Allowed

M/s.Prestige Agri Inputs Private Limited. v. -

Telangana HC19 Apr 2012CP/248/2011

Case brief

AI extract

What is this about?

This judgment sanctions a scheme of amalgamation between M/s. Prestige Agri Inputs Private Limited and M/s. Mandava Holdings Private Limited. The Court held that holding meetings with creditors is discretionary if all creditors have given consent. It ruled that lack of similar objects clauses does not bar sanction, though the transferee must subsequently amend its charter. The Court emphasized its supervisory role, requiring the scheme to be fair, reasonable, and not contrary to public policy.

What did the court decide?

Sanction of the proposed scheme of arrangement and amalgamation between the transferor and transferee companies, with instructions to register the order with the Registrar of Companies.

M/s.Prestige Agri Inputs Private Limited. Vs - — Company and Corporate | Telangana HC (2012)

Outcome

Sanction of the proposed scheme of arrangement and amalgamation between the transferor and transferee companies, with instructions to register the order with the Registrar of Companies.

Issue for consideration

Whether dispensing with the meeting of creditors under Section 391 of the Companies Act, 1956 is permissible when letters of consent from all creditors are obtained. +4 more

Detailed headnote6 paragraphs

1. Under Section 391 of the Companies Act, 1956, the Court has the discretion to dispense with convening a meeting of creditors in a scheme of arrangement between a company and its members if the Court is satisfied that creditors are not adversely affected or have given their consent. The expression 'as the case may be' in Section 391 does not mandate a meeting of creditors in every amalgamation scheme.

2. The Court's jurisdiction under Section 391 is peripheral and supervisory, not appellate. It is the commercial wisdom of the parties, approved by the requisite majority, that guides the Court. However, the Court must scrutinize the scheme to ensure it is fair, just, and reasonable to all concerned, including the dissenting minority and creditors, and is not contrary to any law or public policy.

3. Similarity of objects between the transferor and transferee companies is not a pre-condition for sanctioning a scheme of amalgamation under Section 391.

4. If the transferee company's memorandum of association does not authorize the business of the transferor, the transferee is obligated to amend its objects clause in compliance with Sections 16 and 31 of the Companies Act, 1956. The Court's sanction of the scheme does not exempt the transferee from complying with these statutory requirements post-merger.

5. The Official Liquidator's report is crucial for the Court to satisfy itself that the affairs of the transferor company have not been conducted in a manner prejudicial to the interests of its members or public interest, particularly when the transferor is being dissolved without winding up under Section 394.

6. Public interest in this context is a dynamic concept requiring the Court to ascertain whether the scheme serves a felt need, promotes efficiency, and is not a device to evade the law or is unconscionable.

¶1

THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN COMPANY PETITION NOs.248 AND 249 of 2011

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COMMON ORDER:

¶3

Company Petition No.248 of 2011 is filed by M/s. Prestige Agri Inputs Private Limited (hereinafter called the transferor company) and Company Petition No.249 of 2011 is filed by M/s. Mandava Holdings Private Limited (hereinafter called the transferee company), seeking sanction of this Court, under Section 391 to 394 of the Companies Act, 1956, to the proposed scheme of arrangement and amalgamation between the transferor and the transferee and their respective shareholders.

¶4

The Transferor company was originally incorporated under the name and style of M/s. Prestige Cybercity (India) Private Limited in the State of Andhra Pradesh. The Transferor company changed its name to M/s. Prestige Agri Input Private Limited by special resolution, and a fresh certificate of incorporation was issued by the Registrar of Companies on 24.11.2011. The registered office of the transferor company is situated at Hyderabad in the State of Andhra Pradesh. Its main objects are to carry on business of manufacturers, importers, exporters, distributors, dealers, stockists, buyers, sellers, financiers, etc., and to deal in all types of Agro Chemical products, fertilisers, insecticides, pesticides, weedicides and chemical manure including, but not limited to nitrogenous, phosphoric, potassium and calcium allied chemicals, and also in all types of liquid and vegetable fertilisers of synthetic or natural origin; to produce, import, export distribute, buy, sell, finance and act as agents, of all kinds of certified seeds of all crop varieties under the purview of the Seeds Act, 1996, and other types of quality seeds of crop varieties not covered under the said Act, and to

