Companies Act Case Law Chembra Orchard Produce Ltd & Appellants Vs Regional Director of Company Affairs

Companies Act Case Law

Chembra Orchard Produce Ltd

& Appellants Vs Regional Director of Company Affairs

 

REPORTABLE
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 hereinbelow the
relevant Rules.

“Rule 2(9) `Judge’s summons’ means a summons returnable
before the Judge in Chambers or in Court.

2
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.
5
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
16
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.
(AFTAB ALAM)
New Delhi,
December 4, 2008

Leave a Comment