Ion Exchange (India) Limited vs Unknown
2001 Latest Caselaw 86 Bom

JUDGMENT

D.Y. Chandrachand, J.

1. Sanction of this Court is sought in pursuance of the provisions of Sections 391 and 394 of the Companies Act. 1956, for a Scheme of Amalgamation by which two Companies - Ion Exchange Speciality Chemicals Limited and Ion Exchange Environmental Services Limited will be merged with a Company known as Ion Exhange (India) Limited. The two Transferor Companies are wholly owned subsidiaries of the Transferee Company.

2. The Transferee, Ion Exchange (India) Limited, was incorporated on 6th March 1964 and inter alia, carries on the business of manufacturing water treatment plants, ion exchage resins and chemical additives. Under clause 3 of the Memorandum of Association, the main objects of the Company include manufacturing and dealing in ion exchange resins, organic solvents, wetting agents, textile processing compounds and agents, fibre glass, heavy and other chemicals, petro-chemicals, electro-chemicals and of designing, fabricating, manufacturing and dealing in water treatment machinery.

3. The First Transferor Company. Ion Exchange Speciality Chemicals Ltd. was incorporated on 29th September, 1994 and subsequently became a deemed public company. The First Transferor Company is presently engaged in the business of marketing speciality chemicals. The Second Transferor Company. Ion Exchange Environmental Services Limited, was incorporated on 19th January, 1998 as a Private Limited Company and immediately became a deemed public company. The Second Transferor Company is presently engaged in the business of waste water treatment and sewage and solid waste management.

4. The grounds on which the merger has been sought are specified thus, in para 17 of Company Petition No.980 of 2000 :

"17. All the companies are under the same management. The management is of the opinion that the merger will lead to synergies of operations and more particularly the following benefits:

(a) It will make available to the parties the benefit of financial resources, managerial, technical, distribution and marketing expertise of each other.

(b) The companies will have the benefit of combined reserves, manufacturing and other assests, manpower and cash flows of the companies. The combined resources shall be conducive to enhance its capability to face competition in the market place more effectively.

(c) From the shareholders perspective, the consolidated post-merger balance sheet of ION would reflect increased shareholders value."

In para 25 it has been averred that the sanctioning of the arrangement embodied in the Scheme of Amalgamation will be for the benefit of the Transferee Company.

5. Insofar as the observance of statutory requirements is concerned, the Board of Directors of the Transferee Company resolved in its meeting dated 27th July, 2000 that subject to the sanctions of the appropriate Courts and the permissions required of the statutory authorities, the Scheme of Amalgamation be implemented. Similar resolutions were passed by the Board of Directors of the two Transferor Companies on 27th July, 2000. On a Judge's Summons taken out by the Transferor Companies, this Court by its order dated 18th August. 2000 dispensed with the convening and holding of meetings of members shareholders and creditors of the Transferor Companies. In para 19 of the two Petitions by the Transferor Companies, it has been stated that the shareholders of both the Transferor Companies had given their letters of consent agreeing in writing to the Scheme of Amalgamation. Insofar as unsecured creditors are concerned, the Transferor Companies undertook to issue notice of the hearing of the Petitions to each and every one of the unsecured creditors. The Transferor Companies were also directed to publish the same in newspapers and in the Maharashtra Government Gazette.

6. Insofar as the Transferee Comany is concerned, by an order made on 18th August, 2000 in Company Application No. 434 of 2000, the Transferee Company was directed to convene a meeting of its Equity Shareholders for the purpose of considering and approving the Scheme of Amalgamation. Notices of the meeting were sent individually to all the Equity Shareholders of the Transferee Company together with copies of the Scheme and of the statement required under Section 393 of the Companies Act, 1956. A notice of the meeting was also advertised in the Free Press Journal and Navshakti on 30th August, 2000. A copy of the notice was furnished for publication in the Maharashtra Government Gazette on 28th August, 2000. On 27th September, 2000, a meeting of the Equity Shareholders of the Transferee Company was convened which was attended by 41 Equity Shareholders in person or through representatives or by proxies. The Chairman's Report dated 7th October, 2000 is annexed at Exh. I to the Petition. In para 23 of the Petition, it has been averred that on scrutiny, it was noted that all the 41 Equity Shareholders, who were present in person or through proxies cast their votes and 101 ballots representing 29,85,334 Equity Shares validly voted for the scheme. The scheme is thus, stated to have been passed unanimously. On behalf of the Transferee Company, it has also been stated before the Court that all the secured creditors consisting of the Banks and Financial Institutions have given their letters of No Objection to the Scheme of Amalgamation. The dues of the Banks are stated to be approximately to the extent of Rs. 45 crores.

