Companies Act Case Law Sesa Industries Ltd Vs Krishna H Bajaj & Ors

 Companies Act Case Law

Sesa Industries Ltd Vs Krishna H Bajaj & Ors

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 1430-1431 OF 2011
(Arising out of S.L.P (C) Nos. 8497-8498 of 2009)
SESA INDUSTRIES LTD. — APPELLANT

VERSUS
KRISHNA H. BAJAJ & ORS. — RESPONDENTS
J U D G M E N T
D.K. JAIN, J.:

 

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:
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. Sesa 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

 

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:

“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

 

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
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
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 (v) 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.
1 [2003] 46 SCL 38 (Guj)
2 [2005] 125 Comp Cas 297 (Bom)
3 [2007] 138 Comp Cas 204 (Guj)
1
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 646 (Mad)
6 [1977] 47 Comp Cas 802 (Cal)
7 [1994] 81 Comp Cas 38 (Ker)
1
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.8.
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
8 (2005) 5 SCC 294
9 [2006] 129 Comp Cas 471 (Guj)
10 [2006] 132 Comp Cas 548 (All)
1
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

 

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)

 

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

 

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) 113 Comp Cas 273
17 (2008) 142 Comp Cas 410 (Cal)
18 (2004) 121 Comp Cas 523

 

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 & Sons19.

 

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 re22, to contend that the proposed scheme was a ruse to stifle

 

19 (2007) 8 SCC 559
20 A.I.R. 1967 Bom. 456
21 [1948] 18 Comp Cas 144
22 A.I.R. 1940 Mad 139
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

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:-

 

“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.

(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
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

 

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 (1) SCC 499
24 (1986) 3 SCC 156

 

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

 

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

 

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 277

26 AIR 1968 SC 615

 

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

 

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.
…………………………………….

(D.K. JAIN, J.)
……………………………………..
(H.L. DATTU, J.)
NEW DELHI;
FEBRUARY 7, 2011.
ARS

 

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