2019 (5) TMI 522 - SC - Companies Law

Central Government's compulsory amalgamation order under Section 396 Companies Act struck down for violating constitutional principles

63 MOONS TECHNOLOGIES LTD. (FORMERLY KNOWN AS FINANCIAL TECHNOLOGIES INDIA LTD.) & ORS. Versus UNION OF INDIA & ORS.

The SC held that the Central Government's compulsory amalgamation order under Section 396 of the Companies Act, 1956 was ultra vires and violated Article ... Empowerment of the Central Government to amalgamate companies in public interest - Applicability and construction of Section 396 of the Companies Act, 1956 - pre-requisite of Section 396, including compensation assessment - compulsory amalgamation of companies by a Central Government order - meaning of expression “essential” - Methods of valuation of shares - Validity of the amalgamation order under Articles 14, 19, and 300A of the Constitution of India. HELD THAT:- The Central Government’s satisfaction must be as to the conditions precedent mentioned in the Section as correctly understood in law, and must be based on facts that have been gathered by the Central Government to show that the conditions precedent exist when the order of the Central Government is made. There must be facts on which a reasonable body of persons properly instructed in law may hold that it is essential in public interest to amalgamate two or more companies. The formation of satisfaction cannot be on irrelevant or imaginary grounds, as that would vitiate the exercise of power. In the context of compulsory amalgamation of two or more companies, the expression “public interest” would mean the welfare of the public or the interest of society as a whole, as contrasted with the “selfish” interest of a group of private individuals. Thus, “public interest” may have regard to the interest of production of goods or services essential to the nation so that they may contribute to the nation’s welfare and progress, and in so doing, may also provide much needed employment. “Public interest” in this context would, therefore, mean the combining of resources of two or more companies so as to impact production and consumption of goods and services and employment of persons relatable thereto for the general benefit of the community. Conversely, any action that impedes promotion of industry or obstructs growth which is in national or public interest would run counter to public interest as mentioned in this Section. It is the Central Government that has to be “satisfied” that its order is in public interest and such “satisfaction” must, therefore, be of the Central Government itself and must, therefore, appear from the order itself. All these valiant attempts made to sustain such order must be rejected. Reading of Section 396(3), (3A), and (4) (aa) that every member or creditor of each of the companies before amalgamation shall have, as nearly as may be, the same interest in or rights against the company resulting from the amalgamation as he had in the original company. To the extent to which the interest or rights of such member or creditor are less than his interest or rights against the original company, post amalgamation, he shall be entitled to compensation which is to be assessed. Post assessment, if such member or creditor is aggrieved, he may prefer an appeal to the appellate authority under sub-section (3A). Under sub-section (4)(aa), no order of amalgamation can be made unless the time for preferring an appeal under sub-section (3A) has expired, or where any such appeal has been preferred, the appeal has been finally disposed of. The order dated 12.02.2016 is ultra vires Section 396 of the Companies Act, and violative of Article 14 of the Constitution of India. Issues Involved:1. Applicability and construction of Section 396 of the Companies Act, 1956.2. Whether the amalgamation order was essential in the public interest.3. Compliance with procedural requirements under Section 396, including compensation assessment.4. Validity of the amalgamation order under Articles 14, 19, and 300A of the Constitution of India.Issue-Wise Detailed Analysis:1. Applicability and Construction of Section 396 of the Companies Act, 1956:The case revolves around the interpretation of Section 396, which empowers the Central Government to amalgamate companies in public interest. The section mandates that the Central Government must be satisfied that such amalgamation is essential in the public interest. The section also requires that compensation be assessed for any loss of interest or rights of members or creditors due to the amalgamation.2. Whether the Amalgamation Order was Essential in the Public Interest:The Central Government's satisfaction regarding the necessity of the amalgamation was based on the Grant Thornton report and the FMC order, which highlighted fraudulent activities and financial mismanagement at NSEL. The Government argued that amalgamating NSEL with FTIL was essential to leverage combined assets, achieve efficient administration, and facilitate the recovery of dues from defaulters.However, the Supreme Court found that the essentiality test was not met. By the time the final amalgamation order was passed, significant progress had been made in recovering dues from defaulters, rendering the amalgamation unnecessary. The Court noted that the emergency situation which warranted the amalgamation in 2013 no longer existed in 2016.3. Compliance with Procedural Requirements under Section 396, Including Compensation Assessment:Section 396(3) mandates that members or creditors of the amalgamating companies should have the same interest in or rights against the amalgamated company as nearly as possible. If not, they are entitled to compensation. The assessment of compensation must be made by a prescribed authority, and an appeal can be made against this assessment.The Supreme Court found that the assessment order dated 01.04.2015 did not provide any compensation to the shareholders or creditors of FTIL, despite the clear economic loss they would suffer due to the amalgamation. This non-assessment of compensation was a violation of Section 396(3) and (4), making the amalgamation order procedurally flawed.4. Validity of the Amalgamation Order under Articles 14, 19, and 300A of the Constitution of India:The Court held that the amalgamation order was arbitrary and unreasonable, violating Article 14 of the Constitution. The order failed to satisfy the essentiality test and was not in public interest. The Court also noted that the order did not consider the economic value of shares, which is crucial for assessing the rights and interests of shareholders and creditors.Conclusion:The Supreme Court concluded that the amalgamation order dated 12.02.2016 was ultra vires Section 396 of the Companies Act and violative of Article 14 of the Constitution of India. The appeals were allowed, and the impugned judgment of the Bombay High Court was set aside. The writ petition was disposed of in light of this judgment.