¶5

acquire and hold shares, stocks, debentures in companies engaged in such allied business. The authorised share capital of the transferor company, as on 31.03.2011, was Rs.1,00,000/- divided into 10,000 equity shares of Rs.10/- each. Its issued, subscribed and paid-up capital as on that date was 10,000 equity shares of Rs.10/- each fully paid-up for a total value of Rs.1,00,000/-. The authorised capital was subsequently increased and, as on 17.11.2011 (the date on which the Board of Directors of the transferor approved the proposed scheme of arrangement), the authorised capital of the transferor was 81,00,000 equity shares of Rs.10/- each for Rs.8.10 crores, and its issued, subscribed and paid-up capital as on that date was Rs.7,97,92,540/divided into 79,79,254 equity shares of Rs.10/- each fully paid-up. For the year ending 31.03.2011, the Transferor company did not carry on any business.

¶6

The Transferee company was originally incorporated on 12.03.2008 in the State of Delhi. By special resolution, its registered office was changed from Delhi to Andhra Pradesh. The said change was confirmed by the Company Law Board Northern Bench, New Delhi, vide order dated 20.04.2011, and a fresh certificate of registration was issued by the Registrar of Companies on 19.05.2011. The registered office of the Transferee Company is also situated at Hyderabad. The main objects of the transferee company are to invest in the capital and/or other funds of company, in any of the securities of other companies within India and outside India; to act as a member of any stock exchange in India for buying, selling and dealing in all types of shares, securities, stocks, bonds, debentures, etc; to provide advisory services and consultancy on matters and problems relating to selling of shares, stocks, debentures, securities, debenture stocks, units, negotiable instruments etc, to open and manage investor

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service centres and grievance cells to render assistance, and guide the investors to make an analysis of securities and provide portfolio management services; and to buy, sell, hold, invoice, finance, acquire, to trade and deal in odd lot shares, debentures etc. for any other person, firm or body corporate. The authorised share capital of the Transferee Company as at 31.03.2011 was 1.25 crore equity shares of Rs.10/- each for 12.50 crores. Its issued, subscribed and paid-up capital, as on 31.03.2011, was 1,20,65,567 equity shares of Rs.10/each fully paid-up for Rs.12,06,55,670/-. For the year ending 31.03.2011, the Transferee company earned a profit before tax of Rs.24,78,759/-. The reserves of the Transferee company, as reflected in its Balance Sheet as at 31.03.2011, is Rs.880,54,29,919/-.

¶8

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 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

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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.

¶10

(Miheer H. Mafatlal v. Mafatlal Industries Ltd^[1] ) .

¶11

Under Section 391 of the Act, where a compromise or arrangement is proposed between a Company and its members, the Court may, on the application of the company or of any creditor or member of the company, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs. Sub-section (2) provides that, if a majority in number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the said compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors and all the members of the Company.

¶12

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. Thereafter, even if the proposed scheme is approved by a majority of the concerned members or creditors, the Court should, before sanctioning such a scheme, satisfy itself that the company, or any other person moving an application for sanction under sub-section (2) of Section 391, has disclosed all the relevant matters mentioned in the proviso to the said sub-section.

¶13

This Court, by order in Company Application No.1851 of 2011

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dated 08.12.2011, dispensed with the convening of the meeting of the shareholders of the transferor company. By its order, in Company Application No.1852 of 2011 dated 08.12.2011, this Court dispensed with the holding of the meeting of the shareholders of the transferee company as all the shareholders had given their letters of consent to the proposed scheme of arrangement.

¶15

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 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 of 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

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

¶17

On this issue, 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 Companies 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. Ltd^[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

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creditors were adversely affected, it could refuse to sanction the scheme unless their consent has been obtained. (Ansal Properties and Industries Ltd., In re^[3] ) .

