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Issues Involved
1. Sanction of the court to a scheme of arrangement under section 391 of the Companies Act. 2. Necessary directions under section 394 of the Companies Act. 3. Opposition by the Central Government based on the Monopolies and Restrictive Trade Practices Act, 1969. 4. Requirement for the transferee company to apply under sections 391 and 394 of the Companies Act. Detailed Analysis 1. Sanction of the Court to a Scheme of Arrangement under Section 391 of the Companies Act The Bank of India Ltd. filed a petition for the court's sanction of a scheme of arrangement under section 391 of the Companies Act, following the nationalization of its business under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. The scheme involved the transfer of the bank's undertaking to the Ahmedabad Manufacturing & Calico Printing Company Ltd. (the transferee company). The scheme was approved by an overwhelming majority of the shareholders of the transferor company, with 3,70,194 votes in favor and only 36 votes against. 2. Necessary Directions under Section 394 of the Companies Act The court was also requested to provide necessary directions under section 394 of the Companies Act. Under the proposed scheme, for every four shares in the transferor company, the transferee company would issue and allot to the members of the transferor company: (i) one "A" ordinary share of Rs. 25 credited as fully paid and an entitlement to two fractions of 1/10 each of such "A" ordinary share; (ii) one eight percent convertible bond of Rs. 100 credited as fully paid; and (iii) four eight percent redeemable bonds of Rs. 116 each credited as fully paid. The transferee company would also increase its authorized capital by about Rs. 12 lakhs. 3. Opposition by the Central Government Based on the Monopolies and Restrictive Trade Practices Act, 1969 The Central Government opposed the petition on two grounds: (1) the scheme required the sanction of the Central Government under the Monopolies and Restrictive Trade Practices Act, 1969; and (2) an application under sections 391 and 394 of the Companies Act by the transferee company to the Gujarat High Court was also necessary. The court referred to a previous judgment (Union of India v. Tata Engineering and Locomotive Co. Ltd.) which held that temporary utilization of funds did not constitute carrying on investment business under the Monopolies and Restrictive Trade Practices Act, 1969. The court found this decision binding and rejected the Central Government's first ground of opposition. 4. Requirement for the Transferee Company to Apply Under Sections 391 and 394 of the Companies Act The court considered whether the transferee company also needed to apply under sections 391 and 394. The court noted that sections 391 and 394 did not explicitly state that they applied only to the transferor company. The court held that if a scheme affects the rights of the members or creditors of the transferee company, an application by the transferee company under these sections would be necessary. The court found that the scheme in the present case would affect the rights of the transferee company's members and creditors, as it involved the issuance of new types of equity shares and bonds. Therefore, the transferee company was required to apply under sections 391 and 394. The court also addressed three arguments presented by Mr. Sorabjee against the necessity of an application by the transferee company: 1. No Arrangement Between Transferee Company and Its Members: The court rejected this argument, stating that if the scheme affects the rights of the members or creditors, an application is necessary. 2. English Practice: The court found no support in English law or practice for the argument that an application by the transferee company is unnecessary. 3. Definition of "Company" in Section 390(a): The court rejected the argument that sections 391 and 394 do not apply to a transferee company in sound financial condition, stating that the definition in section 390(a) means a company "liable" to be wound up, not necessarily "capable" of being wound up. Conclusion The court concluded that the scheme required the sanction of both the transferor and transferee companies under sections 391 and 394 of the Companies Act. The petition was made absolute in terms of prayer (a), with the addition that the sanction by the appropriate High Court under section 391 and the necessary orders under section 394 must be obtained by both the transferor and transferee companies.
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