9911796707
TMI Blog2009 (3) TMI 582X X X X Extracts X X X X X X X X Extracts X X X X ..... 8, this Court passed an order dated 29-7-2008 directing the petitioner to convene the meetings of equity shareholders in accordance with the direction enumerated in the said order however the meeting of secured creditors, at the request of petitioner, was dispensed with. Subsequently, by an order dated 4-2-2008, the said application was disposed off. The below mentioned observations in the above referred order dated 29-7-2008 in Company Application No. 426 of 2008 are, for the purpose of present proceedings, relevant : "6. Mr. Thakore submitted that there would be reduction of Securities Premium Account which shall be affected as an integral part of the Scheme itself by way of a composite order from this Court. Mr. Thakore has further submitted that the Equity Shareholders of the applicant company are to consider the Scheme in the meeting which includes the said reduction. As the procedure under section 101 read with section 78 of the Companies Act, 1956 being pari materia with the present proceedings, no separate procedure for reduction of Securities Premium Account is required to be followed. Mr. Thakore has referred to sections 100 and 101 of the Companies Act, 1956 and submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mobile Systems India Limited, in India and in 2007-08 the petitioner company has acquired 81 per cent stake in Wausaukee Composite Inc., in USA and 100 per cent of Nero Plastic Inc., by Wausaukee Composite Inc., for consolidating its position in US plastic composite market. Thereafter, the petitioner company also acquired Nief Plastic SA in France. 7. In this background of development and acquisitions, the petitioner company mooted the scheme so as to undertake financial restructuring exercise whereby the petitioner company proposes to create "Inter-national Business Development Reserve" by appropriating Rs. 200 crore from its "Security Premium Account" as on 31-3-2008. 8. The case of the petitioner company is that the scheme does not involve either diminution of liability in respect of unpaid share capital or payment to any shareholder of paid up share capital and does not affect, in any manner, interests of creditors. It is also the case of the petitioner company that there shall be reduction of the securities premium account but it shall be effected as an integral part of the scheme itself in accordance with the provisions of section 78 and sections 100, 102 and 103 of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evious approval by the Central Government. The Deputy Registrar of Companies has also claimed that the said facts are material facts for considering and deciding the petition. 14. No rejoinder controverting the averments in the said affidavit has been filed by the petitioner company. However, during the submissions it has been urged that the company has submitted its provisional reply dated 12-11-2008 with reference to the said allegations. 15. Mr. Thakore, on demur submitted that assuming occurrence of alleged breach, the consequences for such breach would independently ensue and the allegations will have to be tried and established, however, it would not have any bearing on the scheme. 16. In furtherance of the said affidavit, Mr. Raval submitted that the actions of the petitioner company (extending loan to a private company in which its two directors are interested) constitute contravention of provisions under section 295 of the 1956 Act and that therefore, in view of provision under section 283(1)(h) of the 1956 Act the office of Directors had fallen vacant and consequently the resolution proposing the scheme could not have been mooted and passed by the Board and it could no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal or petition is preferred in respect of the adjudication, sentence, conviction, or order, and the appeal or petition, if allowed, would result in the removal of the disqualification, until such further appeal or petition is disposed of. 290. Validity of acts of directors.-Acts done by a person as a director shall be valid, notwithstanding that it may 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 this Act or in the articles: Provided that nothing in this section shall be deemed to give validity to acts done by a director after his appointment has been shown to the company to be invalid or to have terminated. 295. Loans to directors, etc.-(1) Save as otherwise provided in sub-section (2) no company (hereinafter in this section referred to as "the lending company") (without obtaining the previous approval of the Central Government in that behalf shall, directly or indirectly) make any loan to, or give any guarantee or provide any security in connection with a loan made by any other person to, or to any other person by,- (a )any director of the lending company or o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or sale, purchase or supply of any goods, materials and services in which either the company or the director, relative, firm, partner or private company, as the case may be, regularly trades or does business: Provided that such contract or contracts do not relate to goods and materials the value of which, or services the cost of which, exceeds five thousand rupees in the aggregate in any year comprised in the period of the contract or contracts; or (c )in the case of a banking or insurance company any transaction in the ordinary course of business of such company with any director, relative, firm, partner or private company as aforesaid, for the sale, purchase or supply of any goods, materials or services in which either the company, or the director, firm, partner or private company, as the case may be, regularly trades or does business, provided that the value of such goods and materials and the cost of such services do not exceed five thousand rupees in the aggregate in any calendar year comprised in the period of the contract or contracts. (3) & (4)** ** ** (5) If consent is not accorded to any contract under this section anything done in pursuance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid-up share capital and the order of the High Court sanctioning the scheme, shall be deemed to be an order under section 102 of the Act confirming reduction of Securities Premium Account. The provisions of section 101 of the Act will not be applicable. 