2025 (11) TMI 207 - HC - Companies Law

Objections over non-receipt of notice create triable issue; matter remitted for re-evaluation of share-exchange ratio and expedited disposal

Buragohain Tea Company Limited, B And A Ltd. Versus Union of India, Sharmila Vijay Shetty (Vice And Versa).

HC held that objections alleging non-receipt of notice by a shareholder raised a triable issue but, since parties agreed re-evaluation of the ... Seeking sanction of the Court to the scheme of amalgamation - Sections 391(2) and 394 of the Companies Act, 1956 - whether the company court, while considering a proceeding for accord a sanction to a scheme of amalgamation under the Companies Act, can issue the directions as have been done in the present proceedings which are under appeal? HELD THAT:- The dispute raised to the scheme of amalgamation is on account of non receipt of notice by the Objector, namely, Smt. Sharmila Vijay Shetty who claims to be a share holder of Buragohain Tea Estate which is the transferor company. According to the objector, the notice was required to be served on the objector was never served and consequently, she was unaware of the meeting of shareholders held between the parties and therefore she was deprived of her opportunity to raise objections in the meeting that was concluded purportedly without issuance of notice to the objector. As have been discussed, the basic nuance of the objector is that she was deprived of the right of hearing with the shareholders meeting as she holds a sizeable percentage of shares. This contention of the objector is disputed by the learned Senior Counsel representing the Companies that the objector never attended any Annual General Meeting and the notice was served on the address which was available in the register maintained by the Companies of the members/ shareholders. The claim of the objector is that the address to which the notice was sent was her earlier address and the notice ought to have been sent to her present address is also disputed on the ground that the objector being a shareholder is aware of the procedure required to be maintained and any change in the notice ought to have been brought to the notice of the companies so that the necessary changes would have been effected to the address maintained in the registers by the Company. This Court is of the considered view that taking into consideration the fact that both the parties before the Court are agreed that consequential directions for re-evaluation of share exchange ratio were not called for, this Court considers it appropriate to dispose of these appeals remitting the matters back to the learned Company Judge to conclude the proceedings, as expeditiously as possible, without being influenced by the penultimate directions issued by the learned Company Judge on 28.07.2015. It will be open for the learned Company Judge to re-evaluate the matter and pass appropriate orders as to whether the sanction sought for the scheme of amalgamation ought to be granted with or without modifications. The learned Company Judge will also be at liberty to call for all the records from either or both the Companies or from the Registrar of Companies, if the need so arises to satisfy itself in respect of the share exchange ratio as projected in the scheme of amalgamation. After evaluating such materials as considered necessary, the learned Company Judge will dispose of the petition after passing appropriate order. The Company Appeals stand disposed of. ISSUES PRESENTED AND CONSIDERED 1. Whether the Company Court, in proceedings under Sections 391/394 of the Companies Act, may remit or direct the Registrar of Companies/Regional Director to re-evaluate or determine the share-exchange ratio proposed in a scheme of amalgamation. 2. What is the scope and limits of judicial review by the Company Court when sanctioning a scheme of amalgamation - in particular, whether the Court may substitute its commercial judgment for that of the shareholders or experts who approved the scheme. 3. Whether the absence or alleged non-service of notice to a shareholder entitled to vote at the statutory meetings of shareholders vitiates the meeting/approval or requires separate remedial action by the Company Court. 4. Whether, upon finding that a proposed exchange ratio appears unfair on the materials before it, the proper exercise of the Company Court's discretion is to refuse sanction outright, to modify the scheme, or to direct further inquiry and report. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Power to remit to Registrar of Companies/Regional Director for re-evaluation of share-exchange ratio Legal framework: Sections 391-395 and 392 of the Companies Act empower the Court to call meetings, sanction compromise/arrangement, supervise implementation and to give directions or modifications necessary for proper working of an approved scheme. Precedent treatment: The Court relied on authoritative precedent establishing that the Company Court's jurisdiction is supervisory and not appellate; it may decline sanction if scheme is unconscionable, illegal, or contrary to public policy, but generally will not substitute its commercial judgment for that of shareholders who acted bona fide and with requisite majority. Interpretation and reasoning: The Court found that Section 392 gives the Court power to 'give such directions' and 'make such modifications' for proper working of a sanctioned compromise/arrangement; this supervisory remit may include calling for materials and making inquiries necessary to satisfy itself about fairness and bona fides. Where the learned Company Judge expressed doubt about the material basis for an unusually generous exchange ratio, he directed the Registrar to examine and report through independent experts. The appellate Court observed that, although such direction was unusual and may lack supporting material in the Regional Director's affidavit, the statutory supervisory power and the need to ascertain bona fides furnished a legal basis for inquiry rather than immediate sanction or rejection. Ratio vs. Obiter: Ratio - Court may, under its supervisory jurisdiction and Section 392, call for further inquiry to satisfy itself about bona fides and fairness; Obiter - practical propriety of delegating valuation function to ROC absent materials. Conclusion: The Company Court has power to call for further inquiry and obtain expert assistance; a direction to the Registrar/Regional Director to examine an exchange ratio is within the supervisory ambit, provided the exercise remains consistent with statutory limits