Rajasthan High Court - Jaipur
To Carry On The Business Of Preparing vs Mafatlal Industries Ltd. [Air 1997 Sc ... on 28 September, 2015
Author: Alok Sharma
Bench: Alok Sharma
IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JAIPUR BENCH JAIPUR O R D E R IN S.B. COMPANY PETITION NO.30/2012 IN THE MATTER OF SCHEME OF ARRANGEMENT BETWEEN : MODERN INSULATORS LIMITED AND MODERN POLYTEX LIMITED Date of Order : September 28th, 2015 HON'BLE MR. JUSTICE ALOK SHARMA Mr. Paras Kuhad, Sr. Advocate with Mr. Shivangshu Naval, for the petitioners-Companies. Mr. Dinesh Bishnoi ] Mr. Mukesh Meena ] for the respondent. BY THE COURT
This petition has been filed under Section 391(2) and 394 of the Companies Act, 1956 (hereinafter the Act of 1956) to obtain sanction of this Court to the scheme of arrangement whereunder the Gujarat Polyfils division (hereinafter GPF) a unit of Modern Insulators Limited (hereinafter the demerged company) is to be hived off and transferred to Modern Polytex Limited (hereinafter the resulting company).
The demerged Company was duly incorporated under the Act of 1956 on 01.05.1982 vide Certificate of Incorporation No.2460 of 1982-83 and has its registered office at A-4, Vijay Path, Tilak Nagar, Jaipur, Rajasthan. Its authorized share capital as on 31.03.2012 was Rs.3,000/- lacs divided into 2,50,00,000 equity shares of Rs.10/- each and 5,00,000/- preference shares of Rs.100/- each. Its issued, subscribed & paid-up share capital as on the said date was Rs.2,174.35/- lacs divided into 2,17,43,500/- equity shares of Rs.10/- each. Its main objects as set out in the Memorandum of Association are as under :
1. To carry on all or any of the business of manufacturers, producers, processors, importers, exporters, buyers, sellers and dealers in all kind of high-tension or low-tension insulators made of Ceramics, Glass, Plastics, Epoxy resins or any other substance, which may be used for insulation and all kind of ceramic products, such as, industrial ceramics, high alumina ceramics, electronic ceramics, fuses, fuse carriers, cartridge, caps, gauges, bushings or other article in which clay is used as one of the raw-materials.
2. To carry on all or any of the business of manufacturers, importers, exporters, stockists, distributors and otherwise dealers in Bricks, Tiles, Refractory, Clays, Cement, Gypsum products and Sanitary goods.
3. To carry on all or any of the business of manufacturers, importers, exporters, stockists, distributors, and otherwise dealers in all types of Crockery, Glassware and Enamel-wares.
4. To design, erect and provide consultancy and management services or Ceramic product's plants and other plants in India or abroad.
5. To prospect, purchase or take on leave clay, quartz, feldspar, mines and stone quarries and glass sand deposits, for the purpose of getting clays, quartz, feldspar, gypsum, glass-sand and minerals to use them in pottery or manufacture or sell them.
6. To carry on the business of preparing, combining, spinning, doubling, twisting, drawing, texturising, imparting, crimping, converting, calendaring, testing, sizing, weaving, knitting, bleaching, processing, dying, ginning, cutting, scouring, winding, mercerizing, combing, printing, finishing, manufacturing, buying, selling importing, exporting or otherwise dealing in industrial fabrics, synthetic fabrics, synthetic chips, polyester oriented yarn, fully drawn yarn, textured yarn, synthetic yarn, acrylic yarn, rayon yarn, nylon yarn, nylon tyre yarn, nylon tyre cord, tyre fabrics, polyester, rayon and any other textile celluloric or non celluloric end products, polyester, acrylic, viscose, polypropylene cotton, linen, wool, silk, flex, hemp, jute, artificial silk, rayon, canvas and other fibers or textile products substances whether natural or synthetic or manmade, in any state and whether similar to the forgoing substances or not and to treat, utilize and deal with any waste arising from any such operations and to manufacture, felted, knitted, loped and embroidered fabrics, lace and other types of manufacture coated or laminated fabrics and readymade garments and apparels including all type of industrial and geo fabrics.
7. To carry on all or any of the business of manufacturers, producers, processors, importers, exporters, buyers, sellers of an dealers in all kind of fabrics and textiles, fibers, yarns, threads, tapes, ropes, cord, twines and other products, as are prepared on manufactured from nylon, polyester, acrylics rayon, silk, artificial silk, linen, cotton, wool, jute, and other synthetic, artificial and natural fibers including fire glass and all celluloric and non celluloric fibers.