7. The Regional Director has expressed that he has no objetion to the Scheme of Amalgamation. The Official Liquidator has filed his report dated 8th January. 2001 in the two Company Petitions of the Transferor Companies, placing on record that in pursuance of the order dated 17th November, 2000, passed by this Court, M/s. Shantilal Shah & Co., Chartered Accountants, were appointed as Auditors in order to assist the Official Liquidator in pursuance of the provisions of 4th proviso to Section 394(1) of the Companies Act, 1956. A copy of the report of the Auditors dated 16th December. 2000, has been annexed to the Report of the Official Liquidator. On the basis of the report of the Auditors, the Official Liquidator has formed the view that the affairs of the Transferor Companies have not been conducted in a manner prejudicial to the Interest of their members or to the public interest.

8. This Court is seized of three Company Petitions seeking the sanction of the Court to the Scheme of Amalgamation. Company Petition Nos. 978 and 979 of 2000 have been filed by the two Transferor Companies, whereas Company Petition No. 980 of 2000 has been filed by the Transferee Company. Insofar as is material, the Scheme of Amalgamation provides in clause 3.1 that with effect from the appointed date, the entire business and undertakings of the two Transferor Companies, including all the debts, liabilities, duties and obligations together with the properties and assests of the Transferor Companies shall stand transferred to and vested in the Transferee Company. The appointed date under clause 1.4 of the Scheme proposed, is 1st April, 2000 or such other date this Court may direct. In sub-clause (iii) of clause 3.2 of the Scheme, it has been reiterated that with effect from the appointed date all debts, liabilities, duties and obligations of the Transferor Companies shall without any further act or deed be and shall starid transferred to the Transferee Company. Clause 3.5 provides that subject to other provisions contained in the Scheme, all contracts, deeds, bonds, agreements and other instruments of whatever nature to which the Transferor Companies are parties and which were subsisting or having effect immediately before amalgamation shall be in full force and effect against or in favour of the Transferee Company and may be in force as fully and effectively as if instead of the Transferor Companies, the Transferee Company had been a party thereto. In clause 4 it is provided that all the employees of the Transferor Companies engaged in and for their business on the effective date shall become the employees of the Transferee Company without any break or interruption in their services, on the same terms and conditions on which they are engaged as on the effective date. The effective date under clause 1.5 means the date on which the certified copy of the order of this Court sanctioning the Scheme is filed with the Registrar of Companies, Maharashtra. Clause 5 of the Scheme provides that the entire equity share capital of the Transferor Companies is held by the Transferee Company and the transferors are wholly owned subsidiaries of the Transferee Company. Pursuant to the merger of the Transferor Companies with the Transferee Company, the investments in the shares of the Transferor Companies appearing in the books of account of the Transferee Company as on the appointed date will stand cancelled. On the Scheme becoming effective, the Transferor Companies are, under clause 7 of the Scheme, to be dissolved and wound up. These are the material provisions of the Scheme, at least insofar as the present Petitions are concerned.

9. In opposition to the proposed Scheme of Amalgamation, an intervention in these proceedings has been made on behalf of Paramount Limited, a Public Limited Company with its registered office at Vadodara. The Transferee Company in the present case, ion Exchange (India) Limited, had been awarded a contract by the Gujarat Electricity Board for setting up of the R.O.Plant and that Company in turn awarded a part of the contract to the Intervenors on 7th December, 1995 for designing, engineering, supply and commissioning of a pre-treatment plant on a total contract value of Rs. 2.19 crores. According to the Intervenors, of the total bill of Rs. 2.21 crores lodged by them, the Transferee Company has paid an amount of Rs 1.85 lakhs, leaving an unpaid claim of Rs. 35.45 lakhs. The case of the Intervenors is that they are entitled to the payment of the aforesaid amount which has been paid by the Gujarat Electricity Board to the Transferee Company. The f nlervenors seek to challenge various deductions which have been made by the Transferee Company.

