Chembra Orchard
Produce Ltd. & Ors. Vs. Regional Director of Co. Affairs & ANR. [2008]
INSC 2085 (4 December 2008)
Judgment
IN THE SUPREME COURT
OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 7115-7120 OF 2008
(Arising out of SLP (C) Nos. 25511-25516 of 2007) Chembra Orchard Produce Ltd.
& Ors. ... Appellants versus Regional Director of Company Affairs &
Anr. ... Respondents ORDER Leave granted.
The short question
which arises for determination in these Civil Appeals is whether an application
filed by the Company under Section 391 (1) of the Companies Act, 1956 (for
short the `1956 Act') seeking directions to convene a meeting of creditors and
members to consider a scheme of amalgamation is required to be heard and
decided ex-parte as per Rule 67 of the Companies (Court) Rules, 1959? To answer
the above question we need to quote herein below the relevant Rules.
"Rule 2(9)
`Judge's summons' means a summons returnable before the Judge in Chambers or in
Court.
...
67. Summons for
directions to convene a meeting.- An application under section 391(1) for an
order convening a meeting of creditors and/ or members or any class of them
shall be by a Judge's summons supported by an affidavit. A copy of the proposed
compromise or arrangement shall be annexed to the affidavit as an exhibit
thereto. Save as provided in rule 68 hereunder, the summons shall be moved ex
parte. The summons shall be in Form No. 33, and the affidavit in support
thereof in Form No. 34.
68. Service on
company- Where the company is not the applicant, a copy of the summons and of
the affidavit shall be served on the company, or, where the company is being wound-
up, on its liquidator, not less than 14 days before the date fixed for the
hearing of the summons.
69. Directions at
hearing of summons.- Upon the hearing of the summons or any adjourned hearing
thereof, the Judge shall, unless he thinks fit for any reason to dismiss the
summons, give such directions as he may think necessary in respect of the
following matters: --
(1) determining the
class or classes of creditors and/or of members whose meeting or meetings have
to be held for considering the proposed compromise or arrangement;
(2) fixing the time
and place of such meeting or meetings;
(3) appointing a
chairman or chairmen for the meeting or meetings to be held, as the case may
be;
(4) fixing the quorum
and the procedure to be followed at the meeting or meetings, including voting
by proxy;
3 (5) determining
the values of the creditors and/or the members, or the creditors or members of
any class, as the case may be, whose meetings have to be held;
(6) notice to be
given of the meeting or meetings and the advertisement of such notice;
(7) the time within
which the Chairman of the meeting is to report to the Court the result of the
meeting; and such other matters as the Court may deem necessary.
The order made on the
summons shall be in Form No. 35 with such variations as may be necessary."
...
73. Notice of
meeting.- The notice of the meeting to be given to the creditors and/or
members, or to the creditors or members of any class, as the case may be, shall
be in Form No. 36, and shall be sent to them individually by the Chairman
appointed for the meeting, or, if the Court so directs, by the company (or its
Liquidator), or any other person as the Court may direct, by post under
certificate of posting to their last known address not less than 21 clear days
before the date fixed for the meeting. It shall be accompanied by a copy of the
proposed compromise or arrangement and of the statement required to be
furnished under section 393, and a form of proxy in Form No. 37.
74. Advertisement of
the notice of meeting.- The notice of the meeting shall be advertised in such
newspapers and in such manner as the Judge may direct, not less than 21 clear
days before the date fixed for the meeting. The advertisement shall be in Form
No. 38.
75. Copy of
compromise or arrangement to be furnished by the company.- Every creditor or
member entitled to attend the meeting shall be furnished by the company, free
of charge and within 24 hours of a requisition being made for the same, with 4
a copy of the proposed compromise or arrangement together with a copy of the
statement required to be furnished under section 393, unless the same had been
already furnished to such member or creditor.
76. Affidavit of
service.- The Chairman appointed for the meeting or the Company or other person
directed to issue the advertisement and the notices of the meeting shall file
an affidavit not less than 7 days before the date fixed for the holding of the
meeting or the holding of the first of the meetings, as the case may be,
showing that the directions regarding the issue of notices and the
advertisement have been duly complied with. In default thereof, the summons
shall be posted before the Judge for such orders as he may think fit to make.
