Delhi High Court
Capt. Swadesh Kumar vs M/S Indrama Investment Pvt. Ltd. on 1 June, 2012
Author: A.K.Sikri
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ CA No.280 of 2005 & CA No.331 of 2005
in
Co. Pet. No.95 of 2004
% Decision Delivered on: 1st June, 2012
+ CA No.280/2005 in Co. Pet. No.95 of 2004
IN THE MATTER OF:
M/s Indrama Investment Pvt. Ltd.
-And-
M/s Select Holiday Resorts Ltd.
-And-
IN THE MATTER OF:
CAPT. SWADESH KUMAR
Counsel for the Applicant: Mr. Anish Upadhyay, Advocate.
Counsel for the respondent Company: Mr. Ahay Vohra with Mr.
Satwinder Singh, Ms. Divya Suman and Ms. Sushma Mathur,
Advocates.
Counsel for the O.L.: Mr. Rajiv Bahl.
+ CA No.331/2005 in Co. Pet. No.95/2004
IN THE MATTER OF:
M/s Indrama Investment Pvt. Ltd.
-And-
M/s Select Holiday Resorts Ltd.
-And-
IN THE MATTER OF:
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 1 of 24
CAPT. RAM Kohli
Counsel for the Applicant: Mr. V.N. Kaura, Sr. Advocate with
Ms. Paramjit Benipal, Advocate.
Counsel for the respondent Company: Mr. Ahay Vohra with Mr.
Satwinder Singh, Ms. Divya Suman and Ms. Sushma Mathur,
Advocates.
Counsel for the O.L.: Mr. Rajiv Bahl.
CORAM :-
HON'BLE THE ACTING CHIEF JUSTICE
1. Whether Reporters of Local newspapers may be allowed
to see the Judgment?
2. To be referred to the Reporter or not?
3. Whether the Judgment should be reported in the Digest?
A.K. SIKRI (Acting Chief Justice)
1. Company Petition No.95 of 2004 was a petition under Sections
391 and 394 of the Companies Act, 1956 (hereinafter referred
to as „the Act‟) vide which sanction of this Court to the scheme
of Amalgamation of Indrama Investment Private Limited
(transferor company) with Select Holiday Resorts Ltd.
(transferee company) was sought. This was the second
motion. Earlier, the transferor company had filed Company
Application, which was registered as CA (M) No.14 of 2004
under Sections 391(1) and 394 of the Act praying for directions
regarding dispensing with the requirement of convening of the
meetings of the equity shareholders and creditors of the
transferor company and further directions regarding convening
and holding of meetings of the shareholders and unsecured and
secured creditors of the transferee company for the purpose of
considering and approving the scheme of arrangement. The
said application was disposed of by this Court vide orders
dated 10th February, 2004 dispensing with the meetings of the
shareholders and creditors of the transferor company and
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 2 of 24
further directing convening of separate meetings of the equity
shareholders, secured and unsecured creditors of the
transferee company. However, meetings of the equity
shareholders, secured and unsecured of the transferee
company were held in terms of the orders of this Court and the
reports of the Chairperson were placed on record. Thereafter,
the said petition, viz., Co. Pet. 95/2004 was filed for sanction
of the scheme of arrangement under Section 391(2) read with
Section 394 of the Act. It was also stated that no proceedings
under Sections 235 to 251 of the Act are pending against any
of the petitioner companies. Notices of this petition was issued
and was duly served on the Regional Director, Department of
Company Affairs, Kanpur. Notice was also advertised in the
newspapers in compliance with this Court‟s order dated 21 st
April, 2004. The Regional Director filed his report in this Court.
As per the said report, he had no objection to the grant of
sanction to the scheme of arrangement. In spite of the
advertisement of the notice of this petition in the newspapers,
none had filed any objection to the grant of sanction to the
scheme of arrangement.
2. Taking note of the aforesaid facts, vide orders dated 24 th
August, 2004 scheme of amalgamation/arrangements was
sanctioned in the following manner:
"In the aforesaid circumstances and having regard to the
averments made in this petition and the materials placed
on record and the affidavits filed by the Regional Director,
Department of Company Affairs, Kanpur, I am satisfied
that the prayers made in the petition deserve to be
allowed. I also do not find any legal impediment to the
grant of sanction to the Scheme of Arrangement.