¶19

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, in the nature of amalgamation, is the result of an agreement between the amalgamating 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 two companies to vote on an arrangement of amalgamation proposed between a company and its members. (Nava Bharat Ferro Alloys In re^[4] ; Mafatlal Industries Ltd., In re^[5] ; Coimbatore Cotton Mills Ltd and Lakshmi Mills Co. Ltd., In re^[6] ; and Telesound India Ltd., In re^[7] ) . However, a different view was taken by the Bombay High Court, In Re ICICI Bank Limited^[8] , and it was held that Section 391(1) gives a discretion to the Court to convene a 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,

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therefore, the Court would exercise its discretion as a matter of course to convene a meeting of the creditors of the Company under subsection (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.

¶21

Both the Company Petitions were admitted on 30.12.2011, and the notice of hearing was published in New Indian Express (English daily) and Vaartha (Telugu daily) Hyderabad editions. Sri R. Raghunandan, Learned Counsel for the petitioner, would state that no objections have been received, from any shareholder or creditor, to the proposed scheme of amalgamation.

¶22

A perusal of the Balance Sheet of the Transferor Company, as at 31.03.2011, shows that it had taken an unsecured loan from NSL Textile Limited for Rs.1,61,941/- which was repaid on 02.08.2011. Under the head current liabilities and provisions the liabilities for expenses is shown as Rs.10,000/- which is the audit fee payable. The said amount was paid on 17.10.2011. The Transferor Company has prepared a provisional balance sheet and profit and loss account for the period ending 24.11.2011, and has furnished details of the creditors under different heads. Their letters of consent have also been obtained and filed. Though the submission of Sri R. Raghunandan, Learned Counsel for the petitioner, that the creditors as on 24.11.2011 are substantially different from the creditors as at 31.03.2011 has considerable force, as the Balance Sheet and Profit and Loss account for the period ending 24.11.2011 is only provisional and unaudited, I do not propose to place reliance thereupon, and hence the figures reflected in the audited balance sheet as at 31.03.2011 are alone being examined.

¶23

A perusal of the audited Balance Sheet of the Transferee

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company dated 31.03.2011 would show that its secured loans as on 31.03.2011 were for Rs.2,13,15,14,280/-. In the additional affidavit dated 09.04.2012, filed by the Director of the transferee company, the break-up of these secured loans is furnished. Rs.200.00 crore worth debentures were issued by the transferee company i.e., in favour of L&T Finance Limited for Rs.100.00 crores; in favour of Goldman Sachs (India) Finance Private Limited for Rs.60.00 crores; and in favour of Housing Development Finance Corporation Limited for Rs.40.00 crores. Individual letters of consent have been obtained from each of these three debenture holders. The loan taken from State Bank of Mysore (outstanding amount as at 31.03.2011 was Rs.13,15,14,280/-) was repaid on 20.10.2011. The additional affidavit dated 09.04.2011 also details the other long term liabilities (unsecured loans) taken by the transferee company after 31.03.2011. Letters of consent have been obtained from these creditors also. Under the head “current liabilities”, in the Balance Sheet as at 31.03.2011, the sundry creditors are for Rs.1,19,62,75,672/-. The break-up of this amount, under various sub-heads, is furnished in Schedule-9 to the said Balance Sheet. In the additional affidavit dated 09.04.2012, details of all sundry creditors, and other liabilities, are furnished. While a substantial portion thereof has either been repaid or returned back or adjusted, certain amounts are said to be still outstanding. For instance under the head intercorporate deposits, the amount received from M/s. Excel Cotton Private Limited, as on 31.03.2011, is Rs.31,44,247/- which increased to Rs.4,60,83,785/- as on 24.11.2011. A letter of consent has been obtained from the said sundry creditor. Similarly, under the head “security deposits”, are deposits received from Reliance Digital Retail Private Limited for Rs.1,37,50,000/-; Reliance Homes Stores Private Limited for Rs.7,37,900/-; and from Vatika Hospitality Private

