TaxTMI 
TaxTMI 
2011 (2) TMI 1263
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....ese appeals may be stated thus : SGL was incorporated on 25-6-1965 as a private limited company, and thereafter, on 16-4-1991 became a public company. The appellant company viz., Sesa Industries Ltd. ('SIL') was incorporated on 17-5-1993 as a subsidiary of SGL with the latter holding 88.85 per cent of the shares in the former. 4. On 26-7-2005, a resolution was passed by the Board of Directors of SIL to amalgamate SIL with SGL, effective from 1-4-2005. In pursuance thereof, on 12-1-2006, 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 per cent of the shares in SIL, filed an affidavit on 18-1-2006 intervening in the aforementioned company petitions. Subsequently, on 6-3-2006, respondent No. 1 also filed a letter dated 17-2-2006 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 ....
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....ts 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 addresses to examine the report and take appropriate action." 7. Thereafter, on 8-5-2006, the shareholders of SIL and SGL, by 99 per cent 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 10-8-2006, 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 th....
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....owever, 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 25-4-2007 regarding relevancy of the said report." 12. Finally, vide judgment dated 18-12-2008, 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 17-2-2006 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 ....
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....und 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 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....
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....gamation 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 v. Mysore Galvanising Co. (P.) Ltd. [1976] 46 Comp. Cas. 639 (Kar.), Sugarcane Growers & Sakthi Shareholders' Association v. Sakthi Sugars Ltd. [1998] 93 Comp. Cas. 646 3 (Mad.), Marybong & Kyel Tea Estate Ltd., In re [1977] 47 Comp. Cas. 802 (Cal.) and Mathew Philip v. Malayalam Plantations (India) Ltd. [1994] 81 Comp. Cas. 38 (Ker.), 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. 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., w....
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.... 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 10-8-2006, 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 Corpn. of India v. Escorts Ltd. [1986] 1 SCC 264 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 des....
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....d counsel, a mere enclosure of an extract of covering letter dated 17-2-2006 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 v. Mafatlal Industries Ltd. [1997] 1 SCC 579, 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's case (supra); Bedrock Ltd., In re [2000] 101 Comp. Cas. 343 (Bom.) and T. Mathew v. Smt. Saroj G. Poddar [1996] 22 CLA 200 (Bom.), 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 of the Act would fall under the category ....
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....uded 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 Company Court had no jurisdiction to sanction the scheme. In support, reliance was placed on the decision of this Court in Carona Ltd. v. Parvathy Swaminathan & Sons [2007] 8 SCC 559. 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 v. Dr. Shankar Vishnu Marath....
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.... 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 :- "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 ....
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....ngement, 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....
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....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 v. Hindustan Lever Ltd. [1995] Supp (1) SCC 4991). 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 Corpn. Ltd. v. Brojo Nath Ganguly [1986] 3 SCC 156.) 35. In Miheer H. Mafatlal's case (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 a....
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....hom 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 i....
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....ion 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 17-2-2006 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 he....