The resulting Company was incorporated under the Act of 1956 on 20.01.2011 vide Certificate of Incorporation No.U17119RJ2011PLC033907, 2010-2011and also has its registered office at A-4, Vijay Path, Tilak Nagar, Jaipur, Rajasthan. The authorized capital of the company as on 31.03.2012 was Rs.5 lacs divided into 50,000 equity shares of Rs.10/- each and its issued, subscribed & paid-up share capital was also Rs.5 lacs divided into 50,000/- equity shares of Rs.10/- each. The main objects of the resulting company are as under :
1. To carry on the business of preparing, combining, spinning, doubling, twisting, drawing, texturising, imparting, crimping, converting, calendaring, testing, sizing, weaving, knitting, bleaching, processing, dying, ginning, cutting, scouring, winding, mercerizing, combing, printing, finishing, manufacturing, buying, selling importing, exporting or otherwise dealing in industrial fabrics, synthetic fabrics, synthetic chips, polyester oriented yarn, nylon, nylon tyre yarn, tyre cord, tyre fabrics, and other end products, polyester, acrylic, viscose, polypropylene cotton, linen, wool, silk, flex, hemp, jute, artificial silk, rayon, canvas and other fibers or textile products substances whether natural or synthetic or manmade, in any state and whether similar to the forgoing substances or not and to treat, utilize and deal with any waste arising from any such operations and to manufacture, felted, knitted, loped and embroidered fabrics, lace and other types of manufacture coated or laminated fabrics and readymade garments and apparels.
2. To carry on the business of manufacturers, producers, processors, bleachers, dyers, ginners, spinners, importers, exporters, buyers, sellers of an dealers in all kind of yarns and fibers whether synthetic, artificial or natural, nylon, polyester acrylics, rayon, silk, artificial silk, linen, cotton, wool, jute, and other fibres or fibrous materials, allied products, by products and substitutes for all or any of them, wool combers, worsted spinners, woolen spinners and to treat and utilize any waste arising from any such manufacturer, production of process.
3. To carry on all or any of the business of manufacturers, producers, processors, importers, exporters, buyers, sellers of an dealers in all kind of fabrics and textiles, fibers, yarns, threads, tapes, ropes, cord, twines and other products, as are prepared on manufactured from nylon, polyester, acrylics rayon, silk, artificial silk, linen, cotton, wool, jute, and other synthetic, artificial and natural fibers including fire glass.
The demerged Company is engaged in the business of manufacturer and sale of specialty insulators and has its production facility at Abu Road, District Sikar, Rajasthan. In 2007 it set up a separate 'yarn division' under the name of Gujarat Polyfils at village Nana Borsara, District Surat, Gujarat for manufacturing of polyester yarn with capacity of twenty five thousand (25,000) tones per annum. Commercial production commenced in the year March, 2010.
With the view to implement and develop the business plan of the polyester yarn as a focused entity and to take up the future opportunities in the polyester yarn business, it was proposed to demerge the GPF Division of the demerged Company and transfer and vest the same in the resulting Company.
A joint company application No.12/2011 was in the circumstances, filed by the two companies before this Court seeking direction for convening, holding and conducting of separate meetings of the Shareholders, Secured Creditors and Unsecured Creditors of the demerged Company. In the said application, dispensation of convening of the meetings of the Equity Shareholders, Secured Creditors and Unsecured Creditors of the resulting Company was also sought and prayed for, in view of all its equity shareholders agreeing in writing to the said Scheme and having given their consent in writing for the waiver from holding the meeting. No secured or unsecured Creditors of the resulting Company obtaining, no meeting was required to be conveyed therefor or dispensation sought. Vide order dated 04.10.2012 passed by the Court directions were issued to convene meetings of the equity shareholders, secured and unsecured Creditors of the demerged Company for the purpose of considering and approving with or without modifications, the scheme of arrangement (demerger and transfer of the GPF Division) as presented. Chairpersons for the three different meetings of the demerged company were appointed and were to file reports of the respective meetings with the Court within a period of seven days of the meetings on 09.11.2012. The requisite meetings were held on 09.11.2012 after due notice as required under the Companies (Court) Rules, 1959 (hereinafter the Rules of 1959) and as directed by the Court. The Company Court by the impugned order also dispensed with the holding of the meetings of equity shareholders, secured and unsecured creditors of the resulting Company.
The meeting of Shareholders of the demerged Company was attended by four equity shareholders. Number of shares held by the Equity Shareholders who attended the meeting was 1,12,78,216 with the total value of Rs.11,27,82,160/-. Of the 4 equity shareholders present, 3 voted in favour of the scheme at the meeting whereas 1 voted against it and as such the Scheme was approved by the majority of equity shareholders participating holding amongst themselves 10,278,216 shares with a value of Rs.10,27,82,160/- representing about 91% equity shareholding of the demerged company as against 1 disapproving equity shareholder holding 10 lacs shares with the value of Rs.1 crore only. The scheme was thus agreed upon and approved by the majority of equity shareholders representing more than 3/4th in value of the shareholders present and voting. The meeting of secured and unsecured creditors, which are not an issue in this petition were successfully also held on 09.11.2012 and respective reports submitted by the Chairperson to the Court as directed.
Hence this second notice by the two companies under Section 391 read with Section 394 of the Act of 1956 for sanction of the approved scheme by the Court.
It has been prayed that the proposed demerger of the GPF division of the demerged company being for the benefit of both the demerged company and resulting company ought to be approved by this Court treating the appointed date as 1st April, 2011. It has been prayed that in the circumstances, this Court be pleased to sanction the demerger as prayed for so as to be binding upon all Equity Shareholders, Secured and Unsecured Creditors of both the demerged company and resulting company and further that appropriate orders be passed regarding vesting of assets and liabilities between companies in accordance with the scheme of arrangement.
