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Case Laws Related To Mergers And Acquisitions Of Banking Companies

We know that Mergers and Acquisitions (M&A) play an important role in management of company's establishment. The companies Act, 2013 consists to all these provisions related to M & A. Let us look at few case laws related to few mergers & acquisitions with respect to banking companies.

In Shrikant Bhujaballi Bahirshet and others vs Shamrao Vithal Co - Operative Bank Limited, Mumbai[1], the facts of the case are appellant was employee of Mahavir Co-operative Bank Ltd. (MCBL) was not doing well and was in financial doldrums and was merged into Respondent Bank.

As Appellant was superannuated in year 2003 and had been paid his retirement benefits on such superannuation. Jurisdictional errors or error resulting in miscarriage of justice committed by subordinate Courts or Tribunals can be corrected by exercising powers u/art. 226 of Constitution, and that it is not lawful to hold that jurisdictional errors or error resulting in miscarriage of justice committed by subordinate Courts or Tribunals can be corrected only by exercising powers under article 227 of Constitution.

The court held Labour Court did not answer issue of liability of Respondent Bank on ground that said issue did not survive for consideration as it had come to conclusion that claim of Appellants was not based on any pre-existing right and therefore Application u/s. 33C(2) of Industrial Disputes Act was not maintainable.

It is also required to be noted that Respondent Bank had opposed application filed by Appellants inter alia on grounds mentioned in its Written Statement which included denial of its liability to pay amount claimed by Appellants. Also no such issue was raised and contentions advanced as regards existence or non-existence of pre existing right in Appellants.

In Re: Equitas Finance Limited, represented by its Chief Financial Officer Vasudevan S, Chennai and others[2], Petitioner Companies, i.e., Transferor Company no. 1, Transferor Company no. 2 and Transferee Company, jointly filed petitions seeking sanction of Scheme of Amalgamation. Whether, Scheme of Amalgamation, as proposed, could be sanctioned with or without modification. Sanctioning of compromise or arrangement does not necessarily fetter Court from delaying date of actual amalgamation/merger of entities.

In this case, amalgamation of transferor Company nos. 1 and 2 with transferee Company is dependent on issuance of banking licence by RBI and, in turn, issuance of licence is dependent on HC sanctioning Scheme. The court held that the scheme envisages merger of transferor Company nos. 1 and 2 with transferee Company. Shareholders and secured creditors of each of petitioner companies have given their consent to Scheme.

However, Scheme can neither provide clear appointed date nor can it fix share exchange ratio. What adds further twist to the situation is that Scheme by itself cannot provide for dissolution of transferor Company nos. 1 and 2, albeit, without winding up, perhaps, for the same reason that there is possibility, that RBI may not issue licence to amalgamated company/ merged entity. s. 394 (1) of Act gives such leeway to Court Therefore, since affidavit of RD and report of OL indicate that affairs of transferor Company nos. 1 and 2 are not carried out in a manner prejudicial to its member or public, Scheme can be sanctioned, with caveat, that transferor Companies will move applications for their dissolution, albeit, without winding up within 30 days of effective date.

In Aruna Dixit D/o Late Y. D. Dixit v State of Chhattisgarh, Through Chief Secretary, Chhattisgarh and others[3], A bank was registered under Chhattisgarh Cooperative Societies Act,1960. On committing defaults and mismanagement, Board of Directors of Bank was superseded. Authorized officer convened annual general meeting of shareholders of Bank and resolution was passed for amalgamation of Bank with another Bank despite objection raised by shareholders of Bank including petitioner.

Registrar sent proposal of amalgamation for approval by Reserve Bank of India wherein RBI issued statutory No Objection Certificate. Registrar, Cooperative Societies passed order directing merger of Bank. Petitioner was filed appeal before State Government to set aside Registrar's order. Whether respondents have violated provisions of s.16 of the Act and r.11 of the Rules, and such non compliance of provisions has vitiated entire exercise.

The court held that order dt.2-1-2010 clearly mentions that order of supersession passed on 13-9-2006 is extended for another one year on 12-9-2007, however, since situation has not changed, order of supersession requires to be continued and extended for further one year.

Thus, order nowhere ratifies working of authorized officer during 12-9-2008 till 2-1-2010 includes date i.e.7-11-2009 when annual general meeting of members of Bank is convened by authorizes officer. Apparently, officer is not authorized on that day to convene annual general meeting of Bank because, there is no order in existence, even ex post facto order approving his appointment as authorized officer during period of 12-9-2008 till 2-1-2010. Hence, order dt.18-1-2011 and subsequent actions taken by respondents is quashed.