10. Insofar as the merits of the claim of the Intervenors is concerned, this has been disputed by the Transferee Company though according to the Intervenors, the dues of the Intervenors have been acknowledged to be outstanding in the correspondence exchanged with the Transferee Company. It was conceded by the learned Counsel appearing on behalf of the Intervenors as well as for the Transferee Company that the merits of the dispute between the Intervenors and the Transferee Company is not something which has to be adjudicated upon by this Court in these proceedings. There can be no doubt about that position since in these proceedings the Court is not called upon to evaluate the validity of the claim of the Intervenors, of the liability of the Transferee Company to pay and of what claim, if any, is due and outstanding to the Intervenors. Suffice, however, it would to note at the present stage that the focus of the Intervenors has not been seriously disputed. In pursuance of the order passed by this Court on 11th October, 2000, requiring notice of the hearing to be served on the creditors of the Transferee Company, the notice of hearing was served on the Intervenors as a creditor. It is thus, to be noted that a notice of hearing was served on the Intervenors in pursuance of the order passed by this Court. The motive of the Intervenors in opposing the Scheme of Amalgamation has been seriously sought to be impugned. The learned Counsel appearing on behalf of the Transferee Company has laid a considerable degree of emphasis on the fact that in the meeting of the shareholders, a unanimous approval came to be granted by all the shareholders who were present at the voting. Reliance has also been placed on the fact that all the secured creditors consisting of the Banks which have lent their money, have expressed that they have no objection to the Scheme of Amalgamation. It has been stated that none of the 1265 unsecured creditors to whom there is a total liability of approximately Rs. 35 crores. has opposed the scheme and it is only the Intervenors, who have sought to object (apart from two other claims to which reference shall be made hereafter) and that even the claim of the Intervenors at the highest is to receive a payment of Rs.35 lakhs representing 1% of the total liability towards unsecured creditors. It must be noted here that an effort was made on the suggestion of the Court to attempt a resolution of the dispute between the Intervenors and the Transferee Company by enquiring whether the Intervenors were ready and willing to submit their claim against the Transferee Company to arbitration in pursuance of the arbitration clause under the contract. Though the learned Counsel appearing on behalf of the Transferee Company stated that the Transferee Company was ready and willing to submit to arbitration, the learned Counsel appearing on behalf of the Intervenors on instructions stated that his clients were not willing to go to arbitration unless the dues of the Intervenors were duly secured by the furnishing of a Bank Guarantee. The submissions which have, thus, been urged may be noted at the present stage that though the question as to what weight should be ascribed to each one of the circumstances will have to be considered in the ultimate analysis.

11. Insofar as the merits of the Scheme of Amalgamation are concerned, the Intervenors have made the following submissions :

(i) An analysis of decided cases would demonstrate that the Petitioners must satisfy the Court that the Scheme of Amalgamation does not affect commercial morality, is reasonable and feasible, that it will lead to a smooth and satisfactory execution and that it is not detrimental to the interest of the Creditors.

(ii) The onus to establish that the Scheme satisfies all these requirements is on the Petitioners who propound the scheme.

(iii) The Petitioners were bound to disclose the terms of the scheme as also its effect to this Court. The Petitioners have disclosed the terms by placing the scheme on the record of the Court. However, the Petitioners have not disclosed the effect which the Scheme will have on the shareholders and on the creditors of the Company. The Petition ought to have contained sufficient details to enable the Court to make an assesment which has not been done. Though Section 393(1)(a) of the Act does not in its terms apply in the facts and circumstances of the present case, the requirement of that provision must be read into the pleadings so as to compel the Petitioners to make a sufficient disclosure of material before this Court.

(iv) The statements which have been contained in paras 17 and 25 of the Company Petition, do no constitute a sufficient disclosure so as to enable the Court to make a proper assessment of the scheme. The statement in para 17 to the effect that the Petitioners will get the benefit of the Transferor Companies' financial resources combined with the reserves and the statement that the consolidated post-merger balance-sheet will reflect increased shareholder value is incorrect. The "admitted position" according to the Intervenors is that the Transferee is taking over liabilities which completely outweigh the assests. The deleterious effect of the taking over of the liabilities has not been adverted to in the Company Petition. The negative aspect of the financial position of the two Transferor Companies ought to have been placed before the Court by the Petitioners which has not been done. Even if the financial position of the two Transferor Companies was to be considered by the Court, it would be apparent that there is no benefit to be gained by the Transferee Company from the Scheme of Amalgamation.

12. In considering the tenability of the objections, which have been raised on behalf of the Intervenors in these proceedings, it would be necessary to note at the outset those aspects of the financial condition of the Transferor Companies and the Transferee Company in the present case on which a considerable degree of emphasis has been placed at the hearing of the Petitions. First and foremost, the position of the Transferee Company may be considered. For the Financial Year 1998-99, the Transferee Company made an operating loss of Rs. 2,50,20,390/- on a total turnover of Rs. 1.73 crores. During the Financial Year 1999-2000, the Transferee Company made an operating loss of Rs. 3.95.17.016/- on a turnover of Rs. 1.84 crores. The transferee has net current assests of Rs. 130.42 crores. These figures are not a matter of dispute and are found in the balance-sheet of the Transferee Company as at 31st March, 2000. Insofar as the financial position of the First Transferor Company is concerned. Ion Exchange Speciality Chemical Limited, the balance-sheet of that Company is annexed at Exh. D to the Company Petition. The Auditors' Report of this Company comments in Note 2 on the appropriateness of the "going concern" basis used for the preparation of the accounts. The Auditors have noted that "the net worth of the Company has eroded completely as at 31st March, 2000 and the validity of the going concern basis would depend upon the continuance of the existing funding by Ion Exchange (India) Limited, the holding Company". In Note 3 the Auditors have stated that the Balance Sheet and Profit and Loss Account of the Company for the year which ended on 31st March, 2000, "do not give a true and fair view of the state of the Company's affairs as at 31st March 2000 and its profit for the year ended on that date". If the objections of the Auditors in Note 3.1 had been considered, the Company would have in fact been regarded as having made a loss of Rs. 41.87 lakhs as against a reported profit, after the tax, of Rs. 14.77 lakhs. The difference in the two figures arises out of the fact that an amount of Rs. 56.64 lakhs was considered by the Company as recoverable under the caption of Sundry Debtors though the amount had been receivable for over 3 years and though no payments were forthcoming from the debtors. Again, in Note 5 of Schedule 11 of the Auditors' Report it has been stated that the net-worth of the Company has eroded completely as at 31st March. 2000, but accounts have been prepared on a 'going concern' basis with an assurance of the Transferee Company, the holding Company, of the continuance of its existing funding to the Company. The Intervenors have also sought to highlight that the net-worth of the First Transferor Company is "highly negative" at Rs. 4.10 crores.

