National Company Law Appellate Tribunal
Hotel City Plaza Private Limited vs Nirma Limited." Reported In 2007 Scc ... on 16 January, 2023
NATIONAL COMPANY LAW APPELLATE TRIBUNAL
AT CHENNAI
(APPELLATE JURISDICTION)
Company Appeal (AT) (CH) No. 28 of 2021
Under Section 421 of the Companies Act, 2013 read with Rule 22 of
the National Company Law Appellate Tribunal Rules, 2016
(Arising out of the `Order' dated 05.02.2021 in
TCAA/4/KOB/2019 & TCAA/5/KOB/2019, passed by the
(`National Company Law Tribunal', Kochi Bench)
In the matter of:
Hotel City Plaza Private Ltd.
Having its Registered Office at
Door No. 19 / 315 - T,
City Plaza, Central Bazaar,
Manjeri, Malapuram - 676121 ..... Appellant No.1 / Applicant in
TCAA/4/KOB/2019/Petitioner/
Transferor Company
Trivandrum Apollo Towers Pvt. Ltd.
Having its Registered Office at
Door No.XIX / 315-U,
City Plaza, Central Bazaar,
Manjeri, Malapuram - 676121 ..... Appellant No.2 / Applicant in
TCAA/4/KOB/2019/Petitioner/
Transferee Company
v.
Union of India
Through Office of Regional Director
Southern Region,
Ministry of Corporate Affairs,
5th Floor, Shastri Bhawan,
26, Haddows Road,
Chennai - 600006 ..... Respondent / Respondent
Present:
For Appellants : Dr. K.S. Ravichandran,
Practising Company Secretary
For Ms. Manjula Devi, Advocate
For Respondent : Mr. Avinash Krishnan Ravi, Advocate
Comp. App (AT) (CH) No. 28 of 2021
Page 1 of 44
JUDGMENT
(Virtual Mode) Justice M. Venugopal, Member (Judicial):
Introduction:
Company Appeal (AT) (CH) No. 28 of 2021 :
The `Appellants / Petitioners', have preferred the instant Comp.
App (AT) (CH) No. 28 of 2021, before this `Tribunal', as an `Aggrieved Persons', in respect of the `impugned order' dated 05.02.2021, in TCAA/4/KOB/2019 & TCAA/5/KOB/2019 (Filed under Section 391 -
394 of the Companies Act, 1956), by the `Appellants / Petitioners', passed by the `National Company Law Tribunal', Kochi Bench, in dismissing the `Applications'.
2. The `National Company Law Tribunal', Kochi Bench, while passing the `impugned order' dated 05.02.2021 in TCAA/4/KOB/2019 & TCAA/5/KOB/2019, wherein, inter alia at Paragraphs 18 to 20, had observed the following:
18. ``This Tribunal heard the arguments advanced by Shri Pranoy Harilal, learned counsel for the petitioners / applicants and gone through the report submitted by the Registrar of Companies, Kerala. The Registrar of Companies has stated that the Regional Director, Ministry of Corporate Affairs, who is the competent authority in the matter, has strongly objected to the Scheme of amalgamation submitted by the petitioner companies for the reasons that the companies have violated Section 74(1)(b) of the Comp. App (AT) (CH) No. 28 of 2021 Page 2 of 44 Companies Act, 2013 by retaining amounts of Rs.17,50,000/-
accepted from Sri Mohammed Kasim Varikkodan, a Director of the transferor company during the year 2014-15 as also Rs.15,00,000/- from Sri Ibrahim Kutty another Director of the transferor company during the year 2015-16. In the Board report for 2014-15 and 2015-16 the company has not made disclosure regarding acceptance of deposits of the aforesaid two amounts from the said Directors violating the provisions of Section 73 of the Companies Act, 2013. They have violated the new provisions of Sections 73 to 76A prohibiting the private limited companies from accepting or renewing any deposits from shareholders in excess of the aggregate of the paid up capital, free reserves and securities premium amount. However, the companies have not disclosed in the Notes to the Financial Statements for the financial year coming after 1 st April 2014, the figure of such amount. The transferor company has not uploaded the Notes forming part of the accounts in the MCA portal from 31.3.2014 to 31.3.2019. The said amount collected from the shareholders have been retained by the Transferor company without replaying them with a period of three years under Section 74 of the Act on the due dates as per the terms of acceptance, which is violation of Section 74(1)(b) of the Companies Act. The transferor company has not furnished the required information with respect to deposits received and retained by the Transferor company from the shareholders since 1.4.2014 to 31.3.2019 resulting violation of Section 74 read with companies (Acceptance of Deposits) Rules, 2014, as amended. The transferor company accepted deposits from outside parties, which was not disclosed in the Balance Sheet as on 31.3.2016 but misleading facts were stated that it was received from parties stating it as Long Term Borrowings. The amount outstanding unsecured loans / deposits is over Rs. 14 crores as compared to share capital of around Rs. 2.5 crores is violation of Section 448 of the Companies Act. Similar violations were committed by the Transferee company also. Even though the petitioners filed a counter to the report of Registrar of Companies denying the allegations regarding violation of Sections 73 or 74 of the Companies Act, they simply stated that they are not valid grounds for objecting the proposed scheme of Comp. App (AT) (CH) No. 28 of 2021 Page 3 of 44 amalgamation. Their further submission is that prior to 15.9.2015, there was no requirement to disclose the details of the money accepted from the Directors in the Board's report. However, they stated that an inadvertent omission occurred on the part of the company which resulted in the non-disclosure of the details of loans received from the Directors and that the company has not accepted any deposits within the meaning of term as defined under Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014.
19. In order to see whether on the basis of the objections raised by the Regional Director, Ministry of Corporate Affairs, pointing out various lapses on the part of the petitioner companies, this Tribunal refers to a decision of the coordinate Bench of this Tribunal at Mumbai in the case of UFO Moviez India Limited and another - C.P. (CAA) No./1920/MB/2018 in C.A. (CAA) No. 120 of 2018, wherein even though the facts are different, the question whether based on the report of the Regional Director, the relief for sanction of amalgamation can be rejected has been answered. The Mumbai Bench in that case held as under:-
``It is not that this Bench is against any business combinations, mergers or any proposition that would make the investors, promoters and shareholders more and more profitable. In fact, we welcome it. But at the same time, one must be humble and serious enough to abide by law and any proposition of business must be planned in such a manner that no law, logic and rights of any person are violated. There may be some repetitions which we are conscious of but the same is done to emphasize on various viewpoints differently. In the present case on hand, the Petitioners, underestimating the prudence and ability of the system, made an intelligent attempt to test the depth of the water by flouting various laws, but unfortunately they tested the depth with both the legs and the result is that the Scheme gets doomed for their own misadventure.
Comp. App (AT) (CH) No. 28 of 2021 Page 4 of 44 Therefore, we hereby dismiss the Company Petition. There shall be no order as to costs.''
20. On going through the report of the Registrar of Companies, it is seen that both companies have violated the provisions of the Companies Act and the petitioners could not successfully controvert the objections raised by the Regional Director. They have not followed most of the provisions of the Companies Act, which are mandatory for continuance of a company honestly. They must be humble and serious enough to abide the law and any proposition of business must be planned in such a manner that no law, logic and rights of any person are violated. Hence this Tribunal is of the opinion that this is not a fit case to sanction the Scheme of Amalgamation.'' and dismissed the `Applications'.