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Limited for Rs.1,05,92,124/-. Letters of consent from these sundry creditors have been enclosed to the additional affidavit filed in C.A. No.385 of 2012. In the said additional affidavit, the short term borrowings, trade payables and other current liabilities, as at 24.11.2011, are also shown for which letters of consent have also been obtained. Ms. M. Asha Priya, the Director of the Transferee Company, would confirm, in the said affidavit dated 09.04.2012 that all payments shown to have been made have, in fact, been paid and the balances shown in the tables are true and correct. Since the creditors of the transferor and the transferee companies have either been repaid their dues, or letters of consent have been obtained from them, the holding of the meeting of the creditors either under the head “secured loans” or “unsecured loans” or “current liabilities” is wholly unnecessary.

¶26

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.

¶27

The latest audited financial statement (balance sheet and profit and loss account) as at 31.03.2011 have been filed. It is no doubt true that the subsequent financial year ending 31.03.2012 has also expired a little more than a fortnight ago. However, as the books of accounts of the transferor and transferee companies have not been audited by now, the latest audited financial statements can only be for the year ending 31.03.2011. In the company petitions filed, both by the

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transferor and transferee companies, it is asserted that no investigation or proceedings are pending under Sections 235, 237 or other provisions of the Companies Act, 1956.

¶29

The first proviso to Section 394 of the Act stipulates that no scheme of amalgamation of a company, which is being wound up, with any other company, shall be sanctioned by the Court unless the Court has received a report from the Company Law Board or the Registrar to the effect that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest. Similarly the second proviso to the said Section provides that no order for the dissolution of any transferor company under clause (iv) of subsection (1) of Section 394 of the Act shall be made unless the official liquidator has, on scrutiny of the books and papers of the company, made a report to the Court that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest. Thus, Section 394 of the Act casts an obligation on the Court to be satisfied that the scheme of amalgamation or merger is not prejudicial to the interest of its members or to public interest.

¶30

(Sesa Industries Limited v. Krishna H. Baja j^[9] ) . A combined reading of the first and second provisos of Section 394(1), with Section 394-A of the Act, shows that the scheme of amalgamation would not be sanctioned unless the court has considered the report of the Official Liquidator or the representation of the Central Government, as the case may be. Section 448 of the Act provides for the appointment of an official liquidator for each High Court. The principal function of the official liquidator is, undoubtedly, in relation to the winding up of the company, but that does not mean that the official liquidator has not been entrusted any other functions under the Act. Section 448 merely

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prescribes the manner and mode of appointment of the official liquidator and, once such an appointment is made by the Central Government, it is for the Legislature to clothe the official liquidator with any other duty which it considers expedient and necessary. The second proviso to sub-section (1) of Section 394 of the Act demands submission of the report from the official liquidator in cases of dissolution of the company without winding up. (Sumani Pvt. Ltd's case^[10] ) .

¶32

An Official Liquidator acts as a watchdog of the Company Court reposed with the duty of satisfying the Court that the affairs of the company, being dissolved, have not been carried out in a manner prejudicial to the interests of its members and the interest of the public at large. In essence, the Official Liquidator assists the Court in appreciating the other side of the picture before it, and it is only upon consideration of the amalgamation scheme, together with the report of the Official Liquidator, that the Court can arrive at a final conclusion that the scheme is in keeping with the mandate of the Act, and that of public interest in general. For examining the questions as to why the transferor-company came into existence; for what purpose it was set up; who were its promoters; who were controlling it; what object was sought to be achieved by dissolving it and merging it with another company, by way of a scheme of amalgamation, the report of an official liquidator is of seminal importance and, in fact, facilitates the Company Judge to record his satisfaction as to whether or not the affairs of the transferor company had been carried on in a manner prejudicial to the interest of the minority and to the public interest. (Sesa Industries Limited⁹ ).