Notices having been issued to the Central Government through the Regional Director, Ministry of Corporate Affairs, North-Western Region, he has filed an affidavit of objection to the sanctioning of the Scheme followed by another one in rejoinder to the counter thereto. It has been submitted that details of assets and liabilities which are proposed to be transferred by the demerged company to the resulting company under the scheme of arrangement were not and even now have not been provided with the application or to the Regional Director. It has been submitted that as the demerged company is a Public Limited Company having raised share capital from well over 32,000 shareholders, transparency with respect to details of assets and liabilities proposed to be transferred from the demerged company to the resulting company should have been forthcoming. It has been further submitted that the demerged company a listed one, has written letters to stock exchanges i.e. Delhi Stock Exchange, Ahmedabad Stock Exchange, Calcutta Stock Exchange and Madras Stock Exchange for delisting of its shares and this is not an act in the interest of the Shareholders. Further the Bombay Stock Exchange has suspended the demerged company for violating the listing agreement and no clarification/details have been provided for reasons therefor. It has also been submitted that except for the bald statement that the sanction of the scheme would benefit the shareholders of the demerged company, no comprehensible rationale has been provided and in fact the demerger seems to be illogical as the profitable yarn division of the demerged company is sought to be transferred to the resulting companyan unlisted one. It has been submitted that the demerged company would, subsequent to the sanction of the Scheme as sought, would have less total capital employed as against the capital employed in respect of its GPF Division which is sought to be demerged and transferred to the resulting company. And this would adversely effect the shares of the demerged company on the one hand, and block exit of the shareholders from the resulting company as it is not listed on any Stock Exchange. Consequently the interests of the shareholders of the demerged company would be prejudiced and the biggest loser will be the small shareholders in demerged company. It is also submitted that the scheme provides for share exchange ratio whereunder the demerged company was to issue and allot one equity share of Rs.10 each to its shareholders in the resulting company for every two equity share of Rs.10/- each held in the demerged company. For this consideration no disclosure has been made of the facts relevant to the evaluation of the assets and liabilities of the polyester yarn division and the determination of the share exchange ration. It has been submitted that for the aforesaid reasons, the proposed Scheme of Arrangement in the nature of demerger and transfer between the petitioners-companies is prejudicial to the interest of the shareholders of the demerged company and the public at large and therefore be rejected.
It has been further submitted that in the meeting of the members of the demerged company when held on 09.11.2012 in terms of the Court's direction dated 04.10.2012 on the first motion moved before this Court under Section 391 of the Act of 1956, the requisite quorum was absent rendering any resolution at such a meeting invalid based on which sanction as sought from this Court cannot be granted. It has been submitted that no doubt the Court while inter alia directing a meeting of a class of members of the demerged company had the power under Rule 69 of the Rules of 1959 to direct as to what would constitute the requisite quorum for the members' meeting but no such direction was issued. Consequently the quorum for the meeting had to be as per Section 174 of the Act of 1956 requiring at least five members to be personally present. The demerged company has over 32,000 shareholders. The report of the Chairperson for meeting of 09.11.2012 appointed by the Court indicates that only 4 members were personally present. Further Table A in the Act of 1956 relevant to public limited companies also prescribes minimum five members personally present for constituting a valid quorum for a meeting of the shareholders. The said quorum of five members for a meeting is also provided for under Article No.70 of the Articles of Association of the demerged company. It has been submitted that the meeting of the equity shareholders of the demerged company on 09.11.2012 was therefore not valid and any resolution passed therein approving the scheme of arrangement cannot partake any legal character. This petition seeking sanction of the scheme therefore be dismissed.
The Regional Director has further submitted that the reason for keeping 01.04.2011 as the appointed date is not comprehensible as subsequent audited financial positions as on 31.03.2012 of the demerged company was available at the time of filing of the Scheme. It has been prayed that in the circumstances, the Court, if it sanctions the scheme, should direct that the appointed date be taken as 01.04.2012 and not 01.04.2011.