Hence, sanction is hereby granted to the above-
mentioned Scheme of Arrangement under Section 391(2)
read with Section 394 of the Companies Act, 1956.
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 3 of 24
Consequent upon the amalgamation of the companies,
the Transferor company shall stand dissolved without
going through the process of winding up."
3. After a lapse of about six months, C.A. No.280/2005 was filed
under Section 394 (2) and Section 395 (1) of the Act by Capt.
Swadesh Kumar, one of the shareholders questioning the
validity of the scheme with prayer for modification/recall of the
aforesaid order dated 24th August, 2004 by withdrawing
sanction granted to the said scheme. Within few days
thereafter, another shareholder, viz., Shri Ram Kohli came
forward and filed C.A. No.331/2005 with almost similar
prayers.
4. It is these two applications which are the subject matter of
present order. Notices in both the applications were issued to
the transferee company and has filed replies to both these
applications stoutly contesting the same. Before I indicate the
nature of challenge laid to the validity or approval of the said
scheme and the defence of the transferor company thereto, it
is deemed proper to state some of the salient aspects of the
scheme of amalgamation which was sanctioned vide orders
dated 24th August, 2004, as the narration thereof would
facilitate better understanding of the bone of contention.
5. As pointed out M/s. Indrama Investment Pvt. Ltd. has
transferred and amalgamated to M/s. Select Holiday Resorts
Ltd. It is, inter alia, in consideration of transferee company
issuing to the equity shareholders of the transferor company
shares in the transferee company as provided in the scheme of
amalgamation that the authorized capital of the transferor
company as made out in the scheme is `20,00,000/- divided
into 20,000 shares of `100/- each. The issued, subscribed and
paid-up capital of the transferor company is `18,18,000/-
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 4 of 24
divided into 18,18,000 equity shares of `100/- each. Similarly,
the authorized capital of the transferee company as made out
in the scheme is `30,00,00,000/- divided into 1,50,00,000
equity shares of `10/- each being the issued, subscribed and
paid up share capital of the company. Apart from the above,
the issued, subscribed and paid-up share capital
`1,50,00,000/- being the 6% redeemable cumulative
preference shares of `10/- each.
6. In the scheme presented before this Court seeking sanction, it
had been claimed/made out therein the circumstances made
out which have necessitated and/or justify the proposed
scheme of amalgamation and objects sought amongst others
are, inter alia, as follows:
(i) Both the transferor company as well as the transferee
company are closely held unlisted companies with a
common lineage. The transferor company is holding
approximately 98% shareholding in the transferee
company and the balance is held by the individual
shareholders, including family members of Ms. Inder
Sharma, the promoter of both the companies whose
holding constitutes approximately 1% in the
transferee company.
(ii) The transferee company has been incurring losses in
its operations and had borrowed high cost funds over
a period from the banks and financial institutions and
continues to borrow funds from banks, which are
secured by corporate guarantees given by the
transferor company.
(iii) Under the scheme, the entire assets and liability of
the transferor company will vest in the transferee
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 5 of 24
company with effect from 31st March, 2003 or such
other date or dates as this Court shall direct in
consideration of the transferee company allotting
shares to the shareholders of the transferor company
in the manner indicated in the scheme. It has been
provided in Part-II of the scheme in Para Nos. 6.1 to
6.4 thereof that as a consequence of the sanctioning
of the present scheme the value of shares carrying
face value of `10/- each of the transferee company
shall be reduced to `0.20/- and the remaining to the
extent of `9.80/- shall be cancelled/extinguished. The
exchange ratio, it is claimed, has been arrived at after
due consideration of the financial position, profitability
and effect of amalgamation in respect of the
transferor company and the transferee company and
is considered to the fair and reasonable taking all the
circumstances into consideration.
(iv) It is further claimed that by amalgamating the said
two companies, the cost and management of the said
companies will considerably be reduced and will result
in carrying on the business more economically and
efficiently and also in obtaining their main purpose by
new and improved means and enlarging their areas of
operation.
(v) As a result of the amalgamation, the business of the
two companies can be combined conveniently and
advantageously.
