Sesa Industries Ltd.
Vs Krishna H. Bajaj & Ors. --
J U D G M E N T
D.K. JAIN, J.:
1.
Leave
granted.
2.
These
appeals, by special leave, are directed against the judgment dated 21st
February, 2009 delivered by a Division Bench of the High Court of Bombay at Goa
whereby the Division Bench has set aside the judgment of the learned Single Judge
dated 18th December, 2008, sanctioning a scheme of amalgamation between the
appellant company and Sesa Goa Limited (for short "SGL"), the
Transferee Company.
3.
Shorn
of unnecessary details, the facts material for the adjudication of these
appeals may be stated thus: 1 SGL was incorporated on 25th June, 1965 as a private
limited company, and thereafter, on 16th April, 1991 became a public company.
The appellant company viz. Ses a Industries Ltd. (for short "SIL") was
incorporated on 17th May, 1993 as a subsidiary of SGL with the latter holding
88.85% of the shares in the former.
4.
On
26th July, 2005, a resolution was passed by the Board of Directors of SIL to
amalgamate SIL with SGL, effective from 1st April, 2005. In pursuance thereof,
on 12th January, 2006, SIL and SGL filed respective company applications in the
Bombay High Court seeking the Court's permission to convene a general body
meeting.
5.
Respondent
No. 1 herein, holder of 0.29% of the shares in SIL, filed an affidavit on 18th January,
2006 intervening in the afore-mentioned company petitions. Subsequently, on 6th
March, 2006, respondent No. 1 also filed a letter dated 17th February, 2006 issued
by the Director of Inspection and Investigation, Ministry of Company Affairs,
Government of India, respondent No.3 herein, addressed to the Regional Director,
respondent No.2 in these appeals, together with a copy of the inspection report
under Section 209A of the Companies Act, 1956 (for short "the 2 Act").
At this juncture, it would be useful to extract relevant portion of the said
report, which reads as follows: "It will be apparent from the various
findings of the Inspection Report that the entire control of the day to day
working of the company is being managed by Mitsui & Co. Ltd., Japan whereby
huge turnover and profits are being siphoned away through systematic under invoicing
of international financial transactions and over invoicing of import of coal.
As regards inter-se transactions between SGL & SIL, systematic efforts have
been made by SGL to put SIL into weal financial position by siphoning of the
funds from SIL to SGL by over invoicing the price of iron ore and coke. In the process
the minority shareholders of SIL have been deprived of their reasonable return
in the forms of dividend or gains out of fair price of its shares. The minority
shareholders of (sic) SIL have been cheated through the systematically
siphoning the funds by SGL to the ultimate holding company i.e. M/s Mitsui
& Co. Ltd., Japan. The I.O. has suggested for redressal of grievances of
SIL by SGL in rescinding (sic.) the contract of purchase of shares at under
value price of Rs. 30/- per share."
6.
Ignoring
the objections raised by respondent No.1, vide order dated 18th March, 2006,
the High Court, allowed SIL and SGL to convene meetings for seeking approval of
shareholders for the said amalgamation, and directed the companies to disclose,
as part of the Explanatory Statement to be sent with individual notices, the
following observations from the inspection report: 3 "The Central Government
has issued a letter dated 17th February, 2006 to various governmental agencies
including the Regional Director (Western Region) enclosing a copy of the inspection
report and recording that during the course of the inspection the inspecting
officer has pointed out contraventions of Section 269 read with Section 198/309,
contravention of Section 289 read with Article no. 111 and 140 of the Articles,
contravention of Section 260 and 313, contravention of Section 268 read with
Section 256 and contravention of Section 628 of the Act. The Investigating
Officer has suggested invoking the provisions of Section 397 and 398 read with
Section 388B, 401, 402 and 406 of the Act including that of Section 542 of the
Act. The Inspection report has also pointed out financial irregularities and
also examined the complaints of Mrs. Kalpana Bhandari and Mrs. Krishna H. Bajaj
which have been reported in Part "A" of the Inspection Report.
Contravention of Section 297 of the Act has been reported in Part "B"
of the Inspection Report. It has also been suggested Part "D" of the
Inspection Report for references to be made to the Ministry of Finance and SEBI.
Accordingly, the Central Government has requested the addressees to examine the
report and take appropriate action."
7.
Thereafter,
on 8th May, 2006, the shareholders of SIL and SGL, by 99% majority, approved the
scheme of amalgamation, and respondent No.1 was the sole shareholder who
objected to the said scheme. SIL and SGL both filed petitions in the High Court
for according approval to the amalgamation scheme.
8.
