9911796707
TMI Blog1994 (11) TMI 358X X X X Extracts X X X X X X X X Extracts X X X X ..... ills, cotton mills, jute mills and mills of any other description. The Authorised Share Capital of the petitioner-company is Rs. 1,00,00,00,000 (Rupees one hundred crores only) divided into 30,05,500 equity shares of Rs. 100 each and 69,94,500 unclassified shares of Rs. 100 each. The Subscribed Share Capital of the petitioner-company as on 31st March, 1993 is Rs. 26.30 crores (Rupees twenty-six crores thirty lakhs only) divided into 26,90,000 Equity shares of Rs. 100 each. The paid-up capital of the petitioner-company as on 31st March, 1993 is as under : Rs. in lakhs 13,45,000 Equity shares of Rs. 100 each fully paid up. 1345.00 13,45,000 Equity shares of Rs. 100 each on which Rs. 50 paid up. Rs. 672.50 Less: Allotment Money/Calls in arrears Rs. 16.51 655.99 Rs. 2.000.99 Subsequent to 31st March, 1993,3,091 Equity Shares were forfeited due to non-payment of allotment money. The paid-up capital of the petitioner-company as on 31st December, 1993 is Rs. 26,70,72,075 (Rupees twenty-six crores seventy lakhs s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest thereon at respective agreed rates. The Transferor Company entered into a Memorandum of Understanding (MOU) dated 28th May, 1993 with the financial institutions and banks regarding the guarantees furnished by the transferor- company to the financial institutions and banks for the Rehabilitation Package loans advanced to MEIL. In terms of the said MOU, in a full and final settlement of the amounts due by the petitioner-company to the said financial institutions and banks, under the aforesaid guarantees, the transferor-company was required to issue and allot 2,46,000 Ordinary Shares of Rs. 100 each on 1st October, 1993 and 1,77,120 ordinary Shares of Rs. 100 each on 1st October, 1994 to the various financial institutions and banks, who are the beneficiaries under the aforesaid guarantees, aggregating to 4,23,120 Ordinary Shares of Rs. 100 each reckoned at a price of Rs. 300 per Ordinary Share, for the purposes of discharge of the transferor company's guarantee obligations. Accordingly, the transferor- company has already allotted 2,46,000 Ordinary Shares of Rs. 100 each at a premium of Rs. 200 per share to the financial institutions and banks on 1st October, 1993 out of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrary business cycles. The operations of one unit will be complementary to the other and a stable profitability will be achieved. 7. The Directors of the petitioner-company MIL and transferor-company MFL approved the proposal for amalgamation of the MFL with MIL and pursuant to the respective Resolutions passed by them, the detailed Scheme of amalgamation was finalised. The Directors of both the companies were of the opinion that such Amalgamation was in the interest of both the companies. The detailed reference to salient provisions of the Scheme of Amalgamation need be made at this stage. Salient provisions of the Scheme of Amalgamation : 1. The undertakings and all the properties, rights, claims and powers of the Mafatlal Fine Spg. Mfg. Co. Ltd. (hereinafter called "MF") be without further act or deed transferred to and made to vest in Mafatlal Industries Ltd. (hereinafter called "MIL") with effect from 1st day of April, 1993 pursuant to the provisions of sections 391 to 394 of the Companies Act, 1956 together with all the estates and interests of MF therein but subject nevertheless to the charges, if any, affecting the same. 2. All the liabilities, duties and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. The said order also stipulated that Arvind N. Mafatlal, failing him Hrishikesh A. Mafatlal should act as Chairman of the Meeting and should report the result thereof to this Court. The details of the order shall be mentioned at appropriate stage as a serious objection is taken to the convening and holding of the meeting of the Equity Shareholders of the MIL without classifying the equity shareholders into majority group and minority group and second objection is to the effect that Arvind N. Mafatlal, who acted as Chairman of the meeting, ought not to have been appointed and he ought not to have worked as Chairman of the said meeting. 9. It is admitted fact that pursuant to the direction contained in the order of this Court dated 22-12-1993, notice of the meeting was sent individually to the members of the MIL by post, under certificate of posting at their respective registered addresses together with a copy of the said Scheme of Amalgamation and of the Statement required under section 393 of the said Act and a Form of Proxy. The notice of the said meeting was also advertised in the issues of Times of India, Ahmedabad and Bombay Edition dated 29th December, 1993 and in Guj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, he has inter alia averred that the Scheme of Amalgamation and Arrangement should not be sanctioned by this court for as many as 9 objections which in his own words are as under : Objection No. ( i ) : The Scheme is not for the avowed purpose of objects for which it is proposed. Objection No. ( ii ) : Consequently, as the Scheme is not for the purpose for which it is proclaimed to be, I submit it is for an ulterior motive which is explained hereinafter in details. Objection No. ( iii ) : That the Scheme even otherwise is not in the interest of Mafatlal Industries Limited. Objection No. ( iv ) : Miheer H. Mafatlal, in his personal capacity and as karta of his HUF and as trustee of Trusts and his family members are the shareholders of MIL holding 5% of the total share capital of MIL. He, therefore, claims that he and his family members are of a distinct class of shareholders having interest in the petitioner-company MIL of a distinct nature in view of the family arrangement dated 1st March, 1979 and, therefore, they were required to be treated as a separate distinct class of share- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scheme based on exchange ratio fixed on the basis of such report ought not to be sanctioned by this Court. Objection No. ( ix ) : The Scheme vitally affects the secured and unsecured creditors and in view of the fact that necessary meeting of such class of creditors has not been called, this Honourable Court ought not to grant sanction to the Scheme of Amalgamation. 14. In support of the aforesaid Nine Objections raised by Miheer H. Mafatlal, in the reply affidavit, he has produced voluminous documents to which reference shall be made at the appropriate stage while dealing with the specific objection. It may be stated that reply affidavit is sworn on 9th March, 1994 at Bombay and is accompanied by Annexure-A to Annexure-R from pages 100 to 582. 15. It is also required to be noted that the Company Secretary of the petitioner-company - Ramakant R. Patel has filed affidavit-in-rejoinder and in support thereof some annexures are produced. Miheer H. Mafatlal has filed thereafter, after the commencement of the hearing of this petition, affidavit-in-sur-rejoinder and along with such affidavit-in-sur- rejoinder, once again large number of documents are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gubhai expanded their business undertakings. The said family held controlling interest in different business concerns run through public limited or private limited companies and the members of the family were also partners in partnership firms. The pattern which was maintained throughout was that the two sons Navinchandra and Bhagubhai and their families would respectively have an equal interest in companies or in partnership firms. At the time of the death of the said Bhagubhai, the said Hemant was just 9 years of age. The business of Mafatlal Group was therefore for all practical purposes managed by the said Navinchandra. At the time of the death of Navinchandra the shareholding of the branch of Hemant Mafatlal in Mafatlal Group of Industries was equal to aggregate shareholding of Arvind Mafatlal, Yogindra Mafatlal and Rasesh Mafatlal. On the death of Navinchandra, the Mafatlal Group was managed by Arvind Mafatlal, Yogindra Mafatlal, Rasesh Mafatlal and late Hemant Mafatlal. Arvind Mafatlal was, however, the eldest male member in the family who was always looked at by Yogindra, Rasesh and late Hemant as an elder in the family and respected. 18. On 16th August, 1971, Hemant Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... According to Miheer, in or around 1979, there were certain disputes and differences amongst Arvind Mafatlal, Yogindra Mafatlal and Resesh Mafatlal and it was felt that some arrangements should be worked out, whereby there would be a separation and division of the family business concerns amongst the four branches, viz., Miheer Branch, known as MHM Group, family of Arvind Mafatlal known as ANM Group, family of Yogindra Mafatlal known as YNM Group and family of Rasesh Mafatlal known as RNM Group. It is his further case that Mr. C.C. Chokshi was requested to prepare a Scheme for division of family business concerns. According to him, Mr. C.C. Chokshi, prepared a Note dated 23rd of February, 1979 making six suggestions for the division of Mafatlal Group of Industries into four groups as there were four family groups. Said note is produced at Annexure-E to the reply affidavit by Miheer. It is his further case that suggestion No. V put forth by Mr. C.C. Chokshi with minor modifications was accepted in the meeting held on 1st of March, 1979 at which following were present: (1) Arvind Mafatlal, (2) Yogindra Mafatlal, (3) Rasesh Mafatlal, (4) Miheer Mafatlal, (5) Padmanabh Mafatlal and (6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d continue to be under control of MIL under the MHM Group. 22. It is case of Miheer that although three subsidiary companies were to be floated as suggested by Mr. C.C. Chokshi, he was told by the seniors in the family and Mr. C.C. Chokshi that it would be in his best interest not to be in charge of any company independently at this young age and that it would also be in his best interest to be with the seniormost member Arvind Mafatlal. It is his further case that his grandmother and mother and he himself as young child had implicit faith in Arvind Mafatlal as he was looking after the affairs of his family since the premature death of his father. It is his case that Arvind Mafatlal also assured that at a later date he would separate Group-A Companies and would manage the companies in Group-A till Miheer formally established himself in the management thereof. Even Mr. C.C. Chokshi, who was the Advisor to the family also assured Miheer, his mother and grandmother that the division which was made was fair and would be worked out by Arvind Mafatlal in the best interest of Miheer's family. 23. It is his further case that as a part of the Scheme of arrangement, the two subsidiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diately after the proposed Scheme of Amalgamation was approved by the Equity share holders and creditors of Mafatlal Fine Company petition was filed in Bombay High Court within whose jurisdiction the Registered Office of the M.F. (transferor-company) is situated for its sanction under section 391, read with section 394, to the proposed Scheme of Amalgamation. The High Court of Bombay has already sanctioned the Scheme based on the fact that the scheme is overwhelmingly passed by statutorily required majority of shareholders. The very Scheme of Amalgamation is seriously challenged before this Court by one of the directors of MF and one group of equity Shareholders of MF as well as MIL. This Court, being the Court in whose jurisdiction transferee-company is registered, is therefore, required to decide such Company Petition. One High Court of co ordinate jurisdiction having already sanctioned the Scheme, this Court is called upon not to sanction the Scheme so as to reach findings inconsistent with those reached by the Bombay High Court. It is this anomaly which is required to be answered. Anomaly Noted 25. The proposed Scheme of Amalgamation inter alia stipulates that M.F. an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Scheme and get the approval of the concerned persons in the prescribed manner and also obtain sanction and direction of the appropriate Court under section 391(2) and section 394 of the Act. The transferee-company has, accordingly, initiated proceedings in this Court under sections 391 and 394. The anomaly which may arise in matters of this nature where two different High Courts are moved for appropriate order under section 391 and section 394 of the said Act for its sanction and approval to the Scheme of Amalgamation, with or without modification, is very succinctly brought out by P.D. Desai, J. (as His Lordship then was) in the case of Bank of Baroda Ltd. v. Mahindra Ugine Steel Co. Ltd. [1976] 46 Comp. Cas. 227 (Guj.) in the following words : "It is true that when the registered offices of the transferor and transferee-companies happen to be situate in different places within the jurisdiction of two different High Courts, as in the present case, the compulsion of practical difficulties has necessitated the evolution of this somewhat ingenious formula. I cannot help observing, however, that the solution is far from happy and that in some cases the resultant situation might ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation can presumably be remedied only by an appeal to the higher court. I am not expressing any opinion on the validity of such a contention; it may be right or wrong; it might be possible to urge that even in such a case the court can still exercise powers under section 392 and find a suitable way out. But the possibility bf some complications arising in such a situation cannot altogether be ruled out. There is also one more angle from which the question requires to be examined. In respect of some of the matters contemplated by sub-section (1) of section 394, both the courts would be required to pass orders giving suitable directions and it is somewhat incongruous that provision be made for the same thing or matter by two different judicial orders passed by two different courts presumably on two different dates. Could the Legislature have really envisaged a situation of this nature ? Even if both the amalgamating companies are required to initiate proceedings under sections 391 and 394, would it not be conducive to the achievement of the legislative object if the jurisdiction to sanction the scheme after following the prescribed procedure in relation to both the companies is exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding initiated before this Court by the transferee-company, he has seriously challenged the proposed Scheme of Amalgamation by filing a very detailed reply and raising as many as nine objections. To this very Scheme of Amalgamation sanction and approval of Court was sought by MF (transferor-company) in which Miheer is one of the Directors and for reasons best known to him, he did not file any objection. By his conduct, he permitted the Bombay High Court to sanction this very Scheme of Amalgamation. He thereby not only waived his objections but also invited an anomalous situation to be created whereby, in case of acceptance of any of his objections, this Court would be required to reach conclusion inconsistent with that of Bombay High Court. When Mr. M. J. Thakore, learned counsel for Miheer, was confronted with this question, he submitted that there was no justifiable explanation for Miheer not filing his objection to proposed Scheme of Amalgamation in proceeding initiated by MF (transferor-company) before Bombay High Court. He, however, submit- ted that the proposed Scheme of Amalgamation is more prejudicial and injurious to the interest of shareholders of MIL and, therefore, Mihe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty in number representing 3/4th in value of the creditors, or class of creditors, or members or class of members, as the case may be, present and voting either in person or by proxy agreed to any compromise or arrangement. The approval by such large majority of the members/creditors is recognised by the Act to be prima facie in their business, commercial interest. Upon the Court according sanction to such scheme, it becomes binding on all the creditors and the members and also on the company including the dissenting members and the creditors. Proviso to sub-section (2) of section 391 imposes very important statutory obligation on the person or company moving an application under section 391(1) to disclose to the Court by affidavit or otherwise all the material facts relating to the company. Non-disclosure of relevant facts may result into misleading the court or suppressing from the court vital and material facts having bearing on the matter and may prove to be fatal so as to justify the court to refuse sanction/approval to the scheme. Section 394 (which is corresponding section 208 of English Act), inter alia, provides that the scheme of amalgamation or compromise or arrangeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . ( ii ) Class must have been clearly represented. ( iii ) The arrangement must be such as a man of business would reasonably approve, and ( iv ) the arrangement must be compatible with legal provisions. 31. Oft-quoted passage in Bucklay on the Companies Act, 14th Edition reads: "In exercising its power of sanction the Court will see, first that the provisions of the statute have been complied with, second, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interest adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. 32. The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tected. In a case where a scheme is voted by a majority, two conflicting claims are to be adjusted. If, on the one hand, a minority were to take an unreasonable attitude in the matter of the scheme, then, the interests of the majority will suffer if the scheme cannot be sanctioned. In such case, the majority will suffer on account of recalcitrant attitude of a minority or on account of the intransigence of the minority. On the other hand, if the majority has interests adverse to the minority or where the majority wants to usurp total power so as to exclude the minority, the minority is bound to suffer or to be tyrannised by sheer strength of numbers. It is, therefore, that the Legislature has provided that where a meeting has taken a certain decision, the court must apply its mind and consider whether it is in the interest of the company as a whole and of the class of persons for whom the majority acts and whether the scheme is such that it must be pushed through. Therefore, the correct approach on the second question is to determine that the court is neither called upon merely to register a decision of the majority nor is it called upon to act in such a manner that the minority wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so narrowly interpreted so as to reduce the court to a mere registering agency and preventing it from seeing whether there is such an objection to the scheme which any reasonable man might say that he could not approve it. In this connection, P.D. Desai, J. pointed out that what is to be decided in each case is a question of fact, namely, whether to accord the sanction or not, and circumstances are so infinitely various that however carefully general rules are framed, they must be construed with some liberality and not too rigidly applied. The proposition to accord sanction to a scheme simply because thumping majority has approved it would, in the opinion of the court, tantamount to abdication of statutory function and duty imposed on the court and a breach of faith reposed in it by that class of small shareholders who for obvious reasons cannot and do not participate in the meeting or in the proceedings before the court and also by the dissident members who look upon the court to protect their interests even if they are not present before it having regard to the costs and inconvenience involved. In this connection court proceeded to make the following observations: "... That ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s including the power to give such directions in regard to any matter or to make such modifications in the scheme as it may consider necessary for its proper working and supervise the carrying out of the scheme. The power conferred is exercisable not only at the time of making an order sanctioning the scheme but also at any time thereafter. Such power is not conferred on English courts by statute nor was it conferred on Indian courts under section 153 of the Indian Companies Act, 1913.Section394(1)furthermore authorises the court to make provision for those who dissent from the scheme. In our country, therefore, the role which the courts have to play now is more vital and potent; it is not only an inquisitorial and supervisory role but also a pragmatic role which requires the forming of an independent and informed judgment as regards the feasibility or proper working of the scheme and making suitable modifications in the scheme and issuing appropriate directions with that end in view. Lastly, the court must also take into account the interest of the employees and ensure that they are not adversely affected by the scheme and that adequate provision is made for them...." (p. 241) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, on the whole, one which deserves to be sanctioned, and in doing so, the court must test the scheme not from the point of view of a lawyer or an accountant or an expert, but, it must look at it from the point of view of a reasonable and a fair-minded person. The test in all such cases is to determine how a reasonable person endowed with ordinary commonsense and acting honestly will view the scheme having regard to all the circumstances bearing reasonably and properly on it. While dealing with a commercial or industrial company, the scheme has got necessarily to be looked at from the point of view of a prudent commercial man vide Sidhpur Mills Co. Ltd., In re AIR 1962 Guj. 305. 