' UMAR ATA BANDIAL, J.---Through this application under sections 284 to 288 of the Companies Ordinance, 1984 (hereinafter the "Ordinance") a prayer has been made for merger of petitioner No,2, Messrs Jubilee Energy Limited ("JEL") into petitioner No,1, Jubilee Spinning and Weaving Mills Limited ("JSWL") along with its assets and liabilities.
2. Petitioner No,1 JSWL, established in 1973, is a public limited company with a paid-up capital of Rs,70,168,670 divided into 7,016,867 ordinary shares of Rs,10 each. The petitioner No,2 JEL, an unlisted public limited company, was established in 1994 and has paid-up capital of Rs,89,743,380 divided into 8,974,338 ordinary shares of Rs,10 each.
3. The merger of petitioner No,2 JEL into petitioner No,1 JSWL in terms of scheme attached with the petition as Arnie/cure "C" is sought on the grounds that the creation of a single entity after merger will save administrative expenses/over heads, will enhance the profitability of the entity, improve the operation, manufacturing and production of the unit and will simplify and streamline the credit arrangements. Also the reorganization of capital through amalgamation will be to the advantage of shareholders, jointly and severally.
4. On presentation of the application, general meetings of the aforesaid companies were convened under supervision of the Chairman appointed by the court. The scheme of proposed merger and various arrangements for its execution were placed before the members in general meetings. All the shareholders present or represented in the meetings unanimously approved the amalgamation scheme. Notice of hearing was served through newspapeRs, However, no one has come forward to object the proposed scheme of amalgamation.
5. The SECP filed parawise comments in relation to the terms of the scheme of merger containing three observations, upon which the court conducted hearing after having received reply of the petitioneRs, These points have been answered through rejoinder in the main petition. The points raised are to the following effects:--
(i) The I:I swa p ratio between the petitioner, JSWL and JEL has been calculated on the basis of the break up value of shares taken on historical basis. It is recommended that the swap ratio should be based upon revaluation of assets for arriving at a realistic figure on a fair value basis.
(ii) Although paid-up capital of the two merging entities is being added in consequence of the amalgamation, however, the same treatment cannot be given to their authorized capital. The authorized capital of the surviving entity should be increased to cover the aggregated paid-up capital.
(iii) The merging company petitioner No,1, JSWL, is a loss making entity; the shareholders of the petitioner No,2 JEL would suffer a disadvantage on account of the merger which is not in their interest.
6. Learned counsel for petitioner companies has answered the foregoing observations as follows:-- ' He submits that the law does not lay down any specific method or basis for the purposes of calculating the swa p ratio of shares of the amalgamating companies. Any incremental value obtained as a result of revaluation of assets of a company is to be credited to a Surplus on Revaluation of Fixed Assets ("Account"). According to section 235(2) of the Ordinance, the Account cannot have revenue application. The account is excluded from the Free Reserve of a company and does not form part of its shareholders equity. The account cannot, therefore, be an input in the calculation for determining the break up value of shares. He has reinforced the point by reference to the definition of "Free Reserves" provided in Companies (issue of Capital) Rules, 1996.
7. The intent of the observation of the SECP under consideration is appreciated. However, the higher value that is expected on revaluation of assets of petitioner No,2 is inconsequential. This is because of the statutory prohibition on utilization of the account for calculating shareholders equity, which is the principal ingredient for determining break up value of a share and consequently its swap ratio.
Accordingly, recourse to revaluation of assets of the petitioner No,2 company was not necessary in the circumstances of the case as it would not have fetched any advantage or benefit for its shareholdeRs, It is likewise the case with regard to the break up value of shares of petitioner No,
1. In light of aforesaid, the observation made by the SECP stands explained.
8. The second observation by the SECP to the effect that the authorized capital of the surviving company petitioner No,1 JSWL, should be increased in order to accommodate the increased paid- up capital resulting from its merger with the other company petitioner No,2 JEL, was answered by the learned counsel for the petitioner. The notion of paid-up capital cannot exist in law without the umbrella of authorized capital. Accordingly, where the paid-up capital of two merging companies is aggregated under an amalgamation, likewise, the corresponding authorized capital of both companies must also be added. As a result, by the merger the authorized capital of the surviving company is increased correspondingly by the amount of the authorized capital of the merging company. The resulting figure of the authorized capital of the surviving company shall be sufficient to cover the combined paid-up capital of the two companies.