On
10th August, 2006, the Registrar of Companies, Goa filed an affidavit as the
delegate of the Regional Director stating that SIL and SGL were 4 inspected
under Section 209A of the Act by the Inspecting Officers of the Ministry of
Company Affairs during the year 2005 and "any violation which may be
noticed during the course of inspection, there will be no dilution for initiating
legal action under the Act and that will not in any way affect the
amalgamation". The Registrar stated save and except the observations in
para 4 of the affidavit, which included forwarding of two complaints received
from respondent No.1, he had no objection to the scheme of amalgamation.
9.
On
the same day, Official Liquidator, respondent No.1 in these appeals, also filed
a report in the High Court, inter alia, stating that in light of the Auditor's
report dated 2nd August 2006, according to him the affairs of the transferor
company have not been conducted in a manner prejudicial to the interest of its
members or the public. Respondent No.1 filed an affidavit objecting to the
sanctioning of the scheme.
10.
On
24th August, 2006 respondent No. 1 filed Application No. 56 of 2006 praying for
production and/or inspection of some documents, including joint valuation
report submitted by M/s. N.M. Raiji and M/s. Hairbhakti & Co.; the
aforementioned Inspection Report relating to SGL and SIL, and issuance of notice
to the Bombay Stock Exchange and the National 5 Stock Exchange; the Ministry of
Company Affairs and the Central Government. On 9th February, 2009, while partly
allowing the said application the Company Court directed SGL and SIL to place
on record the joint valuation reports, the proxy register alongwith relevant
proxies held on 8th May, 2006. However, as regards other prayers, the
application was dismissed. Being aggrieved, respondent No.1 preferred an appeal
before the Division Bench. Vide order dated 25th April, 2007, the Division Bench
dismissed the appeal preferred by respondent No.1, observing that: "We
have gone through the two reports. We are of the opinion that the learned
Company Judge should take into consideration the said reports before passing
any final orders in the matter of approving the scheme of amalgamation of the
two companies for considering the purpose of it relevancy, in order to grant approval."
11.
Thereafter,
respondent No.1 filed yet another Company Application No. 24 of 2007, praying
that the reports dated 17th February, 2006 and 20th March, 2006 sent to the
Regional Director by the Ministry of Company Affairs be furnished to her. Vide
order dated 13th July, 2007, the Single Judge allowed the application. Being
aggrieved, SIL preferred an appeal before the Division Bench. Admitting the
appeal, vide order dated 23rd 6 August, 2007, the Division Bench granted
interim stay of the order dated 13th July, 2007. The order reads: "Perusal
of the impugned order, however, nowhere discloses consideration of the said aspect
of the relevancy of the document for the purpose of deciding the issue relating
to amalgamation of the company. We, however, make it clear that the process regarding
amalgamation shall proceed further in accordance with the provisions of law and
in terms of direction in order dated 25.4.07 regarding relevancy of the said
report."
12.
Finally,
vide judgment dated 18th December, 2008, the learned Company Judge sanctioned the
scheme of amalgamation between SGL and SIL, inter alia, observing that:
i.
since
inspection proceedings under Section 209A of the Act are different from an
investigation carried out in terms of Section 235 of the Act, they are not
required to be disclosed under the proviso to Section 391 of the Act;
ii.
in
any event, SIL and SGL have not suppressed any material facts as the letter
dated 17th February, 2006 was made part of the individual notices sent to the shareholders;
iii.
inspections
carried out under Section 209A of the Act cannot come in the way of sanctioning
of amalgamation, as they can only result in criminal prosecution of those
responsible for contravention of various Sections of the Act;
iv.
three
years have elapsed since the inspections but the Central Government has not taken
any further actions in terms of the 7 inspection reports, which shows that
investigations or action in terms of Section 401 of the Act was not in the
offing;
v.
the
Central Government has, through the Regional Director, clarified that the
merger would not come in the way of any action to be taken pursuant to the two
inspection reports,
vi.
non-disclosure
of pending criminal complaints is also not fatal to sanctioning of the scheme as
the Objector did not raise this contention earlier; pendency of criminal
complaints cannot be equated to "material facts" in terms of the
proviso to Section 391 of the Act and the merger will have no effect on the criminal
complaints;
vii.
merely
because the Registrar has failed to perform his duties, it cannot be said that
the scheme of amalgamation, which has been approved by a majority of the
shareholders, should be rejected;
viii.
the
onus is on the Objector to prove that a scheme is contrary to public interest
and is not just, fair and reasonable, and in the instant case, the Objector has
not discharged the burden cast on her;
ix.
the
objection in relation to the share valuation was not well-founded in as much as
the Objector has not placed any material to show that the valuation was unfair,
especially when an overwhelming majority of shareholders have approved the share
valuation;
x.
violation
of Section 73 of the Act is not sufficient to stall an amalgamation as the persons
responsible for the violation can be 8 effectively dealt with even after the
merger and
xi.
the
objection that the proposed scheme is unconscionable deserves to be rejected, as
the scheme has been approved by majority of the shareholders, as also the Central
Government. The learned Judge also clarified that the sanctioning of the scheme
will not come in the way of either civil or criminal proceedings which may be
initiated pursuant to the inspection reports as well as further progress of
criminal complaints filed by the objector.