37. The scheme should not be scrutinised in the way a carping critic, a hair-splitting expert, a meticulous accountant or fastidious counsel would do it, each trying to find out from his professional point of view what loopholes are present in the scheme, what technical mistakes have been committed, what accounting errors have crept in or what legal rights of one or other side have or have not been protected. It must be tested from the point of view of an ordinary reasonable shareholder acting in a bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forecast'." (p. 554) 40. D.A. Desai, J (as his Lordship then was) in the case of Navjivan Mills Co. Ltd., In re [1972] 42 Comp. Cas. 265 (Guj.) made following observations about the approach of the court to a scheme of compromise and arrangement: "Approach of the court to the scheme of compromise and arrangement submitted to the court for its sanction now appears to be well settled. The court undoubtedly has a discretion whether to accord sanction to a scheme of compromise and arrangement or not and in exercising its discretion one way or the other, the court should like to examine the scheme from certain definite standpoints. The court will normally need to be satisfied of three matters: ( i )that the statutory provisions have been fully complied with, ( ii )that the class or classes must have been fairly represented, and ( iii )that the arrangement must be such as a man of business would reasonably approve." (p. 278) 41. The Madras High Court in Coimbatore Cotton Mills Ltd., In re [1980] 50 Comp. Cas. 623 while sanctioning the scheme under sections 391 and 394 of the Act held that the court should normally be satisfied in respect of the following four matters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd., In re [1992] 73 Comp. Cas. 298 . There are certain well recognised limitations on the court's power to sanction the scheme. First limitation is that the court would not sanction a scheme which would be invalid without the court's sanction if every creditor or member concerned agreed to it. In other words, the court has no power to sanction something which the parties could not do by agreement. The second fetter on the court's power is that the court cannot sanction an act being done if the law permits it only subject to conditions and the agreement seeks to dispense with those conditions such as where the scheme of compromise and arrangement also includes within its ambit reduction in share capital in respect of which special procedure provided in the Act and rules has not been carried out. Third known fetter on the Court's power is that the Court would not ordinarily sanction a scheme which includes something which can ordinarily be effected by resort to other provisions of the Companies Act. Within the limitation set out above, the Court will allow the companies the greatest freedom in devising schemes to suit their requirements and will approve those schemes if they a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any will have a strong and large resource fund. The combined technological, managerial and financial resources would enhance the capability of the amalgamated company to invest in larger and sophisticated projects to ensure rapid growth. The amalgamated company's Textiles Division with five operative units at its disposal will have flexibility in its operations. 45. By second objection, Miheer has contended before this Court that the proposed Scheme of Amalgamation is not in fact for the purposes for which it is proclaimed to be. The proclaimed purposes are those which are stated in the Explanatory Statement reproduced hereinabove. He submits that there is another hidden, covert or concealed object behind the Scheme and to achieve such object, the Scheme is proposed. In other words, the Scheme is proposed for some ulterior motive, namely, that of defeating the rights flowing in favour of MHM Group from family arrangement arrived at in 1979 and rendering infructuous the counter claim filed by Miheer in Civil Suit No. 1010 of 1987. Put bluntly, Arvind N. Mafatlal with his towering personality intends to devour and usurp fully the industrial and business interest which had otherwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make a reference to this objection also. Avowed objects for proposed Scheme as stated in Explanatory Statement 47. From the Explanatory Statement set out hereinabove, the following are the objectives sought to be achieved: 1. The main objective is that as both the companies are in the same line of business, it would result in synergy of operations. 2. The proposed Scheme will result in better flexibility in Capital gearing. 3. The proposed Scheme would result into increasing the confidence of the shareholders and that shareholders would benefit from the Scheme. 4. The proposed amalgamation will pave the way for better, more efficient and economic control in the running operations and would lead to economy in the administrative management and finally would improve profitability. 5. The proposed amalgamation would result into creating strong and large reserve funds, and the combined technological, managerial and financial resources would enhance the capability of the amal- gamated company to invest in larger and sophisticated projects to ensure rapid growth. 48. In his objections, Miheer has dealt with the aforesaid objectives in seriatim and has trie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieve synergy of operations. 51. In this connection, it would be relevant to refer to the stand of MIL. It is the case of the Company that substantial activity of MIL is manufac-turing textiles and chemicals. MIL and its subsidiaries have substantial investment in NOCIL which is engaged in manufacturing and marketing petrochemicals and agro-chemicals. In the matter of Common Brand Name, Wholesale Marketing and Retail Outlets and in the matter of purchasing and marketing strategies of textile products of the MIL and of M.F., commonality is achieved. It is pointed out that because of amalgamation, there will be tremendous benefit by way of flexibility of operations, particularly for rationalisation of product-mix. As against two textile units at the disposal of MIL, there would be five textile units after amalgamation which would give tremendous flexibility for product-mix rationalisation in the textiles sector alone. Textile business having turnover contribution of over 75 per cent in the total turnover of both the companies, it is most prominent business of both the companies and common operation of five textile units would greatly benefit the amalgamated companies. It is pointe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... textile division of the companies, the nature and number of products being manufactured by the company and utilization of one unit for some of the purposes which would be common for the entire industry, would result into each unit acquiring better experience and performance in the products assigned to it while the other unit would concentrate on its own product which ultimately would result into better and faster production. This would be in the ultimate interest of the company. It appears that the substantial business of the two companies is textile business and 5 different units of the two companies located at different places would work under common management. Partially, the synergy of operations can be said to have been achieved and if in other aspects where synergy of operations was lacking and is ultimately achieved by proposed amalgamation, it cannot be said that the said objective is not going to be achieved by the proposed amalgamation. It shall have to be kept in mind that textile activity is the common activity of the two companies. It goes without saying that ordinarily amalgamation of two companies, whose activities are same, may help in bringing about synergy of oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring is going to be achieved. He has submitted that MIL has already disposed of substantial holding in Gujarat Gas Co. Ltd. (GGCL), a profit making concern. Such decision of MIL was unwise, according to Miheer. MIL and its subsidiaries have borrowed huge funds to buy shares of NOCIL held by SHELL. This decision was also irrational which has resulted in heavy burden of interest on MIL. He has in this connection pointed out that paying back such borrowing has even resulted into not only wiping out profit of MIL but has reduced substantial income of MIL. He has also pointed out that M.F. has huge liabilities. Its plant and machineries are required to be renewed and renovated which would require huge funds. There is, therefore, no possibility of bringing about flexibility in capital gearing, submits Miheer. Miheer has very seriously questioned, in this connection, the decision to unload the shares of G.G.C.L. with a view to repay the loan taken for purchasing the shares of NOCIL from SHELL. He has pointed out that investment in G.G.C.L. was yielding a very high return of investment. By disposing of such shares, yield to MIL is reduced. On the other hand, shares of NOCIL from SHELL were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in future there would be no possibility of capital gearing. In fact, the aforesaid purpose shall have to be seen in the context of future business and prospects which amalgamation may bring with it. When activities of the two companies would stand united with increase in its assets, borrowing capacity would increase and amalgamated company will be in a better position to tap financial resources. In such circumstances, it cannot be said that the second objective will never be achieved or is not one of the objectives which may be achieved ultimately because of amalgamation. Third objective 56. From the Explanatory Statement it becomes clear that it is the case of the company that the amalgamated company being larger would generate more confidence in the investors and in the persons dealing with the company. It is pointed out by Miheer that the Scheme is not likely to generate any better confidence amongst the investors or shareholders firstly because the Right Issue of the year 1987 of MIL was substantially undersubscribed. This would show that the shareholders lacked requisite confidence and were not ready to subscribe even in Right Issue. He has pointed out that none of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stantial profit exceeding Rs. 2 crores. It is submitted that such overwhelming response received from the shareholders, investors and public financial institutions to the Right Issue of 1992 goes to suggest and establish the confidence of shareholders and investors in MIL. In fact, three textile units of MF and one Chemical Unit of MF would grow the business horizon of MIL tremendously so as to generate more and more confidence of shareholders and investors. 58. The aforesaid assertions made by the company in support of this objective coupled with the fact that more than requisite statutory majority of shareholders have voted in favour of the Scheme, would prima facie establish that the shareholders have not doubted the assertions made in the Explanatory Statement. I do not attach importance to the fact that Miheer has by renouncing Right Issues in 1992 made huge profit of over Rs. 2 crores because it is the case of Miheer that he was coerced to renounce his shares in view of his inability to subscribe to the same as large number of his shares and shares of his family were lying under the control of Arvind N. Mafatlal and Arvind N. Mafatlal is claiming that they are pledged t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts and Directors' report which includes sales of goods traded in, i.e., sales of cloth purchased and sold. However, the figures of raw material cost taken in Annexure-0 would comprise the cost of raw materials consumed, namely, cotton and fibre and yarn purchased only, but, would not include any part of the cost of clothes purchased and sold. Therefore, the ratio of raw material costs to sales as worked out in Annexure-0 would be higher. It is pointed out that the Sales of MIL are lower than the sales of MF in Annexure-0. However, no break up of the figures of sales into figures for sales of cloth manufactured and sold and those of cloth purchased and sold is given. Such a statement is produced by company at Annexure-I. The said statement would show that in the case of MIL, the relative component of cloth purchased and sold is higher than the corresponding ratio in the case of M.F. This would be one factor leading to a lower percentage of raw material cost to sales. Secondly, it is pointed out that the figures of sales given in Annexure-0 referred to sale of cloth, both grey and processed. The processing may be bleaching, dyeing, printing, etc. The cost of raw materials, namely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the proposed Scheme is one whereby no objective or purpose is going to be achieved, no man of business would approve such a purposeless scheme. In the alternative, it is submitted that if no purpose is going to be served by proposed amalgamation, it is not bona fide. Even if, the stated objectives or some of them may be achieved, the scheme is still not a bona fide scheme as the majority represented by Arvind N. Mafatlal by the proposed Scheme intends to coerce and crush the minority represented by MHM Group. Therefore, it is submitted that even if the court finds the proposed Scheme of Amalgamation to be commercially viable scheme, it should not sanction the same. The proposed scheme for stated objectives, in reality and substance, is an attempt to totally oust the minority by suppressing and oppressing it to the status of helpless non-entity. It is submitted that in fact by various steps taken by Arvind N. Mafatlal spread over a period of last 10 years, the dubious device of getting total control of MIL to the total exclusion of MHM Group, could be clearly seen and, therefore, not only the history of family arrangement and other historical facts relevant to the family of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrangement of 1979. Mr. M. J. Thakore, learned counsel appearing for Miheer, has by reference to a large number of factors and specific steps taken by Arvind N. Mafatlal and by a well connected process of reasoning to which a detailed reference is made hereafter, submitted before this Court that each step taken by Arvind N. Mafatlal since 1979 by taking advantage of minority of Miheer was really actuated by desire to gain greater control over MIL and thereby to exclude Miheer and his group from family business. He has submitted that though prima facie each step may appear to be an independent step by MIL or some other subsidiary company, in reality behind every step of MIL or other subsidiaries the towering personality of Arvind Mafatlal could be seen. The various companies including MIL and M.F. and subsidiaries thereof were and are in reality just the puppets of Arvind Mafatlal. He controlled their every movement, each company or subsidiary danced to his bidding. He pulled the strings. Transformed into legal language, two companies and their subsidiaries were merely agents of Arvind N. Mafatlal to do as he commanded. He was the principal guiding (misguiding!) spirit behind all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturers Ltd., National Organic Chemical Industries Ltd. (NOCIL), Polyolef ins Industries Ltd. (PIL), Hoechst Dyes and Chemicals Ltd. He has pointed out that in the aforesaid three companies, the shareholding pattern would clearly indicate that about one half of the shares were held by the family of Hemant Mafatlal, while remaining one half were held by the family of Navinchandra consisting of Arvind, Yogindra and Rasesh. The MHG group was, thus, having approximately one half of the shareholding in the three Apex Companies of Mafatlal family, which companies in turn were controlling and managing the other companies of Mafatlal Group. It is his case that in or around 1979, there were certain disputes and differences amongst Arvind Mafatlal, Yogindra Mafatlal and Rasesh Mafatlal. It was then felt that some arrangement should be worked out whereby there would be separation and division of the family business amongst four branches, viz., Miheer's family (MHM Group), family of Arvind Mafatlal (ANM Group), the family of Yogindra Mafatlal (YNM Group) and family of Rasesh Mafatlal|(RNM Group). It is his further case that Mr. C.C. Chokshi was requested to prepare a scheme for division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eniors in the family that his interest would be safeguarded and protected by remaining with seniormost member Arvind N. Mafatlal and by placing implicit reliance in him and he agreed to the aforesaid advice. According to him, his grandmother and mother also had implicit faith in Arvind Mafatlal who was looking after the affairs of the family after the premature death of his father. Accordingly, at that time, MHM Group remained with Arvind Mafatlal for the time being till Miheer would establish himself independently in the business. He further points out that as a part of the scheme of arrangement, two subsidiary companies, Mahamaya Investment Limited and Sandeep Holdings Limited were floated. The first company is at present held by YNM Group, while the second company is held by RNM Group. However, third subsidiary company, which was to be floated as per understanding was not floated. In fact, companies of Group A B were kept together because of the young age of Miheer. According to Miheer, Arvind Mafatlal had different plans and non-floating of the third subsidiary company was the First Step taken by Arvind Mafatlal in the direction of getting control of Group-A. It is the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thetics Pvt. Limited, MIL and thereby over various companies controlled by MIL. 65. The Third Step attributed to Arvind Mafatlal is that shareholding of Padmashree Synthetics Pvt. Limited in MIL ought to have been transferred to MHM Group. In fact, as per arrangement, MHM Group had a ' right of pre-emption to purchase all the shares of MIL including those from Padmashree Synthetics Pvt. Ltd. It is submitted that Arvind Mafatlal contrary to and in breach of rights of MHM Group transferred on 23rd December, 1993 wrongfully and dishonestly 25136 shares of MIL held by Padmashree Synthetics Pvt. Limited in favour of PIL and 24688 shares of MIL in favour of Surabhi Investments Private Limited, which in turn transferred the said shares to PIL. The said PIL is a company belonging to Group B which was ultimately to go to ANM Group. By this method, the entire shares of MIL held by Padmashree Synthetics Pvt. Limited were got transferred by Arvind Mafatlal to the companies controlled by him and this step was a deliberate step taken by Arvind Mafatlal to gain greater control over MIL. 66. The Fourth Step attributed to Arvind Mafatlal with a view to gaining greater control over MIL is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he members of his family from renouncing the rights in favour of any party other than Arvind Mafatlal. Miheer was also restrained from transferring, amalgamating or pledging any of the shares held by him in MIL. Therefore, it became impossible for Miheer to obtain the finance required for applying for the Right Issue of 1987. The injunction granted by the Single Judge of the Bombay High Court was vacated by the Division Bench of Bombay High Court after the closure of the Right Issue on 27th July, 1987. Thus, by deliberate design and scheme, Arvind Mafatlal could see to it that Miheer and the members of his family could not avail of the offer of Right Issue of 1987. That apart, it is alleged that Arvind Mafatlal had kept in his control and possession a very large number of shares of Miheer and his family and, thus, he has succeeded in enhancing his financial control over MIL and in substantially reducing control of MHM Group in MIL. It is pointed out that the shareholding pattern underwent substantial change after Right Issue of 1987 and percentage of shares held by Arvind Mafatlal and companies controlled by Arvind Mafatlal and his family went from 20 per cent to 35 per cent in MIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e declared by this Honourable Court that under the family arrangement the companies mentioned in Exhibit" 17" to the counter- claim are to come under the management and control of the plaintiff to the counter-claim and his group; ( d )that the defendants, to the counter-claim their nominees and members of their nominees and members of their respective groups be ordered and decreed to specifically perform the family arrange-ment mentioned in prayer ( a ) above and for the said purpose to do all acts, deeds and things as may be necessary for the purpose of placing the companies mentioned in Exhibit "17" to the counter claim under the management and control of the plaintiff to the counter-claim and for the said purpose to delink the shares and the said companies from Group "B" companies; ( e )that the defendants to the counter-claim, their nominees and members of their respective groups be ordered and decreed : ( i )to give to the plaintiff to the counter-claim irrevocable proxies on all shares held by them in the companies mentioned in Exhibit "17" to the counter-claim. ( ii )to forthwith tender their resignations as directors of the companies mentioned in Exhibit "17" to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of his family to total non-entity and to establish his overall supremacy. 