Appellants' Pleas:
3. The Learned Practising Company Secretary for the `Appellants' contends that the `Tribunal', while passing the `impugned order' dated 05.02.2021, had incorrectly, rejected the `Scheme', resting upon the `Objections', raised by the `Respondent', averring that certain `Violation of Law', in regard to some transactions, that took place, during the year 2014-15.
4. It is represented on behalf of the Appellants that a mere perusal of the contents of the `Report' dated 17.09.2020, filed by the `Registrar of Companies, makes it clear that it speaks about `unsecured loans', Comp. App (AT) (CH) No. 28 of 2021 Page 5 of 44 accepted by the `Transferor Company', from `individuals', who became `Members', later to the `Date of Acceptance of the Unsecured Loans'.
5. Also, it was mentioned in the `Report' that `Unsecured Loans', given by the `Directors' of the `Company', are not backed up by a `Declaration' that the `money' they had lent to the `Company', was their own money. Moreover, it was pointed out in the said `Report', about the lack of `disclosures', in the `Financial Statements', `Particulars of Unsecured Loans', accepted by the `Company'.
6. The Learned PCS for the Appellants, brings to the notice of this `Tribunal', that the `1st Appellant / Transferor Company', is the `Petitioner / Applicant' in TCAA/4/KOB/2019 & Appellant No. 2 / Transferee Company is the Applicant in TCAA/5/KOB/2019 in the Application filed before the `National Company Law Tribunal', Kochi Bench. In these two `Applications', the `Appellants / Petitioners', had sought a `relief', in sanctioning a `Scheme of Amalgamation' of the `Appellant No. 1 / Transferor Company', with the `Appellant No.2 / Transferee Company', within the meaning of Sections 230 and 232 of the Companies Act, 2013, read with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (the Rules).
Comp. App (AT) (CH) No. 28 of 2021 Page 6 of 44
7. It is pointed out on behalf of the Appellants, that the aforesaid Applications, were filed initially, before the `Hon'ble High Court of Kerala', in Company Petition Nos. 36 and 38 of 2016, praying for `Sanction of Scheme of Amalgamation' of the `Appellant No. 1 / Transferor Company' with `Appellant No. 2 / Transferee Company'. After the `Constitution of National Company Law Tribunal', the `Hon'ble High Court of Kerala', had transferred the abovementioned Company Petitions, as per Order dated 13.03.2017 to the `National Company Law Tribunal', Chennai Bench, where it was numbered as TP(HC)/ 112 & 113 (Kerala)/2019. Later, after the `National Company Law Tribunal', Kochi Bench, came into existence, the matter was transferred to the `Tribunal', Kochi Bench, and they were renumbered as `TCAA 4 & 5/KOB/2019'.
8. According to the Appellants, the `Appellant Companies', were formed with the purpose of `establishing and running Hotel business and Restaurants'. In fact, the `Scheme' proposes the `Amalgamation' of `Appellant No. 1 / Transferor Company', with the `Appellant No. 2 / Transferee Company', and further seeks approval of the `Tribunal', to `dissolve' the `Appellant No. 1 / Transferor Company', without a `winding up', in lieu of `Amalgamation', of the entire undertaking of the `Appellant No. 1 / Transferor Company', with the `Appellant No. 2 / Transferee Company', on a going concern basis.
Comp. App (AT) (CH) No. 28 of 2021 Page 7 of 44
9. The Learned PCS for the Appellants, submits that the `Scheme of Amalgamation', had set out the major benefits flowing from the `proposed Amalgamation', and inter alia, it has been clearly explained that the `Scheme of Amalgamation', is proposed for the better, efficient and economical management, control and running of their business, achieve synergies in business activities, attaining economies of scale, for further development and growth of the business of the `Transferee Company', and to avoid and eliminate unnecessary duplication of the `Transferee Company' and distribution, etc., and for administrative convenience.
10. The Learned PCS for the Appellants takes a stand that the `Tribunal', had rendered a finding that the `purported breach of the provisions of the Companies Act, 2013', are fatal to the `Approval of Scheme of Amalgamation'.
11. On behalf of the Appellants, it is submitted before this `Tribunal', that the `Tribunal', had failed to `appreciate', that the `Scheme' was `Approved', by the `Shareholders', `Secured Creditors' and `Unsecured Creditors' of both the Companies, and that the `Notice' of the `Meetings', as well as the `Petitions', were published in `Mathrubhumi' Newspaper in `Malayalam' Language and in the `New Indian Express' (English Language), having wide circulation.
Comp. App (AT) (CH) No. 28 of 2021 Page 8 of 44
12. The other submission of the Appellants is that, the `Tribunal', had failed to `appreciate' the ambit of its jurisdiction, under Section 230 & 232 of the Companies Act, 2013.
13. It is the forceful submission of the Appellants that, just because, there is an `allegation of commission of an offence', against the provisions of the Companies Act, 2013, the `Scheme of Arrangement', is not to be `rejected'.
14. It is the version of the Appellants, a mere glance of the documents and records, will exhibit that the whole process, contemplated under the Companies Act, 2013 and the Rules were satisfied and all requirements were complied with. Furthermore, by virtue of the `Amalgamation', there shall be an `impetus' and `increase', in the `area of operations' of the `2 nd Appellant / Transferee Company', apart from the `reduction in costs'.
15. On behalf of the Appellants, it is projected before this `Tribunal' that the `Amalgamation', shall result in the combination of manpower of both the Companies and a `single management structure' for the `Companies'. Added further, the combined managerial and technical expertise, will enable the `2nd Appellant / Transferee Company', to develop a business model, that would be `competitive' and `cogent'. Comp. App (AT) (CH) No. 28 of 2021 Page 9 of 44
16. The Learned PCS for the Appellants contends that there is nothing in the `Scheme', which aims to achieve anything `fraudulent' or `hidden' or which may result in `violation' of any `Law', for the time being in force. Although the Companies are not facing any `investigation' or `winding up proceedings'. In fact, both the Companies have filed their `Income Tax Returns', `Statutory Returns', and there is no `Default', in this regard.
17. The Learned PCS for the Appellants points out that the both the Companies are closely held `Private Companies', and they are `Operating', `Functional', and have `Valuable Physical Assets', `Human Resources' and `Valuable Licences', to run their Hotels and Restaurants.
18. While summing up, the Learned Practising Company Secretary for the Appellants, prays for `allowing' the `Appeal', by setting aside the `impugned order' dated 05.02.2021, passed by the `Tribunal', in TCAA/4/KOB/2019 & TCAA/5/KOB/2019.
Appellants' Citations:
Hon'ble Supreme Court's Decisions:
19. On behalf of the Appellants, the Learned PCS for the Appellants, refers to the decision of the Hon'ble Supreme Court of India, in Miheer H Mafatlal v Mafatlal Industries Limited (Majumdar, J.), vide Civil Appeal Comp. App (AT) (CH) No. 28 of 2021 Page 10 of 44 No. 11879 of 1996 dated 11.09.1996, (1997) 1 SCC 579, at Spl Pgs.: 597 to 602, wherein at paragraph 29, it is observed as under:
29. ``However further question remains whether the Court has jurisdiction like an appellate authority to minutely scrutinise the scheme and to arrive at an independent conclusion whether the scheme should be permitted to go through or not when the majority of the creditors or members or their respective classes have approved the scheme as required by Section 391 sub-section (2).