13. Insofar as the Second Transferor Company, Ion Exchange Environmental Services Limited, is concerned, the Company has made a loss after taxation, in the amount of Rs. 1.31 crores for the year 1998-99. For the year 1999-2000, the loss, after taxation, stood at Rs. 82.68 lakhs. In the year 1998-99, the Company had no turnover at all. The net-worth of the Second Transferor Company is Rs. 35.85 lakhs as at 31st March. 2000.

14. The Petitioners to the Company Petitions have not denied that the Transferee Company had incurred an operating loss of Rs. 2.15 crores for the year 1998-99 and of Rs. 3.95 crores for the year 1999-2000. What the Petitioners seek to emphasise is that the figure of operating losses has the depreciation of assests built into it as a component thereof. It this item of depreciation is removed, it is sought to be contended, the Company would in fact make a cash profit. Insofar as the First Transferor Company is concerned, what is sought to be emphasised is that the statement of the Auditors reflects their views that certain claims against third parties were unrecoverable. The Petitioners seek to highlight that the First Transferor Company has fixed assests of Rs. 1.07 crores. Similarly, insofar as the Second Transferor Company is concerned, the Petitioners emphasise that even according to the Intervenors, the net-worth of the Company is positive. The Second Transferor Company was recently incorporated and the losses which have been sustained by the Company are stated to be the teething problems of a newly established business. In response to the contention of the Intervenors that the Scheme would not envisage any benefit to the Transferee Company and is not feasible, two facets have been emphasised in paras 10 and 11 of the Rejoinder filed on behalf of the Transferee Company on 23rd January, 2001 and thus, would merit some attention:

(1) On behalf of the transferee, it is sought to be submitted that the Transferee Company in the present case is the holding Company which has Invested 100% of the equity capital of the two Transferor Companies. Apart from the fact that the transferee, as holding Company has to attach the Balance Sheet of the Transferor Companies together with its own, every year, what is sought to be emphasised is that in the ultimate analysis, whether directly or otherwise, it is the transferee which as the holding Company, has to bear the losses, if any, incurred by its wholly owned subsidiaries. Even if the Transferor Companies are allowed or made to exist as separate entities, the Petitioners are in the ultimate analysis responsible in respect of the liabilities of the transferor Companies. In these circumstances, what has been emphasised is that by seeking to amalgamate its wholly owned subsidiaries with itself, the hoding Company is, tn effect, attempting to reduce the business and operational losses inclusive of the manpower and machinery costs of the subsidiaries. The Petitioners have submitted that upon amalgamation, the absorbed manpower of the subsidiaries can be deployed in other business activities more effectively. At present the burden of maintaining the manpower as well as the assests and stock of the wholly owned subsidiaries is operating as a drain on the two Transferor Companies. In these circumstances, it has been submitted that it is not only expedient, but also desirable as well as necessary to amalgamate the two Transferor Companies by pooling tn all resources, human, material and financial.

(ii) The Petitioners have sought to place reliance on the post-merger balance sheet, a copy of which is annexed as Exh. 1 to the Rejoinder. From the said balance sheet, what is sought to be emphasised is that upon amalgamation, the net current assest of the transferee on 31st March, 2000 would be to the tune of Rs. 127.93 crores. The net current assests of the Transferee Company as on 1st April, 2000 are Rs. 130 crores. If the net current assest of the two Transferor Companies which are negative to the tune of Rs. 2.46 crores and Rs. 1.86 lakhs are deducted, the transferee Company after amalgamation would possess net current assests of Rs. 127 crores. In the premises, what is sought to be emphasised is that even after amalgamation, the Transferee Company would be able to meet all the claims of its creditors and that the Intervenor can have absolutely no apprehension that its claim would not be protected upon the implementation of the Scheme for Amalgamation.