75. In the course of submissions before this court, Mr. M.J. Thakore, learned advocate for Miheer has further submitted that the court may also examine the nature of share holding in MIL and then ascertain as to whether substantial class of shareholders have voted in favour of the scheme. He has in this connection pointed out that as on 31 -12-1993 paid- up capital of the petitioner-company was Rs. 26,70,72,075 divided into 2652987 equity shares of Rs. 100 each paid up and 33922 equity shares of Rs. 100 each on which Rs. 50 have been paid and 3091 equity shares of Rs. 100 on which Rs. 25 have been paid and which have been forfeited. As against aforesaid paid-up capital of the company, he has pointed out that the meeting of 22-1-1994 was attended by 5522 members present either in person or by proxy holding 2048513 fully paid-up equity shares of Rs. 100 each aggregating to Rs. 20,48,51,300. This would work out to 77 8 of total share capital. He has further pointed out that the total number of shareholders of the petitioner-company is 94674 as against which 5522 shareholders either personally or by proxy re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of equity shareholders who were present and voted would be decisive. If this requirement is kept in mind, the same is fulfilled. The fact that a large number of shareholders from public has not remained present at the meeting should not assume any importance. To ascertain the fact as to whether the statutory requirement is satisfied or not the court shall have to find out as to whether 3 /4th of the majority of shareholders present and voting have voted in favour of scheme and since answer in the present case is in the affirmative, this oral objection shall have to be rejected. 78. However, in the context of majority coercing the minority or majority lacking good faith, the fact of substantial sharehoding of ANM group and financial institutions shall have to be kept in mind. When the other group is reduced to a position of helpless minority, any decision or resolution of majority which is adverse to the interest of minority, may give rise to feeling of suppression or oppression. The minority may develop the feeling that it is being coerced or that it is being ignored. In such case duty of the court of exercising its judicial discretion becomes a delicate duty. Even if the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ass as such, otherwise the sanction of the court would be a sanction to what would be a scheme of confiscation. The object of this provision is not confiscation. It is not that one person should be a victim, and that the rest of the body should feast upon his rights. Its object is to enable compromises to be made which are for the common benefit of some class of creditors as creditors, or for the common benefit of some class of creditors as such. In the context of the scheme of amalgamation these observations of Bowen, L. J. would equally apply to the members of the company. Therefore, it shall have to be kept in mind that it is not compulsory upon the court to register a decision of the majority nor the court is called upon to act in such a manner that the minority will create a stalemate and thereby retard the progress which the majority has legitimately and reasonably a right to expect and make. In every case the court must be satisfied that the majority is acting in a bona fide manner. It is only if the majority is acting honestly and with due care and cooperation that the decision will be binding upon the minority. If the court finds that the majority is acting in a mala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L or MF, and in view of the decision of the Apex Court in the case of V.B. Rangaraj v. V.B. Gopalakrishnan AIR 1992 SC 453, such family arrangement and/or agreement was not enforceable either against the companies or its shareholders. In fact, Suggestion V of Note of family arrangement dated 23-2-1979 or minutes of the meeting dated 1-3-1979 inter alia stipulate transfer of shares of one group to another group to the exclusion of other groups. Transfer of shares to one group alone to the exclusion of other groups is the only mode by which one group can get control of the companies falling to the share of that group. This would necessarily involve restriction against transfer of shares to another group. Therefore, in the absence of necessary amendment of Articles of Association, Note of family arrangement and/or minutes of meeting, dated 1-3-1979 were not enforceable. Fifthly, it emerges from the record of this case that on 23rd July, 1985 Miheer addressed a letter to Arvind Mafatlal expressing his desire to segregate his group from the group of Arvind Mafatlal to the Yogindra Mafatlal and Rasesh Mafatlal and immediately thereafter on 27th July, 1985 addressed a letter to Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract, it is submitted before this court that the question of enforcement of any family arrangement of 1979 does not arise. Sixthly, in Civil Suit No. 1010/87 instituted by Arvind Mafatlal, while deciding Notice of Motion taken out by Arvind Mafatlal, the learned single Judge of Bombay High Court has noticed that even at that stage attempts were made to bring about reconciliation amongst the members of family and that it was stated before the learned Single Judge by senior counsels appearing for the parties that the matter was amicably settled between the parties and on such representation matter was adjourned, however, for the purpose of putting consent terms. Justice S.N. Variava has in his order dated 23-6-1987 noticed and observed that on the next occasion the court was informed that the defendant No. 3 (Miheer) has resiled and refused to sign the compromise. He observed that so far as the court was concerned, there was not the slightest doubt that when a senior counsel stated that the matter was settled, consent was subsequently withdrawn by Miheer. Based on the aforesaid development it is submitted that as back as 1987 all attempts were made to settle the family disputes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken by the Board of Directors of MIL, from time to time, and he has consistently failed. 81. Based on the aforesaid factors taken cumulatively, it is submitted before this court that since 1979 till 1992 Miheer has adopted recalcitrant or obstinate attitude. At every stage, when MIL has taken any substantially progressive step, Miheer has come forward with objection and present objections filed are to be treated as a step taken solely with a view to retard, and if possible, to defeat the progress of the company by amal- gamation of MF with MIL. The court shall have to keep in mind as to how long a shareholder or group of shareholders (admittedly in minority) could hold a company at ransom or could hold the company from taking a progressive step. It is submitted that the court should be loath or slow to permit such attitude on the part of minority shareholders, more so, when by subsequent conduct in the year 1985 alleged family arrange ment of 1979 is replaced by subsequent agreement as could be read from exchange of correspondence between the parties. 82. It is lastly submitted that neither the family arrangement of 1979 nor the agreement of 1985 binds the company (MIL) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ful groups for power to manage the company." 83. From the aforesaid observations it becomes clear that the court has to look at the general interest of the shareholders, and such an interest may not be readily sacrificed at the altar of fight between two groups. Though the aforesaid observations were made in the context of winding up petition it was submitted before this court that ultimately the court must look to the interest of large class of shareholders and not only to the interest of Miheer and his group which is a minority group holding now only 5% shares. By upholding such objection of Miheer, the court should not be instrumental in thwarting the progress of the company, submits Mr. Vakil. 84. Lastly, it is submitted that even if doctrine of lifting the corporate veil is to be applied and the veil is to be lifted, it is not Arvind Mafatlal who could be seen, but it will be the entire class of shareholders which will be visible. The equity shares held by other shareholders and financial institutions are more in number than the equity shares held by ANM group. It is, therefore, not correct to state that in all the subsidiary companies a towering personality of Arvind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or altered so as to incorporate any of the stipulations of family arrangement of 1979. Admittedly, MIL as a legal person was and is not a party to such family arrangement. Therefore, in absence of amendment of Articles of Association such family arrangement is neither binding nor enforceable both against MIL or MF. 86. The question as to whether the MIL, as a legal person, would be bound by such a private agreement or arrangement between the groups of shareholders in the absence of necessary amendment of Articles of Association stands now answered by the decision of the Supreme Court in the case of V.B. Rangaraj ( supra ) wherein the Apex Court in the context of transfer of shares consistent with the private agreement of shareholders but contrary to Articles of Association took the view that the shares of incorporated companies are transferable like any other movable property. The only restriction on the transfer of shares of the company is as laid down in Articles of Association, if any. On the facts of the case before the Supreme Court as discussed hereinbefore it was found that the agreement between the parties was not acted upon so as to amend the Articles of Associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jain v. Kalinga Tubes Ltd AIR 1965 SC 1535 reiterated the same proposition of law, and in my opinion, no exception can be made to this well established position of law. It shall have, therefore, to be held that the family arrangement of 1979, more particularly, Suggestion V thereof, was not binding on MIL and was not enforceable as against MIL in the absence of due amendment of Articles of Association of the MIL. 87. There is yet another strong reason which would disentitle Miheer to claim enforcement of alleged family arrangement of 1979. This factor is one which emerges from subsequent correspondence in the year 1985 which is exchanged between Arvind Mafatlal on one hand and his two brothers, namely, Yogendra Mafatlal and Rashesh Mafatlal on the other hand and correspondence which is exchanged between Arvind Mafatlal and Miheer Mafatlal. From a series of correspondence exchanged between these two parties in the year 1985, an attempt is made in pending proceedings before the Bombay High Court to read a concluded contract between the parties to which reference is required to be made. Miheer has in his objection referred to suit filed by Arvind Mafatlal being Suit No. 1906/8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mafatlal, it can be gathered that he agreed or was ready and willing to sell the shareholdings of MIL of his branch to Arvind Mafatlal at a price to be fixed by the arbitrator. This subsequent development would militate against the claim of enforcement of 1979 family arrangement. In my opinion, in appropriate proceedings between the parties which are pending before the Bombay High Court the court will decide and this court need not express any opinion on the question as to whether the subsequent contract sought to be read from the exchange of correspondence would substitute and/or afface the alleged family arrangement of 1979 or as to whether the family arrangement of 1979 was still enforceable so as to ultimately grant the relief prayed for by Miheer in the counter-claim filed by him in the very suit. This is a moot question pending and subjudice before Bombay High Court but it can be said that at the point of time when Miheer addressed communication to Arvind Mafatlal calling upon him to purchase his shareholdings in MIL at a fair price, he was then ready and willing to give a go-by to his rights, if there were any, under the family arrangement of 1979. This factor strongly weigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings referred to hereinabove, and in view of the defence of MIL that in fact the arrange- ment was between three brothers only to which Miheer was not a party, it is not possible for this court to record a finding that the Notes of Minutes at Annexure "F" constitute an enforceable arrangement so as to enable Miheer to enforce the said arrangement. 90. In view of the aforesaid discussion, both on facts as well as in law, it is not possible for this court to hold that the proposed scheme of amalgamation is an attempt to defeat or frustrate the counter-claim filed by Miheer in C.S. No. 1010/87 or to deny the rights allegedly flowing in favour of MHM group from the family arrangement of 1979. In absence of subsequent conduct of Miheer and his addressing correspondence to Arvind Mafatlal in the year 1985 and his agreeing to dispose of shareholding of his group in favour of Arvind Mafatlal, matter would have assumed different complexion. As against his claim of enforcement of family arrangement there is substantial claim of Arvind Mafatlal to enforce concluded contract alleged to have come into existence in the year 1985 by way of correspondence between the parties. That apart, thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heer Mafatlal, and the findings recorded hereinabove would answer steps I, III IV allegedly taken by Arvind Mafatlal towards achieving total ouster or exclusion of MHM group. Miheer has referred to seven steps and attributed the same to Arvind Mafatlal. Step I is referable to omission on the part of Arvind Mafatlal in forming third subsidiary company as Suggested in Suggestion V of the Note of Minutes, dated 1-3-1979. The formation of two subsidiary companies and non-formation of third company is with a view to gaining greater control over MIL, submits Miheer. The third step attributed to Arvind Mafatlal is that in contravention of right of preemption in favour of MHM group to purchase all shares of the MIL, Padmashree Synthetics Pvt. Ltd. transferred its shares in favour of PIL and some shares in favour of Surabhi Investments Pvt. Ltd. Similarly, the fourth step attributed to Arvind Mafatlal is that he purchased 396 shares in MIL from Yogendra Mafatlal in 1987 contrary to the stipulation in the family arrangement. In my opinion, the aforesaid three steps are based on the assumption that there existed an enforceable family arrangement under which Miheer and his MHM group was to g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bition order against transfer of shares of MIL in favour of any party except his group. In fact, these steps do not go to establish any mala fides on the part of Arvind Mafatlal. 93. This defence is obviously based on the statement of law as propound ed by the Apex Court in the aforesaid case of V. B. Rangaraj ( supra ) . The reason as to why the third subsidiary company on the lines of Mahamaya Investments Ltd. and Sandip Holdings Ltd. was not floated is not specifically forthcoming in the affidavit-in-rejoinder and from such omission only it would be hazardous to assume or infer that the intention was a well conceived plan on the part of Arvind Mafatlal to take over the control of MIL. In my opinion, when serious allegations are made against the Chairman and the Managing Director of the company attributing motives to him, reply affidavit by him would have enabled the court in clearing the doubts created about his intentions by Miheer. In fact, to this answer is to be found in the pleading of Miheer himself that he agreed under the advice of elderly persons. Non-formation of a third subsidiary company at that stage perhaps could have been explained. Even other wise, why ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst Miheer and his group would be sufficient to establish the ulterior motive or lack of bona fides on the part of MIL also because of following factors: ( i )The Right Issue did not specify certain details in the letter of offer which was contrary to guidelines issued by Controller of Capital Issues. Although the breach of guidelines was condoned by the Controller of Capital Issues, the effect of non-disclosure of objective is indicative of their being concealed object other than the one for which the issue was floated. ( ii )The price of share of MIL at the relevant time was in the vicinity of Rs. 300 and to offer share of Rs. 100 at a premium of Rs. 200 would hardly make any difference for the shareholder to go for right share as at the very price the share was available in the market. This high premium was with an object of dissuading the shareholders from subscribing to right shares, which according to Mr. Thakore, the ANM group could corner which would result into strengthening its shareholding in MIL. ( iii )The Right Issue did not achieve its desired objective but it was undersubscribed and the major subscription was from ANM group and other financial institutions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intiffs in the said suit were the employees/ex- employees of a company controlled by Miheer's maternal-uncle Laxmikant Bhagubhai and that the said suits were filed at the instance of Miheer. On the Notice of Motion filed by the plaintiffs, while rejecting the same, the Ld. City Civil Judge granted partial prohibitory injunction on 4-9-1987. 