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Petitioner: Presson-Descon International (Private) Limited etc VS Respondent: Joint Registrar of Companies
Court Name: Lahore High Court Judge(s): Jawad Hassan Title:Presson-Descon International (Private) Limited etc vs Joint Registrar of
Companies Case No.: C.O.No.25683 of 2019 Date of Judgment:2020-06-08 Reported As: 2020 CLD 1128, PLD 2020 Lahore 869, 2020 LHC 1645 Result: Petition allowed Judgment The marriage of two or more individuals in a corporate setting is commonplace today. As long as the participants can "live" with each other , the "marriage" endures. Where the relationship between the partners or their heirs deteriorates, the burden to adjudicate rights of shareholders in a "corporate divorce" may fall upon the judiciary . 1. INTRODUCTION Corporate restructuring is one of the most complex and fundamental pheno mena that every management experiences from time to time. Each company has two opposing objectives from which it has to choose: to diversify or to refocus on its core business. This involves the redeployment of corporate assets through acquisitions, mergers, divestures and demergers as the corporate structure is mutable. In the present case the Petitioners invite this Court to sanction a Scheme of Arrangement for reconstruction and de-merger amongst Presson-Descon International (Private) Limited (the Petitione r No.1) ("Transferor Company"), its members, and DEL Engineering Domestic (Private) Limited (the Petitioner No.2) ("Transferee Company") its members, and Descon (Private) Limited (the Petitioner No.3) (Transferee Company") and its members. In this regard a petition under Sections 279 to 282 of the Companies Act, 2017 (the "Companies Act" ) has been filed by the authorized representative of the Petitioners. 2. FACTUAL TRAIL WITH DISCUSSION 2. Terse facts are that the Petitioner No.1 is a private limited company by shares with an authorized share capital of Rs.200,000,000/- divided into 20,000,000 ordinary shares of Rs.10/- each while its paid-up capital is Rs.166,580,040/- divided into 16,658,004 ordinary shares of Rs.10/- each. Similarly , the Petitioner No.2 is a private limited company by share with an authorized share capital of Rs.2,000,000/- divided into 200,000 ordinary shares of Rs.10/- each while its paid-up capital is Rs.600,000/- divided into 60,000 ordinary shares of Rs.10/- each. Conversely , the Petitioner No.3 is a private limited company by1
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share with an authorized share capital of Rs.2,000,000/- divided into 200,000 ordinary shares of Rs.10/- each while its paid-up capital is Rs.600,000/- divided into 60,000 ordinary shares of Rs.10/- each. 3. It is noteworthy to mention that along with this petition, scheme of arrangement in terms of Sections 279 to 282 of the Companies Act between the Petitioner No.1, the Petitioner No.2 and the Petitioner No.3 and their respective shareholders is also attached as Annex-A. 4. The principal object of the Scheme is to provide for the reconstruction of PDIL by separating its transferred assets and undertaking and transfer and vesting of PDIFZE Shareholding with and into the Petitioner No.2 and consequent transfer of PDIL IP into the Petitioner No.3. 5. Learned counsel for the Petitioners pointed out the copies of the Resolutions passed by the Board of Directors of the Petitioners No.1, 2 and 3 whereby the schemes were sanctioned. In the closin g moments, the learned counsel contended that the Scheme of Arrangement envisages the reconstruction of PDIL by separating its transferred assets and undertaking and transfer and vesting of PDIFZE Shareholding with and into the Petitioner No.2 and transfer of PDIL IP into the Petitioner No.3. 6. The Additional Registrar of Companies , Companies Registration Office, Lahore in response to the main petition filed report and para-wise comments on behalf of Securities & Exchange Commiss ion of Pakistan (SECP) wherein it was observed that (i) as per sub-section (2) of section 279 of the Companies Act, it is required that a majority in number representing three-forth in value of the members of the Petitioners, present and voting either in person or, where proxies are allowed, by proxy at the meeting, agree to the Scheme of Arrangement. Further observed (ii) that the Petitioner No.1 may be directed to solicit no objection certificates (NOC) from United Bank Limited, Allied Bank Limited, Bank Al-Habib Limited and Askari Bank Limited to be submitted before the Court for its satisfaction. Next it was observed (iii) that the value of PDIL IP has not been disclosed in the Scheme of Arrangement therefore, the Petitioner No.1 may be directed to provide the value of PDIL IP alongwith details of assets. 