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TMI Blog2009 (3) TMI 582X X X X Extracts X X X X X X X X Extracts X X X X ..... iated will not be effected in any manner. - C.P. NO. 242 OF 2008 AND C.A. NO. 426 OF 2008 - - - Dated:- 4-3-2009 - K.M. THAKER, J. Thakore and Singhi for the Petitioner. Harin P. Raval for the Respondent. ORDER 1. Present petition has been taken out under section 391(1) and (2) of the Companies Act, 1956 ( 1956 Act ) seeking below mentioned relief : "18( a ) That this Hon ble Court be pleased to sanction the Scheme of Arrangement being Annexure-C to the petition and declare the same to be binding on the petitioner company and the equity shareholders of the petitioner company and all persons concerned under the scheme;" 2. Thus, the petitioner seeks sanction for the scheme of arrangement ("the Scheme" for short) which is at Annexure-C and a declaration that the said scheme, upon sanction, shall be binding to all concerned persons. Matrix of facts 3. Earlier, an application being Company Application No. 426 of 2008 was taken out by this petitioner with a prayer for direction to convene the meetings. In the said Company Application No. 426 of 2008, this Court passed an order dated 29-7-2008 directing the petitioner to convene the meetings of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holders of the company approve the arrangement embodied in the scheme submitted to the meeting. The question was submitted to the meeting in form of resolution and then the resolution was put to vote. It is claimed that 99 poll papers were distributed to 96 equity shareholders. After the voting process was concluded, papers of 7 equity shareholders holding 34,82,304 equity shares were not found in the ballot box instead 5 sheets of papers were found in the ballot box showing the votes in favour of the scheme. Poll papers of 1 equity shareholder holding 7,46,455 equity shares was declared invalid as on the poll paper a remark was put to the effect "abstain from voting". The remaining 88 equity shareholders, holding 5,78,86,007 equity shares voted in favour of the scheme. Thus, the scheme was approved. The said result of the meeting was reported to the Court by the Chairman, vide his report dated 19-9-2008. 6. It deserves to be mentioned that the petitioner company, which is mainly engaged into the plastic business and textile business, has in the year 2006-07, acquired 74 per cent stake in Zeppelin Mobile Systems India Limited, in India and in 2007-08 the petitioner company ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s interest, including interests of creditors, in any manner. He further submitted that the scheme does not involve any action which is or would be contrary to any provision of any law and while framing and presenting the scheme all conditions and requirements have been complied with. He submitted that the scheme deserve the sanction by this Court. 13. Mr. H.P. Raval, learned Assistant Solicitor General of India has appeared on behalf of the Central Government/Regional Director and has filed affidavit dated 8-12-2008 of the Registrar of Companies. By the said affidavit, the Deputy Registrar of Companies has placed on record, inter alia , that as per the petitioner s balance sheet dated 31-3-2008, the petitioner company has granted loan to M/s. BVM Finance Private Limited, a private company. It is further claimed in the affidavit that two directors of the petitioner company are interested in the said other company and that the said loan was granted without previous approval of the Central Government. It is also stated that the petitioner company has paid brokerage to Mr. Shyam Sundar Dangayach to the tune of Rs. 1 lakh without previous approval by the Central Government. The Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the rival submissions of the contesting parties, it is necessary to consider the submissions and facts of this case in light of the provisions contained under sections 283(1)( h ), 283(2), 290, 295 and 297 of the Act : 283. Vacation of office by directors. (1) The office of a director shall become, vacant if ( a ) to ( g )** ** ** ( h )(he (whether by himself or by any person for his benefit or on his account), or any firm in which) he is a partner or any private company of which he is a director, accepts a loan, or any guarantee or security for a loan, from the company in contravention of section 295; (2) Notwithstanding anything in clauses ( d ), ( e ) and ( j ) of sub-section (1), the disqualification referred to in those clauses shall not take effect ( a )for thirty days from the date of the adjudication, sentence or order; ( b )where any appeal or petition is preferred within the thirty days aforesaid against the adjudication, sentence or conviction resulting in the sentence, or order until the expiry of seven days from the date on which such appeal or petition is disposed of; or ( c )where within the seven days afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (5) (6)** ** ** 297. Board s sanction to be required for certain contracts in which particular directors are interested. (1) Except with the consent of the board of directors of a company, a director of the company or his relative, a firm in which such a director or relative is a partner, any other partner in such a firm, or a private company of which the director is a member or director, shall not enter into any contract with the company ( a )for the sale, purchase or supply of any goods, materials of services; or ( b )after the commencement of this Act, for underwriting the subscription of any shares in, or debentures of, the company : ( Provided that in the case of a company having a paid-up share capital of not less than rupees one crore, no such contract shall be entered into except with the previous approval of the Central Government). (2) Nothing contained in clause ( a ) of sub-section (1) shall affect ( a )the purchaser of goods and materials from the company, or the sale of goods and materials to the company, by any director, relative, firm, partner or private company as aforesaid for cash at prevailing market prices; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r : "5.1 Upon the scheme being effective and with effect from the Appointed Date, the securities premium account of SIL without any further act instrument or deed shall stand re-organized to the extent that on and from the Appointed Date. Rupees 200 crores shall be credited to the International Business Development Reserve Account from the securities premium account as appearing in Financials of the SIL as on 31-3-2008. International Business Development Reserve Account so created would be available towards the Expenses incurred by SIL until the balance is available in such account. 