Allowed

M/s.Mazda Concrete Products Private Limited. v. -

Telangana HC18 Sept 2012CP/161/2011

Case brief

AI extract

What is this about?

The Court sanctioned a scheme of arrangement for demerger of pre-stressed concrete railway sleeper businesses from three transferor companies into a transferee company. The Court dispensed with creditor meetings due to consent and repayment, and found the scheme fair and in public interest.

What did the court decide?

Sanction of the scheme of arrangement under Sections 391 and 394 of the Companies Act, 1956, subject to payment of stamp duty.

M/s.Mazda Concrete Products Private Limited. Vs - — Specific Performance | Telangana HC (2012)

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THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN

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COMPANY PETITION Nos.159,160,161 and 162 of 2011

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COMMON ORDER:

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These four Company Petitions are filed by M/s.Annavaram Concrete Private Limited (hereinafter called, “the first transferor company); M/s.ISCO Track Sleepers Private Limited (hereinafter called, “the second transferor company”); M/s.Mazda Concrete Products Private Limited (hereinafter called, “the third transferor company”) and M/s.Patil Rail Infrastructure Private Limited (hereinafter called, the “transferee company”), seeking sanction of this Court for the scheme of arrangement under Sections 391 and 394 of the Companies Act, 1956 (for short, the Act). Under the scheme of arrangement, the pre-stressed concrete railway sleepers divisions of all the three transferor companies are to be demerged from them, and merged with the transferee company.

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The first transferor company was originally incorporated on 16.10.1982 in the State of Uttar Pradesh. Later, it shifted its registered office from the State of Uttar Pradesh to the State of Andhra Pradesh, and the same was confirmed by the Company Law Board, Northern Region Bench, New Delhi by its order dated 20.12.2000, and a fresh certificate of registration was issued by the Registrar of Companies, Andhra Pradesh, Hyderabad, on 20.12.2010. The registered office of the first transferor company is situated at Secunderabad. Its authorized share capital is Rs.75,00,000/- divided into 75,000 equity shares of Rs.100/- each. Its issued, subscribed and paid up capital is Rs.15,00,000/- divided into 15,000 equity shares of Rs.100/- each. The objects for which the first transferor company was incorporated is to carry on the business of designing, developing, manufacturing, fabricating, commissioning, sub-contracting, importing and exporting and otherwise dealing in all types of cement products, ceramics, porcelain etc; to undertake contracts for construction,

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erection and supply of turnkey projects; to purchase, manufacture, buy, sell, import, export or otherwise deal in plant and machineries, accessories, stores etc. For the year ending 31.03.2011, the first transferor company suffered a loss of Rs.6,57,87,820/- which, along with the losses brought forward from the previous years of Rs.60,27,958/-, was carried over to the Balance Sheet as at 31.03.2011 for Rs.7,18,15,778/-. The Board of Directors of the first transferor company, in their meeting held on 24.02.2011, approved the proposed scheme of arrangement.

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The second transferor company was originally incorporated as a private limited company in the State of Maharastra on 12.02.1981. Later, it shifted its registered office from the State of Maharastra to the State of Andhra Pradesh, and the same was confirmed by the Company Law Board, Western Region Bench, Mumbai by its order dated 28.04.2004, and a fresh certificate of registration was issued by the Registrar of Companies, Andhra Pradesh, Hyderabad, on 27.01.2011. The registered office of the second transferor company is also located at Secunderabad. Its authorized share capital is Rs.9,50,00,000/- divided into 19,000 equity shares of Rs.5,000/each. Its issued, subscribed and paid up capital is Rs.8,50,00,000/divided into 17,000 equity shares of Rs.5,000/- each fully paid up. The main objects for which the second transferor company was incorporated is to carry on business as manufacturers and dealers in pre-stressed concrete railway sleepers, and in various types of prefabricated concrete poles required for electric transmission lines, telephone poles, sign piles, fence posts etc. For the year ending 31.03.2011, the second transferor company also suffered a loss of Rs.5,68,61,355/- which, along with the brought forward losses from the previous years of Rs.5,39,95,104/-, was carried forward to the Balance Sheet as at 31.03.2011 for Rs.11,08,56,459/-. The Board of Directors of the second transferor company, in their meeting held on 24.02.2011, approved the proposed scheme of arrangement.