and is not used to usurp shareholders' commercial judgment. Issue 2 - Scope and limits of judicial review of commercial decision in sanctioning amalgamation Legal framework: Sections 391 and 393 require disclosure of material facts, holding of meetings and placement of explanatory statements; Section 392 permits supervision and modification. Judicial review must ensure statutory procedure, bona fides of majority, adequate material for informed voting, and that scheme is not unconscionable, illegal or against public policy. Precedent treatment (followed and applied): The Court applied precedent holding that (a) valuation is a technical matter usually left to experts and shareholders' commercial wisdom; (b) the Court's role is supervisory, not appellate; (c) the Court must ensure compliance with procedure, adequacy of disclosure, and absence of coercion or fraud - and may refuse sanction where those thresholds are not met. Interpretation and reasoning: The tribunal reiterated that it will not sit as an appellate body to second-guess reasonable commercial choices made by informed shareholders, but it may 'pierce the veil' when necessary to ascertain true purpose or detect illegality/fraud. Where the exchange ratio prima facie appeared 'heavily loaded' and no method or supporting material explained its basis, the Company Court was justified in requiring further scrutiny before final sanction. The appellate bench emphasised deference to the single judge's interim exercise of supervisory power unless the direction was perverse or contrary to law. Ratio vs. Obiter: Ratio - Company Court must ensure statutory procedure and fairness and may refuse sanction or require further inquiry if bona fides or fairness are doubted; Obiter - the precise limits of methods the Court may use to obtain valuation assistance (e.g., remitting to ROC) are context-sensitive. Conclusion: The Company Court's supervisory jurisdiction allows it to withhold final sanction and seek further material when the fairness/bona fides of a crucial term (exchange ratio) is inadequately explained; it must not, however, act as an appellate body to override bona fide commercial decisions supported by adequate disclosure and majority approval. Issue 3 - Adequacy of notice to shareholder and consequences of non-receipt Legal framework: Sections 391/393 require notices and explanatory statements so that members can vote informedly; principles from precedent establish that a properly convened class meeting binds the class if statutory majorities approve; failure to attend despite notice may amount to implied consent absent proof of non-service or prejudice. Precedent treatment: Courts have held that a shareholder who fails to notify change of address or does not avail of proxy rights cannot later challenge the meeting for lack of notice unless material irregularity or prejudice is demonstrated. Interpretation and reasoning: The Company Judge examined the fact-dispute about whether notices were sent to the address on the register and whether notices were widely published. The appellate bench accepted that where notice was sent to the registered address and widely published as ordered by the Court, the objection that a shareholder had not received notice requires proof of change of address or other procedural lapse. Absence from meetings despite notice does not automatically vitiate approvals; however, where a shareholder demonstrates lack of opportunity to be heard and substantial stake, the Court may examine fairness of process. Ratio vs. Obiter: Ratio - Proper service in accordance with company records and Court directions generally sustains meeting validity; Obiter - adequacy of notice in particular factual contexts may warrant further inquiry by the Company Court. Conclusion: The Company Court may treat non-receipt claims skeptically where evidence shows notices were sent as per the register and published; nevertheless, factual disputes on notice can justify further judicial consideration when linked to larger concerns about fairness of the scheme. Issue 4 - Appropriate remedy when exchange ratio appears unfair: reject, modify, or inquire Legal framework: Section 392 permits the Court to give directions and make modifications for proper working; the Court must ensure schemes are not unconscionable or violative of law. Precedent treatment: Authorities establish three remedial responses: (a) refuse sanction where scheme is unconscionable, illegal or fraudulent; (b) sanction where statutory safeguards and adequate disclosure exist, leaving commercial judgment to shareholders; (c) supervise/modify implementation where necessary for proper working. Interpretation and reasoning: The Company Judge did not finally sanction but indicated 'no objection in principle' while expressing concerns about the exchange ratio and therefore directed further inquiry. The appellate bench held that, given the interim nature of the order and extensive elapsed time since the proposed appointed date, remittal for final disposal by the Company Judge (with liberty to call records and experts) was appropriate rather than wholesale interference with the interim direction. The Court stressed that rejection is not the only appropriate remedy where reasonable doubt exists; further inquiry consistent with supervisory jurisdiction is permissible. Ratio vs. Obiter: Ratio - Where material inadequacy exists about a decisive term, the Company Court may order inquiry or modification rather than summarily sanctioning or rejecting the scheme; Obiter - direct delegation of valuation to ROC without material basis is disfavoured but not per se invalid if exercised within supervisory powers. Conclusion: The Company Court has a range of remedies; withholding final sanction and directing inquiry or calling for records/experts is a permissible supervisory measure when fairness/bona fides of a core feature (exchange ratio) is inadequately explained; ultimate disposal must be prompt and based on full evaluation. Final disposition and practical directions (as applied) The appellate bench declined to overturn the Company Judge's interim supervisory direction as perverse, but remitted the petition for expeditious conclusion by the Company Judge without being bound by the earlier penultimate directions; the Company Judge was left free to call for records, valuation inputs or expert assistance and to grant or refuse sanction with or without modifications based on a complete factual and legal appraisal. Interim directions previously issued were declared not to be applicable pending fresh disposal.