13.
Aggrieved,
respondent No.1 preferred an intra-court appeal before a Division Bench of the
Court. The Division Bench has, vide the impugned judgment, set aside the order
of the learned Single Judge and revoked the sanction to the amalgamation
scheme. The division bench has, inter-alia, observed that:
i.
when
serious irregularities have been found in the inspection report and when the proceedings
on the basis of the said inspection report are still pending and no further
decision has been taken in this behalf and the Registrar as a delegate of the
Regional Director who was in possession of such inspection report, should not
have filed affidavits both, as the Official Liquidator as well as the Registrar
as the delegate of the Regional Director;
ii.
once
it is found that the report/affidavit on behalf of the Registrar/Regional Director
is not in conformity with the statutory provisions, this Court mechanically
cannot 9 sanction the scheme simply because the majority of the shareholders
have approved the scheme and the majority shareholders in their wisdom have accepted
the valuation regarding exchange ratio;
iii.
as
per the provisions of Section 393, the Registrar as well as the Liquidator,
both are required to submit their separate reports and both are, therefore, functioning
in a different capacity. It is surprising as to how the Official Liquidator who
was the incharge of the Registrar could have filed the affidavits one in the
capacity as a delegate of the Regional Director and the other in the capacity
as the Official Liquidator; (iv) the Affidavit of the Registrar is absolutely
noncommittal. In the affidavit of the Official Liquidator, he has mentioned that
the affairs of the company are not being conducted in a manner prejudicial to
the interests of its members or to public interest. But when the same person
filed affidavit as Registrar, this aspect is clearly omitted in his reply and
iv.
the
learned Company Judge himself has found that from the stand taken by the
Registrar, he has failed in his duty and it cannot be said that the requirement
of Section 394 has been complied with. In fact, two contradictory affidavits
have been filed by the same gentleman, one in his capacity as the delegate of the
Regional Director and the other in his capacity as the Official Liquidator.
When the law requires that there should be two independent 1 reports, it is
clear that the statutory provision has not been complied with.
14.
Hence
these appeals by SIL.
15.
We
heard Mr. K.K. Venugopal, Senior Advocate for the appellant, Mr. H.P. Raval,
learned Additional Solicitor General of India on behalf of respondent Nos.2 to
4 and Mr. Amar Dave, learned Advocate on behalf of respondent No.1 at
considerable length.
16.
Mr.
K.K. Venugopal, learned senior counsel strenuously urged that once a scheme of amalgamation
has been approved by a majority of the shareholders after sufficient disclosure
in the explanatory statement regarding the pendency of an inspection under
Section 209A of the Act, it is neither expedient nor desirable for Courts to
sit in judgment over a commercial decision of the shareholders. Relying on the decisions
in Reliance Petroleum Ltd., In re1, Programme Asia Trading Company Limited, In re2
and Core Health Care Ltd., In re3, learned counsel contended that it is settled
that pendency of an inspection under Section 209A or under Section 235 of the Act
should not stall a scheme of amalgamation.
17.
Learned
counsel submitted that the Division Bench erred in rejecting the scheme of
amalgamation on the sole ground that the requirement of the first proviso to
Section 394(1) of the Act has not been complied with, as it is settled that the
said proviso only applies to the amalgamation of a company which is being wound
up. Learned counsel stressed that in the instant case, the prayer in the
amalgamation petition was for "dissolution without winding up" and
hence only the second proviso to Section 394(1) was applicable. Relying on the decisions
of this Court in Regional Director, Company Law Board, Government of India Vs. Mysore
Galvanising Co. Pvt. Ltd. & Ors.4, Sugarcane Growers & Sakthi Sugars
Shareholders' Association Vs. Sakthi Sugars Ltd.5, Marybong and Kyel Tea Estate
Ltd., In re6 and Mathew Philip & Ors. Vs. Malayalam Plantations (India)
Ltd. & Anr.7, learned counsel contended that the use of the word
"further" in the second proviso to Section 394(1) of the Act does not
indicate that the said proviso is an additional provision in relation to the
situation contemplated under the first proviso. 4 [1976] 46 Comp Cas 639 (Kar) 5
[1998] 93 Comp Cas
18.
While
pointing out that the current investigation under Section 235 of the Act was initiated
in July, 2009, after the impugned judgment was delivered and was based on a fresh
complaint by respondent No.1, learned counsel urged that these investigations
are at a preliminary stage of mere allegations and the final report/accusation,
if any, the trial, its outcome and appeals etc., would all be a long drawn process,
which cannot hold up the amalgamation, as was opined by the Company Judge. Learned
counsel argued that the said finding of the Company Judge having not been
disturbed by the appellate bench, the same has attained finality. Drawing an
analogy with cases under the Election laws, learned counsel pleaded that unless
a person is convicted, no adverse inference can be drawn against him. In
support of the proposition, reliance was placed on the decision of this Court in
Ranjitsing Brahmajeetsing Sharma Vs. State of Maharashtra & Anr.