(vi) As a result of the amalgamation, the resources of the
two companies will be pooled and the transferee
company will be able to retionalize and strengthen its
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 6 of 24
management, finance and it will be able to conduct its
business efficiently.
(vii) The amalgamation will result in usual benefits and
economies of scale, pooling and consolidation of
resources and reduction in the cost of management
and overhead expense and administration.
(viii) The amalgamation will have beneficial results for both
the companies concerned, their shareholders,
employees, creditors and all concerned.
7. It was stated in the petition that pursuant to orders dated 10th
February, 2004 passed in CA (M) No.14/2004, meeting of its
secured/unsecured shareholders and equity shareholders were
convened which had approved the proposed scheme without
any modification. It was also stated that notices of the said
meetings were sent individually to the equity shareholders of
the transferee company together with copy of the scheme of
arrangement as well as the statement required by Section 393
of the Act and form of proxy. The notices of the meetings were
also advertised in the two newspapers, i.e., "The Statesman"
(English) and "The Dainik Jagaran" (Hindi) as directed vide
orders dated 10th February, 2004. Both applicants claimed that
they never received any notice of the meetings. Mr. Ram Kohli
stated that he was, in fact, abroad at the time of publication of
the notice in the newspapers. He came to know about the
sanction of the scheme only when communication dated 14 th
December, 2004 was received in connection with the disposal
of the odd lots shares held by the members/shareholders of the
company. Almost similar kind of averments are made by the
other applicant showing ignorance about holding of the
meetings and coming to know of the sanction accorded by this
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 7 of 24
Court only after receipt of the notice from lawyer in connection
with the disposal of the odd lots shares held by him.
8. Mr. Ram Kohli was holding 15,000 equity shares in transferee
company for a face value of `1,50,000/-. As per the scheme,
since the share carrying face value of `10/-, each of the
transferee company was to be reduced to `0.20/-, he was to
get one share for each 500 shares and in this manner, his
15,000 shares were converted only into 300 shares in the new
company. However, he was not allotted even these 300 shares
because of the reason that the scheme further provided that if
a person is holding less than 500 shares in the new company,
he would no longer remain a shareholder. His share would be
forfeited and he would be paid a value of the share as per the
valuation arrived at and shown in the scheme. The other
applicant also met with the same fate. His shareholding in the
transferee company before amalgamation was 10,000 equity
shares which became only 200 in the new company. He was
also, thus, shown the door by forfeiting shares and paying him
value of the said shares as per the valuation arrived at by the
transferee company.
9. Mr. V.N. Kaura, learned Senior Counsel, argued for the
applicant in C.A. No.331/2005 and these arguments were
adopted by Ms. Anisha Upadhyay, learned counsel who
appeared for the applicant in CA No.280/2005. Mr. Kaura
submitted that the applicants have primarily the two following
grievances:
(i) In the scheme of arrangement, the transferor
company had stipulated artificial exchange ratio
which prejudicially affected the interest of the
applicants.
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 8 of 24
10. A clever and shrewd device was adopted to oust the individual
shareholders except those who wee the family members of Shri
Inder Sharma and this family controlled 99% shares of both
the companies. This resulted into the forfeiture of the shares
of the persons like applicants exiting them form the new
company after the merger of transferor company with the
transferee company.
11. It was highlighted that 99% shares in the transferee company
belonged to Mr. Inder Sharma and his family and only 1%
shareholding was with the outsiders who were all individuals.
Since all these outsiders are exited from the company, full
control of the same now vests with Mr. Inder Sharma family.
Thus, by device of the aforesaid scheme of amalgamation, Mr.
Inder Sharma family has gained not only 100% control over
the transferee company, those individuals whose shares are
forfeited are not even enumerated properly by dubious
methodology of the evaluation of the shares. In the case of
applicant in CA No.331/2005, he was having 15,000 shares of
face value of `1.5 lacs, which he purchased 20 years ago after
holding investment for such a long period. He was not shown
the door making paltry payment of `60,000/-. Same treatment
was meted out to the other applicant.
12. The aforesaid two grievances were sought to be built on the
following legal foundation:
(i) Valuation of the shares of the transferee company
was not as per the law. Along with the scheme,
valuation report of the Chartered Accountant was
filed which reflected Net Asset Valuation basis, as
well as profit generating basis.