In Chinmay Premalkumar Gandhi vs Adarsh Multi State Cooperative Bank Limited[4], Shri Deesa Nagrik Sahkari Bank Ltd. decided to merge with Madhav Nagrik Sahakari Bank Ltd., multi state co- operative bank. The Registrar-Co-operative Societies, Gujarat State passed order dated 23/04/2009 under Section - 17 of the Act approving merger of Shri Deesa Nagrik Sahakari Bank Ltd. with Madhav Nagrik Sahakari Bank Ltd. which subsequently changed its name to Adarsh Multi State Co- operative Bank, the respondent no.1.

What is the effect of merger of a co-operative society registered under the Co-operative Societies Act, 1961 with multi state co-operative society registered under the Multi State Co-operative Societies Act, 2002 on the pending proceedings of Lavad Suit instituted by the state co-operative society before the Board of Nominee for the disputes under Section 96 of the Act.

In fact, when specific provision is made for continuation of legal proceedings after merger especially with the phrase transferee, the legislature clearly intended to continue legal proceedings by or even against other kind of the society on merger of the state cooperative society. Such being clear intention of the legislature emerging from Sub Section 4 of Section 17 of the Act, the Tribunal could be said to have come to correct conclusion on interpretation of Section 17 of the Act that the Board of Nominee committed grave error in returning the plaint to the plaintiff. No interference in such order of the Tribunal is called for in exercise of powers under Article 226/227 of the Constitution of India.

In Hindustan Commercial Bank Limited and another v British Motor Car Company (1934) Limited[5], The tenant had sublet/assigned/parted with possession of the suit premises in favour of Punjab National Bank (PNB) without obtaining the written consent of the petitioner. It is not in dispute that M/s HCB had since been amalgamated with PNB by virtue of a Gazette Notification issued by the Ministry of Finance, Govt. of India; necessary effect was that M/s HCB became non-existent and its complete power and control vested with the transferee company i.e. PNB.

The only question which now has to be answered by this Court is whether the merger of M/s HCB with the PNB by virtue of a Gazette Notification dated 18.12.1986 issued by the Government of India under Section 45 (7) of the Banking Regulation Act, 1949 sanctioning the scheme of amalgamation of the HCB (Kanpur) with the PNB amounted to a subletting under Section 14 (1)(b) of the Delhi Rent Control Act.

The Gazette notification dated 18.12.1986 specifically postulates that the Central Government has sanctioned the scheme under Section 45(7) of the Banking Regulation Act, 1949 and all rights, powers, claims, interests, authorities, privileges including movable and immovable properties including premises subject to all incidents of tenure, of the transferor bank (HCB) shall stand transferred and become properties/assets of the transferee bank (PNB). In these circumstances, the ground of subletting was rightly held to be not available to the landlord. The impugned judgment holding otherwise thus suffers from an illegality.

In Bank of Madura Shareholders Welfare Association v Governor, Reserve Bank of India, and Others[6], The Respondent no. 2 announced extraordinary general meeting for amalgamation to Banks. Hence, Petition was filed for postponement of extraordinary general meeting of shareholders for considering scheme of amalgamation between Petitioner's Bank and ICICI Bank Ltd.

Whether scheme of amalgamation proposed by banking companies with ultimate control vested with RBI, should grant their approval or not. The court held that petitioner association had not produced any letter to show that any shareholder had made complaint to effect that he was not allowed to inspect documents.

Companies proposed to merge were banking companies and considering nature and scope of banking transaction which involved great deal of confidential information, appointment of chartered accountants of transferee-bank could not be faulted.

HC did not accept that petitioner association had not made out any case to order probe into merger scheme proposed by Board of directors of transferor-bank and transferee-bank. However, it was for shareholders either to accept or to oppose scheme of amalgamation, and when requisite majority shareholders of transferor - bank had accepted and approved scheme of amalgamation, question of ordering probe by HC into scheme of amalgamation did not arise.

Thus, when petitioner association had not made out any prima facie case for admitting petition, question of admitting petition did not arise. Expression made in judgment would not bind RBI while considering scheme of amalgamation of Petitioner's Bank with ICICI Bank Ltd. Therefore, petitioner had not made out any case calling for interference by HC and did not incline to admit petition and issue notice to respondents.

In Commissioner of Income Tax v Trichy United Bank Limited[7], Long after merger of three banks, respondent bank had distributed dividends out of credited reserves and claimed that it was entitled to relief u/s.236 of the Act. Income Tax Officer (ITO) held that relief could not be claimed in respect of taxed profits declared as dividends u/s.236 of the Act. Appellate Authority allowed claim for relief u/s.236 of the Act in its entirety.

Tribunal affirmed order of Appellate Authority. Whether Tribunal is right in holding that assessee is entitled to relief u/s.236 of the Act.