19.
Reliance
was placed on the decisions in Search Chem Industries Ltd., In re9 and Banaras
Beads Ltd., In re10 to contend that the pendency of the investigation cannot
come in the way of amalgamation in as much as even if the allegations are found
to be true, the same will lead only to a report under Section 241 of the Act
and ultimately a prosecution under Section 242 of the Act against the Directors/Principal
officers of the company, which would not dilute or affect the scheme of
amalgamation.
20.
Highlighting
the advantages of the amalgamation, learned counsel submitted that SIL being a
subsidiary of SGL, the amalgamation between both the said companies would entail
several benefits for both the companies, including consolidation of the management,
control and operation of both companies thereby resulting in considerable
savings by elimination of duplication of administrative expenses etc. Moreover,
according to the learned counsel, the shareholders of SIL, including the appellant,
will also stand to gain tremendously by allotment of shares of SGL, a very healthy
company. As per the amalgamation scheme, the shareholders of SIL will get one
share of SGL against five shares held by them in SIL. Learned counsel submitted
that 99.68% of the shareholders of both the appellants, viz. SIL and SGL having
approved the scheme, allowing a scheme of amalgamation to be stalled due to the
pendency of an investigation or inspection would lead to a situation whereby any
scheme for amalgamation can be held to ransom by a minority shareholder, like in
the instant case, where the first 1 respondent/complainant had voluntarily offloaded
5,31,950 shares pursuant to a voluntary offer made by SGL out of total
5,89,400/- shares held by him in SIL.
21.
Assailing
the observation of the appellate Bench that the same person viz. the Registrar
of Companies ought not to have filed both Affidavits himself as delegate of Regional
Director as well as the Official Liquidator, learned counsel urged that as
Section 448(1)(a) of the Act contemplates the possibility of part time Official
Liquidators, there was nothing improper in the approach of the Registrar in as much
as the Registrar had filed both the affidavits on 10th August, 2006, and the
same had to be read together, which disclosed all relevant materials. Additionally,
it was urged that the Single Judge had rightly concluded that a scheme of
amalgamation, which is just and fair, cannot be rejected merely because the
Official Liquidator had failed in his duty in placing the correct position
before the Court.
22.
Learned
counsel then submitted that in Life Insurance Corporation of India Vs. Escorts
Ltd. & Ors.11, this Court had held that the functioning 11 (1986) 1 SCC 264
1 of a company was akin to that of a parliamentary democracy wherein the overall
control is exercised by the majority of the shareholders. In the instant case,
majority of the shareholders had approved the scheme of amalgamation despite
having full knowledge of the proceedings against the Companies and the prima
facie findings. Moreover, Section 395 of the Act provides the power to acquire shares
of the shareholders dissenting from the scheme if the said scheme has been
approved by the holders of not less than nine-tenth in value of the shares of
whose transfer is involved.
23.
Mr.
Raval, the learned Additional Solicitor General, on the other hand, relying on a
decision of the Gujarat High Court in Wood Polymer Limited, In re12, submitted that
since the sanctioning of a scheme of amalgamation has the effect of imposing it
on dissenting members, before exercising the power conferred on it by Section
391(2) of the Act, the Court needs to examine the scheme in its proper perspective.
Learned counsel urged that it cannot be argued that merely because statutory
formalities are duly carried out, the Court has no option but to sanction the scheme.
Learned counsel also submitted that since inspection reports had been received
by the Registrar of Companies and 12 [1977] 47 Comp Cas 597 1 Official Liquidator,
respectively on 19th October, 2006 and 15th November, 2006, i.e. after the
filing of affidavit by them on 10th August, 2006, under Section 394 of the Act,
no fault can be found with their affidavits. It was asserted that since serious
irregularities had been found in the affairs of both SGL and SIL, cheating the
minority shareholders of SIL, the order sanctioning amalgamation of the said
companies cannot be permitted to be used for thwarting the investigations. Thus,
the learned Additional Solicitor General supported the impugned order.
24.
Mr.
Amar Dave, learned counsel appearing for respondent No.1, contended that the
provisions of Chapter V of Part VI of the Act were intended to introduce a
system of checks and balances to promote the interests of shareholders,
creditors and society at large so as to promote a healthy corporate governance culture,
and the Courts should adopt an interpretation that advances this object.
25.