7. In response, learned counsel for the Petitioners stated they have removed objection of the Respondent with regard to NOC from United Bank Limited, Habib Bank Limited, Allied Bank Limited, Bank Al-Habib Limited and Askari Bank Limited by filing C.M.No.01 of 2020. However , pointed out that since the Dawood Family is the beneficial owner of the Petitioners' Companies which are 100% owned by the same family , therefore, valuation of PDIL IP is neither required nor material to the Scheme of Arrangement. 8. After filing of the petition, this Court vide order dated 29.04.2019 directed that notices be issued in national dailies namely "News" and "Nawa-i-W aqt" for the purpose of informing general public about the scheme proposing reconstruction/de-merger the Petitioners and inviting objections to the scheme from members and creditors of the Petitioners as well as from any person having interest in the business of the Petitioners. In addition, notices were also directed to be issued to the SECP , the Competition Commission of Pakistan (the "CCP" ) and to the creditors of the Petitioner companies as per list of creditors attached with the petition. 9. The said order also directed that Extra-Ordinary General Meetings of the Petitioners' company be convened for presenting the proposed scheme to their shareholders for sanctioning of the same or otherwise. M/s Ch. Riaz Hussain and Rana M. Faiz-ur-Rehman, Advocates were appointed as Chairmen to supervise extraordinary general meeting of the shareholders of the Petitioners' company with directions to file their report on the proceedings of aforesaid meeting. 10. In compliance with the aforesaid order by the Court, public notices issued in Dailies "News" and "Nawa-i-W aqt" on 20.06.2019 were issued respectively; copies whereof are available on record. 11. The Chairpersons of the general meeting of the Petitioners submitted their report under Rule 57 of the Company (Court) Rules, 1997 on 27.06.2019 which is duly supported by the relevant record. According to the report of the Chairpersons, the Extraordin ary General Meeting of the Petitioners was convened at their respective registered offices on 20.06.2019. Notices of the meeting were issued by the Petitioners company to their shareholders as well as by publication in the Dailies "News" and "Nawa-i-W aqt" on 28.05.2019. The copies of the dispatched notices and names of the shareholders as well as the notices published in the aforementioned newspapers were mentioned in and attac hed to the Chairpersons' report. The attendance sheet of shareholders of the Petitioners have also been placed on record which shows the participation of 100% of voting of shareholders of
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the Petitioner No.1, the Petitioner No.2 and the Petitioner No.3. The approved Scheme of Merger is annexed as "Annex-A-2" with the report of Chairpersons. 12. I would like to preview and foretaste the recital of the Scheme of Arrangements which, for ease of reference, is reproduced as under:- 3. Scheme of Arrangement Transfer of PDIFZE Shareholding into DEL Domestic (i) The entire PDIFZE shareholding as subsisting immediately preceding the Sanction Date shall, without further act or deed, matter or thing, process or procedure, be separated from PDIL and shall be transferred to and vested in DEL Domestic on the Sanction Date. The transfer and vesting of the PDIFZE Shareholding shall be free from all mortgages or charges or other encumbrances. (ii) The separation from PDIL and transfer to and vesting in DEL Domestic of the PDIFZE Shareholding shall be treated as having effect from the Effective Date, and as from that time and until the Sanction Date, the PDIFZE Shareholding shall be deemed to have been owned and held for and on acco unt and for the benefit of DEL Domestic and all profits, dividends, bonus, shares, rights shares and entitlements accruing or arising to PDIL Projects from or on account of the PDIFZE Shareholding shall be treated as profits , dividends, bonus shares, right shares and entitlements (as applicable) accruing or arising to DEL Domestic. (iii) During the period from the Effective Date till the Sanction Date, PDIL shall not sell, transfer or dispose of the PDIFZE Shareholding. It is Petitioners' vehemence that the de-merger contemplated under the Schem e of Arrangement would have significant benefits for the Petitioners' companies and their respective stakehold ers, which are stipulated in the Scheme of Arrangement. 13. Pursuant to order dated 29.04.2019, reports along with the resolutions passed in the meetings under Section 279(2) of the Companies Act have been submitted. For the ease of reference, the core of the resolution is reproduced as under:- "RESOL VED THAT the Scheme of Arrangement for inter alia reconstruction, bifurcation and amalga mation (the "Scheme") between M/s Presson Descon International (Private) Limited and its members, M/s DEL Engineering Domestic (Private) Limited and its members and M/s Descon (Private) Limited and its members, considered by this meeting and initiated by the chairman of this meeting for purposes of identification, be and is hereby approved, adopted and agreed". 