2017 (12) TMI 338 - HC - Companies Law

Compulsory amalgamation of allegedly loss making wholly owned subsidiary (NSEL) with its profit making holding company (FTIL) in public interest - Whether the impugned order was made in violation of the principles of natural justice and fair play? - Held that - In this case, proceeding on the basis that the impugned order is an administrative or at the highest a quasi judicial order as urged by the petitioners, we find that there was no breach in compliance with the principles of natural justice and fair play. Therefore, we do not deem it necessary to address the issue as to whether the impugned order is in the nature of delegated or subordinate legislation. Even independent of any decision upon such issue, in the facts and circumstances of the present case, we are satisfied that no case has been made out to interfere with the impugned order on the ground of any failure in compliance with the principles of natural justice and fair play. Accordingly, for all the aforesaid reasons, we are unable to fault the impugned order on the ground of non compliance with the principles of natural justice and fair play or on the ground of any breach of our directions in order dated 4th February 2015. In this case, since FTIL, NSEL and in particular their shareholders have failed to demonstrate that they have been deprived of their property, there is no question of any infringement of Article 300A of the Constitution. The shareholders cannot confuse between the property of the companies and the interest which they hold by virtue of their shareholding. Further, none of the petitioners have demonstrated any infringement of their rights under Articles 14 and 19 of the Constitution. Accordingly, there is no necessity to go into the issue of any derivative immunity, which might or might not attach to the impugned order made under Section 396. Only if the petitioners had made out a case that the impugned order infringes the rights guaranteed to them under Articles 14, 19 or 300A of the Constitution, could the issue of derivative immunity have assumed importance. Since, this is not the case, we do not deem it necessary to go into the issue of derivative immunity. Therefore, upon cumulative consideration of the aforesaid, we are unable to accept the contention that the Central Government was dis-entitled in law or on facts to order the compulsory amalgamation of allegedly loss making wholly owned subsidiary (NSEL) with its profit making holding company (FTIL) in public interest by resort to Section 396 There is no infirmity in the assessment order dated 1st April 2015 to the extent, it denies compensation to the shareholders of FTIL. The same is the position of the creditors of FTIL. There is nothing in the provisions of Section 396(3) which suggest that prior hearing has to be afforded to members or creditors before assessment order is made. Nothing prevented the shareholders from raising their objections in response to the draft order. Several shareholders, including perhaps the petitioners, did in fact, raise objections. If the shareholders were aggrieved by the assessment order dated 1st April 2015 because it awarded them no compensation, nothing prevented them from instituting appeal under Section 396(3A) within period of 30 days from the date of publication of the assessment in the Official Gazette. At best, the contention now raised by the petitioners, which again, is not at all backed by any pleadings, is some hyper technical objection based upon the form of assessment order dated 1st April 2015. In the facts and circumstances of the present case, we are not inclined to exercise our extra-ordinary and equitable jurisdiction under Articles 226 and 227 of the Constitution and upset the impugned order on the ground urged. This is not a case where the Central Government or the prescribed authority has failed to make any order as contemplated by Section 396(3) or that the shareholders or creditors of FTIL were deprived of opportunity of appeal under Section 396(3A) and therefore there is any breach of the procedure prescribed in Section 396(4) in making the impugned order. Accordingly, we see no merit in the contention that the impugned order is ultra vires Section 396. If the provision in Section 396 is analyzed, it is apparent it represents a complete Code in so far as amalgamation of two or more companies by the Central Government in public interest, is concerned. Therefore, on the basis of circular dated 20th April 2011, it is not possible to read into Section 396 the provisions of Section 391. Since, the petitioners have failed to establish that the impugned order made by the Central Government is in violation of Article 14 of the Constitution, there is really no reason to go into the issue as to whether the impugned order enjoys any derivative immunity under Article 31A (1)(c) of the Constitution. The