Learned
counsel urged that in the instant case the provisions of Section 393(1)(a) of the
Act had not been complied with in as much as all material facts were not placed
before the shareholders, in particular the preliminary letters of findings
addressed to the Managing Director of SIL 1 by the Inspector pursuant to the
inspection under Section 209A of the Act on 28th September, 2005. According to the
learned counsel, a mere enclosure of an extract of covering letter dated 17th February,
2006 cannot be construed as sufficient compliance with the mandate of Section 393(1)(a),
as the said letter did not disclose the details of the findings to the effect
that the affairs of the company had been conducted in a manner which was prejudicial
to the interests of its members. Relying on the decision of this Court in Miheer
H. Mafatlal Vs. Mafatlal Industries Ltd.13, learned counsel contended that
sufficient information had not been disclosed to the shareholders so as to
enable them to take an informed decision.
26.
Learned
counsel contended that in light of the dictum laid down in Miheer H. Mafatlal (supra);
Bedrock Ltd., In re14 and T. Mathew Vs. Smt. Saroj G. Poddar15, the companies
had violated the provisions of the proviso to Section 391(2) of the Act in as
much as SIL and SGL had not disclosed the pendency of the criminal proceedings against
the companies and its directors, and of proceedings under Section 209A of the
Act. Learned counsel submitted that proceedings under Section 209A 13 (1997) 1
SCC 579 14 [2000] 101 Comp Cas 343 (Bom) 15 [1996] 22 CLA 200 (Bom) 1 of the
Act would fall under the category "and of the like" as mentioned in the
proviso to Section 391(2) of the Act, as every material fact which could affect
the Company Court's discretion has to be disclosed. Moreover, both the Companies
had not disclosed the final inspection reports under Section 209A of the Act, and
the same was brought on record by respondent No.1. Learned counsel further
submitted that the petitioner has failed to disclose even before this Court,
that the Serious Fraud Investigation Office (SFIO) was conducting an
investigation into the affairs of the company under the provisions of Section
235 of the Act, and even though the said investigation proceedings arose later,
the obligation under the proviso of Section 391(2) is a continuing obligation and,
therefore, the appellant was obliged to disclose the same before this Court as
well.
27.
Learned
counsel strenuously urged that the reports submitted by the Registrar as
delegate of the Regional Director and as Official Liquidator were clearly in
violation of the mandate of the proviso to Section 394(1) of the Act, in as
much as despite being in possession of the inspection reports prepared by the
Inspecting Officer of the Ministry of Company Affairs, the Official Liquidator filed
a misleading affidavit before the 1 Company Court, reporting "that the affairs
of the transferor Company were not being conducted in a manner prejudicial to
the interests of its members or to the public interest". It was alleged that
the affidavit submitted by the Official Liquidator was solely based on the
report of one M/s S.R. Kenkre & Associates, Chartered Accountants, who in
turn had based their entire report on the information supplied by the Company,
without any independent verification. Relying on the decisions in Securities and
Exchange Board of India Vs. Sterlite Industries (India) Ltd.16; Modus Analysis
and Information P. Ltd. & Ors, In re17; Miheer H. Mafatlal (supra); Larsen
and Toubro Limited, In re18; Wood Polymer (supra) and T. Mathew (supra),
learned counsel argued that the Division Bench had rightly concluded that the
mandate of Section 394 had not been complied with thereby raising a statutory
embargo on the approval of the scheme of amalgamation. Further, the disclosure
of all material information to the shareholders, which included the pendency of
criminal proceedings; inspection proceedings under Section 209A of the Act, and
proceedings under Section 235 of the Act in the report of the Official Liquidator
under Section 394(1) of the Act constitute jurisdictional requirements, and unless
all of them were satisfied, the 16 (2003) Company Court had no jurisdiction to
sanction the scheme. In support, reliance was placed on the decision of this Court
in Carona Ltd. Vs. Parvathy Swaminathan & Sons
28.
Learned
counsel then contended that the fact of huge siphoning off the funds from the transferor
company (SIL) to the transferee company (SGL) being within the knowledge of the
Company Court, it should not have sanctioned the scheme, as the distinction
between the wrongdoer and the beneficiary gets effaced due to sanctions of law.
Learned counsel also argued that under the attending circumstances the swap
ratio of 1 share of the transferee company for 5 shares of the transferor
company was also unfair, especially when the valuers did not have an
opportunity to examine the inspection reports under Section 209A of the Act.
29.
Reliance
was placed on the decisions in J.S. Davar & Anr. Vs. Dr. Shankar Vishnu Marathe
& Ors.20; T. Mathew (supra); Calcutta Industrial Bank Ltd., In re21 and
Travancore National & Quilon Bank Ltd., In re 22, to contend that the
proposed scheme was a ruse to stifle 19 (2007) 8 SCC 559 20 A.I.R. 1967 Bom. further
inquiry into the affairs of the transferor and transferee company and their managements
which have been initiated by the Ministry of Company Affairs, as also criminal
and civil proceedings that may arise thereafter because after the amalgamation,
it may not be possible to initiate any proceedings against the transferor
company as it would cease to exist. Moreover, the proceedings under Sections
244, 397, 398, 401, 402, 406 and 542 of the Act against the transferor company
cannot be initiated against the transferee company even if the transferee
company has undertaken to take over all the future liabilities of the transferor
company. Learned counsel thus, asserted that in light of the serious findings
in the inspection report under Section 209A of the Act, sanction of the scheme
would be detrimental to public interest, more so when on sanction of the scheme
of amalgamation, the transferor company would cease to exist, losing its entity
and in the process its functionaries will go scot free.