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The third transferor company was originally incorporated as a public limited company in the State of Orissa on 07.04.1988. It shifted its registered office from the State of Orissa to the State of Andhra Pradesh, and the same was confirmed by the Company Law Board, Eastern Region Bench, Kolkata by its order dated 13.09.2004, and a fresh certificate of registration was issued by the Registrar of Companies, Andhra Pradesh, Hyderabad, on 04.10.2004. Later the company converted itself into a private limited company and a fresh certificate of incorporation, consequent to change of name on conversion into a private limited company, was issued by the Registrar of Companies, Andhra Pradesh, Hyderabad, on 19.02.2007. The registered office of the third transferor company is also situated at Secunderabad. Its authorized share capital is Rs.6,50,00,000/divided into 65,00,000 equity shares of Rs.10/- each. Its issued, subscribed and paid up capital is Rs.5,00,00,000/- divided into 50,00,000 equity shares of Rs.10/- each. The main objects for which the third transferor company is incorporated is to carry on the business of manufacturing pre-stressed concrete products of any kind or any description and for every use whatsoever, including monoblock concrete sleepers for Indian railways, electric piles, prestressed concrete housing etc; to carry on business of manufacturers, dealers, commission agents of various equipments including iron, wrought iron and such material as may be required to establish workshops for manufacture of equipments etc. For the financial year ending 31.03.2011, the third transferor company made a profit before tax of Rs.2,79,28,478/- and a profit after tax of Rs.2,01,13,931/-, which along with the losses brought forward from the previous years of Rs.2,14,81,202/-, was carried forward to the Balance Sheet as at 31.03.2011 for Rs.13,67,271/- representing the accumulated losses as on that date. The Board of Directors of the third transferor company, in their meeting held on 24.02.2011, approved the scheme of arrangement.

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The transferee company was originally incorporated as a private limited company in the State of Andhra Pradesh. It later became a public limited company. It again converted itself into a private limited company, and a fresh certificate of incorporation was issued by the Registrar of Companies, Andhra Pradesh, Hyderabad, on 16.01.2007. The registered office of the transferee company is also situated at Secunderabad. Its authorized share capital is Rs.23,00,00,000/- divided into 2,30,00,000 of equity shares of Rs.10/each. Its issued, subscribed and paid up capital is Rs.22,40,40,000/divided into 2,24,04,000 equity shares of Rs.10/- each fully paid up. The objects for which the transferee company was incorporated is to manufacture, import, trade and deal in pre-stressed concrete railway sleepers, rail fasteners, wooden sleepers, switches and various types of pre-fabricated concrete poles required for electric transmission lines, telephone piles etc; to manufacture, import, trade and deal in all types of composite sleepers, mechanical and electro-mechanical signaling, safety and traffic control equipment for railway tracks. For the year ending 31.03.2011, the transferee company earned a profit before tax of Rs.55,77,913/- which, along with the brought forward losses of Rs.9,22,94,413/-, was carried forward to the Balance Sheet as at 31.03.2011 reflecting a loss of Rs.8,67,16,500/-. The Board of Directors of the transferee company, in their meeting held on 24.02.2011, approved the scheme of arrangement.