9. In terms of law such an objection has been rejected in other cases including, Mahmood Power Generation Limited and Mahmood Textile Mills Limited v. Joint Registrar of Companies and others 2006 CLC 1364. That view proceeded on the footing that paid-up capital and authorized capital are connected items relating to capital issue by a company. When paid-up capital of merging companies is aggregated, it is necessary that their authorized capital should also receive the same treatment. In the present case, there are no legal or accounting bars to the proposed aggregation. In the light of the aforesaid judgment, the SECP's objection stands explained; it was seemingly meant to recover additional fees for the SECP.
10. The third objection is that the petitioner No,1 JSWL is a loss making entity and the merger of the petitioner No,2 JEL with the former company would cause loss to the shareholders of the petitioner No,2. A perusal of the report by the Chairmen of the extraordinary general meetings of the petitioner companies shows that no objection as raised by any member of either company against the proposed merger being carried into effect. The petitioner No,2 JEL is an unlisted public limited company. Its shareholders are the sponsors of the petitioner No,!, JSWL who are satisfied with the swa p ratio of shares to fortify the balance sheet of JSWL. Clearly they consider the benefits of the scheme to out-weigh its burdens. Petitioner No,2 is a profit making company that declared net profit of Rs,18.978 million for the year ended June 30, 2008. The merger is bringing to the surviving petitioner No,1 company JSWL new assets of petitioner No,2 JEL worth Rs,148,409,188 whereas the new liabilities being added to its balance sheet are of Rs,20,839,834 petitioner No,1 JSWL is being enriched by a net value addition of Rs,127.569 million. Accordingly, the third observation by SECP stands explained with reference to petitioner No,2 JEL.
11. The secured creditors of the petitioner companies except National Bank of Pakistan ("NBP"), have also given their NOCs to the proposed merger. During the hearing of the petition Mr. Tariq Kamal Qazi, Advocate appeared on behalf of NBP, a secured creditor of petitioner No,1 JSWL and objected to the sanction of the scheme. It was, inter alia, contended that NBP holds a first charge on the land, building, plant and equipment of petitioner No,1 JSWL which is in continuous default of installments of availed finance due on 1-9-2007, 1-3-2008, 1-9-2008 and 1-3-2009. This default is admitted in the JSWL balance sheet for the year ended 2008. It was also urged that whilst granting finance to JSWL the NBP had taken its exposure on a customer engaged in the business of spinning and weaving whereas by the proposed amalgamation the nature of business of that customer and therefore NBP's risk would change.
12. In reply, learned counsel for the petitioners contended that creditors have no right of hearing in a scheme of merger that is proposed by the members of the merging companies. An arrangement in the nature of amalgamation is the result of an agreement between the amalgamating company petitioner No,2 JEL and its members, as well as corresponding agreement between petitioner No,1 JSWL and its membeRs, As the court's proceeding in the matter are conducted to hear objections under public notice, therefore, it is important to identify and apply the rules of standing that are contained in section 284 of the Ordinance. The language of section 284 conceives of two types of schemes of compromise or arrangement for amalgamation of any two or more companies made either between the company and its members or any class of them, a members' scheme, or between the company and its creditors or any class of them, a creditor's scheme. The scheme at hand is between the petitioner companies and its membeRs, It could be blocked if 25% or more of the relevant voting members had opposed it. Likewise, a creditors' scheme could be blocked if 25% or more in value of the relevant voting creditors oppose the same.
13. Presently, the NBP holds more than 25% of the long term debt of the petitioner No,1 JSWL. Under section 284 ibid, it is a major creditor with strength to block a creditor's scheme. The hearings by the court are conducted to promote the object of the Ordinance, to protect public interest and such private interests, that have legal status under section 284 ibid. NBP does not have blocking strength in the context of a member's scheme, but it does have serious interest to protect therefore to ensure transparency and fairness its objections were heard on the point that the scheme should not be sanctioned by the court under applicable statutory criteria.