In reply to the objections of the Regional Director, it has submitted that the demerger of the demerged company is a matter of business acumen of its members, a matter of their commercial wisdom and prudence and has been duly approved by the majority of shareholders constituting over 90% of the shareholding present at the Court directed/convened meeting of 09.11.2012. The object of the scheme is that the business of polyester yarn production could move forward in a focused manner with the resulting company instead of continuing as a part of the demerged company which is primarily engaged in the business of manufacture and sale of specialty insulators and has a formidable reputation in the field. The entire rationale of the scheme of arrangement/demerger has been clearly mentioned in the scheme and shareholders after analyzing the objective behind the said transaction have by an overwhelming majority approved it. The Regional Director cannot seek to exercise overarching authority and question the business object and model of the two companies invoked in the scheme. The shareholders of the demerged company suffer no prejudice as they would continue ownership of the GPF division in the resulting company as in the demerged company. It has been submitted that the objection with regard to the lack of details of assets and liabilities which are proposed to be transferred to the resulting company is untenable as a perusal of the Scheme evidences that the demerged company has agreed to transfer all assets and liabilities relating to its polyester yarn division with certain exception as stated in the Scheme and in the circumstances setting out all details of each and every asset and liability was not necessary in the Scheme. Further Clause D of the Scheme specifically deals with all the assets and liabilities proposed to be transferred. The financial statement of the demerged company as on 01.04.2011 have been enclosed with the schedule to the Scheme and consequently no question of any attempt to conceal the transfer of assets and liabilities can be made out. It has been submitted that the demerged company has written letters to the stock exchanges i.e. Delhi Stock Exchange, Ahmedabad Stock Exchange, Calcutta Stock Exchange and Madras Stock Exchange on 11.02.2008 for delisting of its share. None of the shareholders despite having knowledge of this aspect as per the annual report of the financial year 2007-08 have raised any objection thereto. In the alternative it was submitted that the shares of the demerged company had not yet been de-listed and in the event of their being so de-listed, under Section 21A read with other relevant provisions of the Securities Contracts (Regulation) Act, 1956 (hereinafter SC Regulations) aggrieved investors / shareholders would have their remedy to lay an appeal against the delisting before the Securities Appellate Tribunal within a period of fifteen days from the date of delisting. It was then submitted that thus the issue of suspension of the demerged company and that of the shares of the resulting company not being listed on the stock exchanges cannot constitute any valid objection or a ground for the refusal of the sanction as sought from this Court. It was further submitted that the provisions of Sections 391-394 of the Act of 1956 constitute a code complete by themselves for all practical purpose and there is nothing in law which indicates that the alleged non-compliance with the terms and conditions of listing agreement would prohibit a company from making an application under Sections 391-394 of the Act of 1956 or where such an application were to be made it was liable for automatic dismissal.
It has been submitted that the meeting of the members of the demerged company was directed to be convened by this Court vide it order dated 04.10.2012 and was held on 09.11.2012 under the Chairperson nominated for the purpose. The courts order dated 04.10.2012 did not fix the quorum for the meeting of the shareholders required to be present either in person or through proxy. In the meeting then held on 09.11.2012 three of the four shareholders present and voting approved the scheme. Their share holding represented about 91% of the equity of the demerged company. One shareholder, UTS holding 40 lakhs shares with the value of 1 crore did indeed oppose the scheme. It has been submitted that in the circumstances, the alleged lack of quorum resulting in the resolution at the instance of the members on 09.11.2012 being invalid is wholly untenable.
Reference has been made to Rule 69(4) of the Rules of 1959 which provides that the Company Judge upon hearing the petition for calling of the statutory meetings can direct, as necessary on the fixing of quorum and the procedure to be followed at the meeting including voting by proxy. However, the learned Company Judge under his order dated 04.10.2012 not having fixed a quorum of minimum five members being necessary for the meeting of 09.11.2012, it cannot be held to be invalid on count of only four members participating. Sections 391 to 394 of the Act of 1956 constitutes a code in themselves and drawing on Section 174 of the Act of 1956 to test the validity of the members' meeting of 09.11.2012 is misdirected. It has been averred that a general meeting called by the company itself under Section 174 of the Act of 1956 is qualitatively and conceptually different from a meeting of class of members/shareholders in pursuance to notices issued by the Court in the course of considering an application for amalgamation merger/demerger or scheme of arrangement qua a company. In any event the members' meeting of 09.11.2012 had been convened and conducted under the supervision and guidance of the chairperson appointed by this Court under its order dated 04.10.2012 who did not raise any objection with regard to the quorum and hence such an objection should not be entertained at this stage by this Court. The sequitur is that the manner of holding and conducting the meetings of a class of members or creditors with reference to Section 391(1) of the act of 1956 is to be as per the directions of the Company Court and absent such directions, it is only to be determined whether the requisite majority of shareholders as mandated under Section 391 of the Act of 1956 had approved the scheme under consideration. Once the requisite majority of shareholders approves the scheme at a court convened meeting, the Court cannot sit as if in review or appeal over the commercial wisdom of the shareholders on technical grounds.
Reiterating the limited jurisdiction of the company court while sitting over an application for sanction of a scheme approved by the shareholders, secured and unsecured creditors with an overwhelmingly majority both in number and value, it has been submitted that the scheme cannot be scrutinized as by a carping critic, a meticulous accountant or in the manner of a fastidious lawyer and the application for the purpose must be decided with the eye of a shareholder focused on the business benefit from the scheme in his point of view. It was submitted that from that perspective, the proposed scheme is beneficial to all stake holders by facilitating the two companies to focus of their core competencies and does not adversely affect the shareholders interest or public interest. The mere demerger of a division of a listed entity into an unlisted resulting company is not prohibited in law and in any event the resulting company would go in for a fresh listing, at an appropriate time on its extended capital after the scheme is duly sanctioned and transfer of the division made. An undertaking may be recorded by this Court that the resulting company would comply with the relevant listing arrangement and applicable guidelines to ensure a listing. Thus the interest of the shareholders, who themselves have expressed no concern on this count stands wholly protected.