On this aspect the nature of compromise or arrangement between the company and the creditors and members has to be kept in view. It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the Court. The Court certainly would not act as a court of appeal and sit in judgment over the informed view of the parties concerned to the compromise as the same would be in the realm of corporate and commercial wisdom of the parties concerned. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the Scheme by the requisite majority. Consequently the Company Court's jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts like an umpire in a game of cricket who has to see that both the teams play their game according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire. The supervisory jurisdiction of the Company Court can also be culled out from the provisions of Section 392 of the Act which reads as under :
"392, (1) Where a High Court makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company, it -
(a) shall have power to supervise the carrying out of the compromise or arrangement ; and
(b) may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or thereafter, give such modifications in the compromise or arrangement as it may consider Comp. App (AT) (CH) No. 28 of 2021 Page 11 of 44 necessary for the proper working or the compromise or arrangement.
(2) If the Court aforesaid is satisfied that a compromise or arrangement sanctioned under section 391 cannot be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company, and such an order shall be deemed to be an order under Section 433 of this Act.
(3) The provisions of this section shall, so far as may be, also apply to a company in respect of which an order has been made before the commencement of this Act under section 153 of the Indian Companies Act, 1913 (7 of 1913), sanctioning a compromise or an arrangement."
Of course this Section deals with post-sanction supervision. But the said provision itself clearly earmarks the field in which the sanction of the Court operates. It is obvious that the supervisor cannot ever be treated as the author or a policy-maker. Consequently the propriety and the merits of the compromise or arrangement have to be judged by the parties who as sui juris with their open eyes and fully informed about the pros and cons of the Scheme arrive at their own reasoned judgment and agree to be bound by such compromise or arrangement. The Court cannot, therefore, undertake the exercise of scrutinising the scheme placed for its sanction with a view to finding out whether a better scheme could have been adopted by the parties. This exercise remains only for the parties and is in the realm of commercial democracy permeating the activities of the concerned creditors and members of the company who in their best commercial economic interest by majority agree to give green signal to such a compromise or arrangement. The aforesaid statutory scheme which is clearly discernible from the relevant provisions of the Act, as seen above, has been subjected to a series of decisions of different High Courts and this Court as well as by the Courts in England which had also occasion to consider schemes under pari materia English Company Law. We will briefly refer to the relevant decisions on the point. But before we do so we may also Comp. App (AT) (CH) No. 28 of 2021 Page 12 of 44 usefully refer to the observations found in the oft-quoted passage in Buckley on the Companies Act, 14th Edn. They are as under:
"In exercising its power of sanction the Court will see, first that the provisions of the statute have been complied with, second, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interest adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.
The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interest of the class which it is empowered to bind, or some blot is found in the Scheme."
In the case of Alabama, New Orleans, Texas and Pacific Junction Railway Company reported in (1891) 1 Ch 213:
(1886-90) All ER Rep Ext 1143, the relevant observations regarding the power and jurisdiction of the Company Court which is called upon to sanction a scheme of arrangement or compromise between the company and its creditors or shareholders were made by Lindley, L.J. as under:
"What the court has to do is to see, first of all, that the provisions of that statute have been complied with; and, secondly, that the minority has been acting bona fide. The court also has to see that the minority is not being overriden by a majority having interests of its own clashing with those of the minority whom they seek to coerce. Further than that, the Court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing scheme Comp. App (AT) (CH) No. 28 of 2021 Page 13 of 44 laid before them in the interests of those whom they represent, take a view which can reasonably be taken by businessmen. The court must look at the scheme, and see whether the Act has been complied with, whether the majority are acting bona fide, and whether they are coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and then see whether the scheme is a reasonable one or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve it."
To a similar effect were the observations of Fry, L.J., which read as under:
"The next enquiry: is Under what circumstances is the court to sanction a resolution which has been passed approving of a compromise or arrangement? I shall not attempt to define what elements may enter into the consideration of the Court beyond this, that I do not doubt for a moment that the Court is bound to ascertain that all the conditions required by the statute have been complied with; it is bound to be satisfied that the proposition was made in good faith; and, further, it must be satisfied that the proposal was at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it. What other circumstances the court may take into consideration I will not attempt to forecast."
In Anglo-Continental Supply Co. Ltd. Re. (1922) 2 Ch. 723; 91 LJ Ch 658, Ashtury, J., a century later reiterated the very same propositions as under:
"Before giving its sanction to a scheme of arrangement the court will see firstly that the provisions of the statute have been complied with; secondly that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the Comp. App (AT) (CH) No. 28 of 2021 Page 14 of 44 minority in order to promote interests adverse to those of the class whom they purport to represent; and, thirdly, that the arrangement is such as a man of business would reasonably approve."
The Learned Single Judge of the Calcutta High Court in the case of Mankam Investments Ltd. Re. 3 (1995) 4 Comp LJ 330 (Cal) relying on a catena of decisions of the English Courts and Indian High Courts observed as under on the power and jurisdiction of the Company Court which is called upon to sanction a scheme of merger and amalgamation of companies.
"It is a matter for the shareholders to consider commercially whether amalgamation or merger is beneficial or not. The court is really not concerned with the commercial decision of the shareholders until and unless the court feels that the proposed merger is manifestly unfair or is being proposed unfairly and / or to defraud the other shareholders. Whether the merged companies will be ultimately benefitted or will be able to economise in the matter of expenses is a matter for the shareholders to consider. If three Companies are amalgamated, certainly, there will be some economies in the matter of maintaining accounts, filing of returns and various other matters. However, the court is really not concerned with the exact details of the matter and if the shareholders approved the scheme by the requisite majority, then the court only looks into the scheme as to find out that it is not manifestly unfair and / or is not intended to defraud or do injustice to the other shareholders.'' We may also in this connection profitably refer to the judgment of this Court in the case of Employees' Union v. Hindustan Lever Ltd. 1995 Supp (1) SCC 499 wherein a Bench of three learned Judges speaking through Sen, J. on behalf of himself and Venkatachaliah, CJ., and with which decision Sahai, J., concurred Sahai, J., in his concurring judgment in the aforesaid case has made the following pertinent observations in this connection in the Report :
(SCC pp. 506 - 08, paras 3 - 6) Comp. App (AT) (CH) No. 28 of 2021 Page 15 of 44 "But what was lost sight of was that the jurisdiction of the Court in sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical test. A company court does not exercise an appellate jurisdiction.
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 and 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 of "prudent business management test" or that the scheme should not be a device to evade law. But when the court is concerned with a scheme of merger with a subsidiary of a foreign company then the test is not only whether the scheme shall result in maximising profits of the shareholders or whether the interest of employees was protected but it has to ensure that merger shall not result in impeding promotion of industry or shall not result in impeding promotion of industry or shall obstruct growth of national economy. Liberalised economic policy is to achieve this goal. The merger, therefore, should not be contrary to this objective. Reliance on English decisions Hoare & Co. Ltd. Re 1933 All ER Rep 105, Ch. D and Bugle Press Ltd. Re. 1961 Ch 270 (1960) I All ER 768.(1960) 2 WLR 658 that the power of the court is to be satisfied only whether the provisions of the Act have been complied with or that the class or classes were fully represented and the arrangement was such as a man of business would reasonably approve between two private companies may be correct and may normally be adhered to but when the merger is with a subsidiary of a foreign company then economic interest of the country may have to be given precedence. The jurisdiction of the court in this regard is comprehensive."