79. Petition for
confirming compromise or arrangement.- Where the proposed compromise or
arrangement is agreed to, with or without modification, as provided by
sub-section (2) of section 391, the company, (or its Liquidator, as the case
may be), shall, within 7 days of the filing of the report by the Chairman,
present a petition to the Court for confirmation of the compromise or
arrangement. The petition shall be in Form No. 40.
Where a compromise or
arrangement is proposed for the purposes of or in connection with a scheme for
the reconstruction of any company or companies, or for the amalgamation of any
two or more companies, the petition shall pray for appropriate orders and
directions under section 394.
Where the company
fails to present the petition for confirmation of the compromise or arrangement
as aforesaid, it shall be open to any creditor or contributory as the case may
be, with the leave of the Court, to present the petition and the Company shall
be liable for the costs thereof.
Where no petition
for confirmation of the compromise or arrangement is presented, or where the
compromise or arrangement has not been approved by the requisite majority under
section 391(2) and consequently no petition for confirmation could be
presented, the report of the Chairman as to the result of the meeting made
under the preceding rule shall be placed for consideration before the Judge for
such orders as may be necessary.
80. Date and notice
of hearing.- The Court shall fix a date for the hearing of the petition, and
notice of the hearing shall be advertised in the same papers in which the
notice of the meeting was advertised, or in such other papers as the Court may
direct, not less than 10 days before the date fixed for the hearing."
We also quote
hereinbelow Form No.33 and Form No.34:- FORM NO. 33 [See Rule 67] [Heading as
in Form No. 1] Company Application No. ............... of 19.....
...............
Applicant(s) Summons for Directions to Convene a Meeting under section 391 Let
all parties concerned attend the Judge in Chambers on ..:..,......... day,
the............day of ........ 19... at ...............
o'clock in the
............... noon on the hearing of an application of the abovenamed company
(or of the applicant(s) abovenamed) for an order (that a meeting (or separate
meetings) be held at ............... of (Here enter the creditors or class of
creditors, e.g., debenture-holders, other secured credi- tors, unsecured
creditors, etc., or the members or class of members, e.g., preference
shareholders, equity shareholders, etc. of which class or classes, the meeting
have to be held) of the above company, for the purpose of considering, and if
thought fit, approving, with or without modification, a scheme 6 of compromise
or arrangement proposed to be made between the company and the said [here
mention the creditors or class of creditors or members, or the class of
members] of the said company.
And that directions
may be given as to the method of convening, holding and conducting the said
meeting(s) and as to the notices and advertisements to be issued.
And that a chairman
(or chairmen) may be appointed of the said meeting(s), who shall report the
result there of to the Court.
Advocate for the applicant(s)
Registrar.
The affidavit
of............... will be used in support of the summons.
[Note:--Where the
company is not the applicant, the summons should be served on the company, or,
where it is being wound- up, on its liquidator.]"
"FORM NO. 34
[See Rule 67] [Heading as in Form No. 1] Company Application No.
............... of 19.....
...............
Applicant(s).
Affidavit in Support
of Summons I, ............... of etc., solemnly affirm and say as follows :--
1. I am the managing
director/secretary/director/ ............ .../of the said company, (or an
auditor of the said company authorised by the directors to 7 make this
affidavit/or liquidator of the said company in liquidation).
[Where the
application is not by the company or its liquidator, but by a member or
creditor the above paragraph should be suitably altered.]
2. The company was
incorporated on ............... 19.....
The document now
produced and shown to me is a printed copy of the memorandum, and articles of
association of the said company, and also contains copies of all the special
resolutions which have been passed and are now in force.
3. The registered
office of the company is situated at...............
4. The capital of the
company is Rs. ............... divided into ............... (here set out the
classes of shares issued and the amounts paid up on each share).
5. The objects of the
company are set out in the memorandum of association annexed hereto. They are
briefly (here set out the main objects in brief).
6. The company
commenced the business of...............
(e.g., hides and
skins, etc.) and has been carrying on the same since...............
7. [Here set out in
separate paragraphs the circumstances that have necessitated the proposed
compromise or arrangement, the objects sought to be achieved by it, the terms
of the compromise or arrangement, and the effect if any, of the compromise or
arrangement on the material interests of the directors, managing director,
managing agent, secretaries and treasurers or the manager of the company, and
where the compromise or arrangement affects the interests of the debenture
holders, its effect on the material interests of the 8 trustees of the
debenture trust deed. A copy of the proposed compromise or arrangement should be
marked as an exhibit and annexed to the affidavit].