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 9 of 24
(ii) The entire exercise was fraudulent and not
justifiable. It was argued that in the scheme, it
was projected that it is a loss making company and
had borrowed high cost of funds. However, both
these premises were wrong which shows that the
only fraudulent motive was to gain 100% control
over the company. It was argued that the fraud
vitiates everything and thus, the entire process
stood nullified.
(iii) Mr. Kaura also argued that the applicants
constituted separate class of shareholdings, but no
separate meeting was held for them which was
contrary to the procedure provided under Section
391 of the Act. The contention that the applicants
constituted a separate class was founded on the
submission that where 99% shares were held by
Inder Sharma and family, other shareholders
including the applicants could not huddle along with
that class. Being outsiders and in minority, they
should be treated as separate class. Even there
were two categories:
(a) Persons with 25,000 or more shares;
and
(b) Those who are having less than 25%
shares and whose shares were
forfeited.
It was submitted that once the intention was forfeiture with
less than 25% shareholders, they should also have been
treated as separate class and shareholders for the purpose of
holding the meeting under Section 391 of the Act.
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 10 of 24
Mr. Kaura, thus, concluded his arguments by mooting a
proposal that these applicants be allowed to continue to hold
shares 15,000 and 10,000 respectively and as per the
arrangement, it would only be 1500 and 1000 in the
amalgamated company.
13. Mr. Ajay Vohra, learned counsel appearing for the respondent
company countered the aforesaid submissions. He opened his
argument by submitting that the valuation and the shares done
by the company was proper and this exercise was undertaken
by the Chartered Accountants of repute who had followed the
norms prescribed by the Supreme Court in various judgments
for valuing such shares. In this behalf, his submission was that
since it was an on-going concern, "profit earning method" was
best situated as held by the Supreme Court in Commissioner
of Wealth Tax, Assam Vs. Mahedeo Jalan & Ors. [86 ITR
621] and the judgment of Bombay High Court in
Commissioner of Gift Tax, Bombay Vs. Ebrahim Haji Usuf
Botwala, [122 ITR 38]. He also submitted that the Chartered
Accountants had given rationale for following this system in
their letter dated 04.12.2003.
14. His further submission was that the company was not debt free
as alleged by the applicants and there were various loans to be
repaid. He referred to the balance-sheet and also the material
to show that these loans were waived off after raising
preferential share capital. He submitted, in this behalf, that
the entire arguments of the counsel for the applicants that the
amalgamated company was a profit earning company was
wrong as that argument was based on exclusion of
depreciation. He submitted that it could not be done in view of
law laid down by this Court in Commissioner of Income Tax
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 11 of 24
Vs. Sain Processing and Weaving Mills P. Ltd., [325 ITR
565]. The reasons for profitability thereafter was based on
subsequent events, viz., write off debt of Rs.17 Crore by the
parent company and addition of new rooms in the hotel/resort
resulting into additional income. According to him, these
subsequent events resulting in profitability of the company
after the amalgamation, could not be transported back in time
to hold that at the time of propounding the scheme, the
company had profitability. He also pointed out that the secured
loan of Rs.40 Crores had become possible because of M/s.
Indrama Limited coming in, thereby adding to the brand value
and goodwill of the company. Mr. Vohra also submitted that
the valuation of the shares which was got done by the
applicants and file was based on inappropriate method as the
valuation report not only ignored the relevant factors which are
to be taken into consideration, but also done taking into
consideration general circumstances which was not permissible
as the circumstances prevailing on the date of amalgamation
were only to be considered. He also submitted that the
valuation of the shares if taken on yield basis would reflect
negative value and if it is taken on average basis it was coming
to only `2.3 paise per share. However, the shareholders were
paid `4.6 paise per share and thus, they were more than
adequately compensative. He also submitted that both the
applicants had shareholding of 0.010% and 0.67% respectively
and persons with such mini-school share holdings could not
undue of the majority wanted. He also argued that they could
not be treated as separate class for the purpose of Section 391
of the Act.