30.
Relying
on Miheer H. Mafatlal (supra), learned counsel contended that the proposed
scheme of amalgamation was unconscionable, in as much as the minority shareholders
of the transferor company have been oppressed, and in fact the "exit option"
offered by the transferee 2 company to the minority shareholders of transferor
company on 5th June 2003, at an extremely undervalued price of ` 30 per share
was in violation of Section 395 of the Act.
31.
Lastly,
learned counsel urged that though the decision of the majority of the shareholders,
while sanctioning the scheme, is of paramount importance, but in the instant case,
since 99.80% of the votes of the transferor company were those of the transferee
company itself, the significance of the majority decision was of no relevance
and, therefore, under these circumstances the Company Court was required to ensure
that the rights of the minority were not trammeled upon, as observed in Miheer
H. Mafatlal (supra); Bedrock Ltd. (supra); T. Mathew (supra); J.S. Davar
(supra) and Calcutta Industrial Bank Ltd. (supra).
32.
Before
addressing the issues raised, it will be useful to survey the relevant
provisions contained in Chapter V of Part VI of the Act, which deal with "Arbitrations,
compromises, arrangements and reconstructions". Section 391 of the Act, clothes
the Court with the power to sanction a compromise or arrangements made by a
company with its creditors and members. It reads as follows:- 2 "S.391.Power
to compromise or make arrangements with creditors and members.—
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.
1.
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,
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
2 relation to the company under Sections 235 to 251, and the like."Section
394 of the Act, lays down the procedure for facilitating reconstruction and
amalgamation of companies. It reads as under: "S.394. Provisions for facilitating
reconstruction and amalgamation of companies.—
1. Where an application is
made to the Court under Section 391 for the sanctioning of a compromise or
arrangement proposed between a company and any such persons as are mentioned in
that section, and it is shown to the Court—
a. that the compromise
or arrangement has been proposed for the purposes of, or in connection with,
a scheme for the reconstruction of any company or companies, or the amalgamation
of any two or more companies; and (b) that under the scheme the whole or any part
of the undertaking, property or liabilities of any company concerned in the
scheme (in this section referred to as a `transferor company') is to be transferred
to another company (in this section referred to as `the transferee company');
the Court may, either by the order sanctioning the compromise or arrangement
or by a subsequent order, make provision for all or any of the following
matters:--
i.
the
transfer to the transferee company of the whole or any part of the
undertaking, property or liabilities of any transferor company;
ii.
the
allotment or appropriation by the transferee company of any shares,
debentures, policies or other like interests in that company which, under the
compromise or arrangement, are to be allotted or appropriated by that company
to or for any person;
iii.
the
continuation by or against the transferee company of any legal proceedings pending
by or against any transferor company;
iv.
the
dissolution, without winding up, of any transferor company;
v.
the
provision to be made for any persons who, within such time and in such manner
as the Court directs, dissent from the compromise on arrangement; and
vi.
such
incidental, consequential and supplemental matters as are necessary to secure
that the reconstruction or amalgamation shall be fully and effectively
carried out: Provided that no compromise or arrangement proposed for the purposes
of, or in connection with, a scheme for the amalgamation of a company, which is
being wound up, with any other company or companies, shall be sanctioned by the
Court unless the Court has received a report from the Company Law Board or the
Registrar that the affairs of the company have not been conducted in a manner
prejudicial to the interests of its members or to public interest: Provided further
that no order for the dissolution of any transferor company under clause (iv) shall
be made by the Court unless the Official Liquidator has, on scrutiny of the books
and papers of the company, made a report to the Court that the affairs of the
company have not been conducted in a manner prejudicial to the interests of its
members or to public interest. ..........................................................................."
33.
It
is plain from the afore-extracted provisions that when a scheme of amalgamation/merger
of a company is placed before the Court for its sanction, in the first instance
the Court has to direct holding of meetings in the manner stipulated in Section
391 of the Act. Thereafter before sanctioning such a scheme, even though
approved by a majority of the 2 concerned members or creditors, 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 the said sub-section. First
proviso to Section 394 of the Act stipulates that no scheme of amalgamation of
a company, which is being wound up, with any other company, shall be sanctioned
by the Court unless the Court has received a report from the Company Law Board
or the Registrar to the effect that the affairs of the company have not been
conducted in a manner prejudicial to the interests of its members or to public interest.