Comp. App (AT) (CH) No. 28 of 2021 Page 16 of 44 Sen, J. speaking for himself and Venkatachaliah, CJ., also towed the line indicated by Sahai, J., about the jurisdiction of the Company Court while sanctioning the Scheme and made the following pertinent observations: (SCC p. 528, para 84) "An argument was also made that as a result of the amalgamation, a large share of the market will be captured by HLL. But there is nothing unlawful or illegal about this. The Court will decline to sanction a scheme of merger, if any tax fraud or any other illegality is involved. But that is not the case here. A company may, on its own, grow up to capture a large share of the market. But unless it is shown that there is some illegality or fraud involved in the scheme, the Court cannot decline to sanction a scheme of amalgamation. It has to be borne in mind that this proposal of amalgamation arose out of a sharp decline in the business of TOMCO. Dr Dhavan has argued that TOMCO is not yet a sick Company. That may be right, but TOMCO at this rate will become a sick Company, unless something can be done to improve its performance. In the last two years, it has sold its investments and other properties. If this proposal of amalgamation is not sanctioned, the consequence for TOMCO may be very serious. The shareholders, the employees, the creditors will all suffer. The argument that the Company has large assets is really meaningless. Very many cotton mills and jute mills in India have become sick and are on the verge of liquidation, even though they have large assets. The Scheme has been sanctioned almost unanimously by the shareholders, debenture-holders, secured creditors, unsecured creditors and preference shareholders of both the Companies. There must exist very strong reasons for withholding of sanction to such a scheme. Withholding of sanction may turn out to be disastrous for 60,000 shareholders of TOMCO and also a large number of its employees.'' In view of the aforesaid settled legal position, therefore, the scope and ambit of the jurisdiction of the Company Court Comp. App (AT) (CH) No. 28 of 2021 Page 17 of 44 has clearly got earmarked. The following broad contours of such jurisdiction have emerged:
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 the 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 concerned applicant 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 Comp. App (AT) (CH) No. 28 of 2021 Page 18 of 44 bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising of 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. The aforesaid parameters of the scope and ambit of the jurisdiction of the Company Court which is called upon to sanction a scheme of compromise and arrangement are not exhaustive but only broadly illustrative of the contours of the Court's jurisdiction.''
20. In the decision of the Hon'ble Supreme Court of India in Hindustan Lever & Anr. v. State of Maharashtra & Anr. (vide Civil Appeals No. 8232 of 1996 with Nos. 8231, 9237 and 10208 of 1996, dated 18.11.2003, reported in (2004) 9 SCC 438, at Spl Pgs: 456 & 457, wherein at Paragraphs 31 & 32, it is observed as under:
Comp. App (AT) (CH) No. 28 of 2021 Page 19 of 44
31. ``Learned counsel for the appellants argued that the Ruby Sales and Services (P) Ltd., (supra) was a case of consent decree where the term of the settlement was admittedly a conveyance, transferring property alone. That the order passed by the High Court under Section 394 of the Companies Act cannot be equated with a consent order. This submission cannot be accepted. The Court held that consent decree was an instrument. It was not held to be an instrument because it was a consent decree. It was held to be an instrument because it conveyed the title in the property in dispute from the defendant to the plaintiff. It was held to be an instrument because it had the effect of conveying the title and not because it was a consent decree. Once this definition is kept in view, it would be clear that consent or no consent when the decree or order of the Court purports to transfer title in the property, it becomes an instrument. The Court negatived the submission made that prior to introduction of Section 2(g)(iii) the consent decree was not included in the definition of "conveyance" and "instrument" by observing (SCC p. 535, para 15) ``it appears to us that the amendment was made out of abundant caution and it does not mean that the consent decree was not otherwise covered''. It clearly shows that the Court was of the opinion that consent decree which purports to convey the title in the property was in an instrument liable for stamp duty at all times and it was only by way of abundant caution that the legislature had included the consent decree in the definition of the word "conveyance".
32. In view of the aforesaid discussion, we hold that the order passed by the Court under Section 394 of the Companies Act is based upon the compromise between two or more companies.
Function of the Court while sanctioning the compromise or arrangement is limited to oversee that the compromise or arrangement arrived at is lawful and that the affairs of the company were not conducted in a manner prejudicial to the interest of its members or to public interest that is to say, it should not be unfair or contrary to public policy or unconscionable. Once these things are satisfied the scheme has to be sanctioned as per the compromise arrived at between the parties. It is an instrument Comp. App (AT) (CH) No. 28 of 2021 Page 20 of 44 which transfers the properties and would fall within the definition of Section 2 (1) of the Bombay Stamp Act which includes every document by which any right or liability is transferred. The State Legislature would have the jurisdiction to levy stamp duty under Entry 44, List III of the Seventh Schedule of the Constitution of India and prescribe rates of stamp duty under Entry 63, List II.'' Hon'ble High Court's Decisions:
21. In the decision of the Hon'ble Gujarat High Court in Re. Navjivan Mills Co. Ltd. v. Unknown (decided on 11.09.1970), reported in India Kanoon, wherein at Paragraph 55, it is observed as under:
55. ``I should now like to give my reasons why I had accorded sanction to the scheme. As stated at the outset, the court, before according its sanction to the scheme of compromise and arrangement, must be satisfied that the provisions of the statute have been complied with; that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. That is the well recognised approach of the court to a scheme of compromise and arrangement. The scheme should not be examined in the way a carping critic, a hairsplitting expert, a meticulous accountant or a fastidious counsel would do it. It must be tested from the point of view of an ordinary reasonable shareholder acting in a businesslike manner taking within his comprehension and bearing in mind all the circumstances prevailing at the time when the meeting was called upon to consider the scheme in question (vide In re Sidhpur Mills Co. Ltd.). At no stage a dispute was raised that the provisions of the statue have not been complied with by the Comp. App (AT) (CH) No. 28 of 2021 Page 21 of 44 petitioner before coming to the court under section 391(1) and after the meetings were convened and the scheme was approved under section 391(2). At no stage a dispute has been raised before me, now that the scheme has been very meticulously examined by the officer of the Central Government that even by a remote chance any provision of the statute was not complied with. The next question is whether the class was fairly represented. I should like to point out that because of the radical change made by Kohinoor in the ratio of ordinary shares, the meeting of the ordinary shareholders of Navjivan had to be called twice. At the first meeting of the ordinary shareholders, out of a total 45,000 equity shares, 41,710 shares were represented and the holders of the same voted in favour of the scheme. At the second meeting of ordinary shareholders, out of 45,000 shares, 40,132 shares were represented and the altered ratio was also unanimously voted upon, the reasons for which are not far to seek and to which I would presently advert.
At the meeting of preference shareholders, out of the total of 7,000 preference shares, 4,144 shares were represented and the scheme was approved unanimously. At the meeting of unsecured creditors who were depositors and holders of loan accounts, out of a total debt under this head of Rs. 25,72,374, creditors, the value of those deposits was Rs. 24,92,280 attended and unanimously approved the scheme. At the meeting of unsecured creditors who were suppliers of stores, etc., out of the total value of debt of Rs. 29,75,556 affirmative voting represented debt worth Rs. 18,18,370 and the negative voting represented the debt in the value of Rs. 1,22,575. These figures would at a glance show that the classes were fairly represented and the scheme has been approved by an overwhelming majority far above the statutory majority. The last question is whether the scheme is fair and reasonable one which a man protecting his commercial interest and guided by reasonable expectation would approve. I need not dwell upon this aspect because the creditors and shareholders of Navjivan had hardly any choice. If one can say that between getting nothing and getting something there was a choice then there was of course a choice to get something. The position of the shareholders and especially the shareholders of Navjivan becomes apparently discernible from two Comp. App (AT) (CH) No. 28 of 2021 Page 22 of 44 important events that occurred during the progress of the scheme when the ball passed from the court of Navjivan to Kohinoor and was hit back with altered ratio. Initially the sponsors of the scheme, the Kohinoor company, suggested that the fair ratio looking to the financial evaluation of the structure of Kohinoor whose shares will be allotted in exchange for the shares of Navjivan compared with the evaluation of the assets and liabilities of Navjivan would be 1 :
30. Kohinoor being hard bargainers must have reached this conclusion after checking and re-checking the financial evaluation of the assets and liabilities of Navjivan and the benefits the shareholders of Navjivan would derive by allotment of one share of Kohinoor by surrendering thirty shares of Navjivan and the resultant benefit the Kohinoor will derive in converting the Navjivan into a wholly-owned subsidiary company of Kohinoor.