15. Before dealing with the factual aspects of the present case, it would be necessary to consider the scope of the jurisdiction of the High Court, when the sanction of the Court is sought to a scheme for amalgamation under sections 391, 392 and 394 of the Companies Act, 1956. The scope and nature of the powers which the High Court exercises in these cases have been the subject matter of several judicial decisions, both of the High Court and of the Supreme Court. The legal principles which would govern the exercise of jurisdiction by the High Court are firmly established. In one of the early decisions in the case of the Sidhpur Mills Co. Ltd., , a learned Single Judge, (Miabhoy J.) of the Gujarat High Court held that in every such case, what the Court has to ascertain is whether (i) the statutory requirements have been complied with, (ii) to determine whether the scheme as a whole has been arrived at by the majority bona fide and in the interests of the whole body of shareholders in whose interests the majority purported to act, and (iii) to see whether the scheme is such that a fair and reasonable shareholder will consider it to be for the benefit of the Company and for himself. The Court in every such case, it must be noted, is required to exercise its judicial discretion in order to investigate as to whether the scheme is consistent with the statutory provisions: whether it has been arrived at bona fide and whether it is fair and reasonable. The fact that the scheme has been made with the apoproval of a majority of shareholders or creditors, as the case may be, is a circumstance which must be given due weight by the Court but, that by itself is not conclusive or determinative of the exercise of jurisdiction by the Court. Ultimately, the test which the Court must apply is whether a prudent commercial person would accept the scheme. The learned Single Judge of the Gujarat High Court in the Sidhpur Mills case placed the matter succinctly when he observed that it is not for the Court to scrutinise the scheme in the manner of "a carping critic, a hair-splitting expert, a meticulous accountant or a fastidious counsel" for the effort is not to emphasise the loopholes, technical mistakes and the accounting errors. The perspective has to be that of the ordinary shareholder exercising his discretion in a reasonable and business like manner. Fundamentally, the point to be emphasised is that the discretion as to whether to sanction the scheme for amalgamation is one which the Court has the jurisdiction to exercise. This cannot be concluded on the supposed consideration that the scheme has the support of a large majority of shareholders. Majorities are not necessarily comprised of individuals each of whom critiques the provision of the scheme with a measure of expertise. Lethargy is not unknown to collective bodies of shareholders and creditors. In these circumstances, the Court has to be alive to the duty which Sections 391, 392 and 394 cast upon it, therefore, the Court grants the seal of its approval upon the proposed amalgamation.

16. A Division Bench of this Court had occasion to consider the question in J. S. Davar v. Dr. Shankar Vishnu Marathe,. The Division Bench of this Court held that the will of the majority which may have approved the Scheme, does not conclude the issue for the Court as to whether the scheme should be sanctioned. The considerations which must guide the Court were enunciated thus by the Division Bench :

"The jurisdiction of the Court which is called upon to sanction a scheme transcends the mere consideration that a majority of those affected by the scheme is willing to submit to the scheme. The creditors of a company may agree to accept a fraction of the amount due to them from the company and yet, on considerations of more lasting importance, like public or commercial morality, the Court may refuse to accept the verdict of the majority. It may also refuse to accept the scheme on the ground that it is not reasonable or that it is not feasible or that there is no chance that it will yield to a smooth and satisfactory execution. By reasonable is generally meant that the arrangement cannot reasonably be supposed by sensible business people to be for the benefit of the class which they represent. The Court will also not sanction the scheme if the facts which would have influenced decision of the majority were not known or disclosed to the majority, or if the sponsors of the scheme have misrepresented the true position of the company. Finally, if the acceptance of the scheme would lead to the stifling of an inquiry into the conduct of the delinquent directors, the Court would be slow to give its sanction to the scheme. Considerations such as those mentioned above must be taken into account by a Court before a scheme is sanctioned but in the very nature of things, it is not possible to enumerate exhaustively the circumstances which a Court is entitled to take into consideration."

17. In Sakamari Steel & Alloys Ltd., (1981) Vol. 51 Com.Cas. 266, a learned Single Judge of this Court once again emphasised that though the fact that a large majority of shareholders had accepted the scheme was a strong circumstance in favour of the Court sanctioning the scheme that was not conclusive. Amongst the circumstances to be taken into account by the Court on whether to sanction the Scheme were the following :

"(a) the proposal for the scheme was made in good faith,

(b) the scheme is fair and reasonable,

(c) the scheme will yield to a smooth and satisfactory working.

(d) the scheme does not offend public or commercial morality,

(e) the scheme is not detrimental to the Interests of the creditors or members or public interest."

18. Much the same view was taken by Vimadalal, J. while delivering the Judgment of this Court in the Dena Bank case (1976) Vol. 46 Com.Cases 541. The lerned Judge held thus:

"As is well-settled, where a very large majority of the shareholders of the transferor-Company, in this case over 99% of them, consider the scheme to be beneficial to the shareholders of that Company, the cause is fairly and squarely on the dissentients to show that, that view is erroneous and that the offer is unfair and not one which should be accepted, and Indeed, it has been laid down that, that burden is "a heavy one"."