8. [Here set out the
class of creditors or members with whom the compromise or arrangement is to be
made; where the arrangement is between the company and its members, it should
be stated whether any creditors or class of creditors are likely to be affected
by it.]
9. It is necessary
that a meeting (or meetings) of the creditors/members (if the meeting is to be
only of a class of creditors or a class of members, it should be so stated)
should be called to consider and approve the proposed compromise or
arrangement.
10. It is suggested
that the meeting (or meetings) may be held at the premises of the registered
office of the company or at such other place as may be determined by the Court,
and on such date(s) and at such time(s) as this Court may direct; and that a
chairman may be appointed for the meeting (or for each of the meetings) to be
held.
11. It is suggested
that notice of the proposed compromise or arrangement and of the meeting may be
published once in (here set out the newspapers) and in such other manner as the
Court may direct.
12. It is prayed that
necessary directions may be given as to the issue and publication of notices
and the convening, holding and conducting of the meeting(s) proposed above.
Solemnly affirmed,
etc.
(Sd.) X.Y.
9 Before me
(Sd.)........................
Commissioner for
Oaths".
The appellant
-Company moved Company Application Nos. 354 to 359 of 2003 before the Karnataka
High Court on 17th April, 2003 under Sections 391 to 394 of the Companies Act,
1956 in the form of Judge's Summons for Directions supported by an affidavit to
hold a meeting of shareholders and members to consider the proposed scheme of
amalgamation. The applications were filed stating that the applicant had
entered into the said Scheme under which it was proposed to amalgamate
appellant Nos. 1 to 5 into the 6th appellant - Company. This proposed Scheme of
Amalgamation was in fact approved by the Board of Directors vide Resolution
dated 15th February, 2003 stating that the amalgamation would result in economy
of scale. In accordance with Rule 67, Judge's Summons for Directions regarding
holding of meetings was moved ex- parte.
When the Company
Application regarding holding of meeting came before the Company Judge on 15th
March, 2004, a query was raised as to whether it was not necessary to hear the
share-holders and creditors before issuing directions for holding meeting of
share-holders and creditors.
Appellant contended
that Rule 67, quoted above, did not contemplate the 10 hearing of any person,
including share-holders and creditors, before issuing directions for holding of
meetings.
By impugned judgment
dated August 20, 2007, the Division Bench of the Karnataka High Court on
reference answered the above question of law stating that hearing of all
parties was necessary before the Company Court could issue directions to
convene a meeting under Section 391(1) of the Companies Act and that an
ex-parte order in that connection could not be passed. It is this order which
is under challenge.
At the outset, it may
be stated that the Companies (Court) Rules, 1959 are enacted in exercise of the
powers conferred by Section 643(1)(2) of the Companies Act, 1956. They have
force of an Act passed by the Parliament.
The said Rules 1959
have statutory force of law. The said Rule 67 in unequivocal terms states that
an application under Section 391(1) for an order for convening a meeting of
creditors and/or members or any class of them shall be by a Judge's Summons
supported by an affidavit. Rule 67 further requires the proposed compromise or
arrangement to be annexed to the affidavit as an exhibit. Rule 67 is, however,
subject to Rule 68 (which deals with a case where the Company is not the
applicant). If one reads Rule 67 with Form 33 and Form 34, one find that
essentially the Court while issuing such summons is required to apply its mind
to checklist indicated in Rule 69 and it needs to be prima facie satisfied
about the genuineness and bonafides of the application. One aspect needs to be
highlighted. Hearing of the Motion ex-parte does not mean that the Court had
not to apply its mind or that the Court is not required prima facie to be
satisfied about the genuineness or bonafides. However, it is a preliminary
step. One more 11 aspect needs to be mentioned. If hearing is required to be
given to contributors, creditors and share-holders, then the entire scheme of
Section 391 (which is a Code by itself) would become unworkable. Further, when
Rule 67 categorically states that Summons for Directions shall be moved ex-
parte, the question of prejudice or rule of natural justice does not come into
play. However, there is a rationale for stating that the Summons shall be moved
ex-parte and that rationale is that it is an Application for an Order for
Meeting as a preliminary step at the threshold stage and at that stage it is
not necessary for the Company to give notice of hearing to the creditors,
members and share-holders (see: Palmer's Company Law). Further, if one examines
Rule 67 in the context of Rule 73, one finds that after Summons for Direction
are issued as and when the meeting is ordered to be convened, the notice of the
meeting is required to be given to the creditors and/or members or such other
classes enumerated in Rule 73. Similarly, under Rule 74 advertisement of the
notice of meeting is also required to be published in such newspapers and in
such manner as the Judge may direct. This is to be supported by affidavit of
service under Rule 76.