Somehow or other, the shareholders of Navjivan could persuade the sponsors to alter the ratio from 30 : 1 to 26 : 1. That to my mind represents the sound commercial judgment of the shareholders of Navjivan with regard to the value of their own shares. That would be a good starting point to assess the fairness and reasonableness of the scheme. When the matter went back to Kohinoor the ratio was altered from 26 : 1 not to 30 : 1 which was the initial proposition but to 40 : 1 and this evaluation of assets and liabilities of Navjivan was made by the shareholders of Kohinoor. The matter had to go back to Navjivan and on a direction of this court, a fresh meeting of the shareholders of Navjivan was convened. At this meeting nearly 90 per cent of the total shares were represented and unanimously voted in favour of this modification. If there is a choice as I would presently point out such as the workers have to choose between starvation and meager employment the same was the position of shareholders of Navjivan. I must also remember that, much though I may detest this imposition by the Kohinoor shareholders on the Navjivan shareholders leaving them little choice and freedom for manoeuvre, ultimately, the shareholders of Navjivan are the sound judges of their own interest and the support that they have extended to the scheme would indisputably indicate that they are people who have properly considered the whole thing and possibly reached a Comp. App (AT) (CH) No. 28 of 2021 Page 23 of 44 conclusion which represents their best judgment. Presumably, they must have honestly acted. There is no allegation of coercing the minority. There was not even a single dissenting vote. Therefore, despite my intense feeling that Kohinoor has almost dictated its terms to Navjivan I would accept the scheme as reasonable and fair one. At any rate, this narration by itself would effectively repel the contention of the Central Government that the interest of Kohinoor is jeopardised in the scheme. That, in my opinion, is begging the issue. Be that as it may, in the circumstances disclosed in the case, I would accept the judgment of the shareholders evidenced by the votes cast by the shareholders, both preference and ordinary, and unsecured creditors of Navjivan and would hold, keeping in view the huge majority the scheme has received, that the scheme is a reasonable and fair one and it is not oppressive of minority by majority. Then the question is whether the scheme is commercially sound. No question is raised doubting the same and as stated in this judgment at one stage the benefit of the assistance of Kohinoor and its technical know-how would now be available to Navjivan and I should think that this scheme can be worked. This mill can be rejuvenated and resuscitated. Finance is forthcoming as is evident from the arrangement made by Kohinoor with the Bank of India as per letter dated 21st August, 1970, at page 255 of the record.''
22. In the decision of the Hon'ble Bombay High Court, between Bank of India Ltd. v. Ahmedabad Manufacturing and Calico Printing Co. Ltd. (decided on 01.09.1971), reported in (1971) SCC Online Bom 11, wherein at Paragraph 15, it is observed as under:
15. ``It was not at all necessary for him to go further and state that section 391 cannot apply to a company which is in a sound financial condition. His observation to that effect is, in my opinion, therefore, nothing more than an obiter dictum and is not binding upon me. Moreover, I do not agree with the same. To accept that contention would mean, as Mr. Advani has rightly submitted, that Comp. App (AT) (CH) No. 28 of 2021 Page 24 of 44 two prosperous companies could never amalgamate for their mutual benefit, which is contrary to well-established law and practice. In my opinion, the definition in clause (a) of section 390 merely states that a company which seeks to resort to the provisions of the said chapter must be one which is "liable" to be wound up under the Act, and not that it should be one which is in such a financial condition as to be "capable" of being wound up under the Act. Mr. Sorabjee's contention based on definition in section 390(a) that the provisions of section 391 cannot apply to a transferee company, since it would be in a sound financial condition must, therefore, also stand rejected.''
23. In the decision of Hon'ble High Court of Bombay in Re. Niulab Equipment Co. Pvt. Ltd., reported in (2009) 91 SCL 387 (Bom), wherein at Paragraph 15, it is observed as under:
15. ``The mere fact of a violation of the provisions of Sections 235
- 351 by itself does not invalidate or warrant the Court refusing to sanction a scheme of arrangement under Sections 391 - 394, including a scheme of amalgamation. It is not every violation of these sections that disentitles a scheme being proposed or sanctioned. It is only those violations which adversely reflect upon or affect the scheme that would persuade the Court not to sanction the scheme. That Section 391(2) only requires the disclosure of all material facts to the Court, establishes this. If it were otherwise, Section 391, and in particular, Sub-section (2) thereof, would have been worded differently. The purport of Section 391(2) is that all the material facts relating to the company including the pendency of any investigation proceedings in relation to the company under Sections 235 - 351 and the like, ought to be disclosed to the Court in order to enable the Court to decide whether or not the scheme ought to be sanctioned in view of such facts. The manner of exercise of discretion would then depend upon the facts of each case.'' Comp. App (AT) (CH) No. 28 of 2021 Page 25 of 44 Appellate Tribunal's Decisions:
24. In the decision of this `Tribunal', in Mel Windmills Pvt. Ltd. v. Mineral Enterprises Limited & Anr. with Mel Properties Pvt. Ltd. v. Mineral Enterprises Limited & Anr., etc. (vide dated 27.05.2019), reported in (2019) SCC Online NCLAT 900, wherein at paragraph 7, it is observed as under:
7. ``Apart from what has been stated hereinabove, the pending issues could not be construed as an impediment in sanctioning the proposed scheme of demerger. It is so for more than one reason.
First being the case of Appellants - Petitioners before the Tribunal, that the demerger scheme proposed by the Appellants was not with regard to business of Mining which would continue with the Demerged Company and the pending investigation would continue unhindered against the Director of the Demerged Company without having any impact on the proposed scheme of demerger. Second, because pendency of investigation would not stand as a legal impediment in sanctioning the proposed scheme of demerger for any civil action or criminal proceedings in respect of past events/ transactions. In identical circumstances, the Hon'ble Gujarat High Court sanctioned the modified composite scheme of arrangement in terms of its judgment dated 1st March, 2007 rendered in Company Petition Nos. 9 and 10 of 2006 titled "Core Health Care Limited Vs. Nirma Limited." reported in 2007 SCC Online Guj 235. Relevant portion thereof reads as under:-
"89. From this judgment, it would be clear that the scheme can always be sanctioned subject to and without prejudice to the liability, if any, in the civil and criminal proceedings in respect of the past transactions. The argument of objectors that the scheme is vague and incomprehensible should not detain this court unnecessarily because the scheme is clear, nobody either raised an objection in the meetings held for Comp. App (AT) (CH) No. 28 of 2021 Page 26 of 44 the purpose or at the time of the discussion that the scheme was vague and incomprehensible. The liability, if any, of the board, directors, management, etc., in civil and criminal proceedings would continue, and I accordingly so order."
