9911796707
TMI Blog1996 (10) TMI 416X X X X Extracts X X X X X X X X Extracts X X X X ..... n to convene and hold the said meetings and to report the results thereof to this court. The meeting of the equity shareholders of the transferee-company, petitioner No. 1, Kusum Products Ltd., was held on August 4, 1995. The said meeting was attended by 26 equity shareholders holding 39,15,936 equity shares which constitutes 99.50 per cent. of the total value of the issued share captial of petitioner No. 1. All the equity shareholders present in the meeting and holding equity shares voted in favour of the said scheme being adopted and carried into effect without any modification. No shareholder voted against the scheme. In the premises, the said scheme was approved without any modification both in number and value by the requisite majority of the equity shareholders of the transferee-company. The report of the chairman of the said meeting has been annexed and marked "G" to the petition. The meeting of the equity shareholders of the transferor-company Kusum Agrotech Ltd. was held on August 4, 1995, at 3 p. m. The said meeting was attended by 369 equity shareholders holding 43,79,900 equity shares, which constitutes 50.34 per cent. of the total value of the issued equity shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad been propounded and is now seeking to oppose the said petition for sanction of the scheme. It has been submitted on behalf of the petitioner that all the statutory formalities have duly been complied with. In other words, the meetings have been duly convened and held and the scheme was approved by the requisite majority. It has been further submitted that the chairman of the respective meetings duly issued or. caused to be issued the individual notices to the members of the petitioner-companies, issued or caused to be issued the advertisements, convening the meetings and presided over the meetings and submitted their reports to this court on the results of the meetings. It has been further submitted that the notices of the meeting and the explanatory statement under section 393 were duly settled by the Assistant Registrar (Companies) of this court. The individual notices were sent to all the members of the petitioner-companies and the notice was also duly advertised in the Economic Times and Janasatta on July 6,1995. No shareholder of either of the companies has complained of non-receipt of notice or any defect in the explanatory statement. The explanatory statement un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction the learned advocate for the petitioners has relied upon the following decisions: ( i ) Hindustan General Electric Corporation Ltd., In re [1959] 29 Comp Cas 46 ; AIR 1959 Cal 679 and ( ii ) Sussex Brick Co. Ltd., In re [1960] 30 Comp Cas 536 ; [1961] 1 Ch. 289. The main objections to the sanction of the scheme raised by Tamal Kumar Majumdar are as follows: ( i )The ratio of exchange is unfair to the equity shareholders of the transferor-company, Kusum Agrotech Ltd. ( ii )The valuer has not taken into account the details mentioned in the respective balance-sheets, viz., auditor's remarks, directors' reply thereto, etc. ( iii )The valuer has not followed the guidelines issued by the Central Government regarding valuation of shares. It is the contention of the learned advocate for the said Tamal Kumar Majumdar that the valuer's report dated May 12, 1995, being annexure F to the petition is vague and not up to the mark which has been done only to serve the purpose of the promoters and as such is not maintainable in law. Well-known methods of valuation of shares as mentioned by the Central Government guidelines, namely : ( a )net asset value (NAV); ( b )p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor of both the companies and nothing but an interested person, which is contrary to the accepted principle of law and highly illegal. The further contention of Mr. Das Adhikary, is that the auditor's report is full of qualification/adverse comments. The audited accounts of petitioner No. 1 is not at all acceptable and so far as petitioner No. 2 is concerned the report was made on the basis of the certificate by the management for the purpose of completion of accounts. Further contention of the learned advocate for the respondent is that it appears from the verification of records with the Registrar of Companies that the transferee-company, Kusum Products Ltd., has only 30 shareholders out of which seven are minors. It was further revealed that six companies situated at No. 6, Royd Street, Calcutta-16, are holding 96.33 per cent. of the total capital. Mr. Das Adhikary has submitted that there is violation of the statutory requirement so far as the minimum number of shareholders in respect of petitioner No. 1 is concerned. In terms of the recommendations of the High Powered Committee on Stock Exchanges, the Government, vide its Circular No. F. 14(2)/SE/85 dated September ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roximately Rs. 10 per share. He has submitted that it would not be proper and correct to come to a conclusion in respect of book value of shares of the transferor-company (KATL) to be approximately Rs. 10 per share. He has further submitted that in the first place, it appears from the annual report and accounts for 1994-95 of KATL that the share capital is Rs. 8,66,35,000 and not Rs. 8,70,00,000 as stated in the valuation report. Secondly, he has submitted that the miscellaneous expenditure to the extent not written off to the tune of Rs. 53,30,384 as stated in the report