Sesa Industries Ltd vs Krishna H. Bajaj & Ors

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 1430-1431 OF 2011 (Arising out of S.L.P (C) Nos. 8497-8498 of 2009) SESA INDUSTRIES LTD. -- APPELLANT

VERSUS

KRISHNA H. BAJAJ & ORS. -- RESPONDENTS

J U D G M E N T

D.K. JAIN, J.:

Leave granted.

2. These appeals, by special leave, are directed against the judgment dated

21st February, 2009 delivered by a Division Bench of the High Court of

Bombay at Goa whereby the Division Bench has set aside the judgment

of the learned Single Judge dated 18th December, 2008, sanctioning a

scheme of amalgamation between the appellant company and Sesa Goa

Limited (for short "SGL"), the Transferee Company.

3. Shorn of unnecessary details, the facts material for the adjudication of

these appeals may be stated thus:

1 SGL was incorporated on 25th June, 1965 as a private limited

company, and thereafter, on 16th April, 1991 became a public company. The

appellant company viz. Sesa Industries Ltd. (for short "SIL") was

incorporated on 17th May, 1993 as a subsidiary of SGL with the latter

holding 88.85% of the shares in the former.

4. On 26th July, 2005, a resolution was passed by the Board of Directors of

SIL to amalgamate SIL with SGL, effective from 1st April, 2005.

In pursuance thereof, on 12th January, 2006, SIL and SGL filed respective

company applications in the Bombay High Court seeking the Court's

permission to convene a general body meeting.

5. Respondent No. 1 herein, holder of 0.29% of the shares in SIL, filed an

affidavit on 18th January, 2006 intervening in the afore-mentioned

company petitions. Subsequently, on 6th March, 2006, respondent No. 1

also filed a letter dated 17th February, 2006 issued by the Director of

Inspection and Investigation, Ministry of Company Affairs, Government

of India, respondent No.3 herein, addressed to the Regional Director,

respondent No.2 in these appeals, together with a copy of the inspection

report under Section 209A of the Companies Act, 1956 (for short "the

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Act"). At this juncture, it would be useful to extract relevant portion of

the said report, which reads as follows:

"It will be apparent from the various findings of the Inspection Report that the entire control of the day to day working of the company is being managed by Mitsui & Co. Ltd., Japan whereby huge turnover and profits are being siphoned away through systematic under invoicing of international financial transactions and over invoicing of import of coal. As regards inter-se transactions between SGL & SIL, systematic efforts have been made by SGL to put SIL into weal financial position by siphoning of the funds from SIL to SGL by over invoicing the price of iron ore and coke. In the process the minority shareholders of SIL have been deprived of their reasonable return in the forms of dividend or gains out of fair price of its shares. The minority shareholders of (sic) SIL have been cheated through the systematically siphoning the funds by SGL to the ultimate holding company i.e. M/s Mitsui & Co. Ltd., Japan. The I.O. has suggested for redressal of grievances of SIL by SGL in rescinding (sic.) the contract of purchase of shares at under value price of Rs. 30/- per share."

6. Ignoring the objections raised by respondent No.1, vide order dated 18th

March, 2006, the High Court, allowed SIL and SGL to convene meetings

for seeking approval of shareholders for the said amalgamation, and

directed the companies to disclose, as part of the Explanatory Statement

to be sent with individual notices, the following observations from the

inspection report:

3 "The Central Government has issued a letter dated 17th February, 2006 to various governmental agencies including the Regional Director (Western Region) enclosing a copy of the inspection report and recording that during the course of the inspection the inspecting officer has pointed out contraventions of Section 269 read with Section 198/309, contravention of Section 289 read with Article no. 111 and 140 of the Articles, contravention of Section 260 and 313, contravention of Section 268 read with Section 256 and contravention of Section 628 of the Act. The Investigating Officer has suggested invoking the provisions of Section 397 and 398 read with Section 388B, 401, 402 and 406 of the Act including that of Section 542 of the Act. The Inspection report has also pointed out financial irregularities and also examined the complaints of Mrs. Kalpana Bhandari and Mrs. Krishna H. Bajaj which have been reported in Part "A" of the Inspection Report. Contravention of Section 297 of the Act has been reported in Part "B" of the Inspection Report. It has also been suggested Part "D" of the Inspection Report for references to be made to the Ministry of Finance and SEBI. Accordingly, the Central Government has requested the addressees to examine the report and take appropriate action."