14. As a result, the observation by the SECP relating to Section 279(2) of the Companies Act is concerned, it is evident from perusal of Chairpersons' report that 100% of the shareholders of the DEL Projects (Private) Limited were present at the extraordinary gener al meeting who voted, unanimously consented and approved proposed Scheme of Arrangement for reconstruction, bifurcation and de-merger of Petition er No.1 with and into Petitioner No.2 and the Petitioner No.3. 15. Another observation of SECP with regard to NOC from registered secured creditors of the Petitioner No.1 stands cured as the same were duly filed by the Petitioners through C.M.No.01 of 2020. 3. VALUA TION OF INTELLECTUAL PROPERTY 16. In order to understand the Intellectual Property Valuation (IPV), the concept of valuation needs to be understood first. Primarily valuation has been defined as, "the action of estimating or fixing the monetary or other value of something, especially by a professional evaluator ." In fact, valuation of IP is an act of estimating or fixing the monetary and other values of intellectual property rights (such as patents, copyright, design, trademark, trade secret and other recognized intangible rights). The World Intellectual Property Organization (WIPO) in its IP panorama Module 11, defined IPV as, "a process to determine the monetary value of subject IP". It is pertinent to mention here that Intellectual property (IP) refers to creation of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce and in general sense, it is used for a set of intangible assets owned and legally protected by a company from outside use or implementation without consent. In Pakistan, intellectual property rights have been protected and are regulated under various laws which include the Intellectual Property Organization of Pakistan Act, 2012 (the "IPO Act") , The Trade Marks Ordinance, 2001, the2
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Copyright Ordinance, 1962, the Patents Ordinance, 2000, The Registered Designs Ordinance, 2000, The Registered Layout-Designs of Integrated Circuits Ordinance, 2000 and Sections 478, 479, 480, 481, 482, 483, 485, 486, 487, 488 and 489 of Pakistan Penal Code, 1860. The term 'Intellectual Property' has been defined under Section 2(g) of the IPO Act which reads as follows: "Intellectual Property includes a trademark, patent, industrial design, layout-design (topographies) of integrated circuits, copyright and related rights and all other ancillary rights". 17. Now coming to the case in hand, the Respondent-SECP has taken an objection in the report and parawise comments with regard to non-provision/disclosure of PDIL IP value by the Petitioner No.1 in the Scheme of Arrangement. Perusal of letter dated 04.07.2019 issued by the CCP reveals that the Petitioners moved a pre- merger Application along with requisite fee which was received by the CCP on 19.06.2019 regarding reconstruction and de-merger as well as transfer of assets and undertaking of the Petitioner No.1 into the Petitioner No.2 and the Petitioner No.3. On that application, the CCP pointed out certain missing information. However , the Petitioners through letter dated 15.07.2019 replied and mentioned the PDIL IP value as NIL. Furthermore, learned counsel for the Petitioner has drawn the attention of the Court towards letter dated 19.12.2019 issued by the CCP wherein the Commission held the transaction of the Petitioners as exempt from notification in terms of Regulation 4(2) of the Competition (Merger Control) Regulation 2016. Perusal of aforesaid letter reveals that the Petitioners moved a pre- merger application and the Commission upon investigation, held the transaction is exempted from Notification of CCP, mentioned above, and also reimbur sed the fee submitted at the time of submission of application for process of case. It is reflected from the perusal of record that PDIL (the Petitioner No.1 ) is an integrated engineering, procurement, construction and commissioning (EPCC) company with its primary expertise in providing seamless services for supply of production & processing equipment, their related utilities as well as for setting up complete production and processing facilities to the oil & gas sector on turnkey basis. Schedule 1 of the Scheme of Arrangement expresses PDIL IP value in the following manner: (a) all rights, title and interest of PDIL anywhere in the world in any patents, trademarks, service marks, designs, copyrights and inventions, including without limitation, any licenses (inclusive of the benefits and burdens of such licenses) for the same, and any applications or the rights to apply for protection or registration of any of the same having an effective filing date or priority date on or earlier than the Sanction Date, and any continuing, reissue, divisional and re-examination patent applications; (b) all rights, title and interest of PDIL in technical data and know-how , industrial and technical information, trade secrets, secret processes, confidential information, drawings, formulations, technical reports, operating and testing procedures, instruction manuals, raw material or production specifications, the results of research and development work, whether in hard copy or in computer held form (including, for the avoid ance of doubt, such media as microfilm and microfiche). 