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Before sanctioning a scheme of arrangement, the Court must be satisfied that the statutory provisions are complied with; in case a meeting, of the members or a class of members or of the creditors or a class of creditors, is called for, the class is fairly well represented; and the scheme of arrangement is such as a man of business would reasonably approve. It is the commercial wisdom of the parties to the scheme, who have taken an informed decision about the usefulness and propriety of the scheme supporting it by the requisite majority vote, that has to be kept in view by the Court. The Court would not act

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as a court of appeal and sit in judgment over the informed view of the parties to the compromise as it 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. The Company Court’s jurisdiction to that extent is peripheral and supervisory and not appellate. The supervisor cannot ever be treated as the author or the policy-maker. The propriety and the merits of the compromise or arrangement has to be judged by the parties who as sui juris, with their eyes open and fully informed about the pros and cons of the scheme, arrive at their own reasoned judgment and agree to be bound by such a compromise or arrangement. The Court cannot scrutinise the scheme to find out whether a better scheme could have been adopted by the parties. (Miheer H. Mafatlal v. Mafatlal Industries Lt d^[1] ) .

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When a scheme of amalgamation/merger of a company is placed before the Court for its sanction, the Court should, in the first instance, direct holding of the meetings in the manner stipulated in Section 391 of the Act. This Court, by its order in C.A.Nos.761, 762, 763 and 764 of 2011 dated 15.07.2011, dispensed with the convening of the meetings of the members of all the three transferor companies and the transferee company, as affidavits of consent of all the shareholders of the aforesaid companies were filed before this Court.

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On the question whether, in a scheme of arrangement between the company and its members, a meeting of the creditors or a class of creditors must be held, it is necessary to note that Section 391(1) enables the Court, on the application of a company or a creditor or a member of the company, to order a meeting of the creditors/or the members “as the case may be” to be held and conducted in such manner as the Court directs. Under Section 391(2), if a majority representing 3/4^th in value of the creditors or members agree, in the meeting, to approve the compromise or arrangement, the scheme, on

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its sanction by the court, would be binding on all the creditors/members “as the case may be” and also on the company. The expression “as the case may be” finds place both in sub-sections (1) and (2) of Section 391. If the words “as the case may be” in Section 391(1) is construed as requiring the Court to order the meeting of only the members, in a Scheme of arrangement between the Company and its members, and only a meeting of the creditors in a Scheme of arrangement between the Company and its creditors, then should the expression “as the case may be” in Section 391(2) not be read as to bind only the members where a meeting of the members is held and the creditors where a meeting of the creditors is held? The safeguard in the provision, of ¾ the members or creditors in value voting in the meeting to approve the scheme, is that the wishes of a majority of the class should prevail, and the dissenting minority of 1/4^th or less of the class should not be permitted to derail the scheme of arrangement unless, of course, the Court, on examining the scheme, finds that the objection of the minority is justified. If no meeting of the creditors is required to be held, in a Scheme of arrangement between the Company and its members, then, in the absence of ascertaining whether 3/4^th in value of the creditors approve the scheme or not, would the Court be justified in statutorily imposing such a Scheme of arrangement on the creditors, even though their consent has not been obtained or their wishes ascertained? If it were held that not holding the meeting, and ascertaining the wishes of the creditors, would result in the Scheme of arrangement not to bind them, would the very purpose of sanctioning the Scheme by the Court not be defeated, and approval of the Scheme not be an exercise in futility? If, on the other hand, the view, that a meeting of the creditors/members must necessarily be held in all cases irrespective of whether the Scheme of arrangement is between the Company and its members or the creditors, is accepted would that

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not render the words “as the case may be” in Section 391(1) mere surplusage?

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On this question, one view is that the creditors are not entitled, as of right, to participate in the process of consideration of sanction of the Scheme, as the Act does not contain a specific provision for notice being given to the creditors at any stage either prior to the making of the order or subsequent thereto, except in so far as the creditors may have notice of it by public advertisement, (Union of India v. Asia Udyog Pvt. Lt d^[2] ) , and that the legislature has cast a duty on the Court to ascertain whether the Scheme affects the interests of the creditors to such an extent that holding of their meeting is essential and, if the Court were of the view that the interest of the creditors were adversely affected, it could refuse to sanction the scheme unless their consent has been obtained. (Ansal Properties and Industries Ltd., In r e^[3] ) .