On the issue of appointed date it was submitted that appointed date in a scheme under Sections 391-394 of the Act of 1956 is only a date for an accounting exercise with reference to which the assets and liabilities of the demerged company would stand transferred and vest in the resulting company. The members have accepted it, the Regional Director has no legally valid ground to object to it. The effective date of the amalgamation/transfer is more important. Hence that there is nothing from the objections filed by the Regional Director to even remotely establish that the scheme is prejudicial either to the interest of the shareholders or public at large. Since the proposed scheme enjoys support of overwhelmingly majority of the shareholders and unanimously of the secured and unsecured creditors it be approved. It has also been submitted that the Regional Director cannot object to the share exchange ratio arrived at by chartered accountantsexperts in their fields and also approved by the requisite majority by of shareholders. It has been finally submitted that unless the scheme approved by the shareholders, secured and unsecured creditors by the requisite majority under Sections 391-394 of the Act of 1956 is palpably unfair, mala fide or against public interest or unconscionable, motivated by intent to evade law or fails the prudent business management test, the company court cannot reject an application for sanction thereof on hyper technicalities.
Heard. Considered.
The Court seized of an application to sanction a scheme approved by the shareholders and creditors both secured and unsecured as may be, has to see whether the shareholders of whatever description or class they may be, secured and unsecured creditors of the companies, if any, in a scheme of arrangement/merger/demerger have consented to the scheme as reasonably intelligent men of business in a bona fide manner. The court has also to satisfy itself, sanctioning the scheme, that aside of the statutory majority of the concerned members or creditors, the requisite statutory procedure has been followed. It has also to see whether the scheme is just, fair and reasonable to all persons who are likely to be affected by it because it would bind not only the majority of the shareholders and creditors but also the dissenting minority of the shareholders or creditors. The scrutiny of the court however is to be done in a broad common sense manner and the court does not act as an appellate or revising authority minutely scrutinizing the scheme with a view to find faults with it. It is a commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote. The broad contours of the jurisdiction of the Company Court in matters of sanctioning of schemes have been laid down by the Hon'ble Supreme Court in the case of Miheer H. Mafatlal Vs. Mafatlal Industries Ltd. [AIR 1997 SC 506] as under :
(i) A sanctioning court has to ensure that all the requisite statutory procedure for supporting a scheme has been complied with and that the requisite meetings as contemplated by Section 391(1)(a) of the Act of 1956 have been held.
(ii) The scheme put up for sanction of the Court has the requisite majority or votes as required under Section 391(2) of the Act of 1956.
(iii) The concerned meetings 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 an approved scheme in question and 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.
(iv) All the necessary material indicated by Section 391(1)(a) of the Act of 1956 is placed before the voters at the concerned meetings as contemplated under Section 391(1) of the Act of 1956.
(v) All the requisite material contemplated by the proviso to sub-section (2) of Section 391 of the Act of 1956 is placed before the court by the concerned applicant seeking sanction for such a scheme and the court is satisfied with regard thereto.
(vi) The proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public interest. For ascertaining the real purpose underlying the scheme, the court can even pierce the corporate veil and reach its real purpose.
Once the aforesaid broad parameters for obtaining sanction of the court are found to have been met, the Court will have no further jurisdiction to sit, as if, in appeal over the commercial wisdom of the majority of the class or persons who with their eyes open have approved the scheme even if in the view of the Court there could have been a better scheme for the company and its members or creditors for whom it has been framed.
The starting point of the exercise in the grant sanction by the Court to the scheme is to ascertain that all the requisite statutory procedures for supporting the scheme have been complied with and the meetings under Section 391(1)(a) of the Act of 1956 held as mandated by law. In this regard, Section 391(1) of the Act of 1956 indicates that where a compromise or arrangement is proposed inter alia between a member or any class of them the court may, on the application of the company or of any creditor or member of the company, order a meeting of the concerned class of members, the main issue in this petition agitated by way of objections of the Regional Director representing the Central Government is whether meetings of the members of the demerged company was valid, held with the requisite quorumalbeit the majority of the four members present at the meeting of 09.11.2012 did vote in favour of the demerger and represented about 91% shareholding. A look at the order dated 04.10.2012, passed by the Company Court in Company Application No.12/2011 at the first motion moved by the petitioners-companies indicates that it was directed to hold the meetings of members of the Company / shareholders amongst others to examine and approve with or without modification the proposed scheme of arrangement. Ms. Pallavi Mehta was appointed as chairman for the shareholders meetings to be held on 09.11.2012 under the direction of the Court. It was further directed that at least 21 days before the day appointed for holding the meetings i.e. 09.11.2012, advertisement of notice be made stating that free copies of the scheme of arrangement and all other statement required to be furnished at such a meeting pursuant to the provisions of the Companies Act, 1956 and Companies (Court) Rules, 1959 would be available. It was so advertised in the Rajasthan Patrika, Jaipur Edition and Hindustan Times, New Delhi Edition. Notice of the meetings was also to be served upon the each of the members, shareholders of the company entitled to attend the shareholders meeting by ordinary post under the supervision of Chairperson who was directed to submit the report of the result of the meetings within seven days of its conclusion duly verified by an affidavit. What stands out from the order dated 04.10.2012 is that no direction as to what would constitute a quorum for the shareholders meetings was issued by the Court.
