2003 (2) TMI 399 - HC - Companies Law

Summary

Issues Involved:

1. Sanction of the scheme of compromise and/or arrangement under section 391(2) of the Companies Act, 1956.
2. Validity of the scheme involving buy-back of shares and compliance with section 77A of the Companies Act, 1956.
3. Consideration of objections by shareholders and observations by the Central Government.
4. Approval process and methodology for the scheme, including the concept of negative consent.

Detailed Analysis:

1. Sanction of the Scheme of Compromise and/or Arrangement:

The petitioner sought the sanction of a scheme of compromise and/or arrangement under section 391(2) of the Companies Act, 1956, between the petitioner company and its shareholders. The scheme aimed to reduce the wide base of its equity share capital by paying back small shareholders holding up to 99 equity shares per folio in physical form and extinguishing the same. The scheme was proposed to be mutually beneficial for the company and its shareholders, providing an exit route for small shareholders at a price better than the market value.

2. Validity of the Scheme Involving Buy-Back of Shares and Compliance with Section 77A:

The Central Government observed that the scheme involved a buy-back of shares, for which the company should have adopted the procedure laid down under section 77A of the Companies Act, 1956. However, the court noted that section 77A envisages buy-back of shares from all present shareholders on a proportionate basis, which was not applicable in this case. The scheme was framed under section 391, which deals with compromise and arrangement, and not under section 77A. The court referred to the judgment of the Bombay High Court in the case of Sterlite Industries (India) Ltd., which clarified that section 77A and section 391 operate in independent fields.

3. Consideration of Objections by Shareholders and Observations by the Central Government:

Two shareholders objected to the scheme, arguing it was not fair and that shareholders should be given a better offer. The court found these objections to be without merit, noting that the scheme was optional, and shareholders who did not want their shares to be bought could choose to continue as shareholders. The Central Government's observations highlighted the negative option in the scheme, which was deemed against the interest of small shareholders. However, the court concluded that the observations were without basis, as the scheme was approved by the statutory majority at duly convened meetings.

4. Approval Process and Methodology for the Scheme, Including the Concept of Negative Consent:

The scheme was approved by more than 99% of the eligible shareholders, and unanimously by other shareholders, secured creditors, and unsecured creditors. The court emphasized that the scheme was not based on negative consent but was approved by express approval of members present and voting at the meetings. The methodology for buy-back, where shareholders who did not want to continue as shareholders remained silent, was part of the scheme approved by the shareholders. The court found this method valid, as it followed the prior agreement among the parties on how transactions would be undertaken. The court also noted that similar schemes had been approved by other courts, such as the Bombay High Court in the case of Jay Corp. Ltd.

Conclusion:

The court sanctioned the scheme of arrangement, finding it just, fair, and reasonable. It rejected the objections of the shareholders and the observations of the Central Government, concluding that the scheme was in the interest of the shareholders and complied with the relevant provisions of the Companies Act, 1956. The petitioner was permitted to reduce its issued, subscribed, and paid-up capital in terms of the resolution passed at the general meeting of the company. The petitioner was also directed to pay the costs of the petition to the Central Government, quantified at Rs. 3,500.