appears to be incorrect also. In schedule M to the said balance-sheet, a sum of Rs. 47,72,357 and not Rs. 53,30,384 can be found on that count. Thirdly, he has submitted that the sum of Rs. 61,19,562 as credit balance as stated in the valuation report cannot be found in the profit and loss account. Instead a sum of Rs. 52,50,483 has been stated to be the surplus. Therefore, the valuation report in respect of KATL is wrong as it is based on wrong premises as stated hereinabove. The basis being wrong, the conclusion has become wrong. Therefore, according to him, the valuation report of the transferor-company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are capital from Rs. 7,000 to Rs. 8,70,00,000 of which Rs. 3,65,000 is in arrears. Therefore, both the companies are guilty of raising share capital by issuing equity shares of Rs. 10 each. When the value per equity share of Rs. 10 of KPL is quoted at the Calcutta Stock Exchange at Rs. 200 per share it has issued equity shares of Rs. 10 each at par and thereby has tried to make illegal gains against public interest. The same device has been adopted by KATL which is contrary to public interest and mala fide as its share is quoted in the market at Rs. 17.75 per share. Thereby, the company has tried to make illegal gains. If the shareholders of both the companies sell and transfer their shares they will be able to make huge profits. On the other hand, it has been submitted that the companies should have offered public issue of shares instead of dealing clandestinely. At least the shares should have been valued at the quoted rates while being issued to the shareholders, which would have given an altogether different picture. The result is sought to be achieved by fixing the ratio of value of shares of KPL and KATL at 1 : 10 by taking into account different valuation methods although ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provision for contingent liabilities as would be available from the notes of auditors at page 36 of the report and accounts for 1994-95. KATL also has not provided for contingent liabilities which will be available from the notes on accounts at page 18 of the annual report and accounts for 1994-95. Most of the items of contingent liabilities are due to the public fund and, therefore, by ignoring the same the directors of the companies have acted mala fide and prejudicial to public interest. It has been submitted on behalf of the Central Government that the scheme of amalgamation as proposed and especially the share ratio which is the basic structure of the scheme is not a bona fide one and is against public interest. Therefore, the scheme is fit to be rejected. In this connection, it has been submitted that simply because the "majority shareholders have voted in favour of the scheme, the company court is not to act as a mere rubber stamp and sanction the same". In support of this submission reliance is placed on the judgment reported in Sugarcane Growers Association v. Sakthi Sugars Ltd. [1995] 6 SCLR 144 ; [1998] 93 Comp Cas 646 (Mad). It has been submitted on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is fit to be rejected. It is also the contention of Mr. Kundu that section 391(2) of the Companies Act, 1956, requires that a majority representing three-fourths in value is present and voting in favour of the scheme. It means that the majority of three-fourths out of the total shareholders participates in the meeting and accepts the compromise or arrangement. It does not envisage that out of the members present and voting in the meeting, a majority of three-fourths agree and vote in the meeting. In such a situation it has been argued that it might be possible to pass a scheme with a minority group of shareholders attending the meeting and passing the scheme by a three-fourths majority. For instance, if five shareholders holding 100 shares each attend a meeting out of 5,000 shares and four of them vote in favour of the scheme then it would mean that more than three-fourths majority present and voting of the shareholders have voted in favour and, therefore, the scheme has been accepted by the shareholders. It is not the intention of the statute. The words suggest that three-fourths in value out of total shareholders attend the meeting and accepts the scheme. It has also been su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The main objection of the said Tamal Kumar Majumdar is that the ratio of exchange is unfair to the equity shareholders of the transferor-company, KATL. It may be noted that this objection has not come from any shareholder of the transferor-company or the transferee-company on the date on which the scheme was sanctioned at the meeting of the shareholders. As stated already Tamal Kumar Majumdar was not a registered shareholder when the meeting was held. He purchased 100 shares for a total consideration of Rs. 1,500 after the scheme was propounded and has now come forward to oppose the sanction of the scheme. His stake at the most is Rs. 1,500. It is difficult to appreciate what benefit he would derive by opposing the scheme when no other shareholder of the transferor or the transferee-company is opposed to the same. The petitioner-companies have offered to arrange for purchase of the said shares at the price which he paid for them or at any other price which may be fixed by the court. Apart from the fact that the said Tamal Kumar Majumdar was not a shareholder of the company at the material time when the scheme was approved by the shareholders, in the instant case, the valuati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idelines