issue of immunity, whether derivative or otherwise would have arisen, had, the petitioners been able to establish that the impugned order was in violation of Articles 14 of 19 of the Constitution. Since, the petitioners have failed to establish any violation of Article 14 or 19 of the Constitution, there is no necessity to go into the issue of immunity, whether derivative or otherwise.Accordingly, we are unable to fault the impugned order on the ground of violation of Article 14 of the Constitution or on the basis of the petitioners reading of the Central Government s circular dated 20th April 2011. Taking into consideration the importance of stock and commodity exchanges to the national economy and the unprecedented situation which the Central Government was required to deal with in the wake of collapse of the entire commodities exchange, we are unable to hold that the impugned order was not made in national interest . We are unable to fault the impugned order on the ground that it makes no specific reference to national interest but focuses merely on public interest . The Central Government, in making the impugned order has balanced the interests of the two companies, its shareholders, creditors and employees on one hand and the interests, not only of the investors who may have claims, but also, of the investing public, which is required to be given the confidence that the Central Government will act to see that a holding company does not take shelter behind its wholly owned subsidiary and thereby shirk responsibility in the wake of such an unprecedented payment crisis. The three grounds or reasons stated in the impugned order, in our opinion, were sufficient to arrive at the subjective satisfaction that it was essential in public interest to order the amalgamation of the two companies. This is not a case of exercise of powers for any extraneous considerations or alien purposes. At this stage, the commodities sellers defaulted on their outstanding payments obligations to the Trading Clients to the extent of almost ₹ 5600 crores. The NSEL also sought to wriggle itself out of its obligations by contending that the counter guarantee was to apply only in relation to specified commodities and since none had been specified, the counter guarantee was in effective. The settlement guarantee fund to be maintained by NSEL and which was stated to be ₹ 738.55 crores as on 1st August 2013, was, on 4th August 2013 found to be only ₹ 62 crores. Even though the transactions at the spot exchange were to be backed by commodities supposedly checked and stored in warehouses owned and controlled by NSEL, SGS India Limited, which was appointed to inspect and audit the position, reported that stock worth only ₹ 358 crores was available, even though, NSEL, had solemnly stated that it has stocked valued at ₹ 2389.36 crores. This means that there was hardly any stock in the warehouses with which deliveries could be effected. All this, left the Trading Clients in a lurch. The impugned order details the nexus between NSEL and FTIL, in the context of the crisis, which led to the collapse of the spot exchange. For all these reasons, we are unable to fault the impugned order applying the test of Wednesbury unreasonableness. The conduct of the affairs of stock and commodity exchanges is of vital importance to the national economy. Stock and commodity exchanges provide vital hubs for investors and traders to trade in share and commodities. Commerce in modern economy is inconceivable without them. The perception of Indian economy, both locally and abroad, depends to a large extent on the functioning and the health of its stock and commodity exchanges. The failure of a national level commodity exchange under circumstances as stated in the impugned order, is clearly, a matter of serious concern. It is reported that almost 99.99% of the ostensible spot trading in commodities in the entire country was taking place on the NSEL spot exchange. The paired contracts offered by NSEL, which were in breach of the conditions of exemption notification, alone accounted for a turn over of ₹ 1,34,000 crores between the years 2009 to 2013. If exchanges such as these are permitted to be subverted or fail without honouring their obligations and commitments, the confidence in national economic institutions is bound to suffer and the repercussion to the national economy will be severe. In such situations, a negative perception about the business environment of the country is created, which has grave repercussions on the national economy. The Central Government, quite conscious of all such factors, has taken a balanced decision in the facts and circumstances of the present case. Therefore, in the facts and circumstances of the present case, even upon exercise of intensive review and the application of the test of proportionality, we see no reason to interfere with the impugned order.