18. Through present petition, PDIL IP value is being transferred and vested into DPL as described in Article 3 of the Scheme of Arrangement. Relevant portion is reproduced as below: i The entire PDIL IP as subsisting imme diately preceding the Sanction Date, shall without further act or deed, matter or thing, process or procedure, be separated from PDIL and shall be transfe rred to and vested in DPL on the Sanction Date. The transfer and vesting of the PDIL IP shall be free from all mortgages or charges or other encumbrances. ii. The separation from PDIL and transfer to and vesting in DPL of the PDIL IP shall be treated as having taken effect from the Effective Date, and as from that time and until the Sanction Date, the PDIL IP shall be deemed to have been owned and held for and on account and for the benefit of DPL. 19. The raison d'etre given by the Petition ers for non-valuation appears to have due strength due to the reason that since the Dawood Family is the beneficial owner of the Petitioners' Companies which are 100% owned by the same family , therefore, valuation of PDIL IP is neither required nor material to the Scheme of Arrangement. Article 4 of the Scheme speaks about 100% owning of Petitioners' company in the following manner: Consideration
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(i) PDIL is 100% owned by Descon Engineering Limited which is 100% owned by DEL Projects (Private) Limited which is 100% owned by Dawood Family in the below proportions: Category of Shareholders Shares Held% i) Directors Mehreen Dawood 342 0.57 Taimur Dawood 690 1.15 Faisal Dawood 690 1.15 ii) Others Bilquis Dawood 1,716 2.86 Abdul Razak Dawood 56,562 94.27 Total 60,000 100 (i) Since DEL Domestic is 100% owned by Dawood Family (in the same proportions specified above), effectively Dawood Family is 100% beneficial owner of both PDIL and DEL Domestic in the same proportions. Therefore, no new shares of DEL Domestic are intended to be issued and/or allotted to PDIL or its shareholders as consideration for the transfer to, and vesting in, DEL Domestic of the PDIFZE Shareholding. (ii) Since DPL is 100% owned by Dawood Family in the proportions specified in Article 2(III)(a), and PDIL is 100% owned by Descon Engineering Limited which is 100% owned by DEL Projects (Private) Limited which is 100% owned by Dawood Family (In the same proportions mentioned above), effectively Dawood Family is 100% beneficial owner of both PDIL and DPL in the same proportions. Therefore, no new shares of DPL are intended to be issued and/or allotted to PDIL or its shareholders as consideration for the transfer to, and vesting in, DPL of the PDIL IP. 4. DEMERGER- A CORPORA TE DIVORCE MET APHOR 20. Under the Companies Act, companies continuously change their scope of business in Pakistan under Part-VIII (Sections 276 to 285). The preamble of the Companies Act clearly provides reforming company law with the objective of facilitating corporatization and promoting development of corporate sector , regulating corporate entities for protecting interests of shareholders, creditors, other stakeholders and general public, inculcating principles of good governance and safeguarding minority interests in corporate entities. Although the expressions 'merger ' and 'de-merger ' are not defined under the Companies Act but the Company is defined under Section 2(17) of the Companies Act. The power to merge the companies is given to the Commission which is defined under Section 2(16) of the Companies Act. The word 'Commission' is also defined under Section 2(g) of Securities and Exchange Commission of Pakistan Act, 1997 (the "SECP Act" ) which means the Securities and Exchange Commission of Pakistan established under Section 3 of the Act ibid. The said Commission thus consists of Commissioners in terms of Section 5 and headed by the Chairman under Section 6 of the SECP Act. The Commission also has a Security and Exchange Policy Board established under Section 12 and has powers and functions under Section 20 of the SECP Act whereas the functions and powers of the Board are defined under Section 21 of the SECP Act. It is important to mention here that the powers given to the Commission under Section 2(16) of the Companies Act have been delegated to the Court by the Government of Pakistan, Finance Division' s Notification S.R.O.No.840(I)/2017 dated 17th August, 2017. The Court is defined in Section 2(23) of the Companies Act which means a Company Bench of a High Court. 21. A frequent metaphor of mergers and acquisitions is the marriage of companies. The antonym to marriage is the divorce, and the term "corporate divorce" is used to define how previously merged companies are separated. Demerger is defined in the Business Dictionary as "a situation where an entity undertake s a reorganization of its operations and structure, leaving its members in the same economic position as they were immediately before the reorganization. It is a form of structural readjustment for corporations in which a corporate or trust group splits into two more entities or groups. Similarly some jurists have defined demerger as "a corporate strategy to sell off subsidiaries or divisions of a company is called demerger ."3 4 5