It is on record that the shareholders' meeting of 09.11.2012 was attended by only four members, personally present. It is not in dispute that three of the said four members present at the meeting supported the scheme and the value of those supporting the scheme was Rs.10,27,82,160/- based equity shares 10,278,216 representing 91% equity shareholding. Only one shareholder i.e. M/s. UTI Mutual Fund, holding 10 lacs shares with the value of Rs.1 crore dissented. In these circumstances, the majority of the shareholders attending voted for the scheme and had the requisite statutory majority.
However, counsel for the O.L. submitted that despite the dual test of the majority of members voting for the scheme and also having 3/4th of the shareholder value being satisfied, yet the shareholders meeting of 09.11.2012 was invalid for lack of quorum. It has been submitted that as the court had not in its order dated 04.10.2012 exercised its discretion in declaring a quorum for the meeting of members, by default, for a valid meeting, Section 174 of the Act of 1956 was applicable as also was, by analogy, Article 70 of the Articles of Association of the demerged company which also required minimum five members personally present and voting for a valid quorum. Reference has been made to Section 170 of the Act of 1956 more particularly sub-section (2)(b) thereof which provides that unless the articles of the company or a contract binding on the persons concerned otherwise provides, sections 171 to 175 and sections 177 to 186 with such adaptations and modifications, if any, as may be prescribed, shall apply with respect to meetings of any class of members, or of debenture holders or any class of debenture holders, of a company, in like manner as they apply with respect to general meetings of the company. Reference has also been made to Section 174 of the Act of 1956 which provides for quorum for meeting. Sub-section (1) thereof states that unless the articles of the company provide for a large number, five members personally present in the case of public company (other than a public company which has become such by virtue of section 43A), and two members personally present in the case of any other company, shall be the quorum for a meeting of the company. It has been submitted that thus Section 170 (2)(b) read with Section 174(1) of the Act of 1956 essentially requires a quorum of at least five members personally present at a meeting of shareholders in the course of a members' meeting even when convened by the Court under Section 391(1) of the Act of 1956 unless the Court otherwise directs, as it indeed can in terms of its plenary powers under Sections 391-394 of the Act of 1956.
Attention has also been drawn to Article 70 of the Articles of Association which read as under :
70. No business shall be transacted at any General Meeting unless a quorum of members is present at the time when the meeting proceeds to business. Save as herein otherwise provided five members present in person shall be quorum.
It has been submitted that the Articles of the demerged company do not provide that for meetings other than general meetings of the members of the company, a quorum less than that of five members present would suffice. Resultantly, in no circumstances, it can be argued that the presence of the four members of the demerged company at the meeting of 09.11.2012 sufficed for the purposes of a requisite quorum, submitted counsel for the O.L. Reference has been made to the judgment of the Bombay High Court In Re: The Tata Iron and Steel Co., reported in 108 Ind Cas 465, equivalent citation : (1928) 30 BOMLR 197 in support of the contention. It has been submitted that Section 153 of the Indian Company Act, 1913, para materia with Section 391 of the Act of 1956, provided that the meetings be called, held and conducted in such manner as the Court directed. The said power of the Court was construed as plenary but the issue was as to what was to be done in respect of minor matters in respect of which the Court which convened the meeting did not issue any directions. For the company it was urged that the Court must be guided by the Articles of Association and for the objector opposing the scheme, that in such a situation recourse should be taken to common law. The Court was seized with the meeting of a class of shareholders / members which aspect was covered inter alia by the Articles of Association of the Company. In these circumstances, it was held by the Hon'ble Bombay High Court that though the meetings are subject to direction of the court, yet when no express directions were given, the Articles of the company must be looked into for guidance to the extent it was possible and the Articles were applicable. The ratio of the judgment of the Hon'ble Bombay High Court in the Tata Iron and Steel Co. (Supra) was thus that the absence of special direction with respect to any matters qua a meeting convened by the Court ought to be taken to have intended that the meeting so held under the Court's direction, on matters not covered by such directions would be held in terms of its Articles or relevant statutory provisions and the matter not left for a speculative exercise or in an uncertain terrain. It has been submitted that however, no direction as to the quorum for the meeting of 09.11.2012 having been issued by the Court under its order dated 04.10.2012, it was mandatory for a valid quorum in meeting of the shareholders of the demerged company that five members of the company were present. And as admittedly only four of the shareholders were present at the meeting of 09.11.2012 as per the case of the company itself and the report of the Chairpersons appointed by the Court at meeting of 09.11.2012 under the direction of this Court, the meeting was invalid and its resolution supporting the scheme of arrangement/demerger is of no avail as the first test laid down by the Hon'ble Supreme Court in the case of Miheer H. Mafatlal (Supra), i.e. the requisite statutory procedure be complied with, has been breached. In these circumstances, it is not open for the petitioners-Companies to seek a sanction of the said scheme from this Court nor can the Court grant such sanction.