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Another facet of this view is that, under Section 391 of the Act, a compromise or arrangement is either between a company and its creditors or between a company and its members. An arrangement is the result of an agreement between the transferor company and its members, as well as a corresponding agreement between the transferee company and its members, and there is, therefore, no provision for the participation of persons other than the members of the companies involved in the scheme, to vote on an arrangement proposed between a company and its members. (Nava Bharat Ferro Alloys In r e^[4] ; Mafatlal Industries Ltd., In r e^[5] ; Coimbatore Cotton Mills Ltd and Lakshmi Mills Co. Ltd., In r e^[6] ; and Telesound India Ltd., In r e^[7] ) . However a different view was taken by the Bombay High Court, In Re ICICI Bank Limite d^[8] , and it was held that Section 391(1) gives a discretion to the Court to convene a

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meeting of the creditors or any class of them; the Court would exercise the discretion by convening a meeting of creditors, if the creditors are likely to be adversely affected by an arrangement between the Company and its members; attending the meeting and voting are steps of participation in the process of consideration of the Scheme; if the creditors have no right of hearing at the time of hearing of the petition under Section 391, the only way of ascertaining whether the creditors are affected or not would be through the wishes of the creditors which may be expressed by them in a meeting which the Court is entitled to convene under Sub-section (1) of Section 391; and, therefore, the Court would exercise discretion as a matter of course to convene a meeting of the creditors of the Company under sub-section (1) of Section 391 unless the Court is, prima facie, satisfied that the interests of the creditors are not likely to be adversely affected by the scheme.

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A perusal of the Balance Sheet of the first transferor company, as at 31.03.2011, shows that its secured loans as on that date was for Rs.5,75,80,721/-. In the affidavit filed by the Director of the first transferor company, dated 11.09.2012, it is stated that the entire secured loans was from IDBI bank which has given its consent to the proposed scheme of arrangement by its letter dated 05.12.2011. The unsecured loans of the first transferor company, as at 31.03.2011, is for Rs.47,76,66,483/-. The Director of the first transferor company asserts that the entire unsecured loans is from the transferee company which, by its letter dated 15.09.2011, has given its consent to the proposed scheme of arrangement. The current liabilities and provisions of the first transferor company, as at 31.03.2011, is for Rs.9,21,32,814/-. In the said affidavit dated 11.09.2012 it is stated that the company has subsequently repaid its current liabilities to an extent of Rs.8,76,92,999/-, which accounts for 95.18% of the total current liabilities outstanding as at 31.03.2011. The particulars of the payments made are given in the form of a tabular statement, and is

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enclosed to the affidavit dated 11.09.2012. As 95% of the sundry creditors, under the head “current liabilities”, have been repaid, it is unnecessary for a meeting of the sundry creditors of the first transferor company to be convened.

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A perusal of the Balance Sheet of the second transferor company, as at 31.03.2011, would show that its secured loans as on that date was for Rs.4,82,44,373/-. In the affidavit filed by the Director of the second transferor company dated 11.09.2011 it is stated that the secured loans are from IDBI bank for Rs.4,80,04,644/-, and a car loan from HDFC bank for Rs.2,39,729/-. The receipt from the IDBI bank is enclosed to the said affidavit. It is also asserted therein that the car loan, availed from HDFC, has subsequently been repaid. The unsecured loans of the second transferor company, as at 31.03.2011, is for Rs.57,19,29,473/- which, in its entirety, is asserted in the affidavit dated 11.09.2012, to have been received from the transferee company. The letter from the transferee company giving its consent to the scheme of arrangement is enclosed to the said affidavit. The current liabilities of the second transferor company, as at 31.03.2011, is for Rs.23,73,64,490/-. In the affidavit dated 11.09.2012 it is asserted that, subsequently, the company had repaid the current liabilities to an extent of Rs.22,30,67,204/- which is said to account for 93.98% of the current liabilities. It is also stated that the particulars of the payments made were being filed along with the said affidavit. As the statements, enclosed to the said affidavit, was not clear, a subsequent affidavit dated 15.09.2012 is filed explaining repayment of the dues to the sundry creditors shown under the head “current liabilities”. The said affidavit shows that the sundry creditors, as at 31.03.2011, were for Rs.6,24,10,480/-; advance from the customers was for Rs.12,18,58,544/-; and other liabilities were for Rs.3,26,65,828/-. The total amount shown, under the head “current liabilities” as at 31.03.2011, is for Rs.21,69,34,852/-. It is further stated that, after 31.03.2011, the petitioner had repaid/adjusted the