7. Thereafter, on 8th May, 2006, the shareholders of SIL and SGL, by 99%

majority, approved the scheme of amalgamation, and respondent No.1

was the sole shareholder who objected to the said scheme. SIL and SGL

both filed petitions in the High Court for according approval to the

amalgamation scheme.

8. On 10th August, 2006, the Registrar of Companies, Goa filed an affidavit

as the delegate of the Regional Director stating that SIL and SGL were

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inspected under Section 209A of the Act by the Inspecting Officers of the

Ministry of Company Affairs during the year 2005 and "any violation

which may be noticed during the course of inspection, there will be no

dilution for initiating legal action under the Act and that will not in any

way affect the amalgamation". The Registrar stated save and except the

observations in para 4 of the affidavit, which included forwarding of two

complaints received from respondent No.1, he had no objection to the

scheme of amalgamation.

9. On the same day, Official Liquidator, respondent No.1 in these appeals,

also filed a report in the High Court, inter alia, stating that in light of the

Auditor's report dated 2nd August 2006, according to him the affairs of

the transferor company have not been conducted in a manner prejudicial

to the interest of its members or the public. Respondent No.1 filed an

affidavit objecting to the sanctioning of the scheme.

10.On 24th August, 2006 respondent No. 1 filed Application No. 56 of 2006

praying for production and/or inspection of some documents, including

joint valuation report submitted by M/s. N.M. Raiji and M/s. Hairbhakti

& Co.; the aforementioned Inspection Report relating to SGL and SIL,

and issuance of notice to the Bombay Stock Exchange and the National

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Stock Exchange; the Ministry of Company Affairs and the Central

Government. On 9th February, 2009, while partly allowing the said

application the Company Court directed SGL and SIL to place on record

the joint valuation reports, the proxy register alongwith relevant proxies

held on 8th May, 2006. However, as regards other prayers, the application

was dismissed. Being aggrieved, respondent No.1 preferred an appeal

before the Division Bench. Vide order dated 25th April, 2007, the

Division Bench dismissed the appeal preferred by respondent No.1,

observing that:

"We have gone through the two reports. We are of the opinion that the learned Company Judge should take into consideration the said reports before passing any final orders in the matter of approving the scheme of amalgamation of the two companies for considering the purpose of it relevancy, in order to grant approval."

11.Thereafter, respondent No.1 filed yet another Company Application No.

24 of 2007, praying that the reports dated 17th February, 2006 and 20th

March, 2006 sent to the Regional Director by the Ministry of Company

Affairs be furnished to her. Vide order dated 13th July, 2007, the Single

Judge allowed the application. Being aggrieved, SIL preferred an appeal

before the Division Bench. Admitting the appeal, vide order dated 23rd

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August, 2007, the Division Bench granted interim stay of the order dated

13th July, 2007. The order reads:

"Perusal of the impugned order, however, nowhere discloses consideration of the said aspect of the relevancy of the document for the purpose of deciding the issue relating to amalgamation of the company. We, however, make it clear that the process regarding amalgamation shall proceed further in accordance with the provisions of law and in terms of direction in order dated 25.4.07 regarding relevancy of the said report."

12.Finally, vide judgment dated 18th December, 2008, the learned Company

Judge sanctioned the scheme of amalgamation between SGL and SIL,

inter alia, observing that: (i) since inspection proceedings under Section

209A of the Act are different from an investigation carried out in terms

of Section 235 of the Act, they are not required to be disclosed under the

proviso to Section 391 of the Act; (ii) in any event, SIL and SGL have

not suppressed any material facts as the letter dated 17th February, 2006

was made part of the individual notices sent to the shareholders; (iii)

inspections carried out under Section 209A of the Act cannot come in the

way of sanctioning of amalgamation, as they can only result in criminal

prosecution of those responsible for contravention of various Sections of

the Act; (iv) three years have elapsed since the inspections but the

Central Government has not taken any further actions in terms of the

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inspection reports, which shows that investigations or action in terms of