97. In view of the aforesaid defence of the company the fact that the Rights Issue of 1987 was hopelessly undersubscribed cannot be denied by the company or any of its officers. It is required to be noted that the Rights Issue opened on 4-5-1987 while Arvind Mafatlal instituted the suit being CS No. 1010/87 prior thereto and obtained temporary injunction. It is not clear as to whether any ad interim injunction was granted before judgment and order passed on Notice of Motion dated 23-6-1987 was pronounced. However, by such judgment the learned Single Judge of Bombay High Court restrained Miheer and his group from, in any manner, directly or indirectly disposing of, transferring, alienating the shares of MIL held by other persons or their companies or their trusts. They were also restrained from renouncing the Rights Shares in favour of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the court shall have to look at the conduct of ANM group at the time of Rights Issue of 1987. In my opinion, both the groups are not above board. One is trying to outsmart the other. It is, in this type of situation, that the court is reminded of its function as pointed out by N.M Miabhoy, J., Sidhpur Mills Co. Ltd. ( supra ) . I have also focussed my attention to this very point at the commencement of this discussion. The court must apply its mind of considering whether it is in the interest of the company as a whole and if the class of persons for whom the majority acts and whether the scheme is such that it must be pushed through. Keeping the aforesaid consideration in mind, in my opinion, much weight cannot be attached to Step VI attributed to Arvind Mafatlal by Miheer. Such an action on the part of Arvind Mafatlal in instituting suit and obtaining injunction not only deserves denunciation though in a matter of private dispute between two groups he can always contend that he was simply enforcing his rights flowing from allegedly concluded contract as read from the correspondence exchanged between the parties in 1985. However, the fact that he was an elderly person in whom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs put forth in defence by MIL the petitioner-company, the court is called upon to decide as to firstly, whether various steps taken by Arvind Mafatlal can be said to be steps of the company. Secondly, as to whether from various decisions taken by the petitioner-company, from time to time, commencing from 1987, it could be held that Arvind Mafatlal was the guiding force and that he was an alter-ego of the petitioner-company. Thirdly, even if a distinction is made between the acts taken or resolutions passed by the incorporated body of the Company and its Director or Chairman, is it possible for this court to lift or tear the corporate veil, and even if such an exercise is undertaken, is it possible to reach a conclusion that it was Arvind Mafatlal who was the main guiding spirit behind various steps taken by the Company or all the said steps were taken at his instance and at his command. Mr. MJ. Thakore, Ld. Advocate for objector has in the course of his submission by reference to various steps enumerated hereinabove, has submitted before this court that the steps after steps taken by the company since 1987 were at the instance and command of Arvind Mafatlal and were directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llersteiner outright. The trial court struck the claim for libel and made declaration that Wallersteiner was guilty of fraud, misfeasance and breach of trust. The trial court ordered Dr. Wallersteiner to pay a sum of $ 5,00,000 or more. Against such decision Dr. Wallersteiner appealed to the Court of Appeals. While dealing with number of other questions which are agitated, Lord Denning MR was also invited to decide question of lifting of corporate veil. It was argued that Dr. Wallersteiner used many companies, trusts or other legal entities as if they belonged to him. He was in control of them as much as any "one-man company" is under the control of one who owns all the shares and is the Chairman and Managing Director. It was alleged that he made contracts of enormous magnitude on their behalf on a sheet of note paper without reference to anyone else. Reference was also made to number of powers exercised by him so as to impress upon the court that he was the driving force. It was urged that various companies, trusts or legal entities were a facade and each in substance was alter-ego of Dr. Wallersteiner. Each was in reality Dr. Wallersteiner wearing another hat. The court was, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany to see the realities behind facade of corporate personality. After making reference to the observations of Lord Denning MR in Moir 's case ( supra ) D.A. Desai, J. observed that the incorporated company is a legal entity having a legal personality and is described as an artificial person in contrast with a human being, a natural person. By fiction of law it has been attributed aspects of a human being, it can use and be used, it has perpetual succession, it can own and dispose of property and so on. But over a period the abuses of this corporate personality has become apparent. The courts have lifted the veil in order to see that corporate personality is not blatantly used as a cloak for fraud or improper conduct. Ordinarily, corporate personality is to be respected, but when a benefit is misused, the court is not powerless and it can lift the veil of corporate personality to see the realities behind the veil because in so doing, the court subserves the important public interest, namely, to arrest misuse or abuse of benefit conferred by law. 101. Keeping the aforesaid observations of courts of law in mind, it was submitted before this court that this is a fit case whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns are subject to challenge at various stages it cannot be presumed that the actions or decisions taken by the company are bad in law or not in the interest of the company, as a whole. In fact, despite various challenges to various steps taken by the company, the Rights Issue of 1992 was fully subscribed or to an extent oversubscribed. The capital of the company has thus tremendously increased. From the discussion on objection I it would be at once clear that the company is likely to achieve the objectives set-out in the explanatory statement and that the scheme of amalgamation is likely to benefit the company as well as entire class of shareholders. It is further reinforced by the fact that more than requisite majority of shareholders has voted in favour of the scheme. Objection, if any, has come from Miheer and the members of his family or the MHM group. Since 1985, the group has taken up the attitude of dissenter and has dissented and/or objected to each and every step that the company has taken. It is in this context that the court shall have to see as to whether the ANM group and its holding in MIL can be said to be so numerous, huge or large so as to outwit all other sharehol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1010/87 in the High Court of Bombay has no substance and shall have to be rejected. While recording this finding in favour of MIL I cannot resist observing that the conduct of ANM group and/or Arvind Mafatlal on two counts, i.e., ( i ) institution of Civil Suit in the Bombay High Court and obtaining injunction against Miheer and MHM group so as to practically make it impossible for him to subscribe to Rights Issue of 1987, and ( ii ) allotting shares to NOCIL and Sushrupada from unsubscribed portion of Rights Issue of 1987 in contravention of prohibitory order issued by the City Civil Court, Ahmedabad deserves to be depreciated and denounced. More annoying is further stand before this court and that is the contention before this court that even if the breach of order is committed the allotment in favour of NOCIL and Sushrupada cannot be voided. I have at appropriate stage expressed my anguish over such conduct. However, from such conduct it is not possible for this court to hold that the proposed scheme of amalgamation lacks in bona fides or is actuated with ulterior motive. In the suit instituted by Arvind Mafatlal being CS No. 1010/87 Miheer has undoubtedly filed counter-cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w profit earning ratio of MF would reduce the profit earning per share of MIL. It is his case that the decision which is likely to result in dipping of the EPS (earning per share) cannot be said to be a decision in the interest of the company or its shareholders. (2)The second reason canvassed by Miheer is that manufacturing cost of the textile unit of MF is much higher than the manufacturing cost of the textile units of MIL. The cost of raw materials consumed by MF is 25 per cent higher than the cost of raw materials consumed by MIL. Therefore, MIL is not going to reap any benefit by the proposed amalgamation. (3)The third reason assigned by Miheer is that cost of labour in case of MF is higher than that of MIL. In fact, the cost of labour of Mafatlal Fine is the highest in the industry and in this connection he has relied upon Annexure 'P' to his affidavit. Because of amalgamation, such higher cost of labour shall have to be borne by MIL. He, therefore, submits that higher cost of raw materials and labour will substantially reduce the profits of the postmerger MIL and would substantially reduce the EPS of shareholders of MIL. One share holder has even raised such a query, to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re than statutorily required majority has voted in favour of the scheme, the court should be loath to interject itself and to substitute its decisions or to substitute decision of an objector like Miheer who has by conveniently and deliberately remaining absent at the meeting of shareholders, avoided to point out and demonstrate to the large class of equity shareholders present and voting as to how the proposed scheme of amalgamation was not in the interest of the company or its shareholders. The objection which he has put forward before the court could have been put forward by him before the class of equity shareholders present and voting in the meeting which would have enlightened equity shareholders and would have provided an opportunity to all to consider such objection. Miheer having failed to remain present at the meeting and having failed to raise such objection to the scheme, cannot now be permitted to veto the will of majority by simply asserting that the proposed scheme of amalgamation is against the interest of MIL or its equity shareholders. In my opinion, objection of such nature when it comes from an individual objector personally or on behalf of his group or family m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. According to Miheer, the Earning Per Share of MF is Rs. 7 and that of MIL is Rs. 30 per share. He has therefore submitted that shareholders of MIL as such are not going to be benefited by the proposed amalgamation because low profit earning ratio of MF would naturally reduce to profit earning per share of MIL. While dealing with objection No. 8, the court would deal with this objection in detail. However, it would be just and proper at this stage to point out that the defence of the company is that it would be irrational to consider amalgamation as one single time point phenomenon with consequential benefits precipitating on the day the amalgamation takes effect and to ignore its consequential benefits and advantages that may result over a time period. EPS of amalgamated company cannot be worked out of two merging companies. The future profit potential of the amalgamated company must take into account the profit making capacity of the amalgamated company with the transfer of assets, undertakings and liabilities and the resultant situation as regards all aspects of the business of the two companies. It is pointed out that the EPS worked out on the basis of overall profit after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit both the transferor and the transferee-companies and their shareholders. It is submitted that pre-merger EPS in the two amalgamating companies are relevant and must weigh and same have been weighed by both the companies and their shareholders in taking decision in favour of amal- gamation, the manner in and the extent to which EPS weighs with the shareholders depends upon their commercial wisdom. The requisite majority of the shareholders of the two amalgamating companies have after properly weighing the factors of EPS voted in favour of amalgam- ation. 109. In the affidavit-in-sur-rejoinder filed by Miheer he has reiterated his objection and has submitted that even if the last results are considered, the Earning Per Share of MF is Rs. 9.24 per share while that of MIL is Rs. 55.50 per share. He has further stated that there is no justification given as to how the two companies when amalgamated are likely to relatively contribute to the future profitability potential of the amalgamated company. He has reiterated that the amalgamation is not going to benefit the shareholders of MIL but will be injurious to the shareholders of MIL. The exchange ratio must have co-relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he manufacturing cost of textile units of MIL. It is his say that more than 70 per cent of the turnover of both the companies is from their textile divisions. The cost of raw materials consumed by MF is 25 per cent higher than the cost of raw materials consumed by MIL. Therefore, MIL is not going to be benefited at all by the proposed amalgamation. In this connection he has referred to a Statement at Annexure "O" (Heading Ann. 0.579) showing materials of Mafatlal Fine at Annexure-0 to his objection. 112. By such comparative statement of last five years showing raw material cost along with selling price per meter of MIL and MF, he has submitted that percentagewise cost in case of MIL on average for last 5 years compared to Rs. 38.11 crores on an average of MF. 113. The company has by the affidavit-in-rejoinder denied the aforesaid allegation and has pointed out that the alleged higher raw materials cost has no relevance to the basic question of amalgamation of MIL and MF. It might have some relevance only to the question of determining the fair exchange ratio of shares. The percentage of raw material cost would also depend upon the product mix as some varieties may give high ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compared with the component of grey cloth is relatively higher, the ratio of raw material cost to sales as worked out in Annexure "O" would be lower. 114. It is further pointed out that in the context of the comparison of percentages of raw material cost to sales, the sale price alone is not relevant and it would be necessary to take into account other manufac-turing income as per example export incentives, duty draw back, etc. Mafatlal Fine has large export of grey cloth with the result that the sale price proper is relatively lower, but as against that Mafatlal Fine earns export incentives, duty draw back, etc., and saves on income-tax. 115. It is further pointed out that the figures of raw materials cost referred to raw materials consumed in a given financial year, whereas the figures of sales would not include the value of the cloth manufactured but not sold during the year and which remained in stock at the end of the year. Thus by various figures and comparative statements annexed to the Affidavit-in-rejoinder, the Company has submitted that it would not be correct to conclude that cost of raw materials in the case of Mafatlal Fine is higher, which would ultimately re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chasing and selling cloths, which would ultimately show that in the case of Mafatlal Fine, sales of Grey Fabrics are higher while in case of MIL, sales of processed fabrics are higher. I am, therefore, of the opinion that in view of the overwhelming support received by the Scheme from the Equity Shareholders of the company which also include the financial institutions also, it would be difficult to hold that they have exercised their commercial judgment in disregard of the alleged manufacturing cost or raw material cost, being higher in case of Mafatlal Fine which would result the interest of Equity Shareholders of MIL adversely. Labour Cost 116. Miheer has in this behalf pointed out that the cost of labour in case of Mafatlal Fine is much higher than the cost of labour in MIL. He has stated that cost of labour of MF is the highest in the industry. He has in this connection, produced a comparative study in his statement at Annexure 'P' showing the average cost of labour of Mafatlal Fine at Rs. 37.95 crores as against average labour cost per year in MIL of Rs. 24.27 crores. He has, therefore, submitted that when cost of labour of Mafatlal Fine is higher, it would not be in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other benefits required to be offered to them under the relevant Labour Laws. In MF number of employees have progressively gone down because of retrenchment and Voluntary Retirement Scheme, whereas the number of employees in MIL have progressively gone up. MF was required to pay during the relevant years the following amounts either by way of retrenchment compensation or under Voluntary Retirement Scheme. Year Retrenchment compensation/ V.R.S. ( Rupees in lakhs ) 1988-89 90.86 1989-90 129.81 1990-91 100.41 1991-92 29.43 1992-93 89.49 119. In the affidavit-in-rejoinder filed by MIL, reference is made to other relevant materials which must enter into consideration while finding out as to whether labour cost of M.F. is higher than the MIL. It is stated that in the context of the employment cost, it is necessary to consider the manufacturing activities of the companies and their requirement of nature of employees/labour force. Both the companies have Textile and Chemical Divisions which are as under: MIL MF One Textile Unit at Ahmedabad (Guj.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parity in labour cost as pointed out hereinabove and if all relevant factors are taken into consideration, marginal difference of one factor may be upset by presence of another factor. In my opinion, therefore, it would not be just and proper to hold, based on the alleged difference in cost of labour that the proposed scheme of amalgamation would not work in the interest of shareholders of MIL or that it would only result in a lower yield to the shareholders of MIL and a lower profitability to MIL. Debt Equity Ratio 122. Miheer has further submitted that the average Debt Equity Ratio for the last five years of Mafatlal Fine and MIL are as under: M Fine : 2.08: 1 MIL : 1.20:1. 123. According to Miheer, Debt Equity Ratio of MF is adverse and as a result of amalgamation MIL will be required to take over huge debts of Mafatlal Fine. Servicing of huge debts of Mafatlal Fine by MIL would reduce the profitability of MIL and would be against the interest of shareholders of MIL. 124. In reply it is pointed by MIL that what is relevant is Debt Equity Ratio for the last year 1992-93 which were 1.6:1. It is pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not with the intention of presenting a healthier Debt Equity Ratio of Mafatlal Fine. It is submitted that in fact Miheer has relied upon Annual Report of MF prior to August 1992 for making out a case of Debt Equity Ratio. If subsequent steps are taken into consideration, Debt Equity Ratio of MF cannot be said to be in any way adverse so as to reduce the profitability of MIL. In view of the fact that Debt Equity Ratio of MIL is not adverse and in view of the further fact that primarily Debt Equity Ratio assumes importance for the purpose of judging borrowing capacity, MIL, its Board of Directors and Equity Shareholders must have taken into consideration the commercial interest of MIL. It cannot be said that while taking vital decision, a large class of Equity Shareholders more particularly a substantial class of financial institutions holding share of MIL as well as MF would ignore the Debt Equity Ratio of the two companies. After conversion, all debentures as aforesaid, in the relevant year, i.e., 1992-93 Debt Equity Ratio of MF has not remained adverse and, therefore, it is difficult to agree with Miheer that decision to amalgamate MF with MIL would work adverse to the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amalgamation and/or arrangement must be such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. The approach of the court, even when the Scheme is approved by a thumping majority of shareholders should be to scrutinise the Scheme to find out whether it was a reasonable scheme which can by reasonable people concerned with the subject be regarded as beneficial to those who are likely to be affected by it. The burden always lies on the petitioner-company to show that the Scheme of Amalgamation is fair, reasonable, workable and such that a man of business would reasonably approve. The Court would, of course, take into the fact that the Scheme has been approved by a big majority vote, but it would not shirk its duties to scrutinise the Scheme especially when it involves amalgamation of large companies in which many interests are at stake. It is said that the Scheme must be tested from the point of view of an ordinary reasonable shareholder, acting in a business like manner, taking within his apprehension and bearing in mind all the circumstances prevailing at the time when the meeting was called upon to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reholders and is specifically brought out in the Explanatory Statement. The question of cost of raw materials being higher in MF than in MIL was present to the minds of the shareholders as one of the shareholders has put a specific query on such question to which answer is given by the Chairman of the Meeting. Even from the reply filed before this Court by MIL as discussed hereinabove, there does not appear to be any serious commercial objection to amalgamation on the twin aspects of alleged higher cost of raw materials or alleged higher labour cost. In fact, the reasons for higher labour cost are so clearly explained in case of Mafatlal Fine that it is difficult to subscribe to the view of the Miheer that the labour cost in MF is higher than that of MIL. The gradual retrenchment of a large class of employees coupled with the fact that the large number of employees have resorted to the benefit of Voluntary Retirement Scheme, ultimately resulting into payment of retrenchment compensation and/or benefits of Voluntary Retirement Scheme has in fact pushed up the labour cost. If those factors are taken into account and such cost or retrenchment compensation is excluded from consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lders have by requisite statutory majority approved the Scheme of Amalgamation. To undo the wisdom of such class on such jejune grounds would not be a permissible exercise especially when it is not found by this court that the proposed Scheme of Amalgamation would be detrimental to or work against the interest of shareholders of MIL. This objection must also therefore fail. Objection Nos. IV VII 133. By this objection No. IV Miheer for himself and his MHM group claims a right of special, separate and distinct class meeting from that of other shareholders of MIL. In his submission, by virtue of provisions contained in the family arrangement of 1979, his group was to get control of MIL. On the date of the proposed scheme shareholding of his group was around 5%. He submitted that because of disputes in the family, his group has distinct and separate interest from that of other class of shareholders. By objection No. VII he has submitted that a particular class of shareholders, namely, allottees of shares of Rights Issue of 1987 and 1992, namely, NOCIL and Sushrupada Investments Pvt. Ltd. were illegally and unauthorisedly allotted shares in contravention of prohibitory order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... President of the applicant company and failing him Shri Hrishikesh A. Mafatlal, Vice Chairman of the applicant company shall be the Chairman of the said meeting of the Equity shareholders of the applicant company, to be held on the 22nd day of January, 1994 as aforesaid. That the Chairman appointed for the said meeting referred to above." 