5.4 Notwithstanding the reduction as mentioned above. SIL shall not be required to add 'and reduce' as a suffix to its name and SIL shall continue in its existing name." 20. In view of the consequence of reduction of Securities Premium Account, the procedure as prescribed under section 78 and sections 101 to 103 of the Act was required to be followed, however considering the fact that the said procedure would be pari materia with the procedure being followed for the sanction of the scheme under section 391, the procedure contemplated under sections 78 and 101 was, by the aforesaid order dated 29-7-2008, dispensed with because the procedure under section 391 was, even otherwise, being followed. 21. The shareholders have, as noticed earlier, during meeting held on 15-9-2008, accepted and approved, by a majority in number representing 3/4th in value of holding, the proposed scheme. The result and outcome of the voting has been rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he resolution the office of the Directors had, in view of the infraction of the provision contained under section 295, fallen vacant and that therefore, the Board of Directors could not have mooted the scheme and/or passed the resolution. 29. Differently put the crux of the submission is that the resolution cannot be said to be valid as it has not been passed properly and therefore all subsequent actions also are invalid. 30. So as to consider the said submission it is necessary to first take into account the relevant provisions. Section 283(1)(h), inter alia, provides that the office of a director shall become vacant if the director, 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 of 1956 Act. 31. Thus, comes in picture section 295 of the 1956 Act. 32. Section 295, inter alia, provides that no company, without obtaining the previous approval of the Central Government in that behalf shall, directly or indirectly make any loan to, or give any guarantee or provide any securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company's submission on the premise of section 290 of the 1956 Act and he submitted that the petitioner company, so as to counter the submission on the basis of alleged breach of sections 295 and/or 297(1) of the 1956 Act, would depend upon the provisions under section 290 of the 1956 Act, however, the said defence would not be available to the petitioner company/directors inasmuch as the defence on the basis of the said section 290 of the 1956 Act would be available to third party or an outsider. 39. Mr. Thakore referred to the provisions under section 290 and more particularly, the proviso of the said section and submitted that even if the contention on behalf of the Central Government is to be accepted then also only those actions which might have been taken after the Board was/ Directors were shown that the appointment of two directors had become invalid, would be rendered void and not other i.e., not those actions which might have been taken before it was shown that the appointment had been rendered invalid resulting in vacancy in office. In furtherance of the said submission, Mr. Thakore submitted that the company/directors have been shown, for the first time that the appoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cles are registered, insofar as the articles do not exclude or modify the regulations in Table A in the First Schedule those regulations shall, so far as applicable, be the regulations of the company in the same manner and to the same extent as if they were contained in duly registered articles.' The respondent company is limited by shares and was registered after the commencement of the Indian Companies Act, 1913; the Company has adopted special Articles of Association, but there is no Article which excludes or modifies. Regulation 94 of Table A, and by the operation of section 18 of the Act that Regulation must be deemed to apply in the same manner and to the same extent as if it was contained in the registered articles of the Company. We are unable to hold that because the Company has not incorporated Regulation 94 of Table A in its Articles of Association, an intention to exclude the applicability of the regulation to the Company may be inferred. Regulation 94 of Table A is not expressly excluded by the Articles of the Company: that is common ground. It is not excluded by implication : for it is not inconsistent with any other express provision in the Memorandum of the Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od faith may assume that acts done within its constitution and powers have been properly and duly performed, and are not bound to inquire whether acts of internal management have been regular'. But this rule is not applicable to the present case. The reason is that this section which is equivalent to section 143 of the English Companies Act, 1929, and section 180 of the Companies Act, 1948 cannot apply to a transaction where a director or a de facto director invokes the rule so as to validate a transaction which was in fact irregular and unauthorized. The jurisdiction for this rule is that normally the wheels of business will not go smoothly unless it may be assumed that all is in order which appears to be in order. But the maxim has its proper limits as explained in Morris' case [1946] 16 Comp. Cas. 186; [1946] 1 All ER Rep. 586 (HL), that it is a rule designed for the protection of those who are entitled to assume, just because they cannot know that the person with whom they deal has the authority which he claims." [Emphasis supplied] 45. Mr. Raval also relied upon of the observations made by the Hon'ble Punjab & Haryana High Court in the judgment of Col. Kuldip Singh Dhillon's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D.B. Patel (Chairman) and Mr. A.P. Patel (Vice-Chairman). 48. It is further submitted that the resolution mooting the subject scheme and resolving to place it for consideration, acceptance and approval by the shareholders and thereafter for sanction by the Court, was moved under and in accordance with Article 170 of the articles of association by way of a circular resolution and the said resolution was passed by circulation. In light of the said factual aspect it is further submitted that the resolution was passed unanimously and the same has been signed by all 11 directors. 49. In support of the said submission, copy of the circular resolution has been placed on record and a copy thereof has also been supplied to Mr. Raval, learned Assistant Solicitor General appearing for the Central Government. 50. From the copy of the said circular resolution, it transpires that all 11 directors have signed the said resolution. No objection or any contention on this count has been raised by or on behalf of the Central Government. 