Karnataka High Court
Ind Telesoft Private Limited vs Jawad Ayaz And Ors. on 9 January, 2003
Equivalent citations: [2003]117COMPCAS738(KAR), 2003(3)KARLJ295, 2003 AIR KANT HCR 1728, 2003 CLC 694, (2003) 3 KANT LJ 295, (2003) 117 COMCAS 738, (2003) 54 CORLA 283
Author: N. Kumar
Bench: N. Kumar
ORDER N. Kumar, J.
1. The applicant-company filed Company Petition No. 72 of 2001 before this Court under Sections 391 and 394 of the Companies Act, 1956, seeking for sanction of a scheme of arrangement of the company with its shareholders. This Court, by an order dated 12-4-2001 in C.A. No. 199 of 2001, dispensed with the requirement of the advertisement in holding of meeting of shareholders. Thereafter, by an order dated 13-7-2001, the scheme of arrangement was sanctioned and a decree was drawn up in accordance with the said order as per Annexure-A. The relevant portion of that scheme of arrangement which was sanctioned by this Court was 38,73,342 shares of face value of US $ 0.001 each held by the applicant-company in M/s. Zhone Technologies Inc., as on February 20, 2001, was permitted to be transferred in the name of principal shareholders of the applicant-company. This arrangement was based upon the premise that shares would be freely transferable consequent upon the public offering, which was then proposed by M/s. Zhone Technologies Inc. The said scheme was sanctioned subject to the necessary approval to be obtained from various statutory authorities. In the course of implementation of the scheme, it was brought to the notice of the applicant-company that Regulation 5 of Part I of the Foreign Exchange Management (Transfer or Issue of Foreign Security) Regulations, 2000 prohibits any direct investment outside India without prior approval of the Reserve Bank of India. The Reserve Bank of India had objections for transfer of the aforesaid shares in the name of individuals. Under these circumstances, all the parties who had consented for approval of the scheme explored other avenues to make the scheme workable. Thereafter, they resolved that the shares of Zhone can be held in the name of Bangalore Telesoft Private Limited, tenth respondent herein, a company incorporated under the Companies Act, 1956, having its registered office at No. 104, Koramangala Industrial Estate, V Block, Bangalore 560 095. All the shareholders of the applicant-company who were intended recipients of the shares in terms of the scheme as approved are the shareholders of the tenth respondent-company. Thereafter, the Reserve Bank of India was approached for giving effect to this arrangement and the Reserve Bank has given its approval for transferring the shares from the applicant-company to the tenth respondent-company as per Annexure-E. It is in this background the present application is filed for modification of the scheme so as to make the scheme workable.
2. The tenth respondent, who would be beneficiary of such transfer, has expressed its willingness on the scheme.
3. Respondents 1 to 9 are the shareholders of both the applicant-company as well as the tenth respondent-company. Along with the petition, the consent letters have been filed giving their consent for modification of the scheme as proposed. Thereafter, notice was ordered to the respondents. All of them have appeared through their Counsels. On 4-12-2002, notice was ordered to the Central Government as required under Section 394-A. In pursuance of the said notice, the Registrar of Companies (Karnataka), on behalf of the Regional Director, Department of Company Affairs, Southern Region, Chennai, has filed an affidavit bringing to the notice of this Court the fact that transfer of shares is without any consideration and the scheme is silent in this regard. Secondly, it is stated, one of the conditions imposed by the Reserve Bank of India for approving the said scheme is that both the transferor and transferee companies should have the same shareholders and the Zhone shares would continue to be held by the same set of resident Indian shareholders and venture capitalists and the benefits from holding the Zhone should continue to accrue to them. It is stated that 5 shareholders of the applicant-company, the particulars of which are set out in the said affidavit, are not the shareholders in the transferee company i.e., tenth respondent, and therefore, requested this Court to take into consideration the aforesaid lacuna and pass appropriate orders.
4. In addition to the consent letters filed along with the petition, now, the respondents 1 to 9 have also filed their affidavits swearing to the fact that they have no objection to the modification of the scheme, as sought for by the applicant-company.
5. Even in the original scheme, there is no mention about any consideration being paid to the transfer of shares. Today, an affidavit is filed by the applicant-company, stating that the transfer is without any consideration. Therefore, position which existed in the original scheme continues to be the same in the modified scheme. There is no alteration on this score. As such, there is no substance in that objection.