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 12 of 24
15. I have considered the submissions of counsel for the parties.
It is not in dispute that the procedure as laid down in Section
391 of the Act was followed both at the stage of first motion
and at the second motion before approving the scheme. We
cannot merely go by the shareholding pattern and because the
applicants are having small fractions of shares would not make
them a separate class. They remained in the same category
as other shareholders, i.e., equity shareholders. If the
contention is accepted, then there would be different
categories of shareholdings within the same class and no such
position is postulated in Section 391 of the Act.
16. No doubt, even if it is shown that the procedure prescribed
under Section 391 is followed, it is still for the Court to see that
the said scheme is not unfair or enquitable before giving its
imprimatur thereto. The general rule is that the prescribed
majority of the shareholders is entitled to take decision on
scheme of reconstruction/amalgamation, etc. the manner in
which it should be carried into effect. It is a matter of
domestic concern, one for the decision of the shareholders of
the company, which should be not less than 75%.
17. Sub-section (2) of Section 391 of the Act provides that such a
decision of majority, viz., 3/4th in value of creditors or class of
creditors or class of members as the case may be, shall be
binding on all the creditors and share holders of that class as
well as on the company. As per proviso to sub-Section (3) of
Section 391 of the Act, the Court, before sanctioning such
scheme, has to satisfy that the company or any other person
by whom application is made under Section 391(1) has
disclosed to the Court all material facts relating to company,
such as the latest financial position of the company, latest
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 13 of 24
auditor‟s reports on account of company, the pendency of any
investigation proceedings in relation to the company under
Section 235 to 351, and the like. On the other hand,
requirement was also made when the scheme was sanctioned.
In such a scenario, before scheme is to be sanctioned, in what
manner the interest of the minority shareholders is to be
looked into, is the question.
18. This aspect came up for consideration before this Court in
Reckitt Benckiser (India) Ltd. [122 (2005) DLT 612], albeit,
in context of reduction of share capital. In that case also, the
scheme of the reduction was such that many shareholders like
the applicants in the instant case were deprivation of their
shareholdings on payment of certain price. The Court took note
of the general rule that it was the prescribed majority of the
shareholders which is entitled to decide whether there should
be a reduction in capital or not. After taking note of various
judgments, the Court has culled out the following principles:
"20. The principles, which can be distilled from the
aforesaid judicial dicta, are summarised as under:
(i) The question of reduction of share capital is treated as
matter of domestic concern, i.e. it is the decision of the
majority which prevails.
(ii) If majority by special resolution decides to reduce
share capital of the company, it has also right to decide
as to how this reduction should be carried into effect.
(iii) While reducing the share capital company can decide
to extinguish some of its shares without dealing in the
same manner as with all other shares of the same class.
Consequently, it is purely a domestic matter and is to be
decided as to whether each member shall have his share
proportionately reduced, or whether some members shall
retain their shares unreduced, the shares of others being
extinguished totally, receiving a just equivalent.
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 14 of 24
(iv) The company limited by shares is permitted to reduce
its share capital in any manner, meaning thereby a
selective reduction is permissible within the framework of
law (see Re. Denver Hotel Co.1893 (1) Ch D 495.
(v) When the matter comes to the Court, before
confirming the proposed reduction the Court has to be
satisfied that (i) there is no unfair or inequitable
transaction and (ii) all the creditors entitled to object to
the reduction have either consented or been paid or
secured."
19. It would also be advisable to refer to few cases which were
dealt with in the said judgment and may guide this Court how
to proceed in the instant case:
"21. At this stage, let me deal with the two judgments
cited by the objector to state some further principles
culled out therein. These cases are : (i) Trevor v.
Whitworth 12 AC 409 and (ii) Re. Denver Hotel Co. 1893
(1) Ch.D 495 (both these judgments were considered by
the House of Lords in British and American Trustee and
Finance Corporation v. Couper (supra). Trevor v.
Whitworth (supra) was a case where a limited company
was incorporated under the Joint-Stock Companies Act
with the object (as stated in its memorandum) of
acquiring and carrying on a manufacturing business and
any other business and transaction which the company
might consider to be in any way conducive or auxiliary
thereto or in any way connected therewith. The articles
authorise the company to purchase its own shares. The
company having gone into liquidation, a former
shareholder made a claim against the company for the
balance of the price of his shares sold by him to the
company before the liquidation and no wholly paid for.