14. The main emphasis of the learned counsel for the objector was that the petitioner No,1 JSWL is a loss making company, therefore the amalgamation should not be allowed. Reference was made to the audited balance sheets of the two petitioner companies. It was pointed out that so far as the petitioner No,1 JSWL is concerned it has accumulated losses of Rs,291.179 millions as on June 2008. It is also facing cash flow problems and could not pay the installments of the NBP loan which amount to Rs,12.78 million. As a result the merger of the petitioner companies would enhance the risk exposure of the NBP and also jeopardize the interests of the shareholders of JEL.
15. To the Court's mind whether an individual secured creditor is adversely affected by a member's scheme for instance by being required to deal with a new entity posing higher risk in substitution of its original borrower is a matter of perception for that creditor. Such a view would dominate if a creditor's scheme was under review and that creditor had a major stake with standing to block such a scheme. Otherwise, in a member's scheme an objecting creditor must show to the court that the scheme is mala fide or fraudulent or contrary to public interest or unjust to the interests of the creditors as a whole or any class of them to which the objector belongs. In such a scenario, the scheme could be sanctioned after safeguarding the objector or any class of creditors to which it belongs. Since the court has a power to reject the scheme on the ground that it is fraudulent, unjust or unfair, it certainly has a power to sanction the scheme subject to such conditions as would remove the grounds of unjustness and unfairness.
16. Now reverting to the objections of NBP, learned counsel appearing on its behalf submitted that the scheme should not be granted because petition No,1 JSWL has admitted a liability of Rs,12.78 million as being over due and payable. He further submits that unless the petitioner No,1 JSWL clears its matured current liability, the scheme should not be sanctioned. In the court's opinion a scheme under section 284 read with section 287 of the Ordinance is not a tool in the hands of a creditor to recover money or to coerce the company to pay. Of course, in a given case the court may direct payment or direct that a creditor or any class of them should be paid their dues or they be substantially secured, before the court sanctions the A scheme. But it must be remembered that a debtor company may dispute an overdue debt or a creditor may be fully secured for recovery. Therefore, an objector's call must have a wider reach. It would have force if the scheme is shown to be mala fide or fraudulent or against public interest or unjust to the interest of a class or all creditors of the petitioner No,1 JSWL. Reference may be made to "International Multi Leasing Company v. Capital Assets Leasing .Corporation Limited and another reported as 2004 CLD 1 as well as Mayfair Limited in re, (2003)46 SCL 672 and Zee Interactive Multimedia Limited in re.
(2002)111 Comp. Cas 733. (Born.) wherein these principles find recognition.
17. In the present case, the individual perception of NBP about the impact of the proposed scheme of merger had more the character of a pressure tactic rather than a reasoned challenge founded on relevant and specific criteria. The substantive part of the objection of the NBP relates to change of business of petitioner No,1 JSWL. Business viability is a subjective matter that falls purely within the domain of the shareholders and their elected management. The Court should defer to their assessm ent of commercial opportunities and realities of the market place. Often, companies are formed for specific business ventures. The petitioner No,2 JEL is a power generation company established by the sponsor shareholders of petition No,1 JSWL. A reference to the object clause III sub-clauses (82) and (83) of the memorandum of association of petitioner No,1 JSWL reflects that the company was originally established, inter alia, to carry on business of generation and supply of electricity. It is not for the court to sit in judgment over the commercial wisdom of the shareholders and management of the petitioner No,1 JSWL to pursue a business contemplated in its objects clause as long as this does not infringe its charter covenant or any mandatory law of the land. The court would, however, react if the scheme is shown to be contrary to law or shocking to its conscience or if it is patently unfair to the members or creditors or any class of them, or is against public interest or contrary to public policy. Otherwise the court would not stand in the way of new business plans of entrepreneurs by rejecting their bona fide scheme. For the foregoing reasons objection raised by NBP lacks relevance and substance for present purposes and is therefore rejected.
18. There is no other opposition to the petition by any other interested persons, nor other ground to refuse sanction of the scheme. All the necessary procedures have been complied. Accordingly, the court is satisfied that the proposed scheme of amalgamation is a reasonable and that it is in the best interest of the petitioner companies and all concerned. Therefore, sanction is accorded to the scheme of amalgamation appearing at Annexure 'C' to the petition which has been unanimously approved by the members of the petitioner companies in general meetings in terms of prayers made in clauses (c) to (1) of the petition with effect from 1st July, 2008.