Summary

Issues Involved:
1. Violation of principles of natural justice and fair play.
2. Empowerment of the Central Government to order compulsory amalgamation of a loss-making wholly-owned subsidiary with its profit-making holding company under Section 396 of the Companies Act.
3. Ultra vires of Section 396 (3) and Section 396(4) due to failure to assess compensation to shareholders of FTIL.
4. Hostile and invidious discrimination infringing Article 14 of the Constitution.
5. Failure to address the issue of national interest.
6. Absence of public interest in ordering amalgamation.
7. Sole reliance on facilitating NSEL in recovering dues from defaulters and the prohibition of adding reasons by affidavits.
8. Unreasonableness of the impugned order applying Wednesbury principles.
9. Defiance of the doctrine of proportionality.

Detailed Analysis:

Issue A: Violation of Principles of Natural Justice and Fair Play
The contention that the impugned order was made in violation of principles of natural justice and fair play was examined in light of Section 396 of the Companies Act and the directions in the court's order dated 4th February 2015. Section 396 requires sending a draft of the proposed order to the companies concerned and considering objections and suggestions from them. The Central Government complied with these requirements and also provided personal hearings to FTIL and NSEL. The objections from 50389 parties were considered, and the impugned order addressed these objections. The court found no significant prejudice to the petitioners and concluded that there was substantial compliance with the principles of natural justice and fair play.

Issue B: Empowerment of the Central Government
The legislative history of Section 396 indicates that it was intended to provide for the amalgamation of companies in public interest. The expression "interest of a shareholder in or rights against a company" does not include the economic value of the shareholding. The court held that the amalgamation of a loss-making wholly-owned subsidiary with its profit-making holding company is permissible under Section 396 if it serves public interest. The court found no statutory prohibition or violation of Articles 14, 19, or 300A of the Constitution in the impugned order.

Issue C: Ultra Vires of Section 396 (3) and Section 396(4)
The court found that an assessment order dated 1st April 2015 was made and published in the Official Gazette, determining that no compensation was payable to the shareholders of FTIL as their interests in or rights against the resultant company were not diminished. The petitioners' contention that there was no assessment order was rejected, and the court held that the assessment order was in compliance with Section 396(3).

Issue D: Hostile and Invidious Discrimination
The court rejected the contention that the Central Government practiced hostile or invidious discrimination by invoking Section 396 for the first time to amalgamate two non-government companies. The court found no merit in the comparison with other instances where Section 396 was invoked for government companies or the handling of the UTI payment crisis. The court held that the Central Government's action was not arbitrary or discriminatory and did not violate Article 14 of the Constitution.

Issue E: Failure to Address National Interest
The court held that the amendment to Section 396 substituting "national interest" with "public interest" was deliberate and intended to broaden the scope of the provision. The court found no requirement for the Central Government to address itself to the issue of national interest specifically, as the term "public interest" was sufficient to cover the objectives of the provision.

Issue F: Absence of Public Interest
The court found that the impugned order was made on three distinct grounds: restoring public confidence in forward contracts and exchanges, giving effect to business realities, and facilitating NSEL in recovering dues from defaulters. Each of these grounds constitutes a facet of public interest. The court held that the Central Government's action was in public interest and not for any extraneous purposes.

Issue G: Sole Reliance on Facilitating NSEL in Recovering Dues
The court rejected the contention that the impugned order was based on a solitary ground of facilitating NSEL in recovering dues. The court found that the order was based on three distinct grounds, each supported by objective facts. The court held that the Central Government's satisfaction was based on relevant considerations and was not vitiated by reliance on FMC's order or acting under dictation.

Issue H: Unreasonableness Applying Wednesbury Principles
The court found that the Central Government's decision was based on objective facts and was neither irrational nor unreasonable. The court held that the decision was within the bounds of legal reasonableness and did not exclude relevant considerations or include irrelevant ones.

Issue I: Defiance of the Doctrine of Proportionality
The court applied the proportionality test and found that the Central Government's action was necessary, rationally connected to the purpose, and balanced the interests of all stakeholders. The court held that the impugned order did not impose excessive restrictions and was proportionate to the public interest objectives it sought to achieve.

Conclusion:
The petitions were dismissed, and the interim orders were vacated. The court extended the interim order by 12 weeks from the date of the judgment.