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TMI Blog2023 (1) TMI 643X X X X Extracts X X X X X X X X Extracts X X X X ..... e repayment of the Fixed Deposit, which was already Matured, despite the fact that the Company was making Profits, it was obligated on the Company s part, that it should make arrangements in such a way that there could be no problem in the Repayment of Deposits. Payment of Penal Interest - HELD THAT:- Rule 17 of the Companies (Acceptance of Deposits) Rules, 2014, provides that a Company, shall be liable to Pay, Penal Interest at 18% per annum to a Depositor, if there is any failure to repay the Deposits - In fact, the Penal Interest, is payable, when payment was overdue, ofcourse, after Maturity of Deposit. Damages for Fraud - HELD THAT:- Section 75 of the Companies Act, 2013, relates to Damages for Fraud, due to failure to repay the Deposits, accepted by a Company. Further, the definition of Fraud, under Section 447 of the Companies Act, 2013, is an inclusive one and it concerns the Affairs of a Company or a Body Corporate. Disqualification for Appointment of Director - HELD THAT:- Section 164 of the Companies Act, 2013, pertains to the Disqualification of Directors, incurred during the Terms of Office, as Directors, and not with the Retirement of a Director. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany Secretary For Ms. Manjula Devi , Advocate For the Respondent : Mr. Avinash Krishnan Ravi , Advocate JUDGMENT ( Virtual Mode ) Justice M. Venugopal, Member (Judicial): Introduction: Company Appeal (AT) (CH) No. 28 of 2021 : The Appellants / Petitioners , have preferred the instant Comp. App (AT) (CH) No. 28 of 2021, before this Tribunal , as an Aggrieved Persons , in respect of the impugned order dated 05.02.2021, in TCAA/4/KOB/2019 TCAA/5/KOB/2019 (Filed under Section 391 394 of the Companies Act, 1956), by the Appellants / Petitioners , passed by the National Company Law Tribunal , Kochi Bench, in dismissing the Applications . 2. The National Company Law Tribunal , Kochi Bench, while passing the impugned order dated 05.02.2021 in TCAA/4/KOB/2019 TCAA/5/KOB/2019, wherein, inter alia at Paragraphs 18 to 20, had observed the following: 18. This Tribunal heard the arguments advanced by Shri Pranoy Harilal, learned counsel for the petitioners / applicants and gone through the report submitted by the Registrar of Companies, Kerala. The Registrar of Companies has stated that the Regional Director, Ministry of Corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies denying the allegations regarding violation of Sections 73 or 74 of the Companies Act, they simply stated that they are not valid grounds for objecting the proposed scheme of amalgamation. Their further submission is that prior to 15.9.2015, there was no requirement to disclose the details of the money accepted from the Directors in the Board s report. However, they stated that an inadvertent omission occurred on the part of the company which resulted in the non-disclosure of the details of loans received from the Directors and that the company has not accepted any deposits within the meaning of term as defined under Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014. 19. In order to see whether on the basis of the objections raised by the Regional Director, Ministry of Corporate Affairs, pointing out various lapses on the part of the petitioner companies, this Tribunal refers to a decision of the coordinate Bench of this Tribunal at Mumbai in the case of UFO Moviez India Limited and another C.P. (CAA) No./1920/MB/2018 in C.A. (CAA) No. 120 of 2018, wherein even though the facts are different, the question whether based on the report of the Regional Dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransferor Company , from individuals , who became Members , later to the Date of Acceptance of the Unsecured Loans . 5. Also, it was mentioned in the Report that Unsecured Loans , given by the Directors of the Company , are not backed up by a Declaration that the money they had lent to the Company , was their own money. Moreover, it was pointed out in the said Report , about the lack of disclosures , in the Financial Statements , Particulars of Unsecured Loans , accepted by the Company . 6. The Learned PCS for the Appellants, brings to the notice of this Tribunal , that the 1st Appellant / Transferor Company , is the Petitioner / Applicant in TCAA/4/KOB/2019 Appellant No. 2 / Transferee Company is the Applicant in TCAA/5/KOB/2019 in the Application filed before the National Company Law Tribunal , Kochi Bench. In these two Applications , the Appellants / Petitioners , had sought a relief , in sanctioning a Scheme of Amalgamation of the Appellant No. 1 / Transferor Company , with the Appellant No.2 / Transferee Company , within the meaning of Sections 230 and 232 of the Companies Act, 2013, read with the Companies (Compromises, Arrangements and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the Tribunal , had failed to appreciate , that the Scheme was Approved , by the Shareholders , Secured Creditors and Unsecured Creditors of both the Companies, and that the Notice of the Meetings , as well as the Petitions , were published in Mathrubhumi Newspaper in Malayalam Language and in the New Indian Express (English Language), having wide circulation. 12. The other submission of the Appellants is that, the Tribunal , had failed to appreciate the ambit of its jurisdiction, under Section 230 232 of the Companies Act, 2013. 13. It is the forceful submission of the Appellants that, just because, there is an allegation of commission of an offence , against the provisions of the Companies Act, 2013, the Scheme of Arrangement , is not to be rejected . 