Mr. Paras Kuhad, Sr. Advocate emphatically submitted that a general meeting of a company is clearly distinguishable from a meeting of a class of members or creditors convened by the Court as provided for under Sections 391-394 of the Act of 1956. Therefore the requirement in relation to quorum under Section 174 of the Act of 1956 would not apply to such meetings including one of its members when convened by the Court. He submitted that Section 174 of the Act of 1956 was wholly irrelevant and invoked only to obfuscate the issue. Reference has been made to the judgment of the Bombay High Court in the case of Khandelwal Udyog Limited and ACME Mfg. Ltd. In re (Bomb.) decided on 13.08.1976 and the decision of the Hon'ble Madras this High Court in the case of Subhiksha Trading Services Limited, In re Blue Green Constructions and Investments Limited, In re [(2011) 161 Comp Cas 454 (Mad)] wherein it has been held that the Act of 1956 itself maintains a clear distinction between two kinds of meetings referred above. It has been submitted that Section 170 of the Act of 1956 itself spells out the distinction between general meeting of the company on the one hand and the meetings of the members or creditors on the other. It has been submitted that while Section 174 of the Act of 1956 provides for quorum of meeting for annual general meeting or extraordinary general meeting . Rule 69(4) of the Rules of 1959 provides that the Judge on a first motion moved under Sections 391/394 of the Act of 1956 unless he thinks fit for any reason to dismiss the summons, give such direction as he may think necessary in respect of fixing the quorum and the procedure to be followed at the meeting or meetings of class/es, shareholders and creditor/s, including voting by proxy with such variation as permitted. It has been submitted that the manner of holding and conducting a meeting of a class of members or creditors of a company seeking a scheme of arrangement under Sections 391-394 of the Act of 1956 is to be determined as per direction of the Court. Where no specific direction inter alia with regard to the quorum had been issued by the Court, it would not entail a meeting of the member of the company held despite the majority of members present voting for the scheme with the requisite over 3/4th value of the shares being rendered invalid for lack of quorum. The two dual tests for the shareholders meeting under Section 397(1)(a) of the Act of 1956 stand satisfactorily met as per the report of the Chairpersons submitted, qua shareholders / members' meeting of 09.11.2012. Reference has been made to the judgment of the Gujarat High Court in Company Petition No.224/2012 in Company Application No.272/2012 titled as Paraan Ltd., decided on 29.04.2013 where objection to the scheme of arrangement made by the Regional Director inter alia for reason of lack of quorum in the meeting of class of members called under the court's order without any specific direction as to quorum were overlooked and the scheme sanctioned.
It has been submitted in the alternative that even though there may a flaw on the issue of quorum in the members' meeting of 09.11.2012 where the court has a clear sense of the scheme being approved by the requisite majority and not being unfair or not bona fide, it ought not to reject the application for sanction of the schemeas in the present case. The wisdom of the overwhelming majority of shareholders in their best business interests should not be allowed to be defeated. The approved scheme is neither contrary to public interests nor unconscionable or a device to evade the law. Reference has been made to the judgment of the Hon'ble Supreme Court in the case of Hindustan Lever Employees' Union Vs. Hindustan Lever Limited & Ors. [1995 Supp (1) SCC 499] wherein it has been held that Section 394 casts an obligation on the court to be satisfied that the scheme for amalgamation or merger was not contrary to public interest. The basic principle of such satisfaction is none other than the broad arid general principles inherent in any compromise or settlement entered between parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, the courts have evolved, the principle, 'prudent business management test' or that the scheme should not be a device to evade law. Relying on the case of German Remedies Ltd. [2005 In re (Bom) 615] it has been submitted that the Court should not take a pedantic and strict view but instead a liberal one on aspects of procedural rules and substantial compliance should suffice. Relying on M.G. Investment and Industrial Company Ltd. Vs. New Sherlock Spinning and Mfg. Company Ltd. [(1972) 42 Comp Cas 145 (Bom.)] it has been submitted that a scheme of amalgamation even when open to criticism should ordinarily be sanctioned as it reflects the commercial wisdom of the members / creditors. Relying on Flextronics Technologies (India) P. Ltd., In Re. [(2011) 163 Comp Cas 289 (Mad)] it was submitted that even where a creditor meeting was not convened and the consent not obtain, as it did not mean that the scheme should not be scuttled as a whole. Sr. Counsel finally relied on Chembra Orchard Produce Ltd. & Ors. Vs. Regional Director of Company Affairs & Anr. [(2009) 2 SCC 547] wherein it was held that technical objections raised by the Regional Director should not be allowed to scuttle the scheme as a whole if there was substantial compliance with the provisions and requirement under Section 391-394 of the Act of 1956.