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5. CONCEPTUAL FRAMEWORK AND LA W REQUIREMENTS 22. The basic requirement of Section 279 of the Companies Act is as follows (i) there must be a compromise / arrangement/ Scheme (ii) proposed between a company and its creditors (iii) application to be made to the Commission now the High Court, as defined above; (iv) supported by meetings (v) mandatory filing of material facts relating to the company which is; (a) financial position (b) auditor 's report (c) latest accounts of the company (d) the pendency of any investigation proceedings (e) supported by the af fidavits Now moving forward, as highlighted above, the expression 'demerger' is not expressly defined in the Companies Act. Sections 279 to 282 of the Compa nies Act contain provisions regarding Compromises, Arrangement and Reconstruction. However , it could very well be said that the same is covered under the expression arrangement, as defined in subsection (6) of Section 279 of the Companies Act which reads as follows: "....the expression "arrangement" includ es a re-organization of the share-capital of the company by the consolidation of shares of different classe s or by the division of shares into shares of different classes or by both those methods,...." 23. Moreover the term demerger has also not been defined in the Indian Compan ies Act of 2013 which repealed the Companies Act of 1956. However the term demerger finds mention in sub-section (19AA) of Section 2 of the Indian Income Tax Act, 1961. According to the said sub-section, demerger in relation to companies, means transfer , pursuant to a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956, by a demerged company of its one or more undertakings to any resulting company in such a manner that: i. All the property of the undertaking being transferred by the demerged company , immediately before the demerger , becomes the property of the resulting company . ii. All the liabilities relatable to the undertaking, being transferred by the demerged company , immediately before the demerger , become the liabilities of resulting company of virtue of the demerger . iii. The property and the liabilities of the undertaking, being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger; iv. The resulting company issues, in consideration of the demerger , its shares to the shareholders of the demerged company on a proportionate basis; v. The shareholders holding not less than three fourths in value of the share in the demerged company (other than shares already held therein immediately before the demerger or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger . vi. The transfer of the undertaking is on a going concern basis; vii. The demerger is in accordance with the conditions, if any, notified under Sub section (5) of Section 72A of the Income Tax Act 1961 by the Central Government in this behalf. 6. COURT CASES AND VIEWS ON DEMERGER 24. In in the matter of IGI Insurance Limited and 3 others (2018 CLD 572) the Court has explained the meaning and significance of demerger and has held as follows: 10. .... [D]emerger connotes and designates some or all of the transferor company's assets, rights and obligations which are to be divided between one or more transferee companies in return for the shareholders in the transferor company receiving consideration in the form of shares in the company . The de-merger is a business stratagem in which a single business is broken into components. This allows a conglomerate to split off its different varieties to invite or prevent an acquisition, to raise capital by selling off components that are no longer part of the business's fundamental merchandise line or to gener ate distinct lawful entities to manage diverse managements. It is in fact a method of corporate streamlining and restructuring by dint of which business operations are segregated into one or
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more components. The demerged company connotes and exemplifies a conglomerate (transferor company) whose undertaking is transferred pursuant to demerger to a resulting company (transferee company) whereas the resulting company (transferee company) means a company to which the undertaking of the demerged company is transferred in a demerger and the resulting company in consideration of such transfer of undertaking issues shares to the shareholders of the demerged company . The transfer pursuant to a scheme of…
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