25. In the Judgment of this `Tribunal' dated 24.10.2019, in UFO Moviez India Limited & Anr. v. Union of India (vide Comp. App (AT) No. 48 of 2019), wherein, it is observed as under:
``The said order is under challenge in these Appeals. Director (Legal & Prosecutor), Ministry of Corporate Affairs appearing on behalf of 'Union of India'. He accepts that the ground given for rejection in the impugned order dated 21st January, 2019 were uncalled for and the Tribunal was only required to notice all the requirements of Section 230-232 of Companies Act. The Tribunal was also required to follow the Accounting Standard for the treatment of shareholders. However, it is expected that such Issue was not raised and were not discussed by the 'National Company Law Tribunal'.'' Respondent's Contentions:
26. According to the Learned Counsel for the Respondent, the `1st Appellant / Company', had collected `Deposits', from six Directors of the company and 76 number of shareholders of the `1 st Appellant / Company'. Moreover, according to the Respondent, on verification, it was found that `all the six Directors, were appointed, on dates, before giving `Loans', to the `1st Appellant / Company', and all the `Shareholders', who were given `Unsecured Loans', to the `1st Appellant / Comp. App (AT) (CH) No. 28 of 2021 Page 27 of 44 Company', are also the `Shareholders' of the `Company', as per `Register of Member', furnished by the `Company'.
27. It is represented on behalf of the `Respondent / Union of India', through the `Regional Director' (SR), Ministry of Corporate Affairs, Chennai, on `verification of the Ledgers and Registers', filed by the `Appellant Companies', that they had accepted `Unsecured Loans', only from the `Directors' of the `Company' from 01.04.2014, and the said `Loans' or `Exempted Deposits', in terms of Rule 2(i)(viii) of the Companies (Acceptance of Deposits) Rules, 2014.
28. It comes to be known that the `Appellant Companies', had submitted the `copy of the Declaration', secured from the `Directors' of the `Company', who had granted `Loan', to the `Company', as per the requirement of the Companyies (Acceptance of Deposits) Rules, 2014. Moreover, both the `Companies', had not accepted the `Unsecured Loans', from the `Shareholders' of the Company from 01.04.2014, onwards, after the introduction of the New Companies Act, 2013.
29. It is the version of the Respondent that the Companies are retaining the amount collected already from the `Shareholders', before the Companies Act, 2013. In this regard, as per Ministry's General Circular dated 30.03.2015 (vide No. 1/8/2003 - CL-V), it was clarified, that the Comp. App (AT) (CH) No. 28 of 2021 Page 28 of 44 `Sum' received by the `Private Company', before 01.04.2014, shall not be treated as Deposit, under the Companies Act, 2013 and in terms of Companies (`Acceptance of Deposits), Rules 2014. Therefore, both the `Company Directors', were deemed to be `disqualified', as per the ingredients of Section 164(2)(b) of the Companies Act, read with Rule 14(2) of Companies Appointment & Qualification of Directors Rule, 2014.
30. On behalf of the Respondent, the Learned Counsel representing the `Union of India', through `Regional Director', Ministry of Corporate Affairs, Chennai, adverts to Section 164 (2) (b) of the Companies Act, 2013, which reads as under:
``Section 164 (2) `No person who is or has been a director of a company which -
(a) has not filed financial statements or annual returns for any continuous period of three financial years; or
(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more, shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so:'' and proceeds to point out that the very aim / purpose of convening the Comp. App (AT) (CH) No. 28 of 2021 Page 29 of 44 `Board Meeting' of both the `Transferor' / `Transferee' company for `Merger', is an `invalid' one.
31. The Learned Counsel for the Respondent, brings it to the notice of this `Tribunal', that the `1st Appellant / Company', in the year 2013-14, had accepted `numerous Deposits', from as many as `100 Members', (including the Directors), and that `37 Members', out of 100, were `existing', as on 12.09.2013, the date prior to the `Notification' of the Companies Act, 2013, which permitted the `Private Companies', to `increase the Limit', on the `number of Members', from 50 to 200.
32. As a matter of fact, the `1st Appellant / Company', had shown in their record, that 63 more persons, from whom the `Deposits', were `accepted', became `Members', from 13.09.2013 to 31.03.2014.
33. Indeed, the `1st Appellant' / `Company', had manipulated the `records', to reflect that the `Sum' received from these `63 persons', as amount received from the `Members', with a view to `escape', from the `breach of the ingredients of Section 58A of the Companies Act, 1956'.
34. It is pointed out on behalf of the Respondent that the `1 st Appellant / Company', had filed two (2) PAS-3 forms on 26.08.2014 for allotments made on 27.03.2014 and 29.03.2014, each containing 49 new Comp. App (AT) (CH) No. 28 of 2021 Page 30 of 44 shareholders with a considerable delay, as seen from the `records', on verification.
35. Continuing further, it is projected on the side of the Respondent that, in both instances, the `Number of Shareholders' involved was 49', and it was the `methodology' of the `1st Appellant / Company', to first `accept' the `monies' from `outside parties', as `Unsecured Loans', and later, having realised the `non-adherence of Section 58A of the Companies Act, 1956', these `two allotments', were made to `circumvent' the provisions.
36. The Learned Counsel for the Respondent submits that the `Regional Director', Chennai, of the `Ministry of Corporate Affairs', had directed the `Registrar of Companies', Ernakulam, Kerala, to `examine', whether the `1st Appellant / Company', had amended the `Articles', increasing the limit on the `number of Members', from `50 to 200', and if so, whether a `Special Resolution', was passed and filed with the `Registrar of Companies', Ernakulam, within the time specified in `Law', and if there was any delay in filing `Special Resolution', it could be considered that the `1st Appellant / Company', had manipulated the `records', to reflect the `Sum' received from these `63 persons', as the `Sum' received from the `Members', with a view to `escape', from the `breach of Section 58A of the Companies Act, 1956', and the `date of Comp. App (AT) (CH) No. 28 of 2021 Page 31 of 44 receipt' of `Unsecured Loans' / `Deposits', from the persons, who had purportedly became `Members' of the `Transferor Company', on 27.03.2014 and 29.03.2014. That apart, the verification of `Bank Statement', ought to have been done to check whether the `Unsecured Loans / Deposits', brought in by the persons who became `Members' on 27.03.2014 and 29.03.2014, after the `Shares', were allotted to them, and not prior to that.
37. On behalf of the Respondent, it is pointed out before this `Tribunal' that the `1st Appellant / Company', had accepted from Mr. Mohammed Kasim Varikkodan, a `Director' of the `1st Appellant / Company' (in the year 2014-15), a `Sum' of Rs.17,50,000/-. Also that, the `1st Appellant / Company', in the year 2015-16, had accepted a `Sum' of Rs.15,00,000/- from Mr. Ibrahim Kutty, a `Director' of the `1st Appellant / Company'.
38. According to the Respondent, in terms of Rule 2 (1) (c) (viii) of the Companies (Acceptance of Deposits), Rules 2014, `any `Sum' received from the `Directors', will be exempted, only if a `Declaration', is furnished by such `Director', to the company that the amounts, so given were not `borrowed', from `Third Parties' (others) and that such `Disclosure', along with the `details of money', so collected, was made in the `Board's Report'. But, a glance of the `Board's Report' for the year 2014-15 and 2015-16, shows that such a `Disclosure', was not made, Comp. App (AT) (CH) No. 28 of 2021 Page 32 of 44 rendering `Acceptance of Deposits' of Rs.17,50,000/- and Rs.15,00,000/- from the said `Directors', which is in `negation of Section 73 of the Companies Act, 2013, for which, the company, is `liable to pay a minimum penalty of Rs. 1 Crore', and that the `Officer' in `Default', shall be `punishable' with `imprisonment', for a term of seven years or with `Fine', which shall not be less than Rs.25,00,000/-, but, which may extend to Rs.2 Crores. In effect, the submission of the Learned Counsel for the Respondent is that, the `Acceptance of the aforesaid Deposits', attracts the `Penal provision'.