I am of the considered view that even within the limits of the scrutiny of this Court on an application for grant of sanction or approval to a scheme of arrangement/demerger agreed to by the shareholders of the company, this petition under Section 391 to 394 of the Act of 1956 is liable to fail. The meeting of the members of the petitioner-Company on 09.11.2012 as directed by this Court under its order dated 04.10.2012 did not have the requisite five members present and instead only four members being so. It was thus without a quorum. It is indeed true that in terms of Rule 69 of the Rules of 1959, the Company Court convenes the meetings inter alia of the shareholders of the company and can issue direction with regard to the manner of the conduct of such meeting including its quorum. Yet where the Company Court does not determine the quorum of the meeting, the said issue cannot be left to the discretion of the members of the company but will have to be governed by provisions of the Companies Act, 1956 as applicable. In the instant case, the Company Court in its order dated 04.10.2012 did not set out the number of members who/which would constitute a quorum at the shareholders meeting. It was therefore necessary that a quorum with five members was constituted at the said meeting in terms of Section 170(2)(b) read with Section 174(1) of the Act of 1956. In my considered opinion, a reading of the aforesaid two sections together indicates that a general meeting of a public limited company is equated to other meetings of the company including meetings of its members or any class thereof inter alia on the issue of a quorum unless otherwise provided for under the Articles of Association of the Company concerned. It is not in dispute that the Articles of Association of demerged company had no provision with regard to quorum for meeting of members of the company but only a provision (Article 70) for a quorum for a general meeting. In these circumstances, it was mandatory that any meeting of the members of the company convened by the Court had a quorum of five members present at the meeting. In the case of Subhiksha Trading Services Limited (Supra), on which reliance was placed upon by Mr. Paras Kuhad, the Hon'ble Madras High Court indeed held that the Act of 1956 maintains a clear distinction between the general meeting and meeting of any class of members and while it is not permissible for a company in its articles to provide anything to the contrary than what is provided in Section 171 to 186, in so far as general meetings of the company are concerned, it was certainly permissible for a company to modify the provisions and determine the issue of manner and conduct of the meetings of any class of members concerned and so provide in its Articles. It was held that therefore the prescription of a quorum of two members under Articles of Association of the Company even if contrary to Section 170(1)(i), in so far as meetings other than general of the company were concerned, was in tune with Section 170(2)(b) and Section 174(1) of the Act of 1956. What follows from the decision in the case of Subhiksha Trading Services Limited (Supra) therefore is that where no modification with regard to the meeting of a class of members is evident from the Articles of Association of a company, the said meetings would be governed by the provisions of Section 174 of the Act of 1956 as mandated by the plain language of Section 170(2)(b) of the Act of 1956. Therefore in the present case, the Company Court in its order dated 04.10.2012 not having specified any quorum for the meeting of the members of the petitioner Company, the meeting of such members to be valid was required to have a quorum of five members. The quorum being absent in the meeting of 09.11.2012 with only four members being present, its resolution approving the scheme of arrangement/demerger of the GPF Division of the demerged Company and its transfer to the resulting company cannot be construed as a valid resolution and based thereon the scheme cannot be sanctioned as sought by this petition. In coming to this conclusion, I am not inclined to follow the judgment of the Hon'ble Gujarat High Court in the case of Paraan Ltd. (Supra) also relied upon by Shri Paras Kuhad for the reason that even though the issue of invalidity of a meeting of members of a company for lack of quorum of five members was raised, it was not addressed by the Hon'ble Gujarat High Court while sanctioning the scheme. No ratio on the issue is therefore at all evident from the judgment which can have any persuasive value/effect on this Court. I also do not find any force in the submission of the Sr. Counsel based on German Remedies Ltd. (Supra) that this Court should not take a pedantic and strict view with regard to the manner of the meeting of members of the demerged company on 09.11.2012 but instead a liberal one and where substantial compliance is found and the scheme approved by the majority of shareholders present with over 90% majority in shareholding value and nothing contrary to public interest, unfair or unconscionable is found, the scheme should be approved. For rejecting the contention, reference can be made to the judgment of Miheer H. Mafatlal (Supra) wherein the Hon'ble Supreme Court has held that a sanctioning court has to ensure that the requisite statutory procedure for supporting a scheme has been complied with and the requisite meetings as contemplated by Section 391(1)(a) of the Act of 1956 have been held. The non-availability of a quorum of the members' meeting of the demerged company was not a mere irregularity where the doctrine of substantial compliance would operate, but a statutory infraction, an illegality which bears a nullity on its head. Similarly reliance placed on the judgment of Flextronics Technologies (India) P. Ltd. (Supra) is also of no avail. From the reading thereof, no principle can be culled out nor a ratio deduced relevant to the issue which has been agitated by the counsel for the O.L. and has engaged the attention of this Court.
The upshot of the said discussion is that the sanction of the scheme purportedly approved by the shareholders of the petitioner-Company (as also the creditors) in the meetings of 09.11.2012 cannot be granted by this Court.
On this view of the matter, I am of the considered view that addressing the other objections of the O.L. to the approval / sanction of the scheme of arrangement/demerger as agitated and contested by the Sr. Counsel of the petitioner Company would be an exercise in redundancy. The objections are therefore not being addressed.
In the circumstances, detailed hereinabove, I would dismiss the petition.
Accordingly Dismissed.
(ALOK SHARMA), J MS/-
All corrections made in the judgment/order have been incorporated in the judgment/order being emailed.- Manoj Solanki, P.A