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advance from customers for supplies made and other dues of Rs.21,19,93,399/-, which accounts for 97.72% of the total current liabilities. Enclosed to the affidavit is a detailed statement wherein particulars of each of the creditors to whom amounts were due as on 31.03.2011; the date of subsequent payments; the amount paid subsequently; the mode of payment; cheque number and name of the bank etc., are furnished. The said statement shows that 97.72% of the current liabilities, as at 31.03.2011, have been discharged subsequently. Failure to hold the meeting of the sundry creditors under the head “current liabilities” is, therefore, of little consequence.

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A perusal of the Balance Sheet of the third transferor company, as at 31.03.2011, shows that its secured loans, as on that date, was Rs.6,96,15,032/-. In the affidavit dated 11.09.2012 it is stated that the secured loans were received from IDBI bank for Rs.6,84,75,459/-, and from HDFC bank for Rs.11,39,573/-. The letter of consent from IDBI bank is enclosed to the said affidavit. It is also asserted that the tractor loan availed from Kotak Mahindra Bank has been subsequently repaid. The unsecured loans of the third transferor company, as at 31.03.2011, is for Rs.16,89,87,761/-. In the affidavit dated 11.09.2012, it is asserted that the entire unsecured loans were received from the transferee company which has given its letter of consent for the proposed scheme of arrangement. A copy of the letter of consent is enclosed to the said affidavit. The current liabilities (which includes sundry creditors) of the third transferor company, as at 31.03.2011, is Rs.15,08,23,231/-. In the affidavit dated 11.09.2012, the Director of the third transferor company would assert that the company had repaid its current liabilities to an extent of Rs.12,29,62,621/- which accounts for 81.53% thereof. The statement enclosed to the said affidavit is, however, not clear and another affidavit dated 15.09.2012 has been filed by the Director of the petitioner company wherein a detailed breakup of the sundry creditors, under the head “current liabilities” of the third transferor company, is furnished. The breakup

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of the sundry creditors, as at 31.03.2011, is shown as dues to creditors for Rs.2,99,39,825/-; advance from customers as Rs.9,61,06,816/-; and other current liabilities as Rs.2,47,76,590/-. It is also stated, in the said affidavit, that as against the outstandings of Rs.15,08,23,231/-, current liabilities to an extent of Rs.14,28,31,313/have subsequently been repaid/adjusted against the advance from the customers for supplies made, which accounts for 94.70% of the total current liabilities. Enclosed to the said affidavit is a detailed statement reflecting the dues as on 31.03.2011, and the manner of payment/adjustment. Since 94.70% of the dues, shown under the current liabilities, has since been discharged, failure to hold the meeting of the unsecured creditors of the third transferor company is of little consequence.

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The Balance Sheet of the transferee company, as at 31.03.2011, shows that its secured loans as on that date was Rs.16,46,32,432/-. The secured loans are from IDBI bank for Rs.1,21,77,000/-; from Yes bank for Rs.7,32,14,519/-; from IDFC Limited for Rs.7,56,71,948/-, and from Kotak Mahindra bank for Rs.35,68,965/-. Letters of consent to the proposed scheme of arrangement received from Yes bank and IDFC Limited are enclosed along with the said affidavit. It is asserted that the vehicle loan availed from Kotak Mahindra bank, and the bill discounting facility availed from IDBI bank, have been repaid subsequently. The unsecured loans, as at 31.03.2011, is for Rs.28,34,69,772/- which represents the unsecured loan taken from Rayalaseema Concrete Sleepers Private Limited for Rs.3,88,60,872/-, and Compulsory Convertible Debentures for Rs.24,46,08,900/-. The letter of consent to the proposed scheme of arrangement, received from Rayalaseema Concrete Sleepers Private Limited, is enclosed along with the memo dated 20.07.2012. In the affidavit dated 11.09.2012 it is asserted that the Compulsory Convertible Debentures had been converted into equity shares of the petitioner company in the month of June 2011.