¶33

In his report filed on behalf of the Central Government, the

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Regional Director (South Eastern Region), Corporate Affairs, Hyderabad would refer to different parts of the scheme, and state that, while the objects clause of the transferor company is to engage in the business of manufacture and trading of agro-chemical products, the objects clause of the memorandum of association of the transferee company did not have an enabling provision to carry on the business of the transferor company; and, therefore, the Transferee company has to amend its objects clause in the Memorandum of Association suitably to carry on the business of the Transferor Company by applying the requirements under Section 17, read with Section 189 and 192 of the Act. The Regional Director would also state that, as per clause 3.7 of Part 2 of the Scheme, upon the scheme becoming effective, the authorized share capital of the transferee company shall automatically stand increased without any further act, instrument or deed, by the authorized share capital of the transferor company amounting to Rs.8.10 crores comprising of 81.00 lakh equity shares of Rs.10/- each and, accordingly, on the scheme being sanctioned by this Court, the memorandum of association of the transferee would stand altered. He would contend that the transferee company should clarify how they propose to comply with the provisions of Sections 16 and 31 of the Act for amending the Memorandum and Articles of Association.

¶35

In so far as increase in the authorized capital is concerned, Section 16 of the Act relates to amendment of the Memorandum of Association; and Section 31 relates to amendment of the Articles of Association. Since the authorized capital of the transferor company would stand automatically transferred to the transferee company, on the scheme of amalgamation being sanctioned, it is only the procedural requirements prescribed under the aforesaid sections which the transferee may be required to comply with, and the

¶36

transferee cannot be precluded from raising capital to the extent of the increased authorized share capital consequent upon its amalgamation with that of the transferor company. With regards the objections regarding the objects clause, Sri R. Raghunandan, Learned Counsel for the petitioner, would draw attention of this Court to the objects clause in the Memorandum of Association of the Transferee Company where, under the head “the other objects”, include the object of establishing and running the business as researchers, developers, producers, manufacturers, agents, representatives or otherwise in the fields of biotechnology and genetic engineering relating to agriculture, tissue culture, and its metabolics, aqua-culture, pisi-culture including marine, animal and other products. He would also rely on W.A. Beardsell and Company Private Limited v. State^[11] ; PMP Auto Industries Limited., In re^[12] and the judgment of this Court in Golkonda Engineering Enterprises Limited v. Ginni Vyappaar Limited^[13] .

¶37

Section 17 of the Act requires a special resolution to be passed, and confirmation to be obtained from the Central Government, for alteration of the Memorandum of Association including its objects clause. Section 189 of the Act deals with ordinary and special resolutions. The scheme of arrangement does not seek sanction of this Court for any amendment of the objects clause. Sections 391 to 394 do not prescribe, as a pre-condition for the sanction of a scheme by this Court, a similarity of objects between the transferor and transferee companies. Consequent upon the Scheme being sanctioned, the transferee company would necessarily have to comply with the requirements of passing a special resolution, and seek confirmation of the Central Government, in case it proposes to carry on the business

¶38

which its objects clause does not authorize it to do. Failure on the part of the transferee to comply with these statutory requirements would enable action being taken against them, by the prescribed authority, for such non-compliance. It does not follow, merely on a Scheme being sanctioned by this Court, that the transferee is permitted to avoid the consequences of its failure to comply with the requirements of the Act and the Rules made thereunder. It is made clear that this Court has not adjudicated the question whether or not the transferee’s objects clause enable them to carry on the business which the transferor was permitted, under its objects clause, to carry on. All that this Court has held is that there is no bar for a Scheme being sanctioned even in case the objects of the transferee are not similar to that of transferor, and the authorities under the Act and Rules are empowered, even after a Scheme is sanctioned by this Court, to proceed against the transferee in case it violates any of the provisions of the Act and the Rules made thereunder.