136. Consistent with the aforesaid directions meeting of the equity shareholders of the MIL is held on 22-1-1994 under the Chairmanship of Arvind Mafatlal at Ahmedabad. 137. The objections of Miheer to convening and holding of such a joint meeting of entire class of equity shareholders are threefold and they are as under: (A)In view of the family history and background, more particularly, set-out hereinabove, it is submitted that the shares held by Miheer in his personal capacity as well as shares held by him as Karta of HUF, or trustee of private and charitable trusts and all the shares held by the members of his family form a class by themselves. They, as such, have a separate and distinct interest from that of other equity shareholders, historically as well as flowing from the family arrangement of 1979. Being distinct and separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch meeting. It is submitted that in the present case on Company Application No. 892/93 being filed in this court with all necessary material and particulars, Y.B. Bhatt, J. has vide order, dated , simply directed convening, holding and conducting of meeting of equity shareholders of the MIL. The court did not direct a separate and distinct meeting of the group of shareholders being represented by Miheer and his family members nor did the court direct a separate meeting or exclusion of shareholders of 1987 right issue or right issue of 1992 nor did the court direct exclusion of shareholders of NOCIL and Sushrupada Investments (P.) Ltd. who were allotted shares allegedly in violation of the order of the City Civil Court, Ahmedabad. In the absence of any specific direction no separate class meeting could have been convened, conducted or held and therefore no fault can be laid at the doors of the MIL. Since Y.B. Bhatt, J. has not found it necessary to convene, hold and conduct separate meetings of aforesaid classes, resolution of the petitioner-company should not be voided, submits Mr. Vakil, Ld. advocate for the petitioner-company. In my opinion, this preliminary defence has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference shareholders. If there are different groups within a class the interests of which are different from the rest of the class, or which are to be treated differently under the scheme, such groups must be treated as separate classes for the purpose of the scheme. Moreover, when the company has decided what classes are necessary parties to the scheme, it may happen that one class will consist of a small number of persons who will all be willing to be bound by the scheme. In that case, it is not the practice to hold a meeting of that class, but to make the class a party to the scheme and to obtain the consent of all its members to be bound. It is, however, necessary for at least one class meeting to be held in order to give the court jurisdiction under the section. It will be seen from what has been said above that great care must be taken in considering what for the purpose of the scheme constitutes a class. If meetings of the proper classes have not been held, the court may not sanction the scheme." 142. From the aforesaid observations of the learned author it becomes clear that an application to the court for an order for meetings is a preliminary step. If cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares. Hambros through his wholly owned subsidiary MIT already owned 53.01 per cent of the ordinary shares. At a separate meeting of the ordinary shareholders summoned to consider, and if thought fit, approve the scheme, approximately 91 per cent of the shareholders by value attended and voted, and 84.67 per cent in value, including the votes of the wholly owned subsidiary voted in favour of the arrangement. A minority shareholder holding 13.95 per cent, in value, voted against the arrangement. When the company moved a petition for sanction of the court to such arrangement, the minority shareholder objected principally on the ground that the interest of wholly owned subsidiary of an intended purchaser of shares under a scheme of arrangement were different from those of the other ordinary shareholders and different considerations applied in deciding whether to approve the scheme, and therefore the purchasers wholly owned subsidiary was a different class from the other ordinary shareholders and since the meeting had not been properly constituted the court had no jurisdiction to sanction the scheme. In the aforesaid backdrop of facts Templeman, J. while considering the objection obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law is followed and reiterated by D.A. Desai, J. (as His Lordship then was) in Maneckchowk Ahmedabad Mfg. Co. Ltd. 's case ( supra ) . While dealing with the objection to the effect that in the absence of proper directions for convening separate meetings of different classes of creditors and the members of the company, proper meetings of distinct class of members and creditors were not held, and therefore, the resolution was vitiated, the court held that it is at the stage when the judge's summons is taken out under section 391 for convening meetings of different classes, that proper classification of members and creditors may be made. The court observed as under: "If the judge's summons is taken out for seeking directions for convening meetings a duty is cast on the company to put proper material before the court so that the court may give proper directions for separate meetings of different classes of creditors and members. If the creditors and members are not properly classified and if the meeting of the proper class of creditors and members is not separately held, the scheme approved at such meeting cannot be sanctioned, [vide Court Practice Note (1934) Weekly Notes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he court, and what relevant questions are required to be raised and considered while deciding the objection on the ground that a class of equity shareholders constitute separate, distinct class having conflicting interest it would be necessary to refer to certain English as well as Indian precedents on the subject. 147. The first statement of law on the subject is to be found in the case of Sovereign Life Assurance Co. v. Dodd 1892 (2) QBD 573. Before the Court of Appeal the question was as to whether the persons whose policies had matured and those whose policies had not matured constitute a separate distinct class so as to justify summoning and convening of separate meeting. In that case a meeting of policyholders was summoned under section 2 of Joint Stock Companies Arrangement Act, 1870 at which a statutory majority agreed to an arrangement between the plaintiff-company and the Sovereign Life Assurance Co. whereby it was provided that the policies of the plaintiff-company should be transferred to Sovereign Life Assurance Co. and that the holders of the policies in the plaintiff-company should in full satisfaction of all claims upon the plaintiff accept certain reduced p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e objective of section 391, namely, that of effectively consulting the different interests or different classes, no sanction to resolution can be accorded even if statutory majority has passed it. In this very judgment, Bowen, J., in a concurring but separate opinion made following pertinent observations : "If we are to construe the section as it is suggested on behalf of the plaintiffs it ought to be construed we should be holding that a class of policyholders whose interests are uncertain may by a mere majority in value override the interests of those who have nothing to do with futurity, and whose rights have been already ascertained. It is obvious that those two sets of interests are inconsistent, and that those whose policies are still current are deeply interested in sacrificing the interests of those whose policies have matured. They are bound by no community of interest, and their claims are not capable of being ascertained by any common system of valuation. Are we, then, justified in so construing the Act of Parliament as to include these persons in one class? The word 'class' is vague, and to find out what is meant by it, we must look at the scope of the section, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uoted the aforesaid observations, Megarry, J. was of the view that the court has to see whether the majority was honestly endeavouring to decide and act for the benefit of class as a whole rather than with a view to the interests of some of the class and against that of others. This is a conclusion which the court has to reach on the evidence before it. 152. From the aforesaid observations another facet emerges and that is to find out as to how even in such a common meeting where there was no common meeting ground whether majority honestly tried to decide and act for the benefit of class as a whole. If such an exercise is visible or could be justifiably read, individual interest of some of them would not be paramount. Test is, therefore, one of fairness to the body of shareholders and not to the body of a few individuals. 153. Substantial reliance is placed upon the decision of Chancery Division in Hellenic General Trust Ltd. ( supra ) and more particularly upon the observations of Templeman, J. where the court accepted the objection of minority shareholders to the effect that the meeting of the ordinary shareholders summoned to consider the arrangement was not properl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inary shares of the company. It was also found that the company cannot succeed under section 209 because of the express provisions of that section and the size of the shareholding of the objectors. They can only succeed under section 206 by using votes of their own subsidiary company - MIT to secure necessary majority. Thus, having found that the petitioners cannot succeed at all under section 209 and that petition under section 206 was an attempt to overcome the provisions of section 209, Templeman, J. held that they cannot fairly succeed under section 206. Having noticed the aforesaid purpose of moving petition under section 206 a question was put as to why if the scheme was beneficial, it was not acceptable to the objectors, i.e., National Bank of Greece. The answer to such a question given by the objector was that in their opinion there was some advantage in retaining their present shareholding. The second answer was that they would become liable to swinging capital gains tax in Greece. It was not disputed that the objector would be liable to capital gains tax in Greece. In the circumstances, the court was of the opinion that it would be unfair to deprive the objectors of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and the members of his branch were to suffer individual loss and/or were to be deprived of their rights which were to flow under family arrangement of 1979 by the proposed scheme of amalgamation, a separate meeting of such class of shareholders was essential as their interest was conflicting with the interest of majority equity shareholders. 157. In the context of class meetings, it would not be out of place to refer to the summation of law on the subject by D.A. Desai, J. (as His Lordship then was) in Maneckchowk Ahmedabad Mfg. Co. Ltd.'s case ( supra ) wherein His Lordship observed, after referring to the observations of Buckley on the Companies Act as well as observations of Court of Appeals in Sovereign Life Assurance Co.'s case ( supra ) as already quoted hereinabove in para 149, His Lordship also observed as under: ". . . Speaking very generally, in order to constitute a class, members belonging to the class must form a homogeneous group with commonality of interest. If people with heterogeneous interests are combined in a class, naturally the majority having common interest may ride rough shod over the minority representing a distinct interest. One test that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In my opinion, it shall have to be kept in mind that as a matter of fact it was found by Templeman, J., that the scheme before him, in fact and in substance, was one for compulsory purchase of shares which were held by minority. It was also found that MIT was wholly owned subsi- diary of the transferee-company. The scheme for compulsory purchase of shares was in fact governed by the provisions of section 209 equal to section 395 of our Companies Act, 1956 which required 9/ 10th majority, and since nearly 14% of shares were held by the majority and was never likely to succeed if the scheme was moved under section 209. As a subterfuge, therefore, the scheme was moved under section 206 of the English statute. The resort to section 206 was therefore found to be not bona fide and was found to be one solely for the purpose of out-voting the minority shareholders. It is in this fact situation that the observations were made by Templeman, J., which could not be applied as general proposition of law in a scheme for amalgamation under section 391 of our Act which is in pari materia with section 206 of English statute. It would be pertinent to mention that this decision of Templeman, J. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entients as under section 582(5) should get a fair value for their shares. It does not mean that they are entitled to retain their shares and have the scheme thrown out when the cash price they were being offered was 'fair or more than fair to the ordinary shareholders as a class'. If authorities on the relationship between sections 582 and 425 are to be applied to that between sections 428 and 425 then this aspect of the analogy should hold good. 161. From the aforesaid observations it becomes clear that even in a scheme under section 395 equal to section 209 or section 428 of the English statute where the purpose is to compulsory purchase of the share of the minority, the dissentients or the minority must get fair value for their shares. They have no right to retain their shares, and have the scheme thrown out when the cash price they were being offered was fair or more than fair to the ordinary shareholders as a class. On principle also it appears that the ratio laid down in Hellenic General Trust Ltd. s case ( supra ) is not accepted as a proposition of law. 162. In Palmer's Company Law (24th Edition) at page 1184 it is pointed out by the learned author that if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinct treatment if his legal rights are not in any way distinct from the rights of the entire class of shareholders. Group "A": 165. Turning now to the group "A" referred to hereinabove which comprises of Miheer in his personal capacity and as Karta of his HUF and as trustee of trusts and his family members, it is required to be examined as to whether this group constitutes a distinct class of shareholders having separate interest in the company in view of family agreement, dated 1-3-1979, and as to whether this group is required to be treated as a separate class of shareholders requiring a separate meeting for considering the proposed scheme of amalgamation. 166. In the wider class of shareholders the law itself distinguishes between equity shareholders and preference shareholders. However, under the provisions of the Companies Act, or the Rules, a further classification in class of equity shareholders is not made. In the context of section 391 (1) of the Act, for the purpose of determining different class or classes of shareholders of the company, ordinarily, over and above the provisions of the Act and Rules reference is to be made to the classification of shares und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 85 to 90 of the said Act it is not possible to read any further classification in the class of equity shareholders. 168. Thus, neither from the provisions of the Act nor from the provisions of Articles of Association of the MIL it is possible to identify a class within a class or to regard Miheer and the members of his family and his HUF and his Trusts as a separate and distinct class of equity shareholders. Ordinarily, therefore, separate meeting of this group "A" from the entire class of equity shareholders was not permissible nor is any justification found from the provisions of the Act or the Articles of Association for giving separate and distinct treatment to this group "A". 