14. It is the version of the Appellants, a mere glance of the documents and records, will exhibit that the whole process, contemplated under the Companies Act, 2013 and the Rules were satisfied and all requirements were complied with. Furthermore, by virtue of the Amalgamation , there shall be an impetus and increase , in the area of operations of the 2nd Appellant / Transferee Company , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the Court. The Court certainly would not act as a court of appeal and sit in judgment over the informed view of the parties concerned to the compromise as the same would be in the realm of corporate and commercial wisdom of the parties concerned. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the Scheme by the requisite majority. Consequently the Company Court's jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts like an umpire in a game of cricket who has to see that both the teams play their game according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire. The supervisory jurisdiction of the Company Court can also be culled out from the provisions of Section 392 of the Act which reads as under : 392, (1) Where a High Court makes an order under section 391 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch had also occasion to consider schemes under pari materia English Company Law. We will briefly refer to the relevant decisions on the point. But before we do so we may also usefully refer to the observations found in the oft-quoted passage in Buckley on the Companies Act, 14th Edn. They are as under: 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. 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 interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration I will not attempt to forecast. In Anglo-Continental Supply Co. Ltd. Re. (1922) 2 Ch. 723; 91 LJ Ch 658, Ashtury, J., a century later reiterated the very same propositions as under: Before giving its sanction to a scheme of arrangement the court will see firstly that the provisions of the statute have been complied with; secondly 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 interests adverse to those of the class whom they purport to represent; and, thirdly, that the arrangement is such as a man of business would reasonably approve. The Learned Single Judge of the Calcutta High Court in the case of Mankam Investments Ltd. Re. 3 (1995) 4 Comp LJ 330 (Cal) relying on a catena of decisions of the English Courts and Indian High Courts observed as under on the power and jurisdiction of the Company Court which is called upon to sanction a scheme of merger and amalgamation of companies. It is a matter for the shareholders to consider commercially whether amalgamation or merger is beneficial or not. The court is really not conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has to ensure that merger shall not result in impeding promotion of industry or shall not result in impeding promotion of industry or shall obstruct growth of national economy. Liberalised economic policy is to achieve this goal. The merger, therefore, should not be contrary to this objective. Reliance on English decisions Hoare Co. Ltd. Re 1933 All ER Rep 105, Ch. D and Bugle Press Ltd. Re. 1961 Ch 270 (1960) I All ER 768.(1960) 2 WLR 658 that the power of the court is to be satisfied only whether the provisions of the Act have been complied with or that the class or classes were fully represented and the arrangement was such as a man of business would reasonably approve between two private companies may be correct and may normally be adhered to but when the merger is with a subsidiary of a foreign company then economic interest of the country may have to be given precedence. The jurisdiction of the court in this regard is comprehensive. Sen, J. speaking for himself and Venkatachaliah, CJ., also towed the line indicated by Sahai, J., about the jurisdiction of the Company Court while sanctioning the Scheme and made the following pertinent observations: (SCC p. 528, para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. 4. That all the necessary material indicated by Section 393(1)(a) is placed before the voters at the meetings concerned as contemplated by Section 391 sub-section (1). 5. That all the requisite material contemplated by the proviso of sub-section (2) of Section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same. 6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the Scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same. 7. That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not because it was a consent decree. Once this definition is kept in view, it would be clear that consent or no consent when the decree or order of the Court purports to transfer title in the property, it becomes an instrument. The Court negatived the submission made that prior to introduction of Section 2(g)(iii) the consent decree was not included in the definition of conveyance and instrument by observing (SCC p. 535, para 15) it appears to us that the amendment was made out of abundant caution and it does not mean that the consent decree was not otherwise covered . It clearly shows that the Court was of the opinion that consent decree which purports to convey the title in the property was in an instrument liable for stamp duty at all times and it was only by way of abundant caution that the legislature had included the consent decree in the definition of the word conveyance . 