2011 (1) TMI 1218 - HC - Companies Law

Whether ordering a meeting of shareholders is mandatory before any compromise or arrangement is considered or agreed upon by members of a company? Held that - A meeting is to held, in my opinion, when there is plurality of members or creditors to be bound by it. If there is one preference shareholder or one creditor there is no possibility of a meeting to bind him. He takes his own decision. But if his decision is to bind another group, then that decision has to be approved by them. Say there is one creditor. He enters into an arrangement with the company. There is no scope for any meeting. But, if that decision, affects members it has to be placed before them for approval, in a meeting. In this circumstance the application for sanction is allowed.

Issues Involved:

1. Sanction of the scheme of arrangement (demerger) between SEPL and SEJPL.
2. Validity of the court's order dated 27-11-2007 dispensing with the formal meeting of shareholders.
3. Objections to the scheme by members of the Agarwal family and B.S. Sponge (P.) Ltd.
4. Compliance with statutory requirements under the Companies Act, 1956 and Companies (Court) Rules, 1959.
5. Power of the court to dispense with procedural formalities in convening meetings.

Issue-wise Detailed Analysis:

1. Sanction of the Scheme of Arrangement (Demerger) Between SEPL and SEJPL:

The petitioners, SEPL and SEJPL, sought the court's sanction for a scheme of arrangement described as a demerger. The scheme involved the transfer of the Jharsuguda unit from SEPL to SEJPL, along with all related assets, rights, and liabilities. The shareholders of SEPL were to be allotted shares in SEJPL in accordance with the scheme. The court noted that the scheme was duly advertised, and no significant objections were raised by the Central Government. The court directed the petitioners to increase the authorized share capital of SEJPL and comply with applicable accounting standards.

2. Validity of the Court's Order Dated 27-11-2007 Dispensing with the Formal Meeting of Shareholders:

The court had previously dispensed with the formal meeting of shareholders, noting that all members had signified their consent to the scheme. This decision was challenged on the grounds that it was erroneous and a nullity. The court examined the provisions of the Companies Act, 1956, and relevant case law, including the principles established in Mazda Theatres (P.) Ltd. v. New Bank of India Ltd. and Shaw Wallace & Co. Ltd. v. Hindustan Development Corporation Ltd. The court concluded that while it could not dispense with the holding of meetings altogether, it had the discretion to relax procedural formalities in certain cases, such as closely held or family companies.

3. Objections to the Scheme by Members of the Agarwal Family and B.S. Sponge (P.) Ltd.:

The primary objections raised were that the court's order dispensing with the meeting was erroneous, the scheme did not recite the implementation of the family settlement, and the scheme did not account for modifications directed by the court. The court found no substance in these objections, noting that the family settlement need not be mentioned in the scheme and that no case was made for lifting the corporate veil. The court emphasized that the scheme had been unanimously approved by the shareholders, and the objectors were not shareholders in the petitioner companies.

4. Compliance with Statutory Requirements Under the Companies Act, 1956 and Companies (Court) Rules, 1959:

The court extensively reviewed the statutory provisions governing compromises, arrangements, and reconstructions of companies. It noted that the Act provided safeguards against dishonest schemes and required disclosure of the company's financial position and any pending investigations. The court also considered the procedural rules for convening meetings and issuing notices. It concluded that while the Act mandated the holding of meetings, it allowed the court to direct the manner in which meetings were held and conducted, providing some flexibility in procedural requirements.

5. Power of the Court to Dispense with Procedural Formalities in Convening Meetings:

The court acknowledged that it had no power to dispense with the holding of meetings altogether, as mandated by the Companies Act, 1956. However, it could relax procedural formalities in appropriate cases, such as when the number of shareholders was small or the company was closely held. This discretion was exercised to avoid unnecessary costs, delay, and hardship. The court emphasized that such relaxation did not undermine the statutory requirement for meetings but allowed for a more practical approach in specific circumstances.

Conclusion:

The application for sanction of the scheme was allowed, with the court passing orders in terms of the prayers in the petition, subject to compliance with the directions in the order dated 27-11-2007. The objections raised were dismissed, and the court reiterated that it could not set aside the previous order as it was not a nullity. The court also clarified that meetings were necessary when there was a plurality of members or creditors, but procedural formalities could be relaxed in appropriate cases.

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