19. The exercise of discretion by the Court on an application under section 391 of the Companies Act, 1956 has been elaborately dealt with in a Judgment of a learned Single Judge, D. A. Desal, J. (as he then was) of the Gujarat High Court in the Maneckchowk and Ahmedabad Manufacturing Co. Ltd.,: The learned Single Judge emphasised that the effort of the Court is to consider whether the scheme is reasonable and while doing so, the Court will have due regard to a large majority vote and to the reason, if any, which actuated the contesting creditors in opposing the scheme. Though the scheme has to be fair and equitable, it is not for the Court to judge upon the commercial merits of the scheme. The Court does not in that sense usurp the business discretion of the creditors and members of the Company. The Court will sanction the scheme unless it was conceived, designed or calculated to cause injury to others. Similarly, if the Court comes to the conclusion that the scheme is a cloak to cover the misdeeds of the Company or is put forth with a view to shield the Directors against an investigation into their mismanagement, the scheme cannot be accepted only on the ground that it has been approved by the creditors and members.

20. The Judgment need not be burdened by a further reference to decisions emanating in the High Courts save and except to state that the decided cases emphasise that the function of the Court is to determine having regard to the general conditions, background and object of the scheme whether it is fair and reasonable as a whole. The Court does not investigate upon the commercial merits or demerits of the scheme which is the function of those who are Interested in the arangement. This view has been taken by a learned Single Judge of the Madras High Court in the case of Coimbatore Cotton Mills Ltd. v. Lakshmi Mills Co. Ltd.,. In United Bank of India Ltd. v. United India Credit and Development Company Ltd., the scope of the jurisdiction of the High Court was formulated thus, by a learned Single Judge of the Calcutta High Court :

"Further, the Court cannot speculate at this stage as to the possibility, potentiality of the amalgamated-company in future and its working. It is true that the Court is not a mere rubber-stamp but. In sound exercise of its discretionary power to sanction a scheme, must consider the scheme as a whole having regard to the general conditions, background, and object of the scheme and the present day conditions, and atmosphere in the State where the companies are going to function. Court cannot take a pedantic and strict view of each and every clause in the scheme and speculate as to its future, feasibility and possibility at this stage. It is for the collective wisdom of the shareholders who are primarily businessmen and Investors guided by the directors of a company to determine the course of business they choose."

A reference may also be made to a Judgment of a learned Single Judge of the Karnataka High Court in Shankarnarayana Hotels Put. Ltd. v. Official Liquidator, which reiterate these principles.

21. The Supreme Court has considered the question in the Judgment in Miheer H. Mafatlal v. Mafatlal Industries Ltd.,. The test which was formulated by the Supreme Court was that the Court must consider whether the scheme is fair, just and reasonable and is not contrary to any provisions of law or public policy. The Court, however, does not sit in judgment as a Court of Appeal over the Informed view of the parties to the scheme or enter into in the realm of the corporate and commercial wisdom of the parties. The jurisdiction of the Company Court was held to be "supervisory and not appellate" and as a supervisor, the Court cannot assume the role of an author or a policy maker. The Court would, therefore, not scrutinise the scheme with a view to investigate into whether a better scheme could be formulated. In the Mafatlal case, the Supreme Court cited with approval, the observations of the Court in the earlier Judgment of the Court in Hindustan Lever Employees Union v. Hindustan Lever Ltd.,'. There, the Court held that in matters relating to the amalgamation of Companies, the Courts have evolved the principle of the prudent business management test and that the scheme should not be a device to evade law. In the Mafatlal case, the Supreme Court has formulated the following propositions to guide the Courts in the exercise of their jurisdiction of whether or not to sanction the scheme of amalgamation :

" 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 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 approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class.

4. That all necessary material indicated by Section 393(1)(a) is placed before the voters at the concerned meetings as contemplated by Section 391, sub-section (1).

5. That all the requisite material contemplated by the proviso to 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 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 requirement 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."

In Palmer's Company Law (24th edition, C. M. Schmitthoff 79-15) the position has been summarized as being that before the Court sanctions a scheme, it will normally need to be satisfied on four matters:

(1) The statutory provisions must have been complied with:

(ii) The class must have been fairly reepresented;

(iii) The arrangement must be such as a man of business would reasonably approve; and

(iv) The arrangement, in England must be compatible with Section 428 of the English Companies Act.

22. Insofar as the third of third aforesaid principles is concerned, it has been stated thus:

"In excercising its discretion whether or not to sanction a scheme, the Court, as we have seen, treats it as cardinal that its function does not extend to usurping the view of the members or creditors. This does not mean that, provided that the resolutions are duly passed, and that there is no coercion of a minority by a majority, the Court is bound to confirm the scheme and has no discretion. The Court is not a mere rubber stamp. It will look at the scheme to see that it is a reasonable one: If it concludes that there is "such an objection to it as that any reasonable man might say that he could not approve it," then the Court may refuse to confirm the scheme.