Section 401 of the Act was not in the offing; (v) the Central Government

has, through the Regional Director, clarified that the merger would not

come in the way of any action to be taken pursuant to the two inspection

reports, (vi) non-disclosure of pending criminal complaints is also not

fatal to sanctioning of the scheme as the Objector did not raise this

contention earlier; pendency of criminal complaints cannot be equated to

"material facts" in terms of the proviso to Section 391 of the Act and the

merger will have no effect on the criminal complaints; (vii) merely

because the Registrar has failed to perform his duties, it cannot be said

that the scheme of amalgamation, which has been approved by a majority

of the shareholders, should be rejected; (viii) the onus is on the Objector

to prove that a scheme is contrary to public interest and is not just, fair

and reasonable, and in the instant case, the Objector has not discharged

the burden cast on her; (ix) the objection in relation to the share valuation

was not well-founded in as much as the Objector has not placed any

material to show that the valuation was unfair, especially when an

overwhelming majority of shareholders have approved the share

valuation; (x) violation of Section 73 of the Act is not sufficient to stall

an amalgamation as the persons responsible for the violation can be

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effectively dealt with even after the merger and (xi) the objection that the

proposed scheme is unconscionable deserves to be rejected, as the

scheme has been approved by majority of the shareholders, as also the

Central Government. The learned Judge also clarified that the sanctioning

of the scheme will not come in the way of either civil or criminal

proceedings which may be initiated pursuant to the inspection reports as

well as further progress of criminal complaints filed by the objector.

13.Aggrieved, respondent No.1 preferred an intra-court appeal before a

Division Bench of the Court. The Division Bench has, vide the impugned

judgment, set aside the order of the learned Single Judge and revoked the

sanction to the amalgamation scheme. The division bench has, inter-alia,

observed that: (i) when serious irregularities have been found in the

inspection report and when the proceedings on the basis of the said

inspection report are still pending and no further decision has been taken

in this behalf and the Registrar as a delegate of the Regional Director

who was in possession of such inspection report, should not have filed

affidavits both, as the Official Liquidator as well as the Registrar as the

delegate of the Regional Director; (ii) once it is found that the

report/affidavit on behalf of the Registrar/Regional Director is not in

conformity with the statutory provisions, this Court mechanically cannot

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sanction the scheme simply because the majority of the shareholders have

approved the scheme and the majority shareholders in their wisdom have

accepted the valuation regarding exchange ratio; (iii) as per the

provisions of Section 393, the Registrar as well as the Liquidator, both

are required to submit their separate reports and both are, therefore,

functioning in a different capacity. It is surprising as to how the Official

Liquidator who was the incharge of the Registrar could have filed the

affidavits one in the capacity as a delegate of the Regional Director and

the other in the capacity as the Official Liquidator; (iv) the Affidavit of

the Registrar is absolutely noncommittal. In the affidavit of the Official

Liquidator, he has mentioned that the affairs of the company are not

being conducted in a manner prejudicial to the interests of its members or

to public interest. But when the same person filed affidavit as Registrar,

this aspect is clearly omitted in his reply and (v) the learned Company

Judge himself has found that from the stand taken by the Registrar, he

has failed in his duty and it cannot be said that the requirement of Section

394 has been complied with. In fact, two contradictory affidavits have

been filed by the same gentleman, one in his capacity as the delegate of

the Regional Director and the other in his capacity as the Official

Liquidator. When the law requires that there should be two independent

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reports, it is clear that the statutory provision has not been complied with.

14.Hence these appeals by SIL.

15.We heard Mr. K.K. Venugopal, Senior Advocate for the appellant, Mr.

H.P. Raval, learned Additional Solicitor General of India on behalf of

respondent Nos.2 to 4 and Mr. Amar Dave, learned Advocate on behalf

of respondent No.1 at considerable length.

16.Mr. K.K. Venugopal, learned senior counsel strenuously urged that once

a scheme of amalgamation has been approved by a majority of the

shareholders after sufficient disclosure in the explanatory statement

regarding the pendency of an inspection under Section 209A of the Act,

it is neither expedient nor desirable for Courts to sit in judgment over a

commercial decision of the shareholders. Relying on the decisions in

Reliance Petroleum Ltd., In re1, Programme Asia Trading Company

Limited, In re2 and Core Health Care Ltd., In re3, learned counsel

contended that it is settled that pendency of an inspection under Section

209A or under Section 235 of the Act should not stall a scheme of

amalgamation.