Only requirement of s.236 of the Act is that what are distributed as dividends must be profits prior to date in question. Expression actually occurring in s.236 of the Act only rules out non-distribution of taxed profits and it does not rule out process of tracing, or of attribution of profits which subsequently get distributed as dividends to that of accumulated reserves. Thus, Tribunal is right in holding that assessee is entitled to relief u/s.236 of the Act.

Reference answered in favour of assessee. Therefore, order u/s.236 of the Act to extent that it goes against assessee-company is appealable order. Further, because u/s.236 of the Act does not provide for refund application, it does not mean that where one is filed it must be rejected as not maintainable. Order passed by ITO was in fact order passed by way of disposal of application by assessee. Since order refused relief asked for, it must be considered as one passed u/s.237 of the Act.

In Himalaya Bank Limited, Kangra v L. Roshan Lal Mehra[8], Respondents were borne as share-holders of Bank and called for unpaid share capital on every share but failed to make payment of called money. Shares were forfeited as per clause 4 of scheme. Arrears were due from respondents as debt. As petitioner - bank was working under scheme sanctioned by High Court; list of debtors could be settled with permission of High Court.

Whether High Court had jurisdiction to pass orders u/ss. 45M, 45D of 1949 Act for settlement of list of debtors? Section 392 of 1956 Act gave power to HC to supervise carrying out of arrangement or modify same and to order winding up of company if deemed necessary. S. 392 of 1956 Act applied to all companies including banking companies.

Thus, provisions of s. 45-K (1) of 1949 Act was surplus and omitted. When s.45-K of 1949 Act was enacted 1956 Act did not contain similar provision, and 1949 Act conferred additional power on HC to enforce scheme of arrangement and to sanction compromise in respect of banking company. HC had jurisdiction to entertain petition and to pass appropriate order in view of provisions of s. 392 of w/r s. 391 of 1956 Act.

In United Bank of India Limited v United India Credit and Development Company Limited[9], This is an application under sections 391, 392, 393 and 394 of the Companies Act, 1956, for sanction of a scheme of amalgamation and other consequential orders and directions. That the petitioner, United Bank of India Ltd. was incorporated in the year 1918 and carried on banking business in the Eastern region of India.

Three other banking companies, Comilla Banking Corporation Ltd., Comilla Union Bank Ltd., and Hooghly Bank Ltd. were amalgamated and/or merged with the petitioner - bank with effect from 18th December, 1950, under the provisions of section 44A of the Banking Companies Act, 1949. The objects of the petitioner - bank for which it was incorporated as appears from the memorandum of association of the company was mainly for carrying on banking business.

Held, scheme of amalgamation has been approved by requisite majority of shareholders present and voted at statutory meeting convened. Statutory majority were acting bona fide and scheme of amalgamation was such that intelligent and honest shareholder of petitioners might reasonably approve. Opposition party did not seem to be bona fide and for interest of shareholders or petitioners as whole.

Resolution had passed by statutory majority and scheme of amalgamation appears to be reasonable, feasible and to the interest of shareholders present and voting in meeting and there was substantial compliance with statutory requirements of serving notice on shareholders and setting out statements as required u/s.393 of 1956 Act.

This was well recognised method of re - organisation and reconstruction of company & there was no wrong in scheme of shareholders approving scheme and directors are actuated by any sinister motive as sought to be imputed by opposing group of shareholders.

End-Notes:
  1. Shrikant Bhujaballi Bahirshet and others vs Shamrao Vithal Co-Operative Bank Limited, Mumbai, 2017 Indlaw MUM 1495
  2. Re: Equitas Finance Limited, represented by its Chief Financial Officer Vasudevan S, Chennai and others, 2016 Indlaw MAD 4440
  3. Aruna Dixit D/o Late Y. D. Dixit v State of Chhattisgarh, Through Chief Secretary, Chhattisgarh and others, AIR 2015 CHH 170
  4. Chinmay Premalkumar Gandhi vs Adarsh Multi State Cooperative Bank Limited, 2013 Indlaw GUJ 945
  5. Hindustan Commercial Bank Limited and another v British Motor Car Company (1934) Limited, 2012 Indlaw DEL 528
  6. Bank of Madura Shareholders Welfare Association v Governor, Reserve Bank of India, and Others, 2001 Indlaw MAD 25
  7. Commissioner of Income Tax v Trichy United Bank Limited, 1981 Indlaw MAD 147
  8. Himalaya Bank Limited, Kangra vs L. Roshan Lal Mehra, AIR 1961 PUNJAB 550
  9. United Bank of India Limited vs United India Credit and Development Company Limited 1973 Indlaw CAL 52

Written by:
  1. Dhuli Venkata Krishna , Student of B.A.,LLB (Hons.) DSNLU,
  2. Kadimisetty Sai Sreenadh, Student of B.A.,LLB (Hons.) DSNLU,

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