Similarly, second proviso to the said Section provides that no order for the dissolution
of any transferor company under clause (iv) of sub-section (1) of Section 394
of the Act shall be made unless the official liquidator has, on scrutiny of the
books and papers of the company, made a report to the Court that the affairs of
the company have not been conducted in a manner prejudicial to the interests of
its members or to public interest. Thus, Section 394 of the Act casts an
obligation on the Court to be satisfied that the scheme of amalgamation or
merger is not prejudicial to the interest of its members or to public interest.
34.
Therefore,
while it is trite to say that the court called upon to sanction a scheme of
amalgamation would not act as a court of appeal and sit in judgment over the
informed view of the concerned parties to the scheme, as the same is best left
to the corporate and commercial wisdom of the parties concerned, yet it is
clearly discernible from a conjoint reading of the aforesaid provisions that the
Court before whom the scheme is placed, is not expected to put its seal of
approval on the scheme merely because the majority of the shareholders have voted
in favour of the scheme. Since the scheme which gets sanctioned by the court
would be binding on the dissenting minority shareholders or creditors, the
court is obliged to examine the scheme in its proper perspective together with
its various manifestations and ramifications with a view to finding out whether
the scheme is fair, just and reasonable to the concerned members and is not
contrary to any law or public policy. (See: Hindustan Lever Employees Union Vs.
Hindustan Lever Ltd. & Ors.23). The expression "public policy" is
not defined in the Act. The expression is incapable of precise definition. It
connotes some matter which concerns the public good and the public interest. (See:
Central Inland Water Transport Corporation Limited & Anr. Vs. Brojo Nath
Ganguly & Anr.24.)23 1995 Supp
35.
In
Miheer H. Mafatlal (supra), this Court had, while examining the scope and ambit
of jurisdiction of the Company Court, culled out the following broad contours
of such jurisdiction: "1. The sanctioning court has to see to it that all
the requisite statutory procedure for supporting such a scheme has been complied
with and that the requisite meetings as contemplated by Section 391(1)(a) have
been held. 2. That the scheme put up for sanction of the Court is backed up by
the requisite majority vote as required by Section 391 sub-section (2). 3. That
the meetings concerned of the creditors or members or any class of them had the
relevant material to enable the voters to arrive at an informed decision for approving
the scheme in question. That the majority decision of the concerned class of
voters is just and fair to the class as a whole so as to legitimately bind even
the dissenting members of that class. 4. That all necessary material indicated by
Section 393(1)(a) is placed before the voters at the meetings concerned as
contemplated by Section 391 sub-section (1). 5. That all the requisite material
contemplated by the proviso of sub-section (2) of Section 391 of the Act is
placed before the Court by the applicant concerned seeking sanction for such a
scheme and the Court gets satisfied about the same. 6. That the proposed scheme
of compromise and arrangement is not found to be violative of any provision of
law and is not contrary to public policy. For ascertaining the real purpose
underlying the scheme with a view to be satisfied on this aspect, the Court, if
necessary, can pierce the veil of apparent corporate purpose underlying the scheme
and can judiciously X-ray the same. 7. That the Company Court has also to satisfy
itself that members or class of members or creditors or class of creditors, as
the case may be, were acting bona fide and in good faith and 2 were not coercing
the minority in order to promote any interest adverse to that of the latter
comprising the same class whom they purported to represent. 8. That the scheme
as a whole is also found to be just, fair and reasonable from the point of view
of prudent men of business taking a commercial decision beneficial to the class
represented by them for whom the scheme is meant. 9. Once the aforesaid broad parameters
about the requirements of a scheme for getting sanction of the Court are found to
have been met, the Court will have no further jurisdiction to sit in appeal
over the commercial wisdom of the majority of the class of persons who with
their open eyes have given their approval to the scheme even if in the view of
the Court there would be a better scheme for the company and its members or creditors
for whom the scheme is framed. The Court cannot refuse to sanction such a
scheme on that ground as it would otherwise amount to the Court exercising appellate
jurisdiction over the scheme rather than its supervisory jurisdiction."
36.
It
is manifest that before according its sanction to a scheme of amalgamation, the
Court has to see that the provisions of the Act have been duly complied with;
the statutory majority has been acting bona fide and in good faith and are not
coercing the minority in order to promote any interest adverse to that of the
latter comprising the same class whom they purport to represent and the scheme as
a whole is just, fair and reasonable from the point of view of a prudent and reasonable
businessman taking a commercial decision.
37.