The House of Lords held that such a company had no
power under the Companies Act to purchase its own
shares and, thus, the purchase in question was ultra
vires. Claim of the petitioner was, Therefore, rejected. In
the process the Court made following observations which
were relied upon by the learned Counsel for the
respondent:
" Your Lordships then asked in what case, and
under what circumstances, such a purchase
could be said to be incidental to the objects of a
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 15 of 24
limited company. In answer to that question the
learned Counsel not unnaturally turned to in re.
Downfield Stinkstone Coal Company 17 Ch. D.
76, and suggested that at any rate it might be
so when the power was used as an incident of
domestic management to buy out share holders
whose continuance in the company was
undesirable.
That was the way in which the proposition was
put in in re. Dronfield, and Co., where matters
had come to a deadlock. But I would ask, is it
possible to suggest anything more dangerous to
the welfare of companies and to the security of
their creditors than such a doctrine? Who are
the share holders whose continuance in a
company the company or its executive consider
undesirable? Why, share holders who quarrel
with the policy of the Board, and wish to turn
the directors out; to answer; share holders who
want information which the directors think it
prudent to withhold. Can it be contended that
capital of the company in keeping themselves in
power, or in purchasing the retirement of
inquisitive and troublesome critics? xxxx After
all, the inconvenience sought to be avoided
arises either from restrictions which Parliament
has thought right to impose, or from the
common misfortune of having to pay for what
one wants out of one's own purse, when there is
no other way of getting it. If the capital
proposed to be expanded in the purchase of its
shares is in excess of the wants of the
company, the transaction must be carried out
under the provisions of the Acts to which I shall
have presently to refer. If the capital of the
company is not in excess of the company's
wants, it certainly ought not to be diverted from
its proper objects. But even then there is no
reason why there should be a deadlock. The end
in view may still be attained by means to which
no exception can be taken. If share holders
think it worthwhile to spend money for the
purpose of getting rid of a troublesome partner
who is willing to sell, they may put their hands
in their own pockets and buy him out, though
they cannot draw on fund in which others as
well as themselves are interested. That, I think
CA Nos.331 & 280 of 2005 in Co. Pet. No.95/2004 Page 16 of 24
is the law, and that is good sense of the
matter."
It is clear from the above that the observations were
made in the context of deciding as to whether there was
power with the company to purchase its own shares. No
doubt, if there is a ploy to oust inconvenience share
holders in a scheme for reduction, the Court can treat the
same, in a particular case as unfair or inequitable and
reject the proposed reduction.
xxx xxx xxx
23. Facts
of British and American Trustees (supra), were
as under:
"A company carried on business in the United
Kingdom and in America, and a portion of its
investments and some of its share holders
were in that country. Differences having arisen
between the directors in England and the
American committee, it was agreed that the
American share holders should take over the
American investments upon the terms that the
company should cease to carry business in
America and that the capital of the company
should be reduced by the amount of the
shares held in America. A special resolution for
carrying out this agreement was passed and
confirmed. All the creditors of the company
had either been paid or had assented to the
arrangement."
24. Holding that the arrangement was not ultra virus the
company and should be sanctioned by the Court, the
House of Lords observed that it was not beyond the
statutory jurisdiction of the Court under the Companies
Act to sanction a scheme for reduction of capital of a
company which does not deal in the same way with all
shares of the same class. In the process the Court
distinguished Denvor Hotel (supra), adn explained the
ratio of Trevor v. Whitworth (supra).
25. Lord Herschell, LC, after quoting Re. Denvor Hotel Co.
(supra), made following significant observations:
"If all the share holders of a company were of
opinion that its capital should be reduced, and
that this reduction would best be effected by
paying off one shareholder and cancelling the
shares held by him, I cannot see anything in the
Acts of 1867 and 1877, which would render it
incumbent on the Court to refuse to confirm
such a resolution, or which shows that it would
be ultra virus to do so. I do not see any danger
in the conclusion that the Court has power to
confirm such a scheme as that now in question,
or, any reason to doubt that this was the
intention of the Legislature. The interests of
creditors are not involved, and I think it was the
policy of the Legislature to entrust the
prescribed majority of the share holders with
the decision whether there should be a
reduction of capital, and if so, how it should be
carried into effect. The interests of the
dissenting minority of the share holders (if there
be such) are properly protected by this: that the
decision of the majority can only prevail upon it
be confirmed by the Court. This is a complete
answer to the argument ably urged by Counsel
for the respondent that if all the share holders
of the same class were not dealt with in
precisely the same fashion, the interests of the
minority might be unjustly scarified to those of
the majority. There can be no doubt that any
scheme which does not provide for uniform
treatment of share holders whose rights are
similar, would be most narrowly scrutinised by
the Court, and that no such scheme ought to be
confirmed unless the Court be satisfied that it
will not work unjustly or inequitably. But this is
quite a different thing from saying that the
Court has no power to sanction it."