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The current liabilities and provisions (which include sundry creditors) of the transferee company, as at 31.03.2011, is for Rs.26,40,72,214/-. In the affidavit dated 11.09.2012 it is asserted that the company has subsequently repaid its current liabilities for Rs.24,94,14,076/- which accounts for 94.45% of its total current liabilities. As the statement enclosed to the said affidavit was not clear, an affidavit dated 15.09.2012 is filed giving details of the sundry creditors of the transferee company as at 31.03.2011. It is evident, therefrom, that the total outstanding dues of creditors was for Rs.8,80,69,725/-; the loans taken from the subsidiary company was Rs.1,87,97,110/-; advances from customers was Rs.12,22,78,993/-; interest accrued but not due was Rs.3,49,255/-; and other liabilities was for Rs.3,04,41,218/-. As against the current liabilities of Rs.25,99,36,301/-, as at 31.03.2011, it is stated that Rs.25,39,29,209/has been subsequently repaid/adjusted against the advance from customers for supplies which accounts for 97.69% of the total current liabilities. A detailed statement furnishing particulars of the dues, the date of repayment, and the mode and manner of repayment is filed along with the affidavit. It is evident, therefrom, that 97.69% of the total current liabilities have been discharged subsequent to 31.03.2011. As such, holding of a meeting of the sundry creditors, under the head “current liabilities”, is wholly unnecessary.

¶27

Under the proviso to Section 391(2), no order sanctioning any compromise or arrangement shall be made unless the Court is satisfied that the company has disclosed to the Court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under Sections 235 to 251, and the like. Along with the affidavits dated 11.09.2012, a copy of the audited Balance Sheet of all the three transferor companies and the transferee company are enclosed. It is asserted in all the affidavits

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that the petitioner companies have not finalized their accounts for the year ending 31.03.2012. It is evident, therefore, that the latest financial position of the companies and the latest auditor’s reports on the accounts of the four companies is their audited Balance Sheets as at 31.03.2011. In all the Company Petitions it is asserted that no investigation or proceedings are pending under Sections 235 and 237 of the Act or other provisions of the Act against the companies.

¶29

A reading of Section 394A of the Act shows that the scheme of arrangement would not be sanctioned unless the Court has considered the representation of the Central Government. In the affidavit filed on behalf of the Central Government, by the Regional Director, South East Region, Ministry of Corporate Affairs, Hyderabad, dated 09.03.2012 it is stated that, as per the report of the Registrar of Companies, Andhra Pradesh, Hyderabad, dated 17.02.2011, furnished to them, there were no complaints received or investigations pending against the transferor companies/demerged companies and the transferee company.

¶30

While the Court, called upon to sanction a scheme of arrangement, would not act as a Court of appeal and sit in judgment over the informed view of the concerned parties to the scheme, as the same is best left to the corporate and commercial wisdom of the parties concerned, it is clear that the Court, before whom the scheme is placed, is not expected to put its seal of approval on the Scheme merely because the majority of the shareholders have voted in favour of the scheme. Since the Scheme, which gets sanctioned by the Court, would be binding on the dissenting minority shareholders or creditors, the Court is obliged to examine the scheme in its proper perspective together with its various manifestations and ramifications to find out whether the scheme is fair, just and reasonable to the concerned members, and is not contrary to any law or public policy. The expression “public policy”, though incapable of precise definition, connotes some matter which concerns the public good and the public

