Comapnies Act_Practical Problems_82

A Group of shareholders of a company while filing a petition for relief against mismanagement in the conduct of the affairs of the company feel that since the matter has become so serious that they feel that the ultimate relief for mismanagement will be by way of filing a petition for winding up and hence they prefer to file two petitions, one for relief against mismanagement and the other for winding up. State whether simultaneous petitions or composite petition is maintainable.



Supreme Court in Worldwide Agencies (P) Ltd. v. Mrs. Margaret T. held that "a composite petition under sections 397, 398 and 433(f) of the Act is maintainable." This judgement overrides the previous juedgements of several High courts.

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Difference between LLP & “traditional partnership firm”

• Under “traditional partnership firm”, every partner is liable, jointly with all the other partners and also severally for all acts of the firm done while he is a partner.
• Under LLP structure, liability of the partner is limited to his agreed contribution. Further, no partner is liable on account of the independent or un-authorized acts of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful acts or misconduct.

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Other countries where this form is available ?

The LLP structure is available in countries like United Kingdom, United States of America, various Gulf countries, Australia and Singapore. On the advice of experts who have studied LLP legislations in various countries, the LLP Act is broadly based on UK LLP Act 2000 and Singapore LLP Act 2005. Both these Acts allow creation of LLPs in a body corporate form i.e. as a separate legal entity, separate from its partners/members.

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What are the advantages of LLP form ?

LLP form is a form of business model which:
(i) is organized and operates on the basis of an agreement.
(ii) provides flexibility without imposing detailed legal and procedural requirements
(iii) enables professional/technical expertise and initiative to combine with financial risk taking
capacity in an innovative and efficient manner

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What is concept of “limited liability partnership” ?



• LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership.
• The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.
• The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.
• Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
• Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity. Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.

Companies Act_Practical Problems_81

Alpha Ltd. and Beta Ltd. entered into a scheme of amalgamation by which Alpha Ltd. would transfer its entire undertaking to Beta Ltd. However, the Central Government raised an objection that unless the objects clause of the companies are similar, and memorandum empowers to do so, the scheme of amalgamation cannot be permitted. Is the contention of the Central Government correct?

The power to amalgamate may flow from the memorandum or it may be acquired by resorting to the statute. Section 17 of the Companies Act, 1956 indicates that a company which desires to amalgamate with another company will take necessary steps to come before a court for alteration of its memorandum in aid of such amalgamation. The statute confers a right on a company to alter its memorandum in aid of amalgamation with another company. The provisions contained in sections 391 to 396 and 494, illustrate instances of statutory power of amalgamating a company with another company without any specific power in the memorandum. [Hari Krishna Lokia (v) Hoolungooree Tea Co,].

Section 391 is not only a complete code, but it is in the nature of a single window clearance system to ensure that parties are not put to avoidable, unnecessary and cumber some procedure for making repeated applications to court for various alterations and changes. What is to be seen is the over all fairness mid feasibility of scheme of amalgamation and there need not be any 'unison of objects of both transferor and the transferee company. [R Morarjee Gokuldas spg. & wrg. Co.,]. To amalgamate with another company is the power of the company and not an object of the company. Irrespective of the objects clause, the court is empowered to sanction scheme of amalgamation provided it does not prejudice the interest of the public. Therefore, based on the above judicial rulings, the contention of the central government is not correct.

Companies Act_Practical Problems_80

A scheme of merger of XYZ Ltd with ABC Ltd was approved by the shareholders at an extraordinary general meeting and the exchange ratio of 3 shares of ABC Ltd for 20 shares in XYZ Ltd was approved. The proposal was also okayed by a lending financial institution which held 45% shares in XYZ Ltd. The valuation was carried out by one of the directors of XYZ Ltd who is a member of the Institute of Chartered Accountants of India. The valuation was affirmed by three independent valuers nominated by the shareholders in general meeting. However, certain leaseholder properties, under license, which were not transferable, were not taken into account in the valuation. While the scheme was awaiting the Court's sanction, it was challenged by certain shareholders on the ground that the exclusion of leasehold assets in the valuation made the scheme 'Unfair'. Decide giving reasons:
(i) Whether the contention of the shareholders is tenable?
(ii) What factors would the Court take into account in approving the exchange ratio?

The contention of the shareholders in this case shall not be tenable. The court is not to disturb a scheme unless the person who challenges the valuation satisfies the court that the valuation arrived at was grossly unfair. Valuation in this case was approved by the shareholders and also okayed by the lending institution(s) which are usually well-informed and scrutinize the scheme with expert’s eye and which are also presumed to act bonafide. In the similar case of Tata Oil Mills Ltd. Re. (1994), the court held that the presumption of fairness was writ large on the face of the scheme. The Court did not attach importance to the fact that certain leasehold assets and properties held under license were excluded from valuation. Such assets, the court said, were neither transferable nor heritable. They are in the nature of a personal privilege. The Supreme Court affirmed this decision in Hindustan Lever Employee‘s Union v. Hindustan Lever Ltd., (1994) and accepted the exchange ratio proposed. The Supreme Court found no objection to the
valuation being done by one of the directors of TOMCO (XYZ Co. in this case). His report did not show any prejudice and was also affirmed by the independent valuers. Supreme Court also enumerated all the possible methods of valuation such as, market price, book value and yield basis and pointed out that a combination of all or some of the methods, may have to be adopted in circumstances of a particular case. Thus based on the above explanation and the decisions given by the Supreme Court, it can be concluded that the contention of the shareholders that the
exclusion of certain leasehold assets in the valuation has made the scheme unfair, shall not be tenable.