The analysis of the
above Rules indicates that there is a clear dichotomy between the threshold
stage of issuance of directions to convene a meeting and the subsequent stage
of a notice of meeting which is contemplated by Rule 73 and for that precise
reason Rule 67 states that the summons shall be moved ex-parte.
Our view is supported
by various judgments of this Court and the High Courts. As far as the scheme of
Sections 391 to 394 of the Companies Act is concerned, we quote hereinbelow
Paragraph 28 of the judgment of 12 this Court in the case of Miheer H.
Mafatlal v. Mafatlal Industries Ltd. reported in 1997 (1) SCC 579:
"28. The relevant
provisions of the Companies Act, 1956 are found in Chapter V of Part VI dealing
with "Arbitration, Compromises, Arrangements and Reconstructions". In
the present proceedings we will be concerned with Sections 391 and 393 of the
Act. The relevant provisions thereof read as under:
"391. (1) Where
a compromise or arrangement is proposed-- (a) between a company and its
creditors or any class of them; or (b) between a company and its members or any
class of them; the Court may, on the application of the company or of any
creditor or member of the company, or in the case of a company which is being
wound up, of the liquidator, order a meeting of the creditors or class of
creditors, or of the members or class of members, as the case may be, to be
called, held and conducted in such manner as the Court directs.
(2) If a majority in
number representing three-fourths in value of the creditors, or class of
creditors, or members, or class of members as the case may be, present and
voting either in person or, where proxies are allowed under the rules made
under Section 643, by proxy, at the meeting, agree to any compromise or
arrangement, the compromise or arrangement shall, if sanctioned by the Court,
be binding on all the creditors, all the creditors of the class, all the
members, or all the members of the class, as the case may be, and also on the
company, or, in the case of a company which is being wound up, on the
liquidator and contributories of the company:
Provided that no
order sanctioning any compromise or arrangement shall be made by the Court
unless the Court is satisfied that the company or any other person by whom an
application has been made under sub- section (1) has disclosed to the Court, by
affidavit or otherwise, all material facts relating to the company, 13 such as
the latest financial position of the company, the latest auditor's report on
the accounts of the company, the pendency of any investigation proceedings in
relation to the company under Sections 235 to 251, and the like.
...
393. (1) Where a
meeting of creditors or any class of creditors, or of members or any class of
members, is called under Section 391,-- (a) with every notice calling the
meeting which is sent to a creditor or member, there shall be sent also a
statement setting forth the terms of the compromise or arrangement and
explaining its effect, and in particular, stating any material interests of the
directors, managing directors, managing agents, secretaries and treasurers or
manager of the company, whether in their capacity as such or as members or
creditors of the company or otherwise, and the effect on those interests, of
the compromise or arrangement, if, and insofar as, it is different from the
effect on the like interests of other persons; and (b) in every notice calling
the meeting which is given by advertisement, there shall be included either
such a statement as aforesaid or a notification of the place at which and the
manner in which creditors or members entitled to attend the meeting may obtain
copies of such a statement as aforesaid.