The Court will, however, be strongly influenced by a big majority vote, for. provided that the scheme is fair and equitable, the Court will not itself judge upon the commercial merits, which is the function of the class itself. The Court will be slow to differ from the conclusion of the majority."

23. In the present case all the requisite statutory formalities have been complied with and about this there is no dispute. Insofar as the First Transferor Company is concerned, as all the shareholders have given their letters of consent in writing, agreeing to the scheme of amalgamation, this Court by its order dated 16th August, 2000 dispensed with convening and holding of the meeting of the creditors. Individual notices were directed to be issued of the hearing of the Petition to each and every unsecured creditor and the publication thereof was ordered to be carried out in the newspapers and the Maharashtra Government Gazette. The same is the position in reegard to the Second Transferor Company. On behalf of the Transferor Companies, it has been stated that these formalities have been complied with. Affidavits dated 1st December, 2000 have been filed on behalf of the Transferor Companies. The Regional Director has also been served and there is no opposition to the scheme insofar as the Regional Director is concerned. As stated earlier, the Official Liquidator has stated in his report on the basis of the report of the Auditors that the affairs of the Transferor Companies have not been carried out in a manner detrimental to the public interest or the interest of the shareholders. Similarly, insofar as the Transferee Company is concerned, all the requisite formalities required by the statute have been complied with. As narrated earlier, the Scheme of Amalgamation is approved unanimously at the meeting of the shareholders. The secured creditors have issued letters of no objection to the Scheme of Amalgamation.

24. In considering whether the Scheme of Amalgamation should be approved, it would in my view, be necessary to have regard to the fact that the Transferor Companies are wholly owned subsidiaries of the Transferee Company. Consequent upon the Scheme of Amalgamation, the Investments appearing in the books of the Transferee Company in the shares of the two Transferor Companies will stand cancelled. The two Transferor Companies shall be dissolved without being wound up. No new share capital is thus, proposed to be issued by the Transferee Company consequent upon the Scheme of Amalgamation being sanctioned. The Scheme of Amalgamation insofar as it is material, provides that on and from the appointed date, the entire business and undertakings of the Transferor Companies, including their debts, liabilities, duties, obligations and assests would stand transferred to and vest in the Transferee Company. All contracts and agreements to which the Transferor Companies were parties and which were subsisting or having effect Immediately before the amalgamation shall be in full force and effect as against the Transferee Company. The employees of the Transferor Companies are to become the employees of the Transferee Company on and from the effective date without any break in service and on the same terms and conditions.

25. The Tansferee Company is a well established Company which commenced its business in 1964 and manufactures water treatment plants, ion exchange resins and chemical additives. The two Transferor Companies which are its wholly owned subsidiaries, have been incorporated on 29th September, 1994 and 19th January, 1998. The Transferee Company has a sound asset base and its assets as of 31st March, 2000, were valued at Rs.52.57 crores. The First and Second Transferor Companies have fixed assets of the value of Rs. 1-07 Crores and Rs. 37.71 lakhs. The net current assets of the Transferee Company, after making due provision for current liabilities are to the extent of Rs. 130 crores. The combined balance sheet of the three entitles in the post-merger position has been indicated in the chart annexed at Exh. 1 to the Rejoinder filed on behalf of the Petitioners. The Rejoinder elucidates what would be the effect of the Scheme of Amalgamation. As a result of the Scheme of Amalgamation, the net current assests of the merged entity would after taking into account the liabilities of the two Transferor Companies as well as the Transferee Company would still be to the extent of Rs. 127.93 crores. In arriving at this figuree, the chart at Exh. 1 to the Rejoinder also takes into account the goodwill on amalgamation of Rs. 5.34 crores. Though an attempt was made on behalf of the Intervenors to question the Inclusion of this figure, I am of the view that since it is in accordance with standard accounting practice, it would not be open to this Court to enter Into the correctness of the computation. Be that as it may, what emerges from the figures which have been provided for the perusal of the Court on affidavit is that even upon the merger, the Transferee Company will continue to have a resource base which would be more than adequate to meet all the claims of the creditors. Therefore, the fact that at the present stage, the net current assests of the First Transferor Company are negative to the tune of Rs. 2.64 crores and to the extent of Rs. 1.85 lakhs insofar as the Second Transferor Company are concerned, is not ground enough for the Court to come to the conclusion that the Scheme of Amalgamation would have a deleterious effects on the Transferee Company as was sought to be suggested on behalf of the Intervenors. Together with its own fixed assests of Rs. 52.57 crores, the Transferee Company will have the benefit of the fixed assests of the First Transferor Company which stand at Rs. 1.07 crores and of the Second Transferor Company to a lessor extent of Rs. 37.71 lakhs. In other words, having perused the balance sheets which are annexed to the Petition and the summary thereof which is annexed in the chart to the Rejoinder, it is not possible to accede to the submissin of the Intervenors that the amalgamation would have serious consequences for the Transferee Company. There is no doubt about the fact that the two Transferor Companies have sustained a loss and that the net worth of the First Transferor Company has been, to use the words of the Auditors, completely eroded. The Auditors have also emphasised that though the accounts of the First Transferor Company have been prepared on the basis of it being a going concern, the validity of this assumption would depend upon the continuance of the existing funding by the Transferee Company. In Note 5 to Schedule 11 of the Auditors Report, it has been stated that the accounts were prepared on a going concern basis on the assurance of the Transferee Company which is the holding Company of the continuance of its existing funding to the First Transferor Company. These observations would indicate the Importance of the continued funding by the Transferee Company to the well being in the future of the First Transferor Company. In these circumstances, what has been emphasised on behalf of the Petitioner is that since the Transferor Companies are wholly owned subsidiaries of the Transferee Company, the Transferee Company is in the ultimate analysis, whether directly or otherwise, responsible in respect of the loss as well as the benefits of the operation of the Transferee Company. It is undoubtedly true that as a matter of law, the Transferee Companies are independent corporate entities. Equally, as a matter of business reality, the Court cannot Ignore the plea of the Transferee Company that the health and the well being of its wholly owned subsidiaries was a matter which was legitimately entitled to be taken into account by the Transferee Company in coming out with the decision to amalgamate its whooly owned subsidiaries with itself. In the circumstances, the plea that the Scheme of Amalgamation is an attempt to reduce the business and operational losses, inclusive of manpower and machinery costs ought to be accepted. Similarly the foundation of the Scheme for Amalgamation is that the amalgamation will enable the three Companies to pool together human, material and financial resources. This consideration particularly in a case where the two Transferor Companies are wholly owned subsidiaries cannot be regarded as extraneous or irrelevant.