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interest. (Sesa Industries Limited v. Krishna H. Bajaj^[9] ; Hindustan Lever Employees' Union v Hindustan Lever Ltd.,^[10] ; Central Inland Water Transport Corporation Limited. v Brojo Nath Gangul y^[11] ) . Before according its sanction to a scheme, the Court has to see that the provisions of the Act have been duly complied with; the statutory majority has acted bonafide and in good faith and are not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purport to represent; and the scheme, as a whole, is just, fair and reasonable from the point of view of a prudent and reasonable businessman taking a commercial decision. (Sesa Industries Limited⁹ ).

¶32

The only question which remains to be examined is whether the scheme is in public interest. The Court cannot abdicate its duty simply because the statutory majority has approved it and there is no opposition to the scheme in Court. It must scrutinize the scheme to find out whether it is an arrangement which can, by reasonable people conversant with the subject, be regarded as beneficial to those who are likely to be affected by it. In pursuit of such an enquiry the Court is not tied down by any rigid principles or strait-jacket formulae. No enumeration contained in judicial decisions of the factors which can be taken into account, howsoever precise, can be treated as exhaustive so as to limit the scope of the inquiry which, having regard to varying circumstances, might differ from case to case. The burden lies on the petitioner-company to show that the scheme is fair, reasonable, workable and is such that a man of business would reasonably approve. The Court would, of course, take into account the fact that it has been approved by a big majority vote, but it would not shirk its duty to scrutinize the scheme. (Bank of Baroda Ltd. v Mahindra Ugine Steel Co. Ltd.^[12] ) . When it exercises the power, conferred on it by Section 391(2), to sanction the scheme of compromise or

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arrangement, the Court, by its act, is imposing the scheme on the dissenting members of that class. Before taking such an action, it would be open to the Court to examine the scheme before imposing it on the unwilling/dissenting members of the class. Even if all the statutory formalities are duly carried out, the Court has still the discretion either to sanction or refuse to sanction the scheme. (Mahindra Ugine Steel Co. Ltd.¹² and Bengal Hotels P. Ltd. In r e^[13] ) .

¶34

The arrangement must fulfill some felt need, some purpose, some object and that must have some co-relation with public interest. The Court is charged with a duty to ascertain whether the affairs, of the transferor and the transferee, have been carried on not only in a manner not prejudicial to its members but also that it is not against public interest. The expression “public interest” must take its colour and content from the context in which it is used. (Union of India v.

¶35

Ambalal Sarabhai Enterprises Lt d^[14] ) . The Indian law, a departure from the English law, enjoins a duty on the Court to examine objectively whether the merger is, or is not, violative of public interest. What would be in public interest cannot be put in a strait-jacket. It is a dynamic concept which keeps on changing. It has been explained in Black’s Law Dictionary as:-

¶36

“Something in which the public, the community at large, has some pecuniary interest, or some interest by which their legal rights or liabilities are affected. It does not mean anything so narrow as mere curiosity, or as the interests of the particular locality which may be affected by the matters in question. Interest shared by citizens generally in affairs of local, State or national Government.”

¶37

It is an expression of wide amplitude. A scheme, valid and good, may yet be bad if it is against public interest. The basic principle of the satisfaction, that the scheme is not contrary to public interest, is none other than the broad and general principles inherent in any compromise or settlement entered into between the parties that it

¶38

should not be unfair or contrary to public policy or unconscionable. Courts have evolved the principle of “prudent business management test” or that the scheme should not be a device to evade the law. (Hindustan Lever Employees' Union¹⁰ ). No court of law would ever countenance any scheme of compromise or arrangement if it finds that it is an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. The fairness of the scheme, qua the disputing minority shareholders or creditors, also has to be kept in view by the High Court while putting its seal of approval on the scheme.

