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TMI Blog1983 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... action were open to judicial review and whether the High Court was justified in interfering with the same ? The facts giving rise to the aforesaid question may be stated Mahindra Mahindra Limited (for short " M M "), was incorporated under the Indian Companies Act, 1913, and is thus duly registered under the Companies Act, 1956; its share capital has been widely held, the principal shareholders being the public financial institutions to the extent of about 40 per cent. of its equity share capital; it is engaged in the manufacture, inter alia, of jeeps and other motor vehicles on a large scale. M/s. International Tractor Company of India Limited (for short "ITCI "), was incorporated on April 15, 1963, under the Companies Act, 1956, as a public company and was carrying on the business of manufacture and sale of agricultural tractors and implements which are an essential commodity under the Essential Commodities Act, 1955. Though it commenced production within three years of its incorporation, ITCI incurred a loss-of Rs. 253 lakhs in the year 1974-75 ; with the financial assistance received from M M, ITCI was able to improve its operating picture and its working results for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of affairs continued for another two to three years it would lead to the closure of its entire undertaking and consequent unemployment of about 2,400 employees. By its order dated August 10, 1977, passed under s. 23(2) read with s. 54 of MRTP Act and communicated to M M and ITCI, the Central Govt. accorded its approval to the amalgamation as per the scheme subject to the condition that the exchange ratio of the shares proposed in the scheme was approved by 3/4ths majority of the equity shareholders of both the companies. It was, however, specifically stated that this order was not to be construed as conveying any approval of the Central Govt. that may be required under any other law. Thereafter, ITCI and M M preferred Company Petitions (No. 789 of 1977 by ITCI and No. 2 of 1978 by M M) in the Bombay High Court under ss. 391 and 394 of the Companies Act, 1956, seeking the court's sanction to the scheme of amalgamation; and during the pendency of the petitions, pursuant to the interim directions given by the learned company judge, meetings of the shareholders of both the companies were held at which the scheme of amalgamation was approved by them and ultimately by its order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, financially non-viable by reason of its liabilities, losses and other relevant factors, (b) that the amalgamation was in the public interest, and (c) such other conditions as the Central Govt. may, by notification in the Official Gazette, specify, to ensure that the benefit under this section is restricted to amalgamation which would facilitate the rehabilitation or revival of the business of the amalgamating company. In other words, sub-s. (1) of s. 72A provides that if the Central Govt., on the recommendation of the specified authority, is satisfied that the aforesaid conditions are fulfilled in a given case of amalgamation then the Central Govt has to make a declaration to that effect and the consequence of such declaration is that notwithstanding anything contained in any other provision of the Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company is deemed to be the loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected. An additional statutory function of the specified authority under sub-s. (2)(ii) of s. 72A is to issue a certificate to the effect th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d authority for its opinion, accepted the recommendation made by it and passed an order on December 1, 1980, whereby it refused to issue the declaration under s. 72A of the Act to M M. The aforesaid recommendation of the specified authority and the Central Govt.'s decision based thereon were challenged by M M by filing a writ petition in the Delhi High Court; the challenge was principally met by raising a contention that the Central Govt. had refused the relief to M M on the basis of its subjective decision about the non-fulfilment of the condition specified in cl. (a) of s. 72A(1) and for relevant and cogent reasons and hence the decision could not be reviewed or interfered with by the court and with a view to show that both the specified authority and the Central Govt. had considered all the relevant factors and that M M had been fairly treated in the matter great reliance was placed on the minutes of the several meetings held by the specified authority which were produced before the court. On a consideration of the entire material placed before it as well as the rival submissions made by counsel for the parties the High Court came to the conclusion that the view taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laborating the contention, counsel pointed out that in this case the Central Govt's decision was based on the recommendation of a statutory body, namely, the specified authority, which, in its turn, had on relevant and cogent materials opined that the condition specified in cl. (a) of sub-sec. (1) was not satisfied in the case of the instant amalgamation. It was further pointed out that both the specified authority as well as the Central Govt. had, inter alia, relied upon two conspicuous factors that emerged from the materials on record, (a) the exchange ratio of shares fixed under the scheme of amalgamation (two shares of M M in exchange for three shares of ITCI), and (b) the admission on the part of ITCI about its sound financial position contained in para. 14 of its Company Petition No. 789 of 1977, for coming to the conclusion that the