26. The wholly owned subsidiaries which the Transferee seeks to formally amalgamate within its fold have sustained losses. To object to the Scheme of Amalgamation, as the Intervenor has done, on the ground that there is no benefit to the transferee in merging with loss making entities is a simplistic approach to a business and economic problem. Surely, the business and commercial wisdom of those who control corporate enterprise cannot be predicated upn such simplistic assumptions. The law and those whose duty it is to interpret it must be conscious of the complexities of business and economic life. The basic assumptions which were the foundation of a closely regulated and controlled economy have altered in present day society where corporate enterprise has to gear itself up to a free form of competition and an open interface with market forces. The fortunes of corporate enterprise are liable to fluctuate with necessary cycles. Changes in economic policy and economic changes affect the fortunes of business as assumptions and conditions in which corporate enterprises function are altered. Corporate enterprise must be armed with the ability to be efficient and to meet the requirements of a rapidly evolving business reality. Corporate restructuring is one of the means that can be employed to meet the challenges and problems which confront business. The law should be slow to retard or impede the discretion of corporate enterprise to adapt itself to needs of changing times and to meet the demands of increasing competition. The law as it has evolved in the area of mergers and amalgamations has recognized the Importance of the Court not sitting as an Appellate Authority over the commercial wisdom of those who seek to restructure business. The need for this restatement is all the greater today where the interplay of competition and the forces of the market demand efficiency; cost effectiveness and high levels of productivity. Viewed in the context of this business reality, the Scheme of Amalgamation should in the present case pass muster. The holding company in the present case seeks to emerge from the economic difficulties which face its subsldiaris which have become loss making entities. The effort is to pool together human, financial and material resources and to deploy them, upon amalgamation in a manner that would enhance profitability. This is a permissible object and nothing in the proposed scheme in the present case militates against commercial morality, the public interest or a view which a reasonable body or shareholders or creditors would adopt. The transferor and the transferee companies have annexed to the Company Petitions sufficient material and financial data so as to enable the Court to determine whether the Scheme of Amalgamation is reasonable and workable. The averments contained in paragraphs 17 and 25 of the Petitions cannot be looked upon in isolation. There has been a sufficient disclosure in the present case of the terms of the scheme as well as of its effect so as to enable the Court to form a view of the matter. The Intervenor in the present case has a claim of Rs. 35 lakhs. The transferee will be in a position to meet the claim should it be adjudicated by the competent form in favour of the Intervenor.

27. Two other claims have been placed on the record of these proceedings. A Company called Rotex Technical Services Private Limited has a claim of Rs. 4,39,379/- against the transferee. The Company is at liberty to pursue the remedies open to it in law, to recover its claim. A claim made by another Company - Prodosite Anticorrosives Limited has been settled and consent terms have been filed in these proceedings which are taken on record.

28. Company Petition Nos. 978 and 979 of 2000 are made absolute in terms of prayers (a) to (i). Company Petition No. 980 of 2000 is made absolute in terms of prayers (a) to (h). There shall be no order as to costs.