1 [2003] 46 SCL 38 (Guj) 2 [2005] 125 Comp Cas 297 (Bom) 3 [2007] 138 Comp Cas 204 (Guj)

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17.Learned counsel submitted that the Division Bench erred in rejecting the

scheme of amalgamation on the sole ground that the requirement of the

first proviso to Section 394(1) of the Act has not been complied with, as

it is settled that the said proviso only applies to the amalgamation of a

company which is being wound up. Learned counsel stressed that in the

instant case, the prayer in the amalgamation petition was for "dissolution

without winding up" and hence only the second proviso to Section 394(1)

was applicable. Relying on the decisions of this Court in Regional

Director, Company Law Board, Government of India Vs. Mysore

Galvanising Co. Pvt. Ltd. & Ors.4, Sugarcane Growers & Sakthi

Sugars Shareholders' Association Vs. Sakthi Sugars Ltd.5, Marybong

and Kyel Tea Estate Ltd., In re6 and Mathew Philip & Ors. Vs.

Malayalam Plantations (India) Ltd. & Anr.7, learned counsel contended

that the use of the word "further" in the second proviso to Section 394(1)

of the Act does not indicate that the said proviso is an additional

provision in relation to the situation contemplated under the first proviso.

4 [1976] 46 Comp Cas 639 (Kar) 5 [1998] 93 Comp Cas 646 (Mad) 6 [1977] 47 Comp Cas 802 (Cal) 7 [1994] 81 Comp Cas 38 (Ker)

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18.While pointing out that the current investigation under Section 235 of the

Act was initiated in July, 2009, after the impugned judgment was

delivered and was based on a fresh complaint by respondent No.1,

learned counsel urged that these investigations are at a preliminary stage

of mere allegations and the final report/accusation, if any, the trial, its

outcome and appeals etc., would all be a long drawn process, which

cannot hold up the amalgamation, as was opined by the Company Judge.

Learned counsel argued that the said finding of the Company Judge

having not been disturbed by the appellate bench, the same has attained

finality. Drawing an analogy with cases under the Election laws, learned

counsel pleaded that unless a person is convicted, no adverse inference

can be drawn against him. In support of the proposition, reliance was

placed on the decision of this Court in Ranjitsing Brahmajeetsing

Sharma Vs. State of Maharashtra & Anr.8.

19.Reliance was placed on the decisions in Search Chem Industries Ltd.,

In re9 and Banaras Beads Ltd., In re10 to contend that the pendency of

the investigation cannot come in the way of amalgamation in as much as

even if the allegations are found to be true, the same will lead only to a

8 (2005) 5 SCC 294 9 [2006] 129 Comp Cas 471 (Guj) 10 [2006] 132 Comp Cas 548 (All)

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report under Section 241 of the Act and ultimately a prosecution under

Section 242 of the Act against the Directors/Principal officers of the

company, which would not dilute or affect the scheme of amalgamation.

20.Highlighting the advantages of the amalgamation, learned counsel

submitted that SIL being a subsidiary of SGL, the amalgamation between

both the said companies would entail several benefits for both the

companies, including consolidation of the management, control and

operation of both companies thereby resulting in considerable savings by

elimination of duplication of administrative expenses etc. Moreover,

according to the learned counsel, the shareholders of SIL, including the

appellant, will also stand to gain tremendously by allotment of shares of

SGL, a very healthy company. As per the amalgamation scheme, the

shareholders of SIL will get one share of SGL against five shares held by

them in SIL. Learned counsel submitted that 99.68% of the shareholders

of both the appellants, viz. SIL and SGL having approved the scheme,

allowing a scheme of amalgamation to be stalled due to the pendency of

an investigation or inspection would lead to a situation whereby any

scheme for amalgamation can be held to ransom by a minority

shareholder, like in the instant case, where the first

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respondent/complainant had voluntarily offloaded 5,31,950 shares

pursuant to a voluntary offer made by SGL out of total 5,89,400/- shares

held by him in SIL.

21.Assailing the observation of the appellate Bench that the same person

viz. the Registrar of Companies ought not to have filed both Affidavits

himself as delegate of Regional Director as well as the Official

Liquidator, learned counsel urged that as Section 448(1)(a) of the Act

contemplates the possibility of part time Official Liquidators, there was

nothing improper in the approach of the Registrar in as much as the

Registrar had filed both the affidavits on 10th August, 2006, and the same

had to be read together, which disclosed all relevant materials.