169. However, the submission of Miheer is that inter se agreement between the shareholders in the nature of family arrangement of 1979 shall have to be taken into consideration. It is submitted that this court cannot turn a Nelson's eye to the broad realities which are reflected from the draft of family arrangement produced at Annexure "E" to the affidavit-in-reply and the final agreement at Annexure "F". It is further submitted that the existence of family arrangement and/or subsequent a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. In the absence of proper amendment of Articles of Association making special provision for one of the four groups as envisaged by family arrangement, legally it is not permissible for this court to classify this group of equity shareholders as a separate and distinct class. In this connection attention of this court is invited by Mr. S.B. Vakil to the decision of the Supreme Court in the case of V.B. Rangaraj ( supra ) . Before the Supreme Court, the question was as regards transfer of shares of a company in the context of section 82 of Companies Act, 1956. Savant, J. speaking for the court formulated a question as to whether the shareholders can among themselves enter into an agreement which is contrary or inconsistent with the Articles of Association of the Company. Before the Supreme Court, the third defendant was a private limited company having total holding of 50 shares. The joint family of the plaintiff and the defendants, initially held 13 shares, the rest of 37 shares being held by the outsiders. In course of time, the family acquired rest of 37 shares and became the sole shareholders of the company. The family consisted of two brothers, namely, Baluswami Naidu an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res which are contrary to the provisions of Article 13. They are, therefore, not binding either on the shareholders or on the company. In view of this legal position, the finding recorded by the courts below that the sale by the first defendant of his shares to defendants 4 to 6 is invalid as it is in breach of the agreement, is erroneous in law. In view of our above finding, it is unnecessary to go into the question whether the High Court was justified in directing the transfer of shares by defendants 4 to 6 to the plaintiffs even if its finding that the sale was invalid was correct." (p. 457) 171. To similar effect is the decision of the Supreme Court in the case of S.P. Jain ( supra ) . In the case before the Supreme Court the company was not a party to the agreement between the two groups of shareholders and the third group came forward to supply finance on terms that he be allotted shares equal to those held by two groups after increasing share capital. Since the company was not a party to such agreement it was held that it was not bound by it and it was open to the company in its general meeting to decide that the new shares should not be issued to the existing sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not have any significant impact on the ultimate resolution which was passed by the meeting of equity shareholders. This finding is recorded on the assumption that Miheer and members of his group constitute a separate class. In reality, as recorded hereinabove, there is no justification either in law or on facts to hold that Miheer and his group would constitute separate and distinct class of equity shareholders requiring a separate meeting. It is also required to be kept in mind that in the meeting of this nature where equity shareholders are required to consider the proposed scheme of amalgamation of MF with MIL all shall have to think as to whether such an agreement would be beneficial or advantageous both to the company as well as to the shareholders. The right to vote which they exercise in such a meeting is a corporate right or a right which flows from the Articles of Association. Shareholders, inter se, are not in any fiduciary relationship. While taking into consideration the benefits and advantages of the scheme the paramount question the shareholders ask is as to whether it is for the benefit of the company, and secondly, as to whether it was for the benefit of class ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortant guidelines issues by the Controller of Capital Issues were not fulfilled. It was found that the guideline contained in Clause 17 required every company to send a letter to the existing shareholders containing detailed information as to how it proposes to utilise the additional money and to give some broad idea of future investment of such additional capital before making application to the Controller of Capital Issues for issuance of right shares. This clause of the guidelines have not been complied with by the MIL. It was found by the learned City Civil Judge that had such a letter been sent to the shareholders including the plaintiffs, they, perhaps, could have instituted litigations well in advance. The learned City Civil Judge has, however, noted that non-compliance of aforesaid Clause 17 was condoned by the Controller of Capital Issues by subsequent letter of consent. Despite such observations, the learned City Civil Judge felt need of imposing some restrictions as he was not inclined to grant full clearance with respect to allotment of shares. He, thereupon, passed the following operative order : "The Notice of Motion in both the cases partly succeed. The defendants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their shareholding like other equity shareholders. Secondly, it is pointed out that the learned City Civil Judge has not put any prohibition or restriction on the rights of such allottees inasmuch as the allottees are permitted to transfer or deal with their allotted shares in every manner permissible under law. Such allottees therefore cannot be treated as separate class. Thirdly, it is pointed out that the plaintiffs, being Kaushik N. Parikh and Dhirubhai D. Desai of Civil Suit No. 3181/87 and Jatin C. Shah plaintiff of Civil Suit No. 3182/87 were employees or ex-employees of the company controlled by Miheer's maternal uncle, Lakhsmikant Bagubhai. It is submitted that in fact the suits were instituted by the plaintiffs at the instance of Miheer and the plaintiffs were stooges of Miheer. Fourthly, it is submitted that the only ground on which prima facie case was believed at the stage of deciding Notice of Motion was alleged breach of Clause 17 and the guidelines issued by the Controller of Capital Issues. It was pointed out that non-compliance of said clause was also condoned by the Controller of Capital Issues. Fifthly, it was pointed out that though the hearing of bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring of the suits. The suits are, therefore, simply lying in the cold-storage and for years to come the entire class of shareholders to whom the rights issues are allotted cannot be regarded as a class subordinate to class of equity shareholders or a class distinct and separate from the class of equity shareholders. This court also fails to understand as to how the institution of suits simplicitor without any prohibitive order against issuance of rights issue or any prohibitive order disqualifying or subjecting them to disability can disqualify a class of equity shareholders from being equally treated with the other equity shareholders more so when such class itself was comprising of equity shareholders to whom the right issues were issued. For the aforesaid reasons I do not find any substance in the objection of Miheer that the allottees of rights issue in 1987 constitute separate and distinct class of equity shareholders whose rights were under cloud of pending litigation and therefore they were not entitled to participate in the meeting of equity shareholders. Said objection is, therefore, overruled. 180. As regards Rights Issue of 1992 it must be noted that Miheer himself h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he meeting of equity shareholders. Their participation, submits Mr. Miheer, has vitiated the ultimate resolution passed by the petitioner- company, and therefore, the scheme should not be sanctioned. 182. It is undoubtedly true that in the operative portion of injunction granted by the City Civil Court, Ahmedabad in the aforesaid two suits filed by the shareholders challenging the Rights Issue of 1987 it was clearly stipulated that the company shall not allot shares front the unsubscribed portion to anyone except banks and/or public financial institutions without prior permission of the court. It is pointed out that as against 35% holding of the public in the pre-right equity shares of the MIL, less than 10% applied for right shares. It is further asserted that of the total issue of 850500 shares more than 55% was not subscribed. The company was prohibited from allotting any share from the unsubscribed portion of the Right Issue by the City Civil Court. It is Miheer's case that despite such prohibitory orders 1,24,400 shares were allotted to NOCIL a company controlled by MIL on 14-12-1987 after the order was passed by the City Civil Court on the basis of application made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave already initiated action for contempt of court in the City Civil Court which is pending. By reference to various decisions of the High Courts it was contended before this court that the allotment of shares in breach of prohibition imposed by the City Civil Court would not render allotment bad or void and that the allottees would nonetheless remain to be the holders of equity shares. The third defence is that even if it is held that the shares issued to NOCIL and Sushrupada allegedly in breach of prohibitory order of the City Civil Court were void and/or were not lawful and that such shareholders cannot participate in the meeting of equity shareholders, even in the absence of such shareholders and by excluding them from meeting also the requisite majority has voted in favour of resolution and therefore the ultimate resolution passed by the shareholders cannot be voided. 184. At the outset, it must be clarified that the NOCIL was admittedly not a shareholder of MIL on the record date. It was, therefore, not entitled to any offer of right issue as of right. As regards Sushrupada it was the holder of only 563 shares of MIL and was therefore entitled to allotment of just 563 R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies Act, in so far as it is relevant: "81. Further issue of capital (1) Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier it is proposed to increase the subscribed capital of the company by allotment of further shares, then, ( a )Such (further) shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date; ( b )the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined; ( c )unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause ( b ) s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the 70% of shares are disposed of out of total issue of 8,10,000 shares is stated by the company in its affidavit-in-rejoinder and the same is reproduced hereunder: Amount No. of No. of Amount Shares received applied for at Rs. 150 per share 1. From shareholders under the entitlement i.e. themselves exercising pre-emptive right under section 81(1)( a ) 2,98,653 4,47,950 2. From renouncees exercising pre-emptive right under section 81(1)( c ) 4,351 64,87,650 3. Applications for additional shares from shareholders [under section 81(1)( d ) including 42,500 shares applied for by Sushrupada] 72,777 10,90,050 4. Applications from NOCIL under section 81(1)( d ) 1,50,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nouncee are from the subscribed portion. In fact, renouncee is a person stepping into the shoes of offeree to whom the shares were initially offered, and on acceptance of such offers it can be said that it is from the subscribed portion of shares that the shares are being allotted. However, in the context of section 81(1)( d ) when applications were made by NOCIL and Sushrupada for additional shares it is contended that by the very nature of the provision the Board of Directors is left only with unsubscribed portion of shares and that they cannot allot such shares in view of prohibition stipulated in the order of the City Civil Court. The shares which are not accepted or the offers which are not accepted would result into not subscribing to the offer and therefore all such shares should be treated as unsubscribed shares which are left with the Board of Directors under clause ( d ) of section 81(1), submits the learned counsel for Miheer. 189. In this connection, what was noted by the learned City Civil Judge while passing the aforesaid prohibitory order of injunction on 4-9-1987 is required to be noted. In para 23 of the judgment, the Learned City Civil Judge has noted that he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are capital nor do I accept their defence that the power which the Board of Directors exercised under section 81(1)( d ) of the Companies Act to dispose of additional shares would cover the shares other than unsubscribed shares. On my reading of section 81(1)( d ) it is referable only to unsubscribed share capital as such power could only be exercised by the Board of Directors after the expiry of time specified in the notice to be issued under clause ( b ) to the shareholders entitled to issue of right shares or after receipt of information from such shareholders that they decline to accept the offer. It, therefore, leaves no room for doubt to conclude that portion of issue which is not subscribed by the right offerees would only remain with the Board of Directors for which they can exercise power under section 81(1)( d ) and therefore the first part of defence of the company is not tenable in law and is hereby rejected 192. The second part of the defence of the company is that even if it is assumed that the shares allotted to NOCIL and Sushrupada are out of unsubscribed portion of right issue, but it may at the most amount to breach of order of temporary injunction issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f property. Where property has been attached by the order of the court any transfer of property in face of such attachment is void if the attachment has been made by actual seizure or by written order duly intimated or made known. The court held that a temporary injunction has no such effect. Bona fide purchasers of property for valuable consideration without notice of any fraud or collusion on the part of vendor are protected. Such transferees are not in anyway affected by order of injunction which was passed against the transferor. This view is reiterated subsequently by Lahore High Court in Hakim Singh v. Wasan Singh AIR 1928 Lahore 639, AIR 1930Lahore858 and Darbari Ram v. Ghulam Farid-Fazal Karim AIR 1938 Lahore 220. It is not necessary for this court to burden this judgment by detailed reference to subsequent decisions of the same High Court. 193. In the case of Kusuma Dei v. Makti Bewa AIR 1969 Ori. 195,Ld. single judge of Orissa High Court followed the decision of Lahore High Court reported in AIR 1938 Lahore 220 to hold that where an attachment has been made under section 64 any private transfer or delivery of the property attached or of any interest ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t render alienation made in contravention of injunction void. 195. Based on the aforesaid position of law, Ld. counsel for petitioner- company, Mr. Vakil submitted that even if the petitioner-company has allotted shares from unsubscribed portion of right issue to NOCIL and/ or Sushrupada such action would, at the most, amount to contravention of order of injunction for which remedy to aggrieved plaintiffs lies under order 39, Rule 2A of C.P. Code. None else could make complaint about it. Miheer in any case cannot make grievance against such contravention firstly because he was not the plaintiff in the suits of 1987 and secondly, because he relied upon such contravention in subsequent suit at the time of Right Issue of 1992 and failed to get temporary injunction both in the City Civil Court and upto Supreme Court. Thirdly, he pointed out that even if the action of the petitioner-company is regarded as in "contempt of court", at the most it would be "civil contempt" as defined under Contempt of Courts Act for which action could be taken by aggrieved person only, they being the plaintiffs of suits of 1987 but not Miheer. 196. Mr. M.J. Thakore, Ld. advocate for Miheer on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt and for discouraging the attitude of no respect for the orders of the court. 199. Turning now to the third defence of the petitioner-company it is submitted that even if allotment of shares to NOCIL and Sushrupada in Rights Issue of 1987 is excluded from consideration the resolution is passed by requisite majority as required under section 391. It was pointed out that in the Rights Issue of 1987, 1,24,400 shares were allotted to NOCIL and 42,500 shares were allotted to Sushrupada. Total equity shares allotted to the aforesaid two parties would work out to 1,66,900. In 1992 Rights Issue one right share for one equity share was issued and, therefore, 1,66,900 shares were issued to NOCIL and Sushrupada in the aforesaid proportion. Total shares allotted to NOCIL and Sushrupada in 1987 and 1992 Rights Issue would work out to 3,33,800 shares. In the meeting of equity shareholders held on 22-1-1994,19,36,964 shares were in favour of the scheme. If from such shares the shares allotted to NOCIL and Sushrupada are excluded, votes in favour of the scheme would work out to 16,03,164. The votes against the scheme are 86,061. The votes in favour of scheme would therefore work out approxim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereupon, instead of remitting the scheme to separate meetings of unsecured and preferential creditors, based on the ample material available from the report of the Chairman worked out as to what would be the effect of not convening separate meeting of such two distinct and separate classes. The submission of Ld. counsel appearing before the Ld. single judge that there should have been seven separate meetings of unsecured creditors was not countenanced but as regards two classes of workers who were preferential creditors of the company it was noticed that they constitute separate class, separate and distinct from other unsecured creditors. Having accepted that no such separate meeting was convened from the material on record the court came to conclusion that even if two classes were regarded as distinct and separate it was not possible for the court to hold that the proposed scheme has not been approved by requisite majority of different class of groups and members. 201. Based on the aforesaid course of reasoning adopted by D.A. Desai, J. (as His Lordship then was) in the case of Maneckchowk Ahmedabad Mfg. Co. Ltd. ( supra ) Mr. Vakil, Ld. counsel for the company, submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Application No. 872 of 1993, Y.B. Bhatt, J. issued directions under Rule 69 which included directions to the effect that Arvind N. Mafatlal failing him Hrishikesh Mafatlal shall be the Chairman of the said meeting of the Equity Shareholders of the company to be held on 22nd January, 1994. Notices dated 22nd December, 1993 under the signature of Arvind N. Mafatlal convening meeting of the equity share holders of MIL on 22nd January, 1994 were sent to all shareholders and was also published in local daily newspapers - Times of India in English at Ahmedabad and Bombay and in Gujarat Samachar in Gujarati in Ahmedabad. Personal notice to Miheer as shareholder was issued and received by him. Miheer, therefore, knew right from December 1993 that the meeting of the shareholders of both MIL and MF were to be convened and to be presided over by either Arvind N. Mafatlal or Hrishikesh Mafatlal. Miheer never objected to the appointment of Arvind Mafatlal or Hrishikesh Mafatlal as Chairman of the meeting. Since December 1993 to January 1994, there was more than sufficient time at the disposal of Miheer to take appropriate steps by moving an application in the Gujarat High Court to seek mod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection for the first time before this Court in the affidavit filed by him objecting to the proposed Scheme of Amalgamation. In the aforesaid fact situation, this Court shall have to examine as to whether factually and legally the objection is sustainable so as to set at naught the decision of the majority of equity shareholders. 205. In this connection, attention of the Court is invited to Shackleton on the "Law and Practice of Meetings" (7th Edition). The author while describing qualities of a Chairman points out that it is difficult or hard to define qualifications required in a chairman. The Chairman of a meeting should ordinarily be a man of self-confidence, fair-mindedness and he must have the ability to arrive at correct decisions on the spur of the moment. He must have the power to express with facility and discretion the mind of the meeting on the particular question under discussion. He must avoid both garrulousness and secretiveness. He must be careful to subordinate his own views to those of the meeting, both of the majority and the minority. It is further observed on page 52 as under: "A person who is not a member can usually neither be chairman nor present at m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aising such objection, which in the facts and circumstances of the case, is found to be merely procedural and not substantial. It is not pointed out to the Court that Arvind N. Mafatlal has failed to control or manage the meeting or to render any correct decision on objections raised. It is also not submitted that he has either personally or through his speech or through any other method influenced the shareholders present and voting so as to render them incapable of reaching correct decision. The fair and free voting at the meeting is not disputed from which the will of the meeting is clearly evident. In my opinion, therefore, this objection must fail and it is not shown to the Court that as Chairman of the meeting Arvind N. Mafatlal has in any way influenced or affected the voting pattern of equity shareholders either by express act or by omission to act. 209. It is faintly suggested in the affidavit of Miheer in para 4.3 that Arvind N. Mafatlal as Chairman has failed to reply to the query raised by a shareholder. Factually it is required to be noted that such query was raised by a shareholder of MIL at the extraordinary General Meeting of MIL which related to the labour cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proposed scheme being approved by the meeting. The functions of the Chairman, as seen hereinabove, are to preside over the meeting, to give directions or to decide points of order which may arise and to conduct the proceedings in accordance with law. By obtaining proxies to vote in favour of the scheme, the Chairman does not disqualify him from chairing the meeting. The proxies could also be given to oppose the scheme also. The scheme of voting by proxy in the meeting of a Corporate body, whose shareholders are very large and spread over the entire country is a well known statutorily accepted device for ascertaining the wishes of as many members as possible. The right to vote at a meeting either as a shareholder or as proxy holder could not disqualify Arvind N. Mafatlal from becoming Chairman of the meeting. In view of the aforesaid legal and factual position, this Objection No. V is overruled and held to be not sustainable so as to withhold sanction of this Court to the Scheme of Amalgamation. 