26. One will find, on going through this judgment, that
one of the arguments raised was that reduction of the
capital was not proportionate but aimed at a particular
class. Lord Watson in his judgment specifically dealt with
this aspect and negatived the contention. He relied solely
upon the plea that it is beyond the statutory jurisdiction
of the Courts to sanction any scheme for the reduction of
capital which does not deal in precisely the same way
with each and every share belonging the same class. If
that be the law it is manifest that in some cases the result
might be unfortunate. Apart from the interest of creditors,
the question whether each member shall have his share
proportionately reduced, or whether some members shall
retain the shares unreduced, the shares of others being
extinguished upon their receiving a just equivalent, is
purely domestic matter, and it may be greatly for the
advantage of the company that the latter alternative
should be adopted. Lord Macnaghten described that the
provisions of the Companies Act, 1867, while permitting a
company to reduce its share capital provided sufficient
safeguards to ensure that all categories were duly
protected. His Lordships observed:
"The exercise of the power is fenced round by
safeguards which are calculated to protect the
interests of creditors, the interests of share
holders, and the interests of the public.
Creditors are protected by express provisions.
Their consent must be procured, or their claims
must be satisfied. The public, the share holders,
and every class of share holders, individually
and collectively, are protected by the necessary
publicity of the proceedings, and by the
discretion which is entrusted to the Court until
confirmed by the Court the proposed reduction
is not to take effect, though all the creditors
have been satisfied. When it is confirmed the
memorandum is to be altered in the prescribed
manner, and the company, as it were, makes a
new departure.
With these safeguards, which are certainly not
inconsiderable, the Act apparently leaves the
company to determine the extent, the mode,
and the incidence of the reduction, and the
application or disposition of any capital moneys
which the proposed reduction may set free."
20. No doubt, in that case since the company had given option to
such shareholders to continue to hold shares. However, it
would be of interest to note that M/s. Reckitt Benckiser (India)
Ltd. passed special resolution proposing the reduction of equity
capital which resulted in depriving those shareholders also from
holding the shares any longer. Scheme for this purpose was
filed for approval and by means of Co. Pet. No.228 of 2010
which has been approved by the Company Judge vide orders
dated 03.10.2011 dismissing the objections of those minority
shareholders. The same very contentions were advanced
which was raised before us by the application. Following
discussion from the said judgment is also worth to reproduce:
"41. In Organon (India) Ltd. (supra) another Single Judge
of Bombay High Court specifically rejected the argument
of forcible acquisition of public shareholders in context of
a Scheme of Reduction. In the said judgment, it held as
under:-
"13. Mr. Lakhani has first submitted that such
reduction of the share capital proposed by the
petitionercompany, by paying off the public holders
of equity shares, other than the promoter
shareholders and given them certain compensation,
amounts to a forceful acquisition of the shares held
by them. He states that such action on the part of
the petitioner-company is against the principles of
natural justice, corporate democracy and corporate
governance. He states that such reduction
tantamount to a sophisticated corporate mafiaism.
xxx xxx xxx xxx
19. This Court is, however, bound by the decision of
the Division Bench of this Court, reported in Sandvik Asia
Ltd. v. Bharat Kumar Padamsi [2009] 91 CLA 247 [2009]
111 (4) Bom. LR 1421, concerning the reduction of capital
of Sandvik Asia Ltd. The learned Single Judge of this
court, had refused confirmation of the proposal for
reduction of Sandvik Asia Ltd. on the ground that the
promoters group could virtually bulldoze the minority
shareholders and purchase their shares at the price
dictated by them. The learned Single Judge found that
the minority shareholders were not given any option
under the proposal. Hence, the learned Single Judge
concluded that such schemes for reduction of capital
were totally unfair and unjust. In appeal, the Hon‟ble
Division Bench held that they were bound by the law laid
down by the Hon‟ble Apex Court in Ramesh B Desai v.