5.2 Upon the coming into effect of this scheme, the amount credited to the International Business Development Reserve Account as mentioned in clause 5.1 above, shall be utilized by SIL to adjust the expenses. 5.3 To the extent of Securities Premium Account is credited to the International Business Development Reserve Account as mentioned in clauses 5.1 and 5.2 above and its subsequent utilization at an appropriate time as mentioned above, there shall be reduction of the securities premium account which shall be effected as an integral part of the scheme itself in accordance with the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... majority of the shareholders have, after detailed and careful consideration and deliberations over the scheme, accepted and approved the same, this Court would ordinarily not sit in appeal over the commercial wisdom of the company, its Board of Directors and its shareholders. 26. However, at the same time, the Court would also not act as a mere rubber stamp and would not proceed to grant sanction mechanically and without examining the relevant aspects and without being satisfied about the compliance with statutory requirements. It is Court s obligation to ascertain as to whether the scheme would be, generally, in the interest of the company and the shareholders and/or the creditors or not and whether there is anything in the scheme which is objectionable or contrary to or in violation of any other provisions of the 1956 Act. It is, in view of and part of such obligation that objections of the Central Government are invited. 27. It is pertinent that the Central Government, through Dy. Registrar of Companies, has also not raised any objection as regards the provisions of the scheme or merits of the scheme and has, as noticed earlier, not raised any other objections except th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ically i.e., by virtue of operation of law, occurred at the time when the loan was made/given. 34. This contention is, then, taken further to its logical end and it is submitted that the Board which passed the subject resolution consisted the said two directors as well; whereas in view of section 283(1)( h ) they had ceased to hold the office and their office had fallen vacant and thus the resolution cannot be said to have been validly passed and that would render the subsequent actions invalid. 35. There is merits and justification in the said submissions of Mr. Raval inasmuch as if it is duly established that the loan, as is being claimed by Central Government, has been given; then the office of the said two directors would, by operation of law, but subject to other provisions stand vacant from the date on which such loan was given. The question which would, however, arise is as to whether the said vacancy in the office of two directors render the resolution and subsequent actions, invalid. 36. Obvious it is that such violations, if duly established, would entail consequences in accordance with the provisions of the Act. 37. However, according to the petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rohibited by or contrary to law or in violation of other provisions. 41. The object and scope of the provision appear to be to provide protection to those who, unaware of rules or restrictions of indoor management of a company and/or about the authority of an individual ( e.g., director or employee of the company) enter into a transaction, but such protection will not be available to, and the provision cannot be invoked by, directors or company to salvage unauthorized act. 42. In this regard reference of the below mentioned judgments, is made: ( i ) Seth Mohan Lal v. Grain Chambers Ltd. AIR 1968 SC 772, ( ii ) Vivek Kumar v. Pearl Cycle Industries Ltd. (In Liquidation) [1983] 54 Comp. Cas. 77 (Delhi), ( iii ) Eastern Linkers (P.) Ltd. v. Dina Nath Sodhi [1984] 55 Comp. Cas. 462 (Delhi) and ( iv ) Col. Kuldeep Singh Dhillon v. Paragaon Utility Financiers (P.) Ltd. [1988] 64 Comp. Cas. 19 (Punj. Har.). 43. So far as the judgment of the Hon ble Apex Court in the case of Seth Mohan Lal ( supra ) is concerned, Mr. Raval refer to and relied upon Paragraph 15 of the said judgment which reads thus : "15. Regulation 94 of Table A in the First Sched ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isqualification because they had entered into contracts with the Company for sale or purchase or supply of goods, the resolution passed by them is not rendered invalid. It is in the view we have taken necessary to decide whether section 86 of the Indian Companies Act, 1913 also grants protection to the acts done by directors who are subsequently discovered to be disqualified." 44. The Hon ble Delhi High Court has, in the judgment of Eastern Linkers (P.) Ltd. s case ( supra ) observed thus : "As the said allotment was made by a director who was purported to have been elected at an invalid meeting, the said action lacked in validity. Mr. Talwar, however, sought to invoke section 290 of the Companies Act to say that any act done by or purported to be done by a director is valid notwithstanding that it may afterwards be discovered that his appointment was invalid by any reason of defeat or disqualification. The argument is that it is only subsequently during the present proceedings that it has been found that the meeting of April, 1970 which elected Mrs. Bali as director was invalid, and, therefore, the act of Mrs. Bali as a director allotting these shares must be held to be va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or their close relations. It is further noteworthy that some of the resolutions were oppressive to the minority shareholders. In Sunder Lal Jain s case [1986] 60 Comp. Cas. 77 (Punj. Har.). it was observed by me that even if a director ceased to be so in view of section 283, the resolution of the board of directors could not be held illegal in view of section 290 which provided that the acts done by a person would be valid notwithstanding that it might afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in the Act or in the articles. The facts of that case were that a boiler was sold by the company after a decision had been taken in a meeting of the board of directors. The purchaser had no concern with the company. He took a plea that he was a bona fide purchaser for valuable consideration. The case is clearly distinguishable and, therefore, the observations therein are of no help in deciding the petition." [Emphasis supplied] 46. The said judgments support and fortify the view that the protection will not be available to and the provision cannot be invoked by dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors is assumed to have fallen vacant when the resolution was passed, then also the said resolution and the subsequent actions do not become invalid. 