6. Learned Counsel for the petitioner submits that there are in all 9 shareholders in transferor company whereas only 4 shareholders in transferee company. Now 5 shareholders of the transferor company who were not shareholders in transferee company, have become shareholders in transferee company by way of allotment and transfer of shares in their favour. Thus, the objection of Reserve Bank of India is complied with. This fact is evident from the extract of the Registrar of Companies.
7. Learned Counsel for Registrar of Companies submits that the said facts now brought on record are not in dispute.
8. Explaining the scope of Section 392 of the Companies Act, the Supreme Court in the case of S.K. Gupta and Anr. v. K.P. Jain and Anr., has held as under:
"26. According to the definition, 'modify' and 'modification' would include the making of additions and omissions. In the context of Section 392 'modification' would mean addition to the scheme of compromise and/or arrangement or omission therefrom solely for the purpose of making it workable. Reading Section 392 by substituting the definition of the word 'modification' in its place, if something can be omitted or something can be added to a scheme of compromise by the Court on its motion or on the application of a person interested in the affairs of the company for the proper working of the compromise and/or arrangement, we see no justification for cutting down its meaning by a process of interpretation and thereby whittle down the power of the Court do deal with the scheme of a compromise and/or arrangement for the purpose of making it workable in course of its continued supervision as ordained by Section 392(1)".
Therefore, it is clear, Section 392 of the Companies Act deals with power of the High Court to enforce compromises and arrangements. In fact, the said section deals with power of the Court after according sanction for a compromise or an arrangement under Section 391 of the Act. The condition precedent for exercising the power under Section 392 is that the Court should have accorded sanction to a compromise or arrangement under Section 391. The power under the section is of the widest amplitude, but is not unlimited and can be exercised only for the purpose of determination or adjudication of any right or interest claimed. Sub-section (1)(a) confers power on the Court to supervise the carrying out of the compromise or arrangement. Sub-section (1)(b) confers a discretion on the Court to issue such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement either at the time of making such order or at any time thereafter. Similarly, Sub-section (2) expressly gives the Court the power to modify a compromise or arrangement. Parliament has conferred power on the Court not only to make modification at the time of sanctioning the scheme, but at any time thereafter during the period when the scheme is being implemented. The power seems absolute and widest amplitude. Subsequent developments can also be taken into account for considering desirability of the modification. A scheme can be modified by the Court; either at the time of order or after it is sanctioned. Only such modincations to the scheme, which are necessary for the proper, efficient and smooth working of the scheme could be made. Modification can be made at the instance of any person who is interested in the affairs of the company and the Court can also introduce modification suo motu. But the paramount consideration while issuing any such direction by way of modification is that, such direction must be necessary for the proper working of the compromise or arrangement. The power of the Court under the section does not go beyond the implementation of a scheme already sanctioned under Section 391, and, if necessary, its modification. Therefore, the power of the Court to modify the scheme either at the time of according sanction to the scheme or subsequently at the time of working of the sanctioned scheme is statutorily provided under the aforesaid provision and such power has to be exercised only for the purpose of proper working of the scheme, which is the only limitation which is imposed on the Court under this provision.
9. When the original scheme was sanctioned by the Court subject to the permission to be obtained from several authorities while implementing the scheme, the applicant-company found it not possible to work the scheme in view of the regulation of Reserve Bank of India. In terms of the Reserve Bank of India Regulations, the modification sought for is that in the original scheme the transfer of the shares was agreed to be in the name of the individual shareholders. As there is a prohibition in law for transfer of shares in individual names and to satisfy the legal requirement, it has to be transferred in the name of company whose shareholders would be the same as that of the transferor company. Under the proposed modification, shares are to be transferred in the name of the tenth respondent-company, the shares of which are held by the very same shareholders in the applicant-company. In that view of the matter, it is only to satisfy the legal requirement and to make the scheme workable, the modification is sought for and the same is not contrary to provision of law and the public policy and the same is made in the good faith. The applicant is entitled for the modification sought for. Hence, I pass the following order:
The application is allowed. Office is directed to draw a fresh decree incorporating the modifications.