39. The Learned Counsel for the Respondent comes out with a plea that the `1st Appellant / Company, had as much as Rs.10,53,48,359/- as `Outstanding Deposits', as on 31.03.2013 from the `Directors' and `Members', which had risen to Rs.14,44,85,889/-, as on 31.03.2014.
40. In reality, the new provisions Section 73 `Prohibition on acceptance of deposits from public', Section 74 `Repayment of deposits, etc., accepted before commencement of act', Section 75 `Damages for fraud', Section 76 `Acceptance of deposits from public by certain companies', Section 76-A `Punishment for contravention of section 73 or section 76', of the Companies Act, 2013, were notified, with effect from 01.04.2014, which `prohibited' the `Private Limited Companies', from `accepting' or `renewing', any `Deposits', from `Shareholders', in excess of the Comp. App (AT) (CH) No. 28 of 2021 Page 33 of 44 aggregate of the `Paid up Capital', `Free Reserves' and `Securities Premium Sum'.
41. The Learned Counsel for the Respondent points out that the `1 st Appellant / Company', had filed the `One Time DPT - 3', and also for the year ended 31.03.2019, wherein, it was observed that the `1 st Appellant / Company', had not `submitted the required information', especially, in respect of the `Deposits' received and retained', by the `1st Appellant / Company', from the `Shareholders', from 01.4.2014 to 31.03.2019, and thereby, there was a `violation' of `Section 74 of the Companies Act, read with Companies (Acceptance of Deposits) Rules, 2014, as amended.
42. The Learned Counsel for the Respondent takes a stand that from a perusal of the `Balance Sheet', from 2013-14, that it was mentioned that the `1st Appellant / Company', claimed to have accepted `Unsecured Loans', from `Outsiders', but now, it is `claiming' that these were all received from `Members'. More importantly, Note No. 5 of the `Balance Sheet', as on 31.03.2014, clearly mentions that the `1 st Appellant / Company', had accepted such `Deposits', from `Outside Parties'. The `Balance Sheet', as on 31.03.2015, Note No. 5 clearly spells out that the `1st Appellant / Company', raised `Unsecured Loans', from other `Parties'.
Comp. App (AT) (CH) No. 28 of 2021 Page 34 of 44
43. To be noted, the `Balance Sheet', as on 31.03.2016, in a significant manner, does not even make a `Disclosure' of the `Sums', outstanding as `Unsecured Loans', from `Outside Parties'. In fact, it makes a `Misleading Disclosures', that the `Loans and Advances', were received from the `Related Parties', as Note No. 3, under the caption `Long Term Borrowings'.
44. Besides the above, same kind of `Disclosures', were seen in the `Balance Sheet', as on 31.03.2017, 31.03.2018 and as well as on 31.03.2019. Because of the fact that the `Outstanding Loans / Deposits', so received, was over Rs.14 Crores, in comparison to that of the `Share Capital' of around Rs.2.5 Crores, this `Misleading Disclosure', is to be read as a `Material Misstatement', leading to the `violation' of Section 448 of the Companies Act, 2013 `Punishment for false statement', in regard to all these `Balance Sheets', which attracts the `Punishment for Fraud', under Section 447 of the Companies Act.
45. The Learned Counsel for the Respondent, brings it to the notice of this `Tribunal', that the `Regional Director' of the `Respondent', had observed that `similar breaches', committed by the `2nd Appellant / Company', and that the `objection', was placed by the `Regional Director', of the `Respondent', against the `Approval', being accorded to the `Scheme'.
Comp. App (AT) (CH) No. 28 of 2021 Page 35 of 44
46. Furthermore, the `Registrar of Companies', Ernakulam, was directed to examine the above issues, in `depth' / `detail', and `Show Cause Notices', were to be issued to the `1st Appellant', and the `2nd Appellant / Companies' and its `Officer(s)', in `Default', for the `breaches', committed and `explanations', were to be obtained from the said `Companies', and the same to be forwarded to the `Regional Director' of the `Respondent', for further consideration.
47. According to the Respondent, the `Registrar of Companies', Ernakulam, Kerala, had issued `Show Cause Notice(s)', to the `Companies' and its `Directors', and the same were acknowledged, but, `no replies', were sent by them, in this regard.
48. The Learned Counsel for the Respondent points out that the `Appellants', had not `adhered to', most of the `provisions of the Companies Act, 2013, and that the `Tribunal' (`NCLT', Kochi Bench), had rightly, passed the `impugned order' on 05.02.2021, in dismissing the TCAA/4/KOB/2019 & TCAA/5/KOB/2019, by not `according the sanction', pertaining to the `Scheme of Amalgamation'. `Deposit':
49. Section 2 (31) of the Companies Act, 2013, defines `deposit' including any receipt of money by way of deposit or loan or in any other Comp. App (AT) (CH) No. 28 of 2021 Page 36 of 44 form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.
50. As a matter of fact, only those `deposits', `loans' or `money receipts', which are `repayable', and which are not in the category of `exempted Deposits', will be treated as `Deposits'. Also that, Rule 2 (1)
(c) of the Companies (`Acceptance of Deposits'), Rules, 2014, defines, `Deposits', in an inclusive fashion.
51. The `Tribunal' (`National Company Law Tribunal'), under the Companies Act, 2013, has `power', in directing a `company', to `Repay' `Deposit' or `Loss' or `Damage', suffered by a `Depositor'.
52. If a `Company', had `Defaulted' in the repayment of the `Fixed Deposit', which was already `Matured', despite the fact that the `Company' was making `Profits', it was obligated on the `Company's' part, that it should make arrangements in such a way that there could be no problem in the `Repayment of Deposits', as per decision in Unitech Limited in Re., reported in (2015) 191 Comp cas 588 (CLB). `Payment of Penal Interest':
53. Rule 17 of the Companies (Acceptance of Deposits) Rules, 2014, provides that a `Company', shall be liable to `Pay', `Penal Interest at 18% per annum to a Depositor', if there is any `failure to repay the Deposits'. Comp. App (AT) (CH) No. 28 of 2021 Page 37 of 44 In fact, the `Penal Interest', is `payable', when `payment' was `overdue', ofcourse, after `Maturity of Deposit'.
`Damages' for `Fraud':
54. Section 75 of the Companies Act, 2013, relates to `Damages for Fraud', due to `failure to repay the Deposits', accepted by a `Company'. Further, the definition of `Fraud', under Section 447 of the Companies Act, 2013, is an inclusive one and it concerns the `Affairs' of a `Company' or a `Body Corporate'.
55. In this connection, this `Tribunal', worth points out the decision in Swansea Corporation v. Harpur, reported in (1912) KB 493 (CA), where Fletcher Moul Ton LJ, observed to the effect the words `damages' and `damage in Law', have more than one meaning and great care has to be exercised, in examining the context in which they severally appear. `Disqualification for Appointment of Director':
56. Section 164 of the Companies Act, 2013, pertains to the `Disqualification of Directors', incurred during the `Terms of Office', as `Directors', and not with the `Retirement of a Director', as per decision B.R. Kundra, Delhi v. Motion Pictures Association, reported in (1976) 46 CompCas 339 (Del).
Comp. App (AT) (CH) No. 28 of 2021 Page 38 of 44 `Compromises, Arrangements and Amalgamations, under the Companies Act, 2013':
57. Section 230 of the Companies Act, 2013, deals with `Power to Compromise' or make `Arrangements' with the `Creditors' and the `Members', and the said Section is wide enough to include any reasonable `Compromise' or `Arrangement'. The word `Arrangement', has wider meaning, than the term `Compromise'.