The aforesaid
provisions of the Act show that compromise or arrangement can be proposed
between a company and its creditors or any class of them or between a company
and its members or any class of them. Such a compromise would also take in its
sweep any scheme of amalgamation/merger of one company with another. When such
a scheme is put forward by a company for the sanction of the Court in the first
instance the Court has to direct holding of meetings of creditors or class of
creditors or members or class of members who are concerned with such a scheme
and 14 once the majority in number representing three-fourths in value of
creditors or class of creditors or members or class of members, as the case may
be, present or voting either in person or by proxy at such a meeting accord
their approval to any compromise or arrangement thus put to vote, and once such
compromise is sanctioned by the Court, it would be binding to all creditors or
class of creditors or members or class of members, as the case may be, which
would also necessarily mean that even to dissenting creditors or class of
creditors or dissenting members or class of members such sanctioned scheme
would remain binding. Before sanctioning such a scheme even though approved by
a majority of the concerned creditors or members the Court has to be satisfied
that the company or any other person moving such an application for sanction
under sub-section (2) of Section 391 has disclosed all the relevant matters
mentioned in the proviso to sub-section (2) of that section. So far as the
meetings of the creditors or members, or their respective classes for whom the
Scheme is proposed are concerned, it is enjoined by Section 391(1)(a) that the
requisite information as contemplated by the said provision is also required to
be placed for consideration of the voters concerned so that the parties
concerned before whom the scheme is placed for voting can take an informed and
objective decision whether to vote for the scheme or against it. On a conjoint
reading of the relevant provisions of Sections 391 and 393 it becomes at once
clear that the Company Court which is called upon to sanction such a scheme has
not merely to go by the ipse dixit of the majority of the shareholders or
creditors or their respective classes who might have voted in favour of the
scheme by requisite majority but the Court has to consider the pros and cons of
the scheme with a view to finding out whether the scheme is fair, just and
reasonable and is not contrary to any provisions of law and it does not violate
any public policy. This is implicit in the very concept of compromise or
arrangement which is required to receive the imprimatur of a court of law. No
court of law would 15 ever countenance any scheme of compromise or arrangement
arrived at between the parties and which might be supported by the requisite
majority if the Court finds that it is an unconscionable or an illegal scheme
or is otherwise unfair or unjust to the class of shareholders or creditors for
whom it is meant. Consequently it cannot be said that a Company Court before
whom an application is moved for sanctioning such a scheme which might have got
the requisite majority support of the creditors or members or any class of them
for whom the scheme is mooted by the company concerned, has to act merely as a
rubber stamp and must almost automatically put its seal of approval on such a
scheme.
It is trite to say
that once the scheme gets sanctioned by the Court it would bind even the
dissenting minority shareholders or creditors. Therefore, the fairness of the
scheme qua them also has to be kept in view by the Company Court while putting
its seal of approval on the scheme concerned placed for its sanction. It is, of
course, true that so far as the Company Court is concerned as per the statutory
provisions of Sections 391 and 393 of the Act the question of voidability of
the scheme will have to be judged subject to the rider that a scheme sanctioned
by majority will remain binding to a dissenting minority of creditors or
members, as the case may be, even though they have not consented to such a
scheme and to that extent absence of their consent will have no effect on the
scheme. It can be postulated that even in case of such a scheme of compromise
and arrangement put up for sanction of a Company Court it will have to be seen
whether the proposed scheme is lawful and just and fair to the whole class of
creditors or members including the dissenting minority to whom it is offered
for approval and which has been approved by such class of persons with
requisite majority vote."
In the case of
Sakamari Steel & Alloys Ltd. reported in 51 Company Cases page 266, the
learned Single Judge of the Bombay High Court held that Section 391(1) is not a
sign-post but a check-post whereat it is a duty of the Court to examine the
genuineness and the bonafides of the Scheme for itself.
A reading of the
above judgment would, therefore, show that at the stage of issuance of Summons
for Directions to convene a meeting, though the Company Judge has to apply its
mind, prima facie, on the genuineness of the Scheme, basically the entire
exercise is to verify whether the numerous conditions prescribed in Rule 69 are
satisfied read with Form 33 and Form 34.
In the impugned
judgment, reliance is placed on the earlier judgment of the Allahabad High
Court in the case of Hind Auto Indo Ltd. v. M/s Premier Motors (P) Ltd.
reported in AIR 1970 Allahabad 165. From a bare reading of that judgment we
find that the said case related to interpretation of Section 394A of the
Companies Act with which we are not concerned in this case. Be that as it may,
there are observations in the said judgment, with respect, with which we do not
agree, both on the interpretation of Rule 67 and 69 on one hand as also on the basis
of the practical effect of the interpretation given by the High Court in the
present case. If at the threshold stage of directions to convene a meeting
hearing is required to be given to the members as held in the impugned judgment
the scheme of the Companies (Court) Rules 1959 will become unworkable. For the
above reasons, with respect, we disagree with the view expressed by the
Allahabad High Court in the case of Hind Auto Indo Ltd. (supra) and we agree
with the judgment of the Bombay High Court in the case of Sakamari Steel &
Alloys Ltd. (supra).
17 For the
aforestated reasons, we allow these civil appeals.
Consequently, the
impugned judgment is set aside with no order as to costs.
.............................J.
(S. H. KAPADIA)
.............................J
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