Additionally, it was urged that the Single Judge had rightly concluded

that a scheme of amalgamation, which is just and fair, cannot be rejected

merely because the Official Liquidator had failed in his duty in placing

the correct position before the Court.

22.Learned counsel then submitted that in Life Insurance Corporation of

India Vs. Escorts Ltd. & Ors.11, this Court had held that the functioning

11 (1986) 1 SCC 264

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of a company was akin to that of a parliamentary democracy wherein the

overall control is exercised by the majority of the shareholders. In the

instant case, majority of the shareholders had approved the scheme of

amalgamation despite having full knowledge of the proceedings against

the Companies and the prima facie findings. Moreover, Section 395 of

the Act provides the power to acquire shares of the shareholders

dissenting from the scheme if the said scheme has been approved by the

holders of not less than nine-tenth in value of the shares of whose transfer

is involved.

23.Mr. Raval, the learned Additional Solicitor General, on the other hand,

relying on a decision of the Gujarat High Court in Wood Polymer

Limited, In re12, submitted that since the sanctioning of a scheme of

amalgamation has the effect of imposing it on dissenting members,

before exercising the power conferred on it by Section 391(2) of the Act,

the Court needs to examine the scheme in its proper perspective.

Learned counsel urged that it cannot be argued that merely because

statutory formalities are duly carried out, the Court has no option but to

sanction the scheme. Learned counsel also submitted that since

inspection reports had been received by the Registrar of Companies and

12 [1977] 47 Comp Cas 597

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Official Liquidator, respectively on 19th October, 2006 and 15th

November, 2006, i.e. after the filing of affidavit by them on 10th August,

2006, under Section 394 of the Act, no fault can be found with their

affidavits. It was asserted that since serious irregularities had been found

in the affairs of both SGL and SIL, cheating the minority shareholders of

SIL, the order sanctioning amalgamation of the said companies cannot be

permitted to be used for thwarting the investigations. Thus, the learned

Additional Solicitor General supported the impugned order.

24.Mr. Amar Dave, learned counsel appearing for respondent No.1,

contended that the provisions of Chapter V of Part VI of the Act were

intended to introduce a system of checks and balances to promote the

interests of shareholders, creditors and society at large so as to promote a

healthy corporate governance culture, and the Courts should adopt an

interpretation that advances this object.

25.Learned counsel urged that in the instant case the provisions of Section

393(1)(a) of the Act had not been complied with in as much as all

material facts were not placed before the shareholders, in particular the

preliminary letters of findings addressed to the Managing Director of SIL

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by the Inspector pursuant to the inspection under Section 209A of the Act

on 28th September, 2005. According to the learned counsel, a mere

enclosure of an extract of covering letter dated 17th February, 2006

cannot be construed as sufficient compliance with the mandate of Section

393(1)(a), as the said letter did not disclose the details of the findings to

the effect that the affairs of the company had been conducted in a manner

which was prejudicial to the interests of its members. Relying on the

decision of this Court in Miheer H. Mafatlal Vs. Mafatlal Industries

Ltd.13, learned counsel contended that sufficient information had not been

disclosed to the shareholders so as to enable them to take an informed

decision.

26.Learned counsel contended that in light of the dictum laid down in Miheer H. Mafatlal (supra); Bedrock Ltd., In re14 and T. Mathew Vs.

Smt. Saroj G. Poddar15, the companies had violated the provisions of the

proviso to Section 391(2) of the Act in as much as SIL and SGL had not

disclosed the pendency of the criminal proceedings against the

companies and its directors, and of proceedings under Section 209A of

the Act. Learned counsel submitted that proceedings under Section 209A 13 (1997) 1 SCC 579 14 [2000] 101 Comp Cas 343 (Bom) 15 [1996] 22 CLA 200 (Bom)

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of the Act would fall under the category "and of the like" as mentioned in

the proviso to Section 391(2) of the Act, as every material fact which

could affect the Company Court's discretion has to be disclosed.