Thus,
the first question is as to whether the appellant and SGL had disclosed
sufficient information to the shareholders so as to enable them to arrive at an
informed decision? The proviso to Section 391 (2) requires a company to
"disclose pendency of any investigation in relation to the company under
Sections 235 to 351, and the like". Though it is true that inspection
under Section 209A of the Act, strictly speaking, may not be in the nature of
an investigation, but at the same time it cannot be construed as an innocuous
exercise for record, in as much as if anything objectionable or fraudulent in
the conduct of the affairs of the company is detected during the course of
inspection, it may lay the foundation for the purpose of investigations under
Sections 235 and 237 of the Act, as is the case here. Therefore, existence of
proceedings under Section 209A must be disclosed in terms of the proviso to
Section 391(2). In any event, we are of the opinion that since the said issue
is a question of fact, based on appreciation of evidence, and both the Courts
below have held that the information supplied was sufficient, particularly in light
of the order passed by the Single Judge on 18th March, 2006, we are not
inclined to disturb the said concurrent finding of the Courts below,
particularly when it is not shown that the said finding suffers from any demonstrable
3 perversity. (See: Firm Sriniwas Ram Kumar Vs. Mahabir Prasad & Ors.25 and
Ganga Bishnu Swaika Vs. Calcutta Pinjrapole Society26.)
38.
The
next issue that arises for our determination is whether the Division Bench was correct
in holding that the affidavit filed by the Official Liquidator was vitiated on
account of non-disclosure of all material facts. From a bare perusal of the affidavit
dated 10th February, 2006, it is manifest, ex facie, that before filing the
affidavit, the said official had not examined and applied its mind to the
findings contained in the inspection report under Section 209A of the Act. While
it is true that it was not within the domain of the Official Liquidator to
determine the relvency or otherwise of the said report, yet he was obliged to incorporate
in his affidavit the contents of the inspection report. We are convinced that
the official liquidator had failed to discharge the statutory burden placed on him
under the second proviso to Section 394(1) of the Act.
39.
An
Official Liquidator acts as a watchdog of the Company Court, reposed with the duty
of satisfying the Court that the affairs of the company, being dissolved, have not
been carried out in a manner prejudicial to the interests of its members and
the interest of the public at large. In essence, the Official Liquidator
assists the Court in appreciating 25 1951 SCR 27726 AIR 1968 SC 615 3 the other
side of the picture before it, and it is only upon consideration of the amalgamation
scheme, together with the report of the Official Liquidator, that the Court can
arrive at a final conclusion that the scheme is in keeping with the mandate of
the Act and that of public interest in general. It, therefore, follows that for
examining the questions as to why the transferor-company came into existence;
for what purpose it was set up; who were its promoters; who were controlling
it; what object was sought to be achieved by dissolving it and merging with another
company, by way of a scheme of amalgamation, the report of an official liquidator
is of seminal importance and in fact facilitates the Company Judge to record its
satisfaction as to whether or not the affairs of the transferor company had
been carried on in a manner prejudicial to the interest of the minority and to
the public interest.
40.
In
the present case, we are unable to appreciate why the Official Liquidator, who
was aware of the inspection report dated 17th February, 2006 under Section 209A
containing adverse comments on the affairs of both the companies, relied only on
the report of the auditors, which admittedly was not even verified. We can only
lament the conduct of the official liquidator.
41.
Having
held that the Official Liquidator had failed to discharge the duty cast on him
in terms of the second proviso to Section 394(1) of the Act, the next issue
that requires consideration is whether sanction of a scheme of amalgamation can
be held up merely because the conduct of an Official Liquidator is found to be
blameworthy? We are of the view that it will neither be proper nor feasible to
lay down absolute parameters in this behalf. The effect of misdemeanour on the part
of the official liquidator on the scheme as such would depend on the facts
obtaining in each case and ordinarily the Company Judge should be the final
arbiter on that issue. In the instant case, indubitably, the findings in the
report under Section 209A of the Act were placed before the Company Judge, and he
had considered the same while sanctioning the scheme of amalgamation.
Therefore, in the facts and circumstances of the present case, the Company
Judge had, before him, all material facts which had a direct bearing on the sanction
of the amalgamation scheme, despite the aforestated lapse on the part of the
Official Liquidator. In this view of the matter, we are of the considered
opinion that the Company Judge, having examined all material facts, was
justified in sanctioning the scheme of amalgamation, particularly when the
current investigation under Section 235 of the Act was initiated pursuant to a
complaint filed by respondent 3 No.1 subsequent to the order of the Company Judge
sanctioning the scheme.
42.
For
the foregoing reasons, the appeals are allowed; and the impugned judgment is
set aside. Consequently, the order passed by the Company Judge sanctioning the
scheme of amalgamation is restored. However, it is made clear that the scheme
of amalgamation will not come in the way of any civil or criminal proceedings
which may arise pursuant to the action initiated under Sections 209A or 235 of the
Act, or any criminal proceedings filed by respondent No. 1. 43.In the facts and
circumstances of the case, there will be no order as to costs.
...........................................
J. (D.K. JAIN,)
...........................................
J.(H.L. DATTU, J.)
NEW
DELHI;
FEBRUARY
7, 2011.
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