53. It is the case of the petitioner company that the Articles of Association permit passing of resolution by circular. The applicant company has placed reliance, for substantiating the aforesaid submission, on Article 170 of Articles of Association. The said Article reads thus, "170. Resolution by circular. A written resolution circulated to all the Directors or members of committees of the Board, whether in India or overseas and signed by a majority of them as approved, shall (subject to compliance with the relevant requirements of the Act) be as valid and effective as a resolution duly passed at a meeting of the Board or committee of the Board, called and held in accordance with these Articles provided that it has been circulated in draft form, together with the relevant papers, if any to all the Directors." 54. It can be seen from the said provision that a resolution passed by circular, by virtue of the said provision, has effect of a resolution passed at a meeting of the Board. Further, the said Article also provides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d approval by the shareholders and the decision of the majority shareholders to accept and approve the scheme, also cannot be said to be invalid. 59. Resultantly, this Court has to accept that the majority of the shareholders has accepted and approved the scheme. 60. This leaves behind the objection based on the alleged breach of section 297(1). As a second limb of the objection it is further submitted by Assistant Solicitor General that the petitioner company has paid brokerage to M/s. Shyam Sunder Dangayach without previous approval of the Central Government and that the provision under section 297(1) of 1956 Act is, thereby, violated. 61. The said section 297, inter alia, provides that, except with the consent of the Board of directors of a company, a director of the company or his relative, or a private company of which the director is a member or director, shall not enter into any contract with the company ( a ) for the sale, purchase or supply of any goods, materials or services; or ( b ) after the commencement of this Act, for underwriting the subscription of any shares in, or debentures of the company. 62. The petitioner company has given a provisional rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eps against the transferee-company for this alleged violation of section 372, it has a remedy at law which is not affected in any way by virtue of this amalgamation. Because the transferee-company will continue to exist, steps can, therefore, be taken against the transferee-company if so required. The alleged violation of section 372(2), therefore, does not stand in the way of the amalgamation scheme. In any case, the transferee-company at present is not violating section 372(2) as this section is no longer applicable to the transferee-company. There is no provision under the Companies Act which prevents the present amalgamation scheme." 66. In this regard reference can also be made of the judgment in the case of Gwalior Strips Ltd., In re [1994] 79 Comp. Cas. 178 (MP) and the judgment in the case of Cetex Petrochemicals Ltd., In re [1992] 73 Comp. Cas. 298 (Mad.). In case of Gwalior Strips Ltd. ( supra ) the Hon ble Madhya Pradesh High Court has observed : "In my view, the pith and substance of law bearing on amalgamation of companies, as pointed out in the case of Saraswati Industrial Syndicate [1990] 70 Comp. Cas. 184, is that the scheme proposed may be sanction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to have been complied (in view of the waiver/dispensation allowed by the order dated 29-7-2008 coupled with compliance of procedure under section 391) with; and ( e )it is also not claimed by any one, including Central Government or the creditors or the shareholders, that the terms of the scheme are contrary to or violate any statutory provisions. It does not appear necessary to allow the alleged breach, in the peculiar facts of the case, to affect or influence the decision regarding the scheme. However, some safeguard or appropriate condition to protect the concern, anxiety and the obligations of Central Government deserves to be prescribed and the issue as to whether the sanction should be granted or not ought to be considered and decided independently and by divorcing the issue of sanction from the issue of alleged breach of section 297(1). 69. Once it is found that the resolution by the Board of Directors is valid and the alleged vacancy in the Board of Directors, would not invalidate the resolution, then as a corollary the subsequent actions including the acceptance and approval of the scheme by majority of the shareholders would also be valid and the consequenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are capital. On the anvil of the well-recognized criteria, the scheme does not appear to be unreasonable and except the two objections no other illegality or violation is brought to the Court s notice. 71. In view of this Court there is no valid and good ground to refuse to grant the sanction qua the scheme, which, however, is subject to the conditions prescribed by this judgment and order. It is declared that this Court s decision regarding the relief prayed for in the petition ( i.e., sanction or refusal to sanction the scheme), will not have any bearing on and will not affect the future actions by the respondent Central Government or any consequences which may ensue on account of any action of the company including the actions mentioned in the communication dated 17-10-2008 and/or 5-12-2008. The intimation dated 17-10-2008 and the subsequent communication dated 5-12-2008 would naturally be pursued and taken to its logical end in accordance with the provisions under the Act, by the Competent Authority. The scheme and/or the decision of the Court also would not give any impunity to the company or to the directors from any proceedings including prosecution and hence, the pro ..... 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