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TMI Blog2010 (5) TMI 399X X X X Extracts X X X X X X X X Extracts X X X X ..... Arrangement and Demerger is rejected. - C.P. NO. 361 OF 2006 AND C.A. NO. 402 OF 2006 - - - Dated:- 20-5-2010 - PATHERYA, J. S.B. Mukherjee, S.N. Mukherjee, Mrs. Manju Bhutoria and Ms. Neelina Chatterjee for the Petitioner. Ranjan Deb, S.N. Mitra, Asish Chakraborty, Amitava Ghosh and Rohitendra Deb for the Respondent. Ratnanko Banerjee, Reetobrata Mitra and Rajesh Singh for the Objector. JUDGMENT Petitioner s Case 1.1 This is an application for sanction of a Scheme of Arrangement by demerger. The formalities have been complied with and meetings of shareholders and creditors have been held. The Scheme has been approved at the Board meetings and such meetings were chaired by Chairpersons appointed by Court. The Explanatory Statement also placed the documents for inspection of the shareholders. The Stock Exchanges both BSE and CSE have approved the Scheme and issued a No Objection. Employees also have raised no objection and, therefore, in view of Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp. Cas. 792 1 (SC), Hindustan Lever Employees Union v. Hindustan Lever Ltd. [1995] 83 Comp. Cas. 30 (SC) and Maknam Investments Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 95 (Cal.), HCL Infosystems Ltd., In re [2004] 121 Comp. Cas. 861 1 (Delhi), Centron Industrial Alliance Ltd. v. Pravin Kantilal Vakil [1985] 57 Comp. Cas. 12 (Bom.) and Marshall Sons Co. (India) Ltd. v. ITO [1997] 88 Comp. Cas. 528 2 (SC), in absence of challenge to Valuation Report and no allegation of fraud levelled against the chartered accountants, the share valuation ought not to be rejected. 1.6 Even assuming that the Valuation Report has been challenged by both the objectors - Fofalia and Chandak. The allegations made by Chandak are vague and lacking in particulars. Fofalia s allegation postulates a fairness report and then a Scheme. None of the objectors have disclosed what will be a fair Scheme. Therefore, the onus has not been discharged. A fairness report is not mandatory under the 1956 Act and Rules framed thereunder. For the said proposition, reliance has been placed on an unreported decision in the case of Associated Packaging. 1.7 The single window clearance is permitted as held in Maneckchowk Ahmedabad Mfg. Co. Ltd., In re [1970] 40 Comp. Cas. 819 (Guj.), Gobind Pritamdas Malkani v. Amarendra Nath Sircar [1980] 50 Comp. Cas. 219 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of debt into shares. Therefore, in effect by this conversion, the parent Scheme of 1983 is sought to be modified in the absence of JKIL. The Scheme approved does not comply with the SEBI guidelines, section 391 and fairness of the report is questionable. 2.4 There has been non-compliance of section 391(2) 2.4-1 The Chairman s report records attendance of 797 equity share-holders having 25,71,582 shares and 498 shareholders having 21,20,070 voted and approved the said Scheme. 128 shareholders having 2,82,882 shares voted against the Scheme while 125 ballots aggregating to 2,20,037 shares were declared invalid. Therefore, on a calculation there should have been 751 shareholders holding 26,22,989 shares who should have cast ballots. Some of the shareholders wanted an adjournment but the same was turned down. The conduct of the poll must be examined. Ballot papers were given against Attendance Slips. Ballots cast as per the Chairperson s report is 751. There is no dispute that the meeting was attended by Mr. Chandak. The scrutineer s report also evidences that 751 ballots were cast. This differs from the Attendance Slips which is part of the record. The report of the Chairma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought to be converted to capital and the Scheme of 1983 is sought to be modified without any order or parties to earlier Scheme being present. By this mechanism shareholders such as Chandak will be reduced to a hopeless minority and, therefore, the Scheme is prejudicial to the interest of the shareholders. Under the Scheme of 1983, time to redeem the preferential shares and bonds has not expired. Part - IV of the Scheme will exhibit increase of capital and decrease of shareholding. The consideration for investment division is 64.62 crores while that for the seed division is 20.38 crores aggregating in all to 85 crores. The explanatory statement has provided for inspection of the fairness report. The present Scheme is the third in order. Two earlier Schemes were proposed. In the first Scheme, there was no change in the shareholding pattern and 81 crores was to go to the seed division, i.e., the transferee-company. The first Scheme is based on two reports of Ernst and Young. The first of such report deals with the shares to be given by the transferee-company and the second report deals with the conversion pattern. By the second report, the preferential shares and bonds of 85 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, a public limited company. The 100 per cent shareholder of FAL is the transferor-company, and the equity shares are held by it. No business was commenced as the only member of the said public limited company is one in number and, therefore, under section 433( c ) and ( d ) of the Companies Act, 1956, FAL is liable to be wound up. 2.5-4 By this Scheme preferential payment is sought to be made. The transferee-company has taken only the assets while the liabilities remain with the transferor-company. The conversion is to be effected by the transferor-company. 