¶39

In his report No.32 of 2012 dated 09.02.2012, the Official Liquidator would state that he had, vide letter dated 05.01.2012, called for the statutory books and other relevant information from the transferor company, and the information/documents called for were furnished on 03.02.2012. The Official Liquidator would refer to the name, registered office, capital structure and the objects clause of the transferor company, as also to various provisions of the scheme, and then conclude that, basing on the information made available, he was of the opinion that the affairs of the company appeared to have not been conducted in a manner prejudicial to the interest of the members or to public interest.

¶40

While the Court, called upon to sanction a scheme of amalgamation, would not act as a Court of appeal and sit in judgment

¶41

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 interest. (Sesa Industries Limited⁹ ; Hindustan Lever Employees' Union v Hindustan Lever Ltd. ,^[14] ; Central Inland Water Transport Corporation Limited. v. Brojo Nath Ganguly^[15] ) . Before according its sanction to a scheme of amalgamation, 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 ).

¶42

The Court cannot abdicate its duty simply because the statutory majority has approved it and there is no opposition to the scheme of amalgamation in Court. It must scrutinize the scheme to find out whether it is an arrangement which can, by reasonable people

¶43

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 of amalgamation 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.

¶44

Mahindra Ugine Steel Co. Ltd .^[16] ) . When it exercises the power, conferred on it by Section 391(2), to sanction the scheme of compromise or 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.¹⁶ and Bengal Hotels P. Ltd. In re^[17] ) .

¶45

The amalgamation must fulfil 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 both 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

¶46

and content from the context in which it is used. (Union of India v. Ambalal Sarabhai Enterprises Ltd^[18] ) . 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:-

¶47

“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.”

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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 should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, 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' Union¹⁴ ). 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.

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The High Court should examine whether the proposed scheme

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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

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Section 391. (Zee Interactive Multimedia Ltd., In rein^[19] ) .

¶52

The scheme of amalgamation is in three parts. Clause 3.1 in Part 2 provides for transfer and vesting of the undertaking of the transferor company in the transferee company. Clause 3.2 relates to staff, workmen and employees. Under Clause 3.2.1, upon the scheme becoming effective, all staff, workmen and employees on the payrolls of the transferor company in service on the effective date shall be deemed to have become the staff, workmen and employees of the transferee company on such date without any break or interruption in their service and on the terms and conditions of their employment not being less favourable than those subsisting with reference to the transferor company as on the said date. Clause 3.2.2 provides that all

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contributions made towards provident fund and other funds of the staff, workmen and employees of the transferor shall stand transferred to the transferee which is required to make appropriate contributions towards such funds subsequent to the effective date. Clause 3.5.1 provides that, upon the scheme becoming effective, the transferor company would be dissolved without winding up pursuant to the provisions of Section 394 of the Act. Clause 3.7 relates to consolidation of authorized capital. Clause 3.9 relates to consideration and, under clause 3.9.1, it is noted that the entire share capital of the transferor is held by the subsidiary of the transferee company, and both the transferor and transferee companies agree that no shares would be issued on the merger of the transferor with the transferee.

¶54

The rationale, as stated in the Company Petition, is that the transferor company holds advances and investments in group companies as well as other companies. The transferor company also holds group’s investments; the group wishes to consolidate its investments at the group holding company level; in view of the above, it was proposed to amalgamate the transferor with the transferee; amalgamation of the transferor with the transferee would lead to synergy of operations, stronger and wider capital, and financial base for future growth and expansion; to achieve greater efficiency in cash management, and unfettered access to cash flows, generated by the combined investment business which could be deployed more effectively to fund organic or inorganic growth opportunities; and the amalgamation of the transferor with the transferee would result in reduction of multiplicity of regulatory compliances required to be carried out as at present.

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In view of the aforesaid objects of the scheme, it cannot be said that the scheme of amalgamation, if approved, would be against public

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interest. I consider it appropriate, therefore, to sanction the scheme of amalgamation. As required under Section 394 (3) of the Act, read with Rule 81 of the Company (Court) Rules, 1959, the transferor company 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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Date: 19.04.2012 MRKR/USD

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