211. It would not be out of place to mention that on number of occasions, this Court has while entertaining application under section 391 to convene a meeting of shareholders/credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the scheme or against it. Therefore, the meeting and the resolution passed therein are of no effect, and the Court should not sanction the scheme. 213. In support of this objection, Miheer has firstly relied upon the statutory obligation on the petitioner-company to disclose to the Court by affidavit or otherwise all material facts relating to the company, the latest Auditor's Report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251 and the like. Section 391(2) proviso casts aforesaid obligation on the company. 214. The proviso came to be inserted on the recommendation of Daphtary- Shastri Committee by the Companies (Amendment) Act, 1965. The Committee observed that in order that the Court may not proceed to sanction an arrangement or amalgamation with too little material on record and without information as to important facts which, if they were present before the Court, would weigh heavily against the sanction of the scheme, must be disclosed by the company or any other person who has applied for sanction. 215. However, this obligation is referable at a point of time when an applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory and non-compliance thereof shall result into invalidation of the resolution passed at the meeting. 217. According to Miheer, following material facts ought to have been disclosed, and non-disclosure thereof would vitiate the resolution of the meeting held on 22-1-1994 : ( i )MIL has not disclosed material fact, such as, pendency of Original Suit No. 1010/87 in the High Court of Bombay which is filed by its Director and Chairman, Arvind N. Mafatlal for declaration and enforcement of alleged concluded contract as read from the correspondence exchanged between him and Yogendra, Rashesh Miheer in the year 1985, and more particularly, the material fact being institution of counter claim by Miheer in such suit claiming ownership and management of MIL based on family arrangement of 1979. It is submitted that had this fact been disclosed, the learned single Judge of Gujarat High Court would not have appointed Mr. Arvind N. Mafatlal as Chairman of the meeting. ( ii )MIL has not disclosed the fact of pendency of two civil suits being CS Nos. 3181 3182 of 1987 filed by three independent shareholders against allotment of Right Issue of 1987 and CS. No. 5198/92 filed by Miheer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Miheer in such suit do not constitute material facts relating to the MIL. It is also further pointed out that pendency of Civil Suit Nos. 3181 3182ofl987 filed by two shareholders against the Right Issue of 1987 and Civil Suit No. 5198/92 filed by Miheer against the Right Issue of 1992 or the orders passed therein have no material bearing on the scheme of amalgamation. 219. Having referred to the statutory provisions of proviso to section 391(2), section 393(1) and section 173 and the necessary pleadings of the parties and having noticed the facts which according to Miheer, are material non-disclosure of which may prove fatal to the resolution passed by the meeting of shareholders on 22-1-1994.1 may now refer to the position of law as propounded by judicial decisions on the issue. 220. Under section 393(1) along with every notice calling a meeting under section 391(1) which is sent to creditors or members there is an obligation to send also a statement setting-forth the terms of compromise or arrangement and explaining its effect and in particular stating any material interest of Directors and Managing Director etc., of the company and the effect on those interests of compr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permitted the meeting to proceed. In this context, the Court found that it is well-settled that where the shareholder by his conduct shows that he knew the real facts of work to be transacted at a meeting, he cannot complain against the notice on the ground of its insufficiency. What are the material facts and what is the nature and extent of interest under section 173(2) are questions of fact dependent on the facts of each case. When a party is in know of the facts which according to him would have bearing on the decision making process may object at the earliest possible opportunity by showing that certain facts which were material were required to be disclosed. The aforesaid view of Orissa High Court was approved by the Supreme Court in appeal arising from the decision of Orissa High Court in the case of S.P. Jain ( supra ) . Such an approval is a tacit approval if reference is made to para 22 of the reported decision. The Court has found that the objection to a notice under section 173 was not taken in the petition and therefore the same cannot be permitted to be taken before the Supreme Court. The Court noticed that though such an objection was not taken, Das, J. has dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the effect of the scheme on the material interest of Directors and Managing Directors has not been clearly set out in the statement, and while negating the objection His Lordship made following pertinent observations: "The statement under section 393 should be drawn up as to convey to the members and creditors sufficient information so that they may be able to bring to bear upon the scheme their intelligent judgment. They must have information which would help in considering the scheme on its own merits. In my opinion, in this case, the scheme as a whole as was annexed to the notice* along with various statements and statement under section 393 gave the necessary information to the creditors and members so that they may be able to intelligently deliberate upon the scheme keeping in view the commercial feasibility of the scheme and on the material supplied they were in a position to decide intelligently whether the scheme should or should not be approved. It is of course true that some further information was sought at the meeting and Mr. Surottam Hatheesing, the chairman of the company, till the date of appointment of the provisional liquidator was unable to furnish that inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contemplate convening of a meeting of members or a class of members. It is true that any meeting of a company is factually also a meeting of the members of that company but the thrust of the two sets of sections clearly establishes a different legal identity of such meetings. This distinction is also borne out when the language of section 391 is contrasted with the language of section 186 of the Companies Act, 1956. Both the sections confer power on the Court (section 156 prior to its amendment by the Act 41 of 1974) to convene meetings. Sub-section (1) of section 186 in terms refers to a 'meeting of a company'. Section 391 refers to a 'meeting of creditors or class of creditors or members or class of members'. There is deliberate omission of the words 'of a company' in section 391. This omission postulates that different fields and situations are contemplated. The legislative intent appears to provide by sections 391 and 393 for meetings of the creditors or the members or class thereof as contradistinguished from the meetings of the company. This understanding is further buttressed by the fact that the chairman of the company does not preside over the meetings of the members conve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsons, assuming without deciding that interests of the directors are to the disclosed. Even so, there would be no breach of the provisions. Interests of directors is an expression which has well defined connotation. The term 'interest' relates to the interest which is peculiar to each of the directors and does not refer to the factum of knowledge of a director in regard to the status of every director or his being concerned as a director of any other company. Nothing has been shown to me in support of such a contention. I do not find any authority or justification for taking such a view." (p. 517) 225. In the case of United Bank of India Ltd v. United India Credit Development Co. Ltd. [1977] 47 Comp. Cas. 689 (Cal.), in the context of scheme of amalgamation once again the Court was called upon to decide the requirement of explanatory statement issued with the notice under section 393. In this context, while overruling the objection, the Court made following observations: "Then, on the question of sufficiency or adequacy of explanatory statement under section 393 of the Companies Act, 1956,1 am of the view that there is nothing wrong in the said explanatory statement. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herwise true, one possibly could not object to statement resulting in bias against the scheme of amalgamation. In my opinion, the statement of law made by the Ld. single Judge of Karnataka High Court on the scope of statement under section 393 is rather too wide. Even if the facts stated in the statement are true, non-disclosure of material facts or suppression of vital facts might assume importance as the purpose of statement is to give true and accurate picture to all concerned. By concealing or not disclosing vital facts the persons present and voting can be deprived of material facts which will have bearing on the decision making process of shareholders. It is, therefore, not correct to state that simply because the facts stated in the statement were true the court would not undertake further exercise of finding out as to whether it suffers from vice of non disclosure of material facts having bearing on the issue of amalgamation. 228. In the case of Jitendra R. Sukhadiav. Alembic Chemical Works Co. Ltd. [1988] 64 Comp. Cas. 206 (Guj.) in the context of scheme of amalgamation, the Division Bench of Gujarat High Court was called upon to decide the requirement of the explana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce or result which would have the scheme. The requirement is to state and explain the effect in detail, or purpose or consequence or result. In other words, the basis of working on which certain consequences or result of the scheme would flow from the scheme is not required to be stated. It is only the resultant effect of the scheme which is required to be stated. As observed in Sidhpur Mills Co. Ltd In re AIR 1962 Guj. 305, if there is anything in the scheme or compromise or arrangement which is not quite obvious to a person reasonably acquainted with the facts of the case by merely reading the terms of the scheme, then, a duty is cast upon the persons concerned to mention what the consequence will be if the scheme is approved of. If something is implied in the scheme which is not obvious, it must be brought to the notice of the creditors and shareholders ." (p. 215) 229. From the aforequoted observations of various High Courts in the context of Explanatory Statement under section 173 and one under section 393(1)( a ), it becomes abundantly clear that two provisions operate at different time, have distinct purposes to achieve and non-compliance thereof may lead to differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the like interests of other persons. document, then explanatory state- ment will also mention time and place where document can be inspected. This clause thus requires disclosure of all material facts. 5. Section is general in nature which requires a statement setting out all material facts concerning each spe- cial item of business. The notice which is not accompanied by proper explanatory statement defeats the very purpose for which the state- ments are prescribed by law. The object of the section is that the shareholders must know all the material facts and the interests of the managerial personnel in each item of business so that they may not be duped by the management and may not be persuaded to act in any manner desired by the man- agement. 5. The statement under this section should incorporate only specified items such as terms of compromise or arrangement and must explain the terms of such compromise, ar- rangement or amalgamation. It is quite clear that what has got to be explained are not the details of the scheme, but the effect which the scheme will have obviously on such terms as to the welfare of the com- pany and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etails of such suit are matters of for concerned parties to the proceedings and not to the entire class of shareholders. Neither the alleged family arrangement of 1979 nor allegedly concluded agreement of 1985 between Arvind Mafatlal, his two brothers and Miheer are incorporated in the Articles of Association of the company or companies by appropriate amendments thereof. The alleged family arrangement of 1979 or allegedly concluded contract of 1985 amongst family members, therefore, cannot bind company/companies nor can such private agreements have any effect or consequence upon the rights of the shareholders. The details of such litigations, in my opinion, therefore, do not constitute material facts non-disclosure of which would affect the interests of shareholders. Similarly, details of two civil suits being CS Nos. 3181 3182 of 1987 filed by three shareholders in the City Civil Court, Ahmedabad need not be stated. In fact, the shareholders have challenged the legality and validity of the Right Issue of MIL of 1987. Admittedly, in such suits no prohibitory injunction against Right Issue is granted which would prohibit the company from allotting Right Issues. Once Right Issue is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... family trusts, his charity trusts and investment companies renounced their rights to subscribe to the Right Issue to public financial institutions and made huge profit of more than Rs. 2 crores. The fact of pendency of this litigation was specifically known to Miheer and non-disclosure thereof has not in anyway prejudiced him. Disclosure of such facts to the entire class of shareholders was not necessary under section 393(1)( a ) of the said Act. In fact, under section 393(1)( a ), such facts are not required to be disclosed. Nondisclosure thereof therefore cannot vitiate the explanatory statement nor can it be said that ultimate resolution passed at the meeting is vitiated because of alleged non-disclosure. 231. Mr. M. J. Thakore, Learned advocate for the objector has strenuously urged before this Court that in explanatory statement Arvind Mafatlal was expected to state his interest in the MIL. He ought to have brought to the notice of the shareholders the fact that the suits were pending between him and his brothers and his nephew - Miheer and that by proposed scheme of amalgamation of Mafatlal Fine with the MIL such suits would be rendered infructuous. He further submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. At this stage, various factors could be examined by the Court and such an examination of various factors enumerated by the learned single judge include the factor as to whether the company is ready with statutory information under proviso to sections 391(2) and 393(1)( a ). It has also observed that the Court's role under section 391(1) is no less important than under section 391(2) and the very said role is entrusted to the Court under section 391. The Court also observed that it is more necessary to examine the essential nature of the scheme at the stage when it is launched. If, at the initial stage, the Court can satisfy itself as to the viability of the scheme, and if it has any doubt, it should not hesitate either to reject the scheme as proposed or ask for additional material to safeguard the interests of all concerned or even make necessary observations while giving directions so that the creditors, members of the company can take note of pitfalls, loopholes and defects of the scheme. There cannot be a casual or mechanical approach at the time of giving directions for convening meeting under section 391(1). The Court's role under section 391(1) is equally useful, vit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was stipulated in the order of the City Civil Court itself that such allotment of right shares was subject to the final outcome of the civil suit. Each allottee was, therefore, through covering letter, given to know that the shares were allotted to him/her subject to the final outcome of the civil suit. Such fact which is so widely known to the present objector as well as to the large class of shareholders is not required to be stated in the explanatory statement to be issued under section 393(1)( a ) of the said Act. Such fact is, once again, not material or vital fact having bearing on the issue of amalgamation of Mafatlal Fine with the MIL and non-disclosure of such facts has, in no way, adverse effect on the decision making process of the shareholders present and voting. It is pertinent to note that Miheer and his group though in full know of the facts have remained absent and have not thought it fit to disclose such facts even at the meeting so as to change the voting pattern. If such facts were to have such tremendous effects as to even change the voting pattern the objector and other persons of his group would have very well brought such facts to notice of all shareholders p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... independent report of any independent Chartered Accountant regarding the Fair Exchange Ratio. 236. In affidavit-in-rejoinder filed by the Company it is denied that C.C. Chokshi Co. could not have given any report based on which Fair Exchange Ratio is fixed. It is further pointed out that M/s C.C. Chokshi and Company is a very reputed firm of Chartered Accountant in India and its partners are held in high esteem in profession as also in industrial and commercial circles and they have high standards of professional ethics and integrity. It is also pointed out that they are the statutory Auditors of the Company as well as of Mafatlal Fine for last several years. They are being re-elected as Auditors of the said Companies by their shareholders from year to year. Miheer who is a shareholder and director of M.F. for the last several years never objected to their appointment of M/s C.C. Chokshi Company nor has he never ever suggested that said company has ever acted with any partition interest. 237. From the aforesaid nature of objection, the question which imme- diately arises for consideration is as to whether doctrine of bias would apply to report of an independent Chartere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, in the sense in which the doctrine of bias is applied in the Administrative Law, the same s not required to be applied in the context of opinion/report of expert on the subject. 238. With the aforesaid preface in mind, it shall have to be kept in mind that C.C. Chokshi Co. has been working as Auditor and the Chartered Accountant of both the companies continuously since last number of years. They are, therefore, having complete knowledge of the working of MIL and M.F., their liabilities, assets, standing in the market and future prospects of development. The fact that they have been appointed from year to year as Chartered Accountant of both these companies would go to show that there is no earthly reason because for them to take any partition attitude either for MIL or for M.F. Secondly, their report or opinion is merely in the nature of opinion of an expert, not binding on the company or its shareholders. The companies and their shareholders have right to reject such opinion. Thirdly, by such report/opinion, they are not deciding of any lease between the parties or any dispute between the parties nor do they perform any adjudicatory role. They simply function as e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that ICICI is a very well-known financial institution in India. ICICI prepared project appraisal reports for various companies in which it holds shares or to which it has advanced substantial term loans and they are relied upon by various companies at the time of public issues. ICICI is allowed by SEBI to act as managers to many public issues. It is therefore submitted that ICICI could not be said to be interested in fixing a ratio unfair to any of the two companies because of its shareholding and financial participation in MF. It is further pointed out that in the present case the report of exchange ratio is not given by ICICI but is given by ICICI Securities and Finance Company Limited. 