Moreover, both the Companies had not disclosed the final inspection

reports under Section 209A of the Act, and the same was brought on

record by respondent No.1. Learned counsel further submitted that the

petitioner has failed to disclose even before this Court, that the Serious

Fraud Investigation Office (SFIO) was conducting an investigation into

the affairs of the company under the provisions of Section 235 of the Act,

and even though the said investigation proceedings arose later, the

obligation under the proviso of Section 391(2) is a continuing obligation

and, therefore, the appellant was obliged to disclose the same before this

Court as well.

27.Learned counsel strenuously urged that the reports submitted by the

Registrar as delegate of the Regional Director and as Official Liquidator

were clearly in violation of the mandate of the proviso to Section 394(1)

of the Act, in as much as despite being in possession of the inspection

reports prepared by the Inspecting Officer of the Ministry of Company

Affairs, the Official Liquidator filed a misleading affidavit before the

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Company Court, reporting "that the affairs of the transferor Company

were not being conducted in a manner prejudicial to the interests of its

members or to the public interest". It was alleged that the affidavit

submitted by the Official Liquidator was solely based on the report of

one M/s S.R. Kenkre & Associates, Chartered Accountants, who in turn

had based their entire report on the information supplied by the

Company, without any independent verification. Relying on the decisions

in Securities and Exchange Board of India Vs. Sterlite Industries

(India) Ltd.16; Modus Analysis and Information P. Ltd. & Ors, In re17;

Miheer H. Mafatlal (supra); Larsen and Toubro Limited, In re18; Wood

Polymer (supra) and T. Mathew (supra), learned counsel argued that the

Division Bench had rightly concluded that the mandate of Section 394

had not been complied with thereby raising a statutory embargo on the

approval of the scheme of amalgamation. Further, the disclosure of all

material information to the shareholders, which included the pendency of

criminal proceedings; inspection proceedings under Section 209A of the

Act, and proceedings under Section 235 of the Act in the report of the

Official Liquidator under Section 394(1) of the Act constitute

jurisdictional requirements, and unless all of them were satisfied, the

16 (2003) 113 Comp Cas 273 17 (2008) 142 Comp Cas 410 (Cal) 18 (2004) 121 Comp Cas 523

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Company Court had no jurisdiction to sanction the scheme. In support,

reliance was placed on the decision of this Court in Carona Ltd. Vs.

Parvathy Swaminathan & Sons19.

28.Learned counsel then contended that the fact of huge siphoning off the

funds from the transferor company (SIL) to the transferee company

(SGL) being within the knowledge of the Company Court, it should not

have sanctioned the scheme, as the distinction between the wrongdoer

and the beneficiary gets effaced due to sanctions of law. Learned counsel

also argued that under the attending circumstances the swap ratio of 1

share of the transferee company for 5 shares of the transferor company

was also unfair, especially when the valuers did not have an opportunity

to examine the inspection reports under Section 209A of the Act.

29.Reliance was placed on the decisions in J.S. Davar & Anr. Vs. Dr.

Shankar Vishnu Marathe & Ors.20; T. Mathew (supra); Calcutta

Industrial Bank Ltd., In re21 and Travancore National & Quilon Bank

Ltd., In re22, to contend that the proposed scheme was a ruse to stifle

19 (2007) 8 SCC 559 20 A.I.R. 1967 Bom. 456 21 [1948] 18 Comp Cas 144 22 A.I.R. 1940 Mad 139

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further inquiry into the affairs of the transferor and transferee company

and their managements which have been initiated by the Ministry of

Company Affairs, as also criminal and civil proceedings that may arise

thereafter because after the amalgamation, it may not be possible to

initiate any proceedings against the transferor company as it would cease

to exist. Moreover, the proceedings under Sections 244, 397, 398, 401,

402, 406 and 542 of the Act against the transferor company cannot be

initiated against the transferee company even if the transferee company

has undertaken to take over all the future liabilities of the transferor

company. Learned counsel thus, asserted that in light of the serious

findings in the inspection report under Section 209A of the Act, sanction

of the scheme would be detrimental to public interest, more so when on

sanction of the scheme of amalgamation, the transferor company would

cease to exist, losing its entity and in the process its functionaries will go

scot free.

30.Relying on Miheer H. Mafatlal (supra), learned counsel contended that

the proposed scheme of amalgamation was unconscionable, in as much

as the minority shareholders of the transferor company have been

oppressed, and in fact the "exit option" offered by the transferee

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company to the minority shareholders of transferor company on 5th June

2003, at an extremely undervalued price of ` 30 per share was in violation

of Section 395 of the Act.