32. In view of the aforesaid discussion, we hold that the order passed by the Court under Section 394 of the Companies Act is based upon the compromise between two or more companies. Function of the Court while sanctioning the compromise or arrangement is limited to oversee that the comprom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oming to the court under section 391(1) and after the meetings were convened and the scheme was approved under section 391(2). At no stage a dispute has been raised before me, now that the scheme has been very meticulously examined by the officer of the Central Government that even by a remote chance any provision of the statute was not complied with. The next question is whether the class was fairly represented. I should like to point out that because of the radical change made by Kohinoor in the ratio of ordinary shares, the meeting of the ordinary shareholders of Navjivan had to be called twice. At the first meeting of the ordinary shareholders, out of a total 45,000 equity shares, 41,710 shares were represented and the holders of the same voted in favour of the scheme. At the second meeting of ordinary shareholders, out of 45,000 shares, 40,132 shares were represented and the altered ratio was also unanimously voted upon, the reasons for which are not far to seek and to which I would presently advert. At the meeting of preference shareholders, out of the total of 7,000 preference shares, 4,144 shares were represented and the scheme was approved unanimously. At the meeting of un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasonableness of the scheme. When the matter went back to Kohinoor the ratio was altered from 26 : 1 not to 30 : 1 which was the initial proposition but to 40 : 1 and this evaluation of assets and liabilities of Navjivan was made by the shareholders of Kohinoor. The matter had to go back to Navjivan and on a direction of this court, a fresh meeting of the shareholders of Navjivan was convened. At this meeting nearly 90 per cent of the total shares were represented and unanimously voted in favour of this modification. If there is a choice as I would presently point out such as the workers have to choose between starvation and meager employment the same was the position of shareholders of Navjivan. I must also remember that, much though I may detest this imposition by the Kohinoor shareholders on the Navjivan shareholders leaving them little choice and freedom for manoeuvre, ultimately, the shareholders of Navjivan are the sound judges of their own interest and the support that they have extended to the scheme would indisputably indicate that they are people who have properly considered the whole thing and possibly reached a conclusion which represents their best judgment. Presumabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be one which is in such a financial condition as to be capable of being wound up under the Act. Mr. Sorabjee's contention based on definition in section 390(a) that the provisions of section 391 cannot apply to a transferee company, since it would be in a sound financial condition must, therefore, also stand rejected. 23. In the decision of Hon ble High Court of Bombay in Re. Niulab Equipment Co. Pvt. Ltd., reported in (2009) 91 SCL 387 (Bom), wherein at Paragraph 15, it is observed as under: 15. The mere fact of a violation of the provisions of Sections 235 - 351 by itself does not invalidate or warrant the Court refusing to sanction a scheme of arrangement under Sections 391 - 394, including a scheme of amalgamation. It is not every violation of these sections that disentitles a scheme being proposed or sanctioned. It is only those violations which adversely reflect upon or affect the scheme that would persuade the Court not to sanction the scheme. That Section 391(2) only requires the disclosure of all material facts to the Court, establishes this. If it were otherwise, Section 391, and in particular, Sub-section (2) thereof, would have been worded differentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vague and incomprehensible. The liability, if any, of the board, directors, management, etc., in civil and criminal proceedings would continue, and I accordingly so order. 25. In the Judgment of this Tribunal dated 24.10.2019, in UFO Moviez India Limited Anr. v. Union of India (vide Comp. App (AT) No. 48 of 2019), wherein, it is observed as under: The said order is under challenge in these Appeals. Director (Legal Prosecutor), Ministry of Corporate Affairs appearing on behalf of Union of India . He accepts that the ground given for rejection in the impugned order dated 21st January, 2019 were uncalled for and the Tribunal was only required to notice all the requirements of Section 230-232 of Companies Act. The Tribunal was also required to follow the Accounting Standard for the treatment of shareholders. However, it is expected that such Issue was not raised and were not discussed by the National Company Law Tribunal . Respondent s Contentions: 26. According to the Learned Counsel for the Respondent, the 1st Appellant / Company , had collected Deposits , from six Directors of the company and 76 number of shareholders of the 1st Appellant / Company . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r any continuous period of three financial years; or (b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more, shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so: and proceeds to point out that the very aim / purpose of convening the Board Meeting of both the Transferor / Transferee company for Merger , is an invalid one. 31. The Learned Counsel for the Respondent, brings it to the notice of this Tribunal , that the 1st Appellant / Company , in the year 2013-14, had accepted numerous Deposits , from as many as 100 Members , (including the Directors), and that 37 Members , out of 100, were existing , as on 12.09.2013, the date prior to the Notification of the Companies Act, 2013, which permitted the Private Companies , to increase the Limit , on the number of Members , from 50 to 200. 32. As a matter of fact, the 1st Appellant / Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and not prior to that. 37. On behalf of the Respondent, it is pointed out before this Tribunal that the 1st Appellant / Company , had accepted from Mr. Mohammed Kasim Varikkodan, a Director of the 1st Appellant / Company (in the year 2014-15), a Sum of Rs.17,50,000/-. Also that, the 1st Appellant / Company , in the year 2015-16, had accepted a Sum of Rs.15,00,000/- from Mr. Ibrahim Kutty, a Director of the 1st Appellant / Company . 