241. In order to answer this objection, in my opinion, it will be necessary to refer to the relevant portion of the text of the report/letter dated 10th November, 1993 given by ICICI Securities and Finance Company Limited. This letter is given in response to letter of MIL calling upon the said company to give its opinion on the Fair Exchange Ratio for the merger of M.F. with MIL. The relevant text reads as under : "After studying the proposal, on the basis of the information made available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or by Chairman of M.F. as well as Chairman of MIL. For both these companies, M/s C.C. Chokshi Company has been working as Chartered Accountants since last several years and it was in know of all details of the working of the two companies, the investment of the companies, the assets and liabilities of the companies, the growth prospect, if any, in each of the two companies. It has after taking into consideration all relevant facts and the gradual progress of the two companies commencing from the inception of each company till date, decided the Fair Exchange Ratio. In that view of the matter, while accepting the criticism of Miheer about the report of ICICI, in my opinion, the fixation of Fair Exchange Ratio based on the report of M/s C.C. Chokshi and Company cannot be said to be bad as ultimately vitiating the resolution passed by the meeting. 243. C.C. Chokshi Co. has submitted a report dated 10th November, 1993, and from such report, it becomes clear that the Chairman of the Mafatlal Fine and the Chairman of MIL have requested M/s C.C. Chokshi Co. to submit a report on the fair basis of amalgamation of M.F. with MIL. On such request after undertaking the exhaustive stud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess on 31st March, 1993 shall vest in and become the assets and liabilities of "MIL", the subsequent operations from 1st April, 1993 being to the account of "MIL". ( ii )MIL shall allot to the holders of the Equity share of MF (other than shares of MF held by MIL) as at the date to be fixed by the Board of MIL, on completion of the requisite formalities of amalgamation, 2 (two) equity shares of "MIL" of Rs. 100 each credited as fully paid up for every 5 (five) equity shares of Rs. 100 each of MF. ( iii )The 12,06,914 Equity Shares of MF held by MIL representing about 39.58% of the paid-up share capital of MF shall stand cancelled on amalgamation taking effect." 244. In the proposed Scheme of Amalgamation at Annexure-G to this petition, in para 5 it is proposed as under: "5.( a )The amalgamation of M.F. with MIL will be made on the basis that every member of MF shall in respect of every 5 ordinary shares in MF of Rs. 100 each held by him on the day when this Scheme becomes effective, be entitled as of right to an allotment to himself of 2 Equity Shares in MIL of Rs. 100 each credited as fully paid up and MIL shall, without any application, allot to such member in MF shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the ratio of 5 : 2 would have an average earning attributable to those shares at Rs. 35 while the two shares of MIL would be earning Rs. 60. It is therefore suggested that there is clear discrepancy between the existing earning of shareholders of five shares of M.F. and the subsequent earning after the said holder of shares is allotted two shares of MIL in lieu thereof. It is suggested that the higher earning which the shareholders of M.F. would receive would be at the cost of the existing earning of the shareholders of MIL. It is submitted that the Earning Per Share (EPS) must weigh with both the company and their shareholders in taking any decision. The decision which is likely to result in dipping of the EPS (Earning Per Share) cannot be said to be a decision in the interest of the company or its shareholders. It is therefore submitted that the proposed scheme which would result in dipping of the profits of the MIL should not be sanctioned as it would not be in the interest of shareholders of MIL to amalgamate with M.F. 246. Miheer has in his objection tried to assail the exchange ratio by pointing out that on the basis of earning per share, the exchange ratio fixed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C. Chokshi and Co. had relied upon the book value of the investments in stock and shares and other securities. It is submitted that their exist a wide gap between the book value of investment in stock and shares and other securities as against the market value of investments in stock and shares and other securities. It is pointed out that market value of shares and stocks of MIL is approximately 5 times its cost price while the market value of the investments of MF and cost price thereof is almost identical. The disparity in value of shares and stock and other securities when compared on the basis of market value would show that the fixation of exchange ratio was not just, proper or fair. 247. Third objection raised by Miheer is that MIL, apart from having huge investments in other companies, textile and chemical divisions, is also owning two commercial properties in the Gity of Bombay which are very valuable assets of the company. The said properties are "Mafatlal House" near Mantralaya and "Mafatlal Centre" at Nariman Point. These two assets which are available to MIL and ultimate to its shareholders. 248. Applying the method of break-up value, it is submitted by Miheer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis for the amalgamation of M. Fine with MIL on the basis of the Balance Sheet as at 31st March, 1993 of both the Companies. They have submitted their report dated 10th November, 1993, and according to the said report, the fair and equitable basis of amalgamation of M. Fine with MIL would be allotment of 2 equity shares of MIL for every 5 equity shares of M. Fine in consideration for transfer of the entire business of M. Fine, together with all assets and liabilities of MIL. Copy of said report is circulated herewith marked as Annexure-H. ICICI Securities Finance Co. Ltd. have also given their opinion, vide letter dated 10-11-1993 that the exchange ratio of the shares for the purpose of effecting the amalgamation be 2 equity shares of the company for 5 equity shares of M. Fine on the basis of the net asset value prevailing market prices of the shares and the future prospects of both the two companies. Copy of the said opinion letter is attached with the report of Messrs C.C. Chokshi Co. The Board to pass suitable Resolution approving the basis of amalgamation as suggested by Messrs C.C. Chokshi Co., and authorise Mr. Arvind N. Mafatlal, Chairman, Mr. Hrishikesh A. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trepreneurs (P.) Ltd., In re [1976] 46 Comp. Cas. 642 . In CWT v. MahadeoJalan [1972] 86 ITR 621 (SC), a question arose before the Supreme Court, whether the appellate Tribunal was justified in law to follow the method involving the principle of "break-up value" instead of method involving the principle of "Yield Value" in determining the value of the shares under section 7 of the Wealth-tax Act. In that context Jaganmohan Reddy, J. speaking for the Court observed as under : "An examination of the various aspects of valuation of shares in a limited company would lead us to the following conclusion : (1)Where the shares in a public limited company are quoted on the stock exchange and there are dealings in them, the price prevailing on the valuation date is the value of the shares. (2)Where the shares are of a public limited company which are not quoted on a stock exchange or of a private limited company, the value is determined by reference to the dividends, if any, reflecting the profit-earning capacity on a reasonable commercial basis. But, where they do not, then the amount of yield on that basis will determine the value of the shares. In other words, the profits which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but nonetheless is one of the methods." (p. 633) 255. In the aforesaid case, B.K. Mehta, J. has also noticed that when a leading firm of Accountants and Valuers had after taking into consider- ation all relevant factors, suggested the exchange ratio, and when such ratio is not shown to be patently unfair or unjust, the Court shall be slow to set at naught the entire Scheme of Amalgamation. It is also to be kept in mind that valuation of shares is essentially a technical matter, requiring expertise. In the given cases, there can be genuine differences of opinion about the correct valuation of shares. When there are more than one method of valuation, adoption of one method to exclusion of other methods, may at times, bring about difference of opinions. In the case of Piramal Spg. Wvg. Mills Ltd., In re [1980] 50 Comp. Cas. 514 , the learned single Judge of the Bombay High Court while approving the Scheme of Amalgamation, held that the valuation of shares was a technical matter which required considerable skill and expertise. There were bound to be differences of opinion as to what the correct value of the shares of any given company was. Simply because it was possible to val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involves exchange of shares. The exchange is by way of allotment of shares of the transferee-company to the shareholders of the transferor-company for their shares ,in the transferor-company. The share exchange ratio is decided by the fair value of shares of the transferor and transferee-companies. The fair value of shares is arrived at after consideration of different modes of valuation and diverse factors. There is no mathematically accurate formula of valuation. An element of guesswork or arbitrariness is involved in valuation. Subject to this, the following methods of valuation are summarised by Datta on the Company Law page 1108. Open Market Price - The hypothetical open market sale of shares is between a willing seller and a willing buyer in a market operating under perfect competitive conditions . As the hypothetical situation does not exist, this method will give a rough and ready estimate of the ratio of exchange of the shares of the companies. It will be more scientific, equitable and satisfying to the shareholders and the Court if all the other aspects are considered and then the exchange ratio is decided. Stock Exchange Quotation - The Stock Exchange Quotatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g referred to various permissible methods of valuation of shares as propounded by the experts on the subject and as referred to by various Courts in their respective judicial pronouncements, this Court would now undertake the exercise of referring some detail in the report of M/s C.C. Chokshi Co. It must be mentioned that report is called for by Chairman of MIL as well as Chairman of MF. For both these companies, M/s C.C. Chokshi Co. have been working as Chartered Accountants since last several years. From the report, it becomes clear that it has gone through audited statement of accounts and annual reports of the two companies, i.e., M.F. and MIL for five years commenc- ing from 1st of April, 1988. It has also considered projected working results of MF and MIL for the next five years ending 31st March, 1998 taking into account the participation in units to be set up the modernisation efforts of the companies and the export potential likely to result therefrom. They have also stated the working results and the financial position of the two companies. They have also noticed that under clause 13 of Memorandum of Association of MF and clause 44 of Memorandum of Association of MI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en referred to the fact that M.F. was required to issue and allot equity shares to the financial institutions and Banks on 1st October, 1993, and 1st October, 1994 and if the said shares are taken into account, the value per Equity Share of Rs. 100 comes to Rs. 221 per share. As against that position of MF, in the case of MIL, paid up capital of Rs. 20.01 crores as at 31st March, 1993, the company has reserves and surplus of Rs. 82.69 crores. The Reserves of MIL are more than four times its paid-up share capital. Thus, on the basis of the Balance Sheet as at 31st March, 1993, the net worth of the MIL is Rs. 102.70 crores, based on which value per Equity Share would work out to Rs. 509 per share of Rs. 100 each fully paid-up share. It is pointed out that rights shares issued by the company in 1992 were then partly paid but would become fully paid up in May 1993 and if that is taken into account, value per Equity Share of Rs. 100 each on the basis of the revised net worth would work out at Rs. 507 per Equity Share. In para 11.5 of the report, it has noticed as under: "11.5. The investments of MIL in shares, debentures, bonds and Government Securities of the book value of Rs. 39.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge profits of MIL per year after tax on the basis of the working results of the last 5 years works out at Rs. 7.39 crores. On the basis the earning per share of the equity shareholders at Rs. 37 per share. If the Rights Shares issued in 1992-93 were to be considered as fully paid, the earning per share works out at Rs. 27 per share. 260. In para 14.2 of the report, it is noticed that in the case of both M.F. and MIL, there are several factors which need to be considered on account of which the past results may not properly reflect the potential of these companies to earn profits in the future. With respect to M.F., three factors are enumerated in para 14.3. As regards MIL, around 11 factors are set out in para 14.4. Thereafter, in para 14.5, following conclusion is recorded: '14.5 In the light of the above, in the present proposal, the valuation cannot obviously proceed only on the basis of what is known as historical profits or profits of past years. It is necessary to take into account what is known as estimated or future maintainable profits. For example, the well known author on valuation Bonbright has avered "value, under any plausible theory of capitalised earning po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fair value of the equity shares of that company where such quotations are arising from the shares being regularly and freely traded in, subject to the element of speculative support that may be in built in the value of the shares. It is further noticed that there could be situations where the value of the share as quoted on the stock market would not be regarded as a proper index of the fair value of the share especially where the market values are fluctuating in a volatile capital market. The report makes reference to the decision of the Supreme Court in the case of Mahadeo Jalan ( supra ) where while dealing with shares of quoted companies, the Court observed: ". . . Where shares in a company are brought and sold on the stock exchange and there are no abnormalities affecting the market price, the price at which the shares are changing hands in the ordinary course of business is usually their true value. These quotations generally reflect the value of the asset having regard to the several factors which are taken into consideration by persons who transact business on the stock exchange and by the buyers who want to invest their money in any particular share or shares ." (p. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t exchange ratio, the company has ultimately decided to apply one method in preference to another. For not applying another method, namely, method of Valuation of shares at the Market Price quoted at Stock Exchange, M/s C.C. Chokshi Company has given reasons for ultimately reaching the decision it has rightly concluded as quoted hereinabove. That valuation will have be tampered by the exercise of judicious discretion and judgment taking into account of the relevant factors. Several factors, such as quality and integrity of the management, present and prospective competition, yield of comparable securities and market sentiments etc., which are not evident from the face of the balance sheet, but which will strongly influence the worth of a share are taken into account. The observations of House of Lords in Gold Coast Selection Trust quoted hereinabove are also kept in mind the fixation of exchange ratio is thus an outcome of a well considered report of M/s C.C. Chokshi and Company. From the aforesaid gist and substance of the report, it is difficult to accept any of the objections of Miheer to the fixation of Fair Exchange Ratio. From the report of M/s C.C. Chokshi and Company, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and it is not satisfied about the valuation, it would be justified in refusing sanction to the Scheme. There is enough power in the Court and in such a situation, the Court may even call for report of independent Chartered Accountant. 267. Even keeping the aforesaid observation in mind, on consideration of the report of M/s C.C. Chokshi and Company where Fair Exchange Ratio is fixed on the basis of break-up value, it is not possible for this Court to agree with Miheer that the said Exchange Ratio is unfair or unjust to the shareholders of MIL or that it would result into gradual decrease in their per share income. The submission that the other method, namely, earning per share method could be applied and that by that method proper Exchange Ratio could be worked out is liable to be rejected on the ground that in report of C.C. Chokshi and Company that method is also taken into consideration and it is pointed out that other relevant factors are also to be kept in mind. The report is a well considered report, wherein all relevant factors are at length considered and discussed. It is also required to be noted that majority of shareholders have accepted the proposed Scheme of Ama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intangible of transferee-company are not going to be affected. The creditors of the transferee-company are not, in any way, going to be affected by the proposed scheme of amalgamation as the proposed scheme would result into increase of all movable and immovable assets of the transferee-company and it would not in any way result into transferring or vesting any of the properties of MIL to anyone else. As such, by the proposed scheme of amalgamation the class of creditors of the petitioner-company is not going to be affected at all. Under section 391 on an application being made to the Court, the Court passes appropriate order to call, hold and conduct the meeting. Since in a petition for sanction to the scheme of amalgamation the properties of the transferee-company are not to be adversely affected and since they are available to the class of creditors, ordinarily, their meeting is not required to be convened. Shackleton on the Law and Practice of Meeting notes that "where the proposed arrangement is one between one company and its members, meetings of creditors are not necessary under section 206 of English Act. No meeting of any class which is not involved in the proposed scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the transferee-company are not in anyway going to be adversely affected. In view of the aforesaid I do not find any substance in this objection of Miheer. Mr. Thakore has also not made any submission on this objection. I do not find any substance in this objection so as to vitiate the resolution passed by requisite statutory majority approving the scheme of amalgamation. I, therefore, overrule this objection. 270. At this stage it is required to be mentioned that Mr. Darshan M. Parikh, Ld. Advocate tendered before the Court an objection to the proposed scheme of amalgamation allegedly sent by a party, namely, Dinyar R. Contractor and Firozi R. Contractor, vide letters dated 9-3-1994. On enquiry being made from the registry of this Court, it was found that no such communication containing such objection of the party is received by the O.J. Branch of this Court. Technically, therefore, such objection at this belated stage could have been rejected on the ground that no such objections are filed in this Court. However, Mr. D.M. Parikh submitted that those objections which these parties wanted to raise are identical to the objections raised by Mr. Miheer and that he adopts the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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