31.Lastly, learned counsel urged that though the decision of the majority of

the shareholders, while sanctioning the scheme, is of paramount

importance, but in the instant case, since 99.80% of the votes of the

transferor company were those of the transferee company itself, the

significance of the majority decision was of no relevance and, therefore,

under these circumstances the Company Court was required to ensure

that the rights of the minority were not trammeled upon, as observed in

Miheer H. Mafatlal (supra); Bedrock Ltd. (supra); T. Mathew (supra);

J.S. Davar (supra) and Calcutta Industrial Bank Ltd. (supra).

32.Before addressing the issues raised, it will be useful to survey the

relevant provisions contained in Chapter V of Part VI of the Act, which

deal with "Arbitrations, compromises, arrangements and

reconstructions". Section 391 of the Act, clothes the Court with the

power to sanction a compromise or arrangements made by a company

with its creditors and members. It reads as follows:-

2 "S.391.Power to compromise or make arrangements with creditors and members.--(1) Where a compromise or arrangement is proposed--

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them;

the Court may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, 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.

(2) 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, where proxies are allowed under the rules made under Section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company:

Provided that no order sanctioning any compromise or arrangement shall be made by the Court unless the Court is satisfied that the company or any other person by whom an application has been made under sub-section (1) 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

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relation to the company under Sections 235 to 251, and the like."

Section 394 of the Act, lays down the procedure for facilitating

reconstruction and amalgamation of companies. It reads as under:

"S.394. Provisions for facilitating reconstruction and amalgamation of companies.--(1) Where an application is made to the Court under Section 391 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Court--

(a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies; and

(b) that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme (in this section referred to as a `transferor company') is to be transferred to another company (in this section referred to as `the transferee company');

the Court may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters:--

(i) the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company;

(ii) the allotment or appropriation by the transferee company of any shares, debentures, policies or other like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person;

2 (iii) the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company;

(iv) the dissolution, without winding up, of any transferor company;

(v) the provision to be made for any persons who, within such time and in such manner as the Court directs, dissent from the compromise on arrangement; and

(vi) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out:

Provided that no compromise or arrangement proposed for the purposes of, or in connection with, a scheme for the amalgamation of a company, which is being wound up, with any other company or companies, shall be sanctioned by the Court unless the Court has received a report from the Company Law Board or the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest:

Provided further that no order for the dissolution of any transferor company under clause (iv) shall be made by the Court 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.

..........................................................................."

33.It is plain from the afore-extracted provisions that when a scheme of

amalgamation/merger of a company is placed before the Court for its

sanction, in the first instance the Court has to direct holding of meetings

in the manner stipulated in Section 391 of the Act. Thereafter before

sanctioning such a scheme, even though approved by a majority of the

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concerned members or creditors, the Court has to be satisfied that the

company or any other person moving such 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. 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, second proviso to the said

Section provides that no order for the dissolution of any transferor

company under clause (iv) of sub-section (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.

2 34.Therefore, while it is trite to say that the court called upon to sanction a

scheme of amalgamation 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, yet it is clearly discernible from a conjoint reading of

the aforesaid provisions 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 with a view to finding out

whether the scheme is fair, just and reasonable to the concerned members

and is not contrary to any law or public policy. (See: Hindustan Lever

Employees Union Vs. Hindustan Lever Ltd. & Ors.23). The expression

"public policy" is not defined in the Act. The expression is incapable of

precise definition. It connotes some matter which concerns the public

good and the public interest. (See: Central Inland Water Transport

Corporation Limited & Anr. Vs. Brojo Nath Ganguly & Anr.24.)

23 1995 Supp (1) SCC 499 24 (1986) 3 SCC 156 2

35. In Miheer H. Mafatlal (supra), this Court had, while examining the

scope and ambit of jurisdiction of the Company Court, culled out the

following broad contours of such jurisdiction:

"1. The sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391(1)(a) have been held.

2. That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391 sub-section (2).

3. That the meetings concerned of the creditors or members or any class of them had the relevant material to enable the voters 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 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 applicant concerned 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, were acting bona fide and in good faith and

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were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent.

8. That the scheme as a whole is also found to be 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.

9. Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction."

36.It is manifest that 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 been acting bona fide

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.