amalgamating company (ITCI) was financially viable immediately before its amalgamation with M M and since the opinion of the statutory body as well as the decision of the Central Govt. were based on the aforesaid relevant and cogent materials, the High Court was in error in interfering with the same. Secondly, counsel contended that neither t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fulfilled and if the Central Govt. had disagreed with that opinion of the specified authority its refusal of relief would have been based on the non-fulfilment of both the conditions instead of one and therefore, the inference was irresistible that both the specified authority as well as the Central Govt. had refused relief to M M only on the ground that the condition specified in cl. (a) had not been fulfilled and if that conclusion was vitiated on any of the aforesaid grounds the High Court was right in striking down the impugned orders and remanding the matter to the Central Govt. for doing the needful in the light of its judgment; and the High Court was also right in issuing the directions which it did. By now, the parameters of the court's power of judicial review of administrative or executive action or decision and the grounds on which the court can interfere with the same are well settled and it would be redundant to recapitulate the whole catena of decisions of this court commencing from Barium Chemicals case [1966] Suppl. SCR 311 ; [1966] 36 Comp Cas 639, on the point. Indisputably, it is a settled position that if the action or decision is perverse or is such that n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. Nor, is it possible to differentiate with precision the grounds of invalidity contained within each category." As stated earlier, the issuance of the requisite declaration in favour of M M by the Central Govt. under s. 72A depended in the instant case on the fulfilment of only two conditions mentioned in sub-s. (1), namely, (a) that ITCI was not, immediately before its amalgamation with M M, financially viable, and (b) that the amalgamation was in the public interest. Both the specified authority as well as the Central Govt., on the materials before them, came to the conclusion that ITCI was, immediately before its amalgamation with M M, financially viable and as such the first condition mentioned in cl. (a) of sub-s. (1) had not been fulfilled. In its order of negative recommendation dated May/June 2, 1980, the specified authority has set out six reasons that led it to form the aforesaid conclusion and it is undisputed that substantially the same six reasons have been given by the Central Govt., though couched in better language and compressed in four paragraphs of its order dated December 1, 1980, while upholding the recommendation of the specified authority and decli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e exchange ratio fixed under the scheme of amalgamation was two shares of M M for every three shares of ITCI in the case of equity shares and one share of M M for one share of ITCI in the case of preference shares. This share exchange ratio does not indicate any sickness or non-viability on the part of ITCI. Moreover, although as per accounts the net worth of ITCI on the date of amalgamation was negative, if the market value of the assets is taken into account, the assets exceeded the liabilities by 790 lakhs. This shows that the company was a viable unit. (same as reason (iii) of the specified authority)." Before undertaking a scrutiny of these reasons for ultimately deciding whether the impugned conclusion of the specified authority and the Central Govt. is liable to be interfered with or not it will be useful to indicate briefly the object with which this new provision of s. 72A was introduced in the Act as it will throw light on what was the mischief or situation that was intended to be remedied by its introduction as also the true concept of financial non-viability. From the Budget speech of the Finance Minister, the Notes on Clauses of the Finance (No. 2) Bill of 1977 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse financial circumstances that disables the unit to stand and work on its own. This is also made clear by the provision contained in cl. (a) of sub-s. (1) which states that the financial non-viability of the amalgamating company has to be judged by reference to " its liabilities, losses and other relevant factors ". Moreover, since the expression is occurring in a taxing statute in the context of amalgamation of companies it will have to be understood in its popular sense, that is to say, the sense or meaning that is attributed to it by men of business, trade or commerce and by persons or institutions interested in or dealing with companies. In this behalf counsel for the contesting respondent invited our attention to the several criteria adopted by various bodies like the Govt. of India, financial institutions and commercial banks on what could be regarded as a sick unit. For instance, while announcing its scheme of merging sick units with healthy ones (Finance Act, 1977), the Govt. of India had classified " those units where losses, past and present, have eroded 50% of capital and reserves, as sick According to the RBI, commercial banks consider a unit to be sick if it has in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given point of them. It may be stated that by a Press Note issued by the Government (Ministry of Industry) on 23rd February, 1981, certain guidelines for approval of amalgamation under s. 72A in regard to the fulfilment of the condition specified in cl. (a) of sub-s. (1) were laid down but for the purpose of deciding the issue raised in this appeal those guidelines would not be of any avail for the simple reason that those did not exist when the