issued by the Central Government regarding valuation of shares. It may be noted that the same objection was taken by the said Tamal Kumar Majumdar, in another matter, namely, Maknam Investment Ltd., In re [1995] 1 CHN 368 ; [1996] 87 Comp Cas 689 , 696. The same objection was considered in the said judgment and B.L. Jain J., as he then was, held, inter alia , as follows : "The guidelines relied on behalf of the objector mentions that the same are purely administrative instructions for internal official views and are, therefore, not to be quoted, cited or published as the official guidelines of the Government. In my opinion, the court is not going into the matter of fixing of exchange rates in great detail or to sit in appeal from the decision of the chartered accountant. If a chartered accountant of repute has given the exchange rate as per valuations made by him and if the same is accepted by the requisite majority shareholders the court will only see whether there is any mani-fest unreasonableness or manifest fraud involved in the matter." I find no reason to differ with the view expressed in the said judgment and respectfully agree with the same. Since the said gui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion determined, it could not be interfered with by courts as "certainly" it is not part of the judicial process to examine entrepreneurial activities to ferret out flaws. The court is least equipped for such oversights. Nor indeed, is it a function of the judges in our constitutional scheme. We do not think that the internal management, business activity or institutional operation of public bodies can be subjected to inspection by the court. To do so, is incompetent and improper and, therefore, out of bounds. Nevertheless, the broad parameters of fairness in administration, bona fides in action and the fundamental rules of reasonable management of public business, if breached, will become justiciable (Fertiliser Corporation Kamgar (Regd.) Union v. Union of India [1981] 59 FJR 237, 257 ; [1981] 2 SCR 52. See in Buckley on the Companies Acts, 14th edition pages 473 and 474 and Palmer on Company Law, 23rd edition para. 79.16)." In the instant case, there cannot be any dispute that the formalities under the statute have been complied with and the petition has been properly made under section 391(2) of the Companies Act. It is well settled that if the statutory formalities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he consistent view of the courts that no scheme can be said to be fool-proof and it is possible to find faults in a particular scheme but that by itself is not enough to warrant a dismissal of the petition for sanction of the scheme. The courts have gone further to say that a scheme must be held to be unfair to the meanest intelligence before it can be rejected. It must be affirmatively proved to the satisfaction of the court that the scheme is unfair before the scheme can be rejected by the court. It is not necessary to refer to many cases on this point but reference in this connection may be made to the decision in English Scottish and Australian Chartered Bank, In re [1893] 3 Ch. 385. Objection has been raised on the ground that D. K. Chhajer, partner of D. K. Chhajer and Co., chartered accountants is the statutory auditor of Kusum Products Ltd., being petitioner No. 1 who is at the same time a director of Kusum Agrotech Ltd., being petitioner No. 2. It may, however, be mentioned that even if the valuation had been made by a director of the company, who also happens to be a partner of the chartered accountant firm, the same by itself would not be of any consequence. In the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id case may be summarised as follows: "( i )That the scheme ought to be sanctioned because the statutory provisions were complied with ; the majority was acting bona fide; the class of creditors and shareholders were fairly represented and that the scheme was sanctioned by an overwhelming majority; they had voted as men of business in favour of the scheme and their votes were not obtained by perpetrating any fraud upon them. The scheme was scrutinised from various angles by the authority constituted under the Monopolies and Restrictive Trade Practices Act as well as the income-tax authorities. Moreover, an industry in a backward area generating employment was required to be resuscitated and rejuvenated rather than annihilated and obliterated because the only alternative outcome of not granting sanction to the scheme would be that Neomer would have to be wound up. So far it was practical, the court would always be in favour of reviving an industry rather than closing it down. ( ii )That the break-up value of the shares of Neomar arrived at by the chartered accountants was not one which could be termed as grossly exaggerated. The only method which could be available for arriving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the statutory requirements have been complied with, the sanction of the court would not automatically follow. A duty is cast upon the court to find out whether the proposed scheme is for the benefit of the company as a whole. The court is not supposed to set its seal upon a decision of the majority and while the court is not supposed to scrutinise the scheme with fine-tooth comb to find out flaws and then to view them through a magnifying glass, the court must be satisfied before the sanction is accorded that the majority vote was honestly obtained, that the majority acted honestly, that no financial or arithmetical jugglery