38. According to the Respondent, in terms of Rule 2 (1) (c) (viii) of the Companies (Acceptance of Deposits), Rules 2014, any Sum received from the Directors , will be exempted, only if a Declaration , is furnished by such Director , to the company that the amounts, so given were not borrowed , from Third Parties (others) and that such Disclosure , along with the details of money , so collected, was made in the Board s Report . But, a glance of the Board s Report for the year 2014-15 and 2015-16, shows that such a Disclosure , was not made, rendering Acceptance of Deposits of Rs.17,50,000/- and Rs.15,00,000/- from the said Directors , which is in negation of Section 73 of the Companies Act, 2013, for which, the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Balance Sheet , as on 31.03.2015, Note No. 5 clearly spells out that the 1st Appellant / Company , raised Unsecured Loans , from other Parties . 43. To be noted, the Balance Sheet , as on 31.03.2016, in a significant manner, does not even make a Disclosure of the Sums , outstanding as Unsecured Loans , from Outside Parties . In fact, it makes a Misleading Disclosures , that the Loans and Advances , were received from the Related Parties , as Note No. 3, under the caption Long Term Borrowings . 44. Besides the above, same kind of Disclosures , were seen in the Balance Sheet , as on 31.03.2017, 31.03.2018 and as well as on 31.03.2019. Because of the fact that the Outstanding Loans / Deposits , so received, was over Rs.14 Crores, in comparison to that of the Share Capital of around Rs.2.5 Crores, this Misleading Disclosure , is to be read as a Material Misstatement , leading to the violation of Section 448 of the Companies Act, 2013 Punishment for false statement , in regard to all these Balance Sheets , which attracts the Punishment for Fraud , under Section 447 of the Companies Act. 45. The Learned Counsel for the Respondent, brings it to the not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Company s part, that it should make arrangements in such a way that there could be no problem in the Repayment of Deposits , as per decision in Unitech Limited in Re., reported in (2015) 191 Comp cas 588 (CLB). Payment of Penal Interest : 53. Rule 17 of the Companies (Acceptance of Deposits) Rules, 2014, provides that a Company , shall be liable to Pay , Penal Interest at 18% per annum to a Depositor , if there is any failure to repay the Deposits . In fact, the Penal Interest , is payable , when payment was overdue , ofcourse, after Maturity of Deposit . Damages for Fraud : 54. Section 75 of the Companies Act, 2013, relates to Damages for Fraud , due to failure to repay the Deposits , accepted by a Company . Further, the definition of Fraud , under Section 447 of the Companies Act, 2013, is an inclusive one and it concerns the Affairs of a Company or a Body Corporate . 55. In this connection, this Tribunal , worth points out the decision in Swansea Corporation v. Harpur, reported in (1912) KB 493 (CA), where Fletcher Moul Ton LJ, observed to the effect the words damages and damage in Law , have more than one meaning and gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would clearly reflect on the lack of bonafide of the company in proposing scheme of arrangement. In our considered opinion, non-disclosure of the action taken and initiated by the RBI as apparent from the letter dated 18th January, 2005, amounted to non-disclosure of material facts which are required to be disclosed under Section 391(1) read with Section 393(1) of the Companies Act. The Company Court whilst examining the fairness and the bonafide of a scheme of arrangement does not act as a rubber stamp. It cannot shut its eyes to blatant non-disclosure of material information, which could have a major influence/impact on the decision as to whether the scheme has to be approved or not. In our opinion, the High Court has not committed any error of jurisdiction in rejecting the submission of the appellant that the non-disclosure of the letter dated 18th January, 2005 was not material. Tribunal s Role : 61. The Tribunal , under the Companies Act, 2013, is to perform a supervisory role , near to a Judicial Review , of Administrative action. Assessment : 62. In the instant case on hand, although on behalf of the Appellants , it is projected before this Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned, it cannot be forgotten that both the Company Directors , were deemed to be disqualified, in the teeth of ingredients of Section 164 (2) (b), read with Rule 14 (2) of the Companies Appointment and Qualification of Directors Rules 2014. There is a clear cut violation of Section 73 of the Companies Act, 2013, in regard to the Prohibition on acceptance of deposits from public , for acceptance of deposits , from the Directors of the 1st Appellant / Company , in respect of the years 2014-15 and 2015-16. 68. The unfavourable circumstance in favour of the Appellants is that a mere running of the eye of the Balance Sheet from the year 2013-14, the Balance Sheet as on 31.03.2014, 31.03.2015, 31.03.2016, indicate that the 1st Appellant / Company , had tacitly accepted the Deposits from Outsiders , the raising of Unsecured Loans from other Persons and and not resting with that, a Misleading Disclosure , that the Loans and Advances , were received from Related Parties , under the caption Long Term Borrowings (as seen from Note. 3) and all the more, these Disclosures , were made, in the Balance Sheet , as on 31.03.2017, 31.03.2018 and 31.03.2019. 69. Be that as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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