specified authority as well as the Central Govt. arrived at its impugned conclusion. Suffice it to say that the factors which these guidelines lay down as being required to be taken into account for deciding the question of non-viability of the amalgamating company are more or less similar to and in accord with the aforesaid tests or criteria adopted by men of business, trade or commerce and financial institutions and counsel for the contesting respondent claimed that those guidelines had been more than fulfilled in the instant amalgamation. However, for the purpose of this appeal we would rather ignore the said guidelines contained in the Press Note dated 23rd February, 1981, and decide the question whether the impugned conclusion of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, in the circumstances, further financial assistance worth the name could be rendered by M M to ITCI only after amalgamation. It is thus clear that both the specified authority as well as the Central Govt. had come to the impugned conclusion by wrongly equating financial non-viability with basic non-viability and in complete disregard of the provisions of ss. 370 and 371 of the Companies Act. Further, the fact that during the year 1977-78, following the amalgamation, M M took adequate steps for the revival of ITCI's undertaking by making repayments to its creditors to the tune of Rs. 4 crores and by making investment of Rs. 0.7 crore on maintenance, replacement of machinery, etc., thereby enabling the undertaking to earn a cash profit of Rs. 3.9 crores, could not be regarded as a factor showing the financial viability of ITCI, prior to 1-11-1977, as was wrongly done by the specified authority and the Central Govt. All this shows that the impugned conclusion was the result of an entirely wrong approach being adopted as regards the true concept of financial non-viability. On the other hand, while stating the facts in the earlier part of our judgment, we have pointed out that at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s thus: "Although the petitioner company has sustained a loss it is in a sound financial position and its assets are more than sufficient to meet its liabilities ". Torn out of context it might support the suggested inference but if para. 14 is read as a whole it will appear clear that the said statement was based on the latest audited accounts for the year ending 30th September, 1976, referred to in the same paragraph and, as such, it referred to the company's position as on 30th September, 1976, and not as on 31st October, 1977 (i.e., immediately prior to the amalgamation). Admittedly, the balance-sheet as at 31st October, 1977, was ready only in May, 1978, and was furnished to the specified authority in July, 1978. Obviously, therefore, the so-called admission was referable to the position as on 30th September, 1976, and it cannot be forgotten that at the close of that year the working results of ITCI had shown a profit of Rs. 70 lakhs, though in the following year it again made a huge loss. Further, all these facts were clearly stated in para. 6 of M M's petition seeking court's sanction for amalgamation and averments in both the petitions, (which were heard together by the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book value of all assets over liabilities and market value of the assets is never taken into consideration in fact the market value of assets which gives the "current worth " becomes a relevant factor when in liquidation the question has to be considered whether the company possesses assets which would be sufficient to meet all its creditors or not. Admittedly, the " net worth " of ITCI as per the books of account was negative on the date of amalgamation and, therefore, when the specified authority and the Central Govt. took into consideration the market value of the assets of the ITCI as on the date of amalgamation for coming to the conclusion that the company was a viable unit, they were clearly influenced by irrelevant and extraneous material vitiating the impugned conclusion. Having regard to the above discussion the High Court, in our view, was right in holding that the impugned conclusion of the specified authority and the Central Govt. on the aspect of non-fulfilment of the condition specified in cl. (a) of sub-s. (1) of s. 72A being vitiated was liable to be set aside and that consequently the recommendation of the specified authority and the order of the Central Govt. ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relief was refused to M M on the ground that the condition specified in cl. (a) of sub-s. (1) had not been fulfilled and no other ground was given. In this view of the matter it is difficult to accept the contention that the High Court was wrong in presuming that the condition in cl. (b) had been fulfilled in the instant case. In our view, from the aforesaid material on record an irresistible inference arises that relief under s. 72A was refused by the Central Govt. to M M only on the ground that the condition specified in cl. (a) of sub-s. (1) had not been fulfilled. It is also clear from the record that M M had taken adequate steps for the revival of ITCI and had carried on the same business without any modification or reorganisation during the relevant previous year. In the result we confirm the High Court's decision as also the several directions issued by it in the operative part of its order subject to one modification that the specified authority and the Central Govt. should dispose of M M's application within three months from the date hereof (instead of six months as directed by the High Court) in the light of our judgment. Assessment proceedings for the years ..... X X X X Extracts X X X X X X X X Extracts X X X X
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