………………
(f) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation is fully and effectively carried out”.
(2) Where an order under this section provides for the transfer of property or liabilities, that property shall, by virtue of the order, be transferred to and vest in, and those liabilities shall, by virtue of the order, be transferred to and become the liabilities of, the transferee company, and, in case of any property, if the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect.
……………………
……………………”
It is, therefore, held that the provisions of Sections 92 or 94 ibid are inapplicable to the cases of merger or amalgamation of companies and/or their authorized or paid-up share capital, and such cases shall be governed only under Part IX “Arbitration, Arrangements and Reconstruction” of the Ordinance.
12. The next contention of the learned counsel for SECP was that authorized capital of the petitioner No.1 company cannot be allowed to be merged / amalgamated with and into the petitioner No.2 company, as it is not tangible, but is an imaginary figure of notional value which is incapable of being transferred, and it cannot be termed as “property” or “liability” within the ambit of Section 287(4) of the Ordinance. Similar objection raised by SECP was rejected by Lahore High Court in Messrs Omer Iqbal Sovent (Pvt.) Ltd. and Mahmood Power Generation Limited supra. I am in full agreement with the decisions rendered in the cited cases, but for different reasons. In order to appreciate the above contention of the learned counsel for SECP, it is necessary to understand the meaning and importance of “authorized capital”. Every company limited by shares or limited by guarantee and having a share capital is required to have an authorized capital with which it is registered. This is one of the essential features of the company’s constitution and it must be specifically stated in the memorandum of association. The authorized capital may be increased above, or reduced below, the figure stated in the memorandum. It is equal to the nominal value of the shares which the directors of the company are authorized to issue, hence is termed as “authorized capital”. In its original or altered form, the authorized capital sets the limit of capital available for issue, and accordingly the issued capital of a company can never exceed its authorized capital. It is an authority by the shareholders of the company to its directors to create new capital by the issue of shares. While an increase or a decrease in the authorized capital cannot be effected without a resolution of the company in its general meeting, the issue of shares may be decided by the Board of Directors of the company without recourse to a general meeting, provided that the articles of association of the company do not provide otherwise.
13. Sub-Section (4) of Section 287 of the Ordinance has to be examined in the above perspective, which reads as under :
“ (4) In this section the expression “property” includes property, rights and powers of every description, and the expression “liabilities” includes duties.” (emphasis added)
The words “rights and powers of every description”, especially the words “of every description”, used in this Sub-Section with particular reference to “property”, are significant. It is the “right” of a company to increase its share capital, and such right can be exercised only by the company itself. Such right is, however, exercised by the company through its Board of Directors duly authorized by the shareholders, and only the Board of Directors has the exclusive “power” to exercise such right on behalf of the shareholders and the company. The right of a company and the power of its shareholders / Board of Directors, to increase or decrease the authorized share capital, if denied, can be enforced through a Court of law. This valuable right of the company and the special and exclusive power of its shareholders / Board of Directors, cannot be said to be intangible, imaginary or incapable of being transferred, as argued by the learned counsel for SECP. As soon as fee is paid by the company on its authorized share capital, the said right becomes available to the company as a tangible and real right, and the power becomes available to the shareholders / Board of Directors to exercise such right. It is an admitted position that the respective authorized share capitals of both the petitioner companies were subjected to payment of fee at the time of registration, therefore, in my humble opinion, the same are covered by the definition of property of every description under Section 287(4) of the Ordinance. There is no provision in the Ordinance, nor does it make any sense, that a company should be again subjected to pay fee on the same authorized share capital on which it had already paid the requisite fee. Such concept is completely alien to the scheme of the Ordinance. The facts and circumstances of the case relied upon by the learned counsel for SECP are distinguishable, therefore, the same is not applicable in the instant case.
14. In view of the above discussion, the objections raised on behalf of SECP are hereby rejected. Consequently, the amount of Rs.2,250,000.00 deposited by the petitioners with the Nazir, be returned to them. The Scheme of Amalgamation of the petitioner companies was allowed by this Court vide order passed 27.05.2013 as per the terms prayed by them, and by order dated 06.07.2012 passed on C.M.A. No.178 of 2012, the petitioners were allowed to convene separate meetings as prayed. As the objections raised by SECP have now been rejected, the petition and the listed applications stand disposed of.
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