3 37.Thus, the first question is as to whether the appellant and SGL had

disclosed sufficient information to the shareholders so as to enable them

to arrive at an informed decision? The proviso to Section 391 (2)

requires a company to "disclose pendency of any investigation in relation

to the company under Sections 235 to 351, and the like". Though it is

true that inspection under Section 209A of the Act, strictly speaking, may

not be in the nature of an investigation, but at the same time it cannot be

construed as an innocuous exercise for record, in as much as if anything

objectionable or fraudulent in the conduct of the affairs of the company is

detected during the course of inspection, it may lay the foundation for the

purpose of investigations under Sections 235 and 237 of the Act, as is the

case here. Therefore, existence of proceedings under Section 209A must

be disclosed in terms of the proviso to Section 391(2). In any event, we

are of the opinion that since the said issue is a question of fact, based on

appreciation of evidence, and both the Courts below have held that the

information supplied was sufficient, particularly in light of the order

passed by the Single Judge on 18th March, 2006, we are not inclined to

disturb the said concurrent finding of the Courts below, particularly when

it is not shown that the said finding suffers from any demonstrable

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perversity. (See: Firm Sriniwas Ram Kumar Vs. Mahabir Prasad &

Ors.25 and Ganga Bishnu Swaika Vs. Calcutta Pinjrapole Society26.)

38.The next issue that arises for our determination is whether the Division

Bench was correct in holding that the affidavit filed by the Official

Liquidator was vitiated on account of non-disclosure of all material facts.

From a bare perusal of the affidavit dated 10th February, 2006, it is

manifest, ex facie, that before filing the affidavit, the said official had not

examined and applied its mind to the findings contained in the inspection

report under Section 209A of the Act. While it is true that it was not

within the domain of the Official Liquidator to determine the relvency or

otherwise of the said report, yet he was obliged to incorporate in his

affidavit the contents of the inspection report. We are convinced that the

official liquidator had failed to discharge the statutory burden placed on

him under the second proviso to Section 394(1) of the Act.

39.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

25 1951 SCR 277

26 AIR 1968 SC 615

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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. It, therefore, follows that 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 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 its 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.

40.In the present case, we are unable to appreciate why the Official

Liquidator, who was aware of the inspection report dated 17th February,

2006 under Section 209A containing adverse comments on the affairs of

both the companies, relied only on the report of the auditors, which

admittedly was not even verified. We can only lament the conduct of the

official liquidator.

3 41.Having held that the Official Liquidator had failed to discharge the duty

cast on him in terms of the second proviso to Section 394(1) of the Act,

the next issue that requires consideration is whether sanction of a scheme

of amalgamation can be held up merely because the conduct of an

Official Liquidator is found to be blameworthy? We are of the view that

it will neither be proper nor feasible to lay down absolute parameters in

this behalf. The effect of misdemeanour on the part of the official

liquidator on the scheme as such would depend on the facts obtaining in

each case and ordinarily the Company Judge should be the final arbiter

on that issue. In the instant case, indubitably, the findings in the report

under Section 209A of the Act were placed before the Company Judge,

and he had considered the same while sanctioning the scheme of

amalgamation. Therefore, in the facts and circumstances of the present

case, the Company Judge had, before him, all material facts which had a

direct bearing on the sanction of the amalgamation scheme, despite the

aforestated lapse on the part of the Official Liquidator. In this view of the

matter, we are of the considered opinion that the Company Judge, having

examined all material facts, was justified in sanctioning the scheme of

amalgamation, particularly when the current investigation under Section

235 of the Act was initiated pursuant to a complaint filed by respondent

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No.1 subsequent to the order of the Company Judge sanctioning the

scheme.

42.For the foregoing reasons, the appeals are allowed; and the impugned

judgment is set aside. Consequently, the order passed by the Company

Judge sanctioning the scheme of amalgamation is restored. However, it is

made clear that the scheme of amalgamation will not come in the way of

any civil or criminal proceedings which may arise pursuant to the action

initiated under Sections 209A or 235 of the Act, or any criminal

proceedings filed by respondent No. 1.

43.In the facts and circumstances of the case, there will be no order as to

costs.

...........................................

(D.K. JAIN, J.)

............................................ (H.L. DATTU, J.) NEW DELHI;

FEBRUARY 7, 2011.

ARS

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