¶39

The High Court should examine whether the proposed scheme of compromise and arrangement is 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. The High Court has also to satisfy itself that the members or class of members or the creditors or class of creditors, as the case may be, were acting bonafide and in good faith and were not coercing the minority in order to promote any interest adverse to them. It must also ensure that the scheme as a whole is also just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. (Miheer H. Mafatlal¹ ). Unless the scheme is shown to be contrary to any law or is such as to shock the conscience of the court or is patently unfair to the members or creditors or any class of them, or is against public interest or against public policy, the Court should not come in the way of business by rejecting a bonafide scheme under Section 391. (Zee Interactive Multimedia Ltd., In r e^[15] ) .

¶40

Clause 3 of the scheme of arrangement relates to transfer and vesting of the sleepers business undertakings of all the three

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transferor companies with the transferee company and, under Clause 3.1 thereof, upon the scheme becoming effective and with effect from the appointed date all properties, assets and liabilities relating to the sleepers business undertaking of the transferor companies are to stand transferred to, and vested in, the transferee company without any further act or deed subject to existing charges, if any, in favour of banks and financial institutions. Likewise, the assets of the transferor companies, relating to the sleepers business undertaking, are to stand transferred and become the property of the transferee company. Clause 3.4 provides that all liabilities, relating to and comprised in the sleepers business undertakings of the transferor companies, including all secured and unsecured debts, sundry creditors, liabilities etc., are to stand transferred to, and be vested in, the transferee company. Clause 3.5 stipulates that the transfer and vesting shall be subject to subsisting charges, if any, in respect of any assets of the sleepers business undertaking of the transferor companies concerned. Clause 3.6 stipulates that all staff, workmen and employees in relation to the sleepers business undertaking of the transferor companies shall stand transferred to the transferee company without any further act or deed to be done by the transferor companies or the transferee company. Under Clause 3.7 all items detailed in Clause 2.1.11(vi), in relation to the sleepers business undertaking of the transferor companies, are to stand transferred to and vested in the transferee company. Clause 6 relates to staff, workmen and employees. Under Clause 6.2, subsequent to the effective date, the transferee company is required to make appropriate contributions towards provident fund/other funds in respect of staff, workmen and employees of the sleepers business undertaking taken over by it pursuant to the scheme. It is clarified, under Clause 6.3, that the services of the transferred staff, workmen and employees of the sleepers business undertaking of the transferor companies will be treated as having been continuous for the purpose of employees’ benefits and other liabilities etc. Clause 8 deals with

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consideration and, thereunder, upon the scheme becoming effective, the transferee company is required to pay Rs.10,00,000/- to the first transferor company as consideration; Rs.1,50,00,000/- to the second transferor company as consideration; and Rs.2,10,00,000/- to the third transferor company as consideration. Clause 8.4 stipulates that the consideration, for the transfer of the sleeper business undertaking of the transferor companies, would be discharged by the transferee company within such time as may be mutually agreed upon by the Board of Directors of the transferee company, and the respective transferor companies.

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The rationale of the scheme is that the proposed scheme of arrangement would achieve greater integration, greater financial strength and flexibility, which may maximize overall shareholder value and improve the competitive position of the combined entity; it would achieve strengthened leadership in the industry in terms of the consolidated asset base and the consolidated revenues of the combined entity; and it would achieve greater efficiency in cash management, and give unfettered access to cash flows generated by the combined business which can be deployed more effectively to fund organic and inorganic growth opportunities. It cannot, therefore, be said that the scheme, if approved, would be against public interest.

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I consider it appropriate, therefore, to sanction the scheme of arrangement on condition that stamp duty would be paid as stipulated under Article 20(d) of Schedule 1-A of the Indian Stamp Act, and proof of payment is enclosed along with the certified copy of the sanctioned order to be filed with the Registrar of Companies. As required under Section 394(3) of the Companies Act, read with Rule 81 of the Companies (Court) Rules, 1959, the petitioners shall file a certified copy, of the Order of this Court, with the Registrar of Companies for its registration within thirty days from the date of the order.

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______________________________ (RAMESH RANGANATHAN, J)

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18.09.2012

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