51. In light of the said factual aspect, it has been submitted by Mr. Thakore Senior Counsel, on behalf of the company, on demurer and without prejudice to other c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion inasmuch as all 11 Directors have signed the said resolution. There is no dispute about the fact that (a) the resolution recording the scheme was moved by way of "circular resolution" in accordance with the provisions under Article 170 of the Articles of Association of the company; (b) the Board of Directors of the company comprise 11 directors and that all of them have signed the resolution; (c) the fact that the resolution has been passed in accordance with relevant provisions of Articles of Association and the relevant provisions of the Act. 56. Now, therefore, even if the vote/signature of the concerned two Directors is to be overlooked and ignored then also the resolution would bear signatures of 9 Directors and thus, it can be said that the same was duly passed in accordance with Article 170 of the Articles of Association. Consequently, the alleged disqualification of the two Directors of the company would not, in light of the aforesaid peculiar facts of this case, render the resolution invalid and the resolution is, thus, salvaged. 57. Under the circumstances, in present case, it is not necessary to examine the contention of the Central Government raised on the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther, the said payments have been made at prices, which are reasonable having regard to the prevailing market prices at the relevant time. Further during the financial year 2007-08, there was no transaction in this regard. We are in the process of preparing the compounding application, since it will take some time to prepare, get signature of Directors and to get ready all documents our matter of Scheme of Arrangement will be delayed. You are requested to approve our case, we will file the compounding application and will submit the acknowledged copy of the same with your office." 63. The said reply and even the nature of allegation do not leave any room for doubt and make it clear that the allegation, in the first instance, will have to be proved so as to establish the alleged breach of section 297(1). If it is duly established that the petitioner company paid any brokerage to Mr. Dangayach without previous approval of Central Government, then, in view of proviso of sub-section (1) of section 297, such action would amount to and constitute violation of sub-section (1) of section 297. 64. The next question which would arise, however, if that assuming that the breach of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 98 (Mad.) the view taken is that the Court should be normally satisfied in respect of the requirements statutorily contemplated such as of the resolution being passed by a statutory majority in accordance with section 391(2) of the Act; in the exercise of its discretion in sanctioning the scheme, the Court is to be satisfied that the scheme, as a whole, having regard to the general conditions and background and object of the scheme is a reasonable one though it is not for the Court to interfere with the collective wisdom of the shareholders of the company." 67. Mr. Thakore has, in this context, also relied upon the judgment of this Court in the matter between Surbhi Chemicals and Investment Limited in Company Petition No. 131 of 2008 and order of this Court dated 23-10-2008 in the matter of Cadila Healthcare Limited in Company Petition No. 243 of 2008. 68. In light of the position settled by the aforesaid judgments and upon considering the relevant provisions of the Act as well as the scheme and also after considering the following aspects; that :- (a)the consequences/penalty for such breach is separately provided in the act; and that (b)there is, on one hand no direct nexus be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndently. 70. It can be seen from the scheme that the reduction of the "securities premium account" is to be effected as an integral part of the scheme and the "international business development reserve account" is going to be utilized by the petitioner company to adjust the expenses and the said account would be available towards the expenses until balance is available in such account. It is also noticed from the Chairman's report which is not opposed or doubted by any one including Central Government-that the resolution is passed by statutory majority in accordance with section 391(2) at a meeting duly held. Further, the majority's decision appears to have been taken without coercion and undue influence and the object as well as the terms of the scheme appear reasonable and have been so found by the shareholders in their collective and commercial wisdom and the scheme also does not appear to be (and no one-including the Central Government or the shareholders-has alleged it to be) against the interest of the company or shareholders. There does not appear to be any legal impediment in the scheme and 3/4th majority of the shareholders in share value has accepted and approved the sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... open and permissible to the competent authority to take appropriate actions in accordance with the provisions of the Act with regard to the alleged irregularities mentioned in the affidavit and/or communications dated 17-10-2008 and 5-12-2008 and present order sanctioning the scheme would not in any manner whatsoever dilute the proceedings and/or the action which the competent authority may consider appropriate to take with regard to the alleged irregularities, or the result therein and the same shall be considered and decided independently and without being influenced by this order. 73. In the result, with the aforesaid clarifications and subject to the aforesaid conditions and directions and also without prejudice to and while keeping open the rights of the Central Government/competent authority to pursue any action which it may consider appropriate and necessary in respect of the alleged breaches, the scheme of arrangement is sanctioned. The relief as prayed for in paragraph 18(a) of the petition is granted. The petition is, thus allowed and is disposed off accordingly, subject to the aforesaid conditions and to the aforesaid extent. 74. So far as the costs to be paid to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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