2009 (3) TMI 582 - HC - Companies Law

Compromise and arrangement - Held that - No valid and good ground to refuse to grant the sanction qua the scheme, which, however, is subject to the conditions prescribed by this judgment and order. It is declared that this Court s decision regarding the relief prayed for in the petition (i.e., sanction or refusal to sanction the scheme), will not have any bearing on and will not affect the future actions by the respondent Central Government or any consequences which may ensue on account of any action of the company including the actions mentioned in the communication dated 17-10-2008 and/or 5-12-2008. The intimation dated 17-10-2008 and the subsequent communication dated 5-12-2008 would naturally be pursued and taken to its logical end in accordance with the provisions under the Act, by the Competent Authority. The scheme and/or the decision of the Court also would not give any impunity to the company or to the directors from any proceedings including prosecution and hence, the proceedings which might have been already initiated or which are likely to be initiated and may be initiated will not be effected in any manner.

Issues Involved:
1. Sanctioning of the Scheme of Arrangement under sections 391(1) and (2) of the Companies Act, 1956.
2. Validity of the Board of Directors' resolution in light of alleged breaches of sections 295 and 297 of the Companies Act, 1956.
3. Effect of alleged breaches on the sanctioning of the Scheme.

Issue-wise Detailed Analysis:

1. Sanctioning of the Scheme of Arrangement:
The petitioner sought the court's sanction for a Scheme of Arrangement under sections 391(1) and (2) of the Companies Act, 1956, which involved creating an "International Business Development Reserve" by appropriating Rs. 200 crore from its Securities Premium Account. The scheme was approved by an overwhelming majority of equity shareholders. The court noted that the scheme did not involve the diminution of liability in respect of unpaid share capital or payment to any shareholder of paid-up share capital and did not affect the interests of creditors. The court, therefore, found no objection to the scheme based on the shareholders' approval and the absence of any adverse impact on creditors.

2. Validity of the Board of Directors' Resolution:
The Central Government raised objections regarding the validity of the Board of Directors' resolution, citing alleged breaches of sections 295 and 297 of the Companies Act, 1956. It was contended that the petitioner company had extended a loan to a private company in which two of its directors were interested without prior approval from the Central Government, thereby violating section 295. Consequently, it was argued that the office of these directors had fallen vacant under section 283(1)(h), rendering the resolution invalid. However, the court noted that the resolution was passed unanimously by all 11 directors, including the two allegedly disqualified directors. Since the Articles of Association permitted passing resolutions by circular, and the resolution had the signatures of all directors, the court held that the resolution was valid even if the votes of the two directors were disregarded.

3. Effect of Alleged Breaches on the Sanctioning of the Scheme:
The Central Government also alleged a breach of section 297(1) concerning the payment of brokerage to a director without prior approval. The court acknowledged that these breaches, if proven, would entail consequences under the Act. However, it found that these breaches did not have a direct nexus with the provisions of the scheme or the statutory requirements for its sanction. The court emphasized that the scheme had been accepted and approved by a statutory majority of shareholders, and no objections regarding the scheme's terms or the procedure followed were raised. The court decided to sanction the scheme independently of the alleged breaches, noting that the competent authority could still pursue appropriate actions for the breaches under the Act.

Conclusion:
The court sanctioned the Scheme of Arrangement, subject to the conditions and clarifications that the sanction would not affect any future actions or proceedings regarding the alleged breaches. The court emphasized that the competent authority could still take appropriate actions concerning the breaches independently of the scheme's sanction. The petition was allowed, and the scheme was declared binding on the petitioner company and its shareholders. The court also directed the petitioner to pay costs to the Central Government.

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