58. At this juncture, this `Tribunal', worth recalls and recollects the decision in Travancore National v. Quilon Bank, in Re., reported in (1939) 9 CompCas 14 Mad., wherein it is observed that the use of word `may', in the Section denotes, that the `Court' (now `Tribunal'), has to exercise its `Discretion', in making an `Order', when the `Scheme, before it for `Sanction', after its `Approval', by the `majority of the Creditors'.
59. If the `Scheme', is `unjust', `unfair', `unconscionable' or an `illegal' one, the `Court' (now `Tribunal'), is justified in declining to `Sanction' the `Scheme', in the considered opinion of this `Tribunal'. No wonder, a `Tribunal' / a `Court of Law', is to bear in mind that the `fairness' and `viability' of the `Scheme', qua the `right' of `minority shareholders', before according an `Approval'. Comp. App (AT) (CH) No. 28 of 2021 Page 39 of 44 Hon'ble Supreme Court's Decision:
60. At this juncture, this `Tribunal', worth recalls and recollects the Judgment of the Hon'ble Supreme Court of India, in the matter of M/s. Integrated Finance Co. Ltd. v. Reserve Bank of India (vide Civil Appeal Nos. 5505 -5508 of 2013 dated 16.07.2013), wherein at Paragraph 58, it is observed as under:
58. ``In our opinion, the High Court has correctly concluded that even if no investigation was pending under Section 235-251 of the Companies Act, it was incumbent on the company to disclose the violations pointed out by the RBI on inspection of its books under Section 47N, which led to the issuance of the notice dated 18th January, 2005. This, in our opinion, would clearly reflect on the lack of bonafide of the company in proposing scheme of arrangement. In our considered opinion, non-disclosure of the action taken and initiated by the RBI as apparent from the letter dated 18th January, 2005, amounted to non-disclosure of material facts which are required to be disclosed under Section 391(1) read with Section 393(1) of the Companies Act. The Company Court whilst examining the fairness and the bonafide of a scheme of arrangement does not act as a rubber stamp. It cannot shut its eyes to blatant non-disclosure of material information, which could have a major influence/impact on the decision as to whether the scheme has to be approved or not. In our opinion, the High Court has not committed any error of jurisdiction in rejecting the submission of the appellant that the non-disclosure of the letter dated 18th January, 2005 was not material.'' Tribunal's Role:
61. The `Tribunal', under the Companies Act, 2013, is to perform a `supervisory role', near to a `Judicial Review', of `Administrative' action.
Comp. App (AT) (CH) No. 28 of 2021 Page 40 of 44 Assessment:
62. In the instant case on hand, although on behalf of the `Appellants', it is projected before this `Tribunal', that the `sanctioning of the arrangement', mentioned in the `Scheme', will be for the `advantage and benefit' of the `Appellants'/`Companies', its `Shareholders', and the `Creditors', coupled with the fact that no `investigation proceedings', were instituted or pending, in terms of the relevant provisions of the Companies Act, etc., this `Tribunal', on a consideration of the submissions made on behalf of the `Respondent' / `Union of India' (Regional Director, Southern Region, Ministry of Corporate Affairs, Chennai), pertinently points out that the `Appellants', had not `adhered to', the utmost provisions of the Companies Act, 2013, which creates an `unfavourable circumstance', to and in favour of the `Appellants'. Also that, the `Regional Director' of the `Respondent', had raised `objections', against the `Sanction of the Scheme'.
63. Besides the above, the `1st Appellant' and the `2nd Appellant Companies', and its `Officers' (is in `Default'), though they had acknowledged the `Show Cause Notices', issued by the `Registrar of Companies', Ernakulam, Kerala, no `replies', were furnished by them. Comp. App (AT) (CH) No. 28 of 2021 Page 41 of 44
64. In this connection, this `Tribunal', aptly points out that if a `Transaction', is entered into mainly with a view to circumvent, supplant, evade or avoid the `Rules of the Game' or any `Law' in `Force', and also evade `Tax Liability', a `Tribunal' / `Court of Law', cannot and will not `approve', any `Compromise' / `Arrangement'. Moreover, if the `Arrangement', is an `inequitable' and `unfair' one, the `Scheme', cannot be given a `Green Signal', for an `Approval', sought for in the matter, by the `Party / Parties', concerned.
`Disclosure':
65. In reality, a `Disclosure', in respect of `any proceedings', pertaining to a `Company', which have an `impact or material effect' on the decision, is to be made, apart from the `Disclosure', to be made, in respect of any `pending investigation'. In fact, the `proceedings', ought to be in the `character' or `leading to an investigation', which has a crucial bearing in the subject matter in issue.
66. The `Tribunal', is to see that the `Scheme' is not a `camouflage', for a purpose, other than `ostensible' reason(s). Also, the `Tribunal', is to find out, whether a particular `Scheme', is `opposed' to `public policy' or `otherwise', by `applying' its `judicial mind'. Comp. App (AT) (CH) No. 28 of 2021 Page 42 of 44
67. As far as the present case is concerned, it cannot be forgotten that both the `Company Directors', were deemed to be disqualified, in the teeth of ingredients of Section 164 (2) (b), read with Rule 14 (2) of the Companies Appointment and Qualification of Directors Rules 2014. There is a clear cut `violation' of Section 73 of the Companies Act, 2013, in regard to the `Prohibition on acceptance of deposits from public', for `acceptance of deposits', from the `Directors' of the `1 st Appellant / Company', in respect of the years 2014-15 and 2015-16.
68. The unfavourable circumstance in favour of the Appellants is that a mere running of the eye of the Balance Sheet from the year 2013-14, the Balance Sheet as on 31.03.2014, 31.03.2015, 31.03.2016, indicate that the `1st Appellant / Company', had tacitly accepted the `Deposits' from `Outsiders', the raising of `Unsecured Loans' from other `Persons' and and not resting with that, a `Misleading Disclosure', that the `Loans and Advances', were received from `Related Parties', under the caption `Long Term Borrowings' (as seen from Note. 3) and all the more, these `Disclosures', were made, in the `Balance Sheet', as on 31.03.2017, 31.03.2018 and 31.03.2019.
69. Be that as it may, in the light of the detailed upshot, this `Tribunal', on a careful and meticulous consideration of the contentions advanced on Comp. App (AT) (CH) No. 28 of 2021 Page 43 of 44 either side, in the light of the `violations', committed by the `Appellants', under the Companies Act, keeping in mind that both the Companies had not `given replies', to the `Show Cause Notices', issued by the `Registrar of Companies', Ernakulam, Kerala, and also taking note of the surrounding facts and circumstances of the present case, comes to an `inevitable', `inescapable' and `irresistible' conclusion that the `Appellants', had not made out a fit and proper case, for `Sanctioning the Scheme of Amalgamation', in accordance with `Law'. Looking at from that perspective and also on going through the `impugned order' dated 05.02.2021, passed by the `Tribunal' (`National Company Law Tribunal', Kochi Bench), in TCAA/4/KOB/2019 & TCAA/5/KOB/2019, is free from `Legal Infirmities'. Consequently, the `Appeal', is `devoid of merits'.
Disposition:
In fine, the instant Comp. App (AT) (CH) No. 28 of 2021 is dismissed. No costs.
[Justice M. Venugopal] Member (Judicial) [Naresh Salecha] Member (Technical) 16/01/2023 SR / TM Comp. App (AT) (CH) No. 28 of 2021 Page 44 of 44