41 per cent shareholding of the transferor-company is held by the parent company J.K. Corporation Ltd. By virtue of this scheme, the promoter s share will increase to 70 per cent. None of the guidelines provided by SEBI have been followed. The issuance of prefe-rential shares is without compliance of section 81(1A). Under section 81(1A), issuance of preferential shares without safeguards would be impossible and, therefore, section 391 has been resorted to. Section 81(1A) and the Takeover Regulation of 1997 will apply. Regulations 10, 11 and 13 are safeguards provided in addition to section 81. Regulation 3(1)( c ) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of preference shares on sanction of Scheme. This is not possible in view of section 81(1A) nor can the same take effect from the appointed date. The decision in Miheer H. Mafatlal s case ( supra ) lays down the parameters to be examined before sanctioning a Scheme. Therefore, the Court is empowered to consider the objections raised before sanctioning the Scheme. The decision reported in Hindustan General Electric Corpn. Ltd., In re AIR 1959 Cal. 679 was prior to the 1997 Code and the 1992 Act, therefore, the same is distinguishable on facts. "Fairness" of the report must be examined in common law as accepted by the Supreme Court. Therefore, the report must be such that it satisfies the Court s conscience. No report regarding conversion has been disclosed although other reports have been disclosed. In 1960 (1) AER 772, bad faith was alleged. In the instant case, no such allegation of bad faith or intent to mislead has been alleged as the Scheme is unfair. The objector Chandak has been treated unfairly and by the injunction order of the CLB has not been allowed to participate in the Annual General Meeting. For all the said objections raised the Scheme ought not to be sanctioned. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -4-2005. Therefore, the transfer takes place in April, 2005. There is no reason for choice of this date except to reap the benefits of the profits of 2006-07. On 3-3-2005, the transferor- company has shown a profit of Rs. 1.2 crore which has increased in the subsequent years. The meeting was held on 13-9-2006. The Listing Agreement postulates 25 per cent to be given to the public under Clause 40( A )( i ) and in Miheer H. Maftalal s case ( supra ), [2004] 9 SCC 438 and [1966] (2) Comp. LJ 278, the Court s role to examine minority shareholders has been upheld. The only meeting to be looked into is that of the parent company as the other meetings are of the controlling company and approval would have been granted. 3.6 The Scheme is intended to promote the interest of a group of shareholders and, therefore, must fail. For the said proposition, reliance is placed on [1975] 3 AER 382. The Scheme is aimed at increasing the promoter s stake and thereby gaining control and as held in Bedrock Ltd., In re [2000] 101 Comp. Cas. 343 1 (Bom.) for the said reason too the scheme must fail. The unreported decision in C.A. No. 344 of 2006 was upheld on appeal by order dated 14-12-2006 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioner s-in-reply 4.1 Counsel for the applicants in reply submit that in view of section 3( j )( ii ) of the 1997 Code, the said Code is not to apply to a Scheme under section 391 of the 1956 Act and in view of Hindustan General Electric Corpn. Ltd. s case ( supra ), preferential allotment to shareholders can be made. None of the objectors have been misled by the Explanatory Statement which has also not been challenged. Sections 391 to 394 of the Companies Act is a complete Code. Section 173 of the Companies Act contemplates notice of a general meeting and the Explanatory Statement is under section 393 of the Companies Act and the two sections operate in different fields, therefore, Khandelwal Udyog Ltd. Acme Mfg. Co. Ltd., In re [1977] 47 Comp. Cas. 503 (Bom.) has no application. No exception can be taken to the explanatory statement as it has been settled by an officer of Court. 4.2 There is no pleading or evidence of coercion. Preferential allotment has been made due to conversion of Bonds and conversion is an integral part of the scheme. No report of a Chartered Accountant appointed by the objectors has been disclosed to show or prove the unfairness of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . No. Proxy Form Number 1. 463 2. 467 3. 469 4. 485 5. 519 6. 522 7. 523 8. 552 9. 553 10. 554 11. 556 12. 674 13. 596 14. 597 15. 598 16. 599 17. 603 18. 604 19. 605 20. 606 ( ii )According to the Company votes in respect of the following were validly cast ( a ) Serial No. 6 Proxy # 522 Ballot # 630 ( b ) Serial No. 7 Proxy # 523 Ballot # 423 ( c ) Serial No. 18 Proxy # 604 Ballot # 462 ( d ) Serial No. 12 There is no proxy Ballot # 672. ( iii )This leaves us with 16 proxy forms. Even if these 16 proxies were validly cast and 41 ballots relating to the missing attendance slips credited to the lot of objector Chandak, he could not have defeated the Sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he time specified and the present day discounted value ought to have been considered. This has also not been done. 6.13 This is relevant as no prudent businessman while considering the commercial aspect of the Scheme in his wisdom would have proposed a Scheme without considering the discounting aspect. Furthermore, such a Scheme could also not have been approved by a prudent businessman cloaked with commercial wisdom unless such men approving were nothing but "yes-men" of the transferor-company, transferee-company and promoter-company. 6.14 In the Supplementary Affidavit filed the reason given for conversion is the decision of the Bombay Stock Exchange. The application filed before the Bombay Stock Exchange was only in respect of the Listing agreement. Therefore, the Scheme has been examined by the Bombay Stock Exchange only for the purpose of approving listing on the Stock Exchange and for no other purpose. The said approval is also subject to certain relaxation granted by SEBI under the 1957 Rules. 6.15 Although in the affidavit filed by Pawan Kumar Rustogi it has been stated that the promoter-company (JKIL) would not have agreed to discount the value. There is no pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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