was perpetrated either upon the creditors or upon the shareholders to cajole them or coax them into voting in favour of the scheme. However, the scheme is not to be scrutinised by the court with the eye of an expert or the exactness of an accountant, but if the scheme is broadly speaking calculated to benefit the company as a whole it would be entitled to the sanction of the court." In the case of Jitendra R. Sukhadia v. Alembic Chemical Works Co. Ltd. [1988] 64 Comp Cas 206 (Guj), the Division Bench of the Gujarat High Court held that what section 393 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be of any assistance to the said objector. The judgment and the decision in the case of Sugarcane Growers Association v. Sakthi Sugars Ltd. [1995] 6 SEBI Corporate Laws 144 ; [1998] 93 Comp Cas 646 (Mad.) has been relied upon by the learned advocate for the respondent. In the aforesaid decision, the facts are that the respondent and the transferor-companies were both public limited companies belonging to the same group and having a common managing director. In separate meetings of the board of directors of the two companies, it was resolved to amalgamate the transferor-company with the respondent-company to enable the respondent to diversify its activities into an area with enormous potential for growth and the transferor-company to get adequate financial help. Resolutions were passed at the extraordinary general meetings of both the companies approving the scheme of amalgamation, subject to the approval of the financial institutions and other necessary approvals. Thereafter, petitions were filed by the respondent and the transferor-companies under sections 391 and 394 for sanctioning the scheme of amalgamation and dissolution of the transferor-company without being w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve the lack of good faith of the majority which passed the resolution. In a separate order he also held that the sugarcane growers who supplied sugarcane to the respondents were not creditors of the respondent and, thus, had no locus standi to seek a direction to convene a meeting of the creditors. The court, thereafter, accorded approval to the scheme of amalgamation and directed the official liquidator of the transfer to file a report regarding the affairs of the transferor-company with a view to enable the court to dissolve the said company without winding up. An appeal was preferred against the decision of the learned single judge. The Division Bench of the Madras High Court, however, upheld the judgment of the learned single judge and, while disposing of the appeal, the Division Bench of this court laid down the following principles: (1)The court has to be satisfied that the resolutions have been passed by the requisite majority as prescribed in the statute at a meeting duly convened. (2)The court is not a mere rubber stamp and the fact that the majority has approved of the scheme is not conclusive. ' (3)The approval by the majority is an important factor to be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned if it could reasonably be supported by sensible people to be for the benefit of each class of the members or creditors concerned ( Alabama, New Orleans, Texas and Pacific Junction Railway Qo., In re [1891] 1 Ch. 213, 239, 243 and English Scottish and Australian Chartered Bank, In re [1893] 3 Ch. 385). It is also the duty of the court to see that the resolutions were passed by the statutory majority. ... In the case before me Mr. Mitra, who opposed this scheme on behalf of the Hindustan Commercial Bank Ltd., which is the holder of 2,000, 5 per cent. preference shares of Rs. 100 each of the company, has contended that the scheme was not passed by the requisite majority. It is argued with reference to the report of the chairman of the meeting held on December 11, 1957, that holders of preference shares of the value of Rs. 6,42,700 were present at the meeting but only holders of the preference shares of the value of Rs. 4,42,700 voted in favour of the resolution whereas to constitute the requisite majority the holders of the preference shares of the value of Rs. 4,82,000 should have voted and so the resolution was not validly passed. Now there is some controversy raised in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te majority contemplated in section 391(2) agreed to the arrangement now presented before the court for sanction. Reference maybe made to Buckley's Companies Act, latest edition, page 408, where Buckley points out that the words 'and voting' had brought about an alteration in the corresponding English section. Mr. Mitra relied on the case reported in Bengal Bank Ltd. v. Suresh Chakravarthy [1951] 21 Comp Cas 315 ; 55 CWN 206 ; AIR 1952 Cal 133, in support of his argument but that was a case under section 153 of the (Indian) Companies Act 1913, and so is not of assistance to Mr. Mitra." S. B. Mukherjee, the learned advocate for the petitioner, has relied upon the judgment and the decision in the case of Sussex Brick Co. Ltd., In re [1960] 30 Comp Cas 536 , 539 ; [1961] 1 Ch. 289. In the said case, it was, inter alia , held as follows: "A scheme must be obviously unfair, patently unfair, unfair to the meanest intelligence. It cannot be said that no scheme can be effective to bind a dissenting shareholder unless it complies to the extent of 100 per cent., with the highest possible standards of fairness, equity and reason. After all, a man may have an offer made to him and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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