Bipin Vadilal Mehta [2006] 73 CLA 357/[2006] 5 SCC 638
(SC) where the Apex Court recognised the judgment of
the House of Lords in the case of British & American
Trustee & Finance Corporation (supra). The Learned
Bench also referred to the judgment in Poole v. National
Bank of China Ltd. [1907] AC 229 (HL), the relevant
portion of which is as follows:
"19.The dissenting shareholders do not demand,
and never have demanded, better pecuniary terms,
but they insist on retaining their holdings which in
all reasonable probability can never bring profit to
any of them and may be detrimental to the
company."
20. The learned Bench granted sanction to the reduction
of capital, overruling the order of the learned Single
Judge in Sandvik Asia Ltd. (supra), and posited as
follows:
"Once it is established that non-promoter
shareholders are being paid the fair value of their
shares, at no point of time it is even suggested by
them that the amount that is being paid is way less
and even the overwhelming majority of
nonpromoter shareholders having voted in favour
of the resolution shows that the court will not be
justified in withholding its sanction to the
resolution." [para 9]
21. An SLP [Petition for Special Leave to Appeal (Civil)
No. 12418/2009] filed therefrom, was dismissed by the
Hon‟ble Apex Court, by its order dated 13th July, 2009.
Thus, this Court is bound by the decision of the learned
Division Bench and cannot withhold sanction to the
special resolution for reduction of capital, unless there is
some patent unfairness regarding the fair value of the
shares or there is lack of an overwhelming majority of
non-promoter shareholders who vote in favour of the
resolution."
(emphasis supplied)
xxx xxx xxx
44. It is also settled law that a valuer‟s report is not to be
interfered with by a Court in the absence of any fraud or
illegality - which allegation is missing in the present
petition. In fact, Supreme Court in Hindustan Lever
Employees' Union v. Hindustan Lever Ltd., 1995 Supp (1)
SCC 499 has held "Mr. Ashok Desai, appearing on behalf
of TOMCO, has argued that the valuation of shares had to
be done according to well-known methods of accounting
principles. The valuation of shares is a technical matter.
It requires considerable skill and experience. There are
bound to be differences of opinion among accountants as
to what is the correct value of the shares of a company.
It was emphasised that more than 99% of the
shareholders had approved the valuation. The test of
fairness of this valuation is not whether the offer is fair to
a particular shareholder. Mr Jajoo may have reasons of
his own for not agreeing to the valuation of the shares,
but the overwhelming majority of the shareholders have
approved of the valuation. The Court should not interfere
with such valuation."(emphasis supplied)."
20. This answers most of the arguments of the applicants.
21. One other aspect remains to be considered, viz., arguments of
the applicants that the entire this is designed in such a way to
control 100% equity by Sharma Family and to eliminate
minority shareholders like applicants and this motive in
extinguishing the entire class of outside shareholders was
improper and Court could look into this aspect. The question is
as to whether it was an unfair or inequitable arrangement. As
pointed out above, it has been held by the Court that merely
because the arrangement results in extinguishing some shares
and resulting into 100% shareholdings in the hands of a
particular group cannot be treated improper per se.
22. Coming to the valuation, I find that the auditors adopted profit
earning method, which is held to be a valid method for on-
going concern. In its letter dated 04.12.2003, the Chartered
Accounts gave their justification in the following manner:
"In our opinion, CCI Valuation seems to be most
appropriate as both companies are unlisted companies,
no realistic future cash flows can be projected for either
of the companies as the tourism trade as well as
investment business at stock exchanges are of highly
volatile nature and data available for hotel companies
pertain to either hotel chains or those owing five star
properties.
We enclose herewith the calculation sheets for the
valuation of the shares of the respective companies on
the basis of CCI guidelines which give the respective
valuations as under:
"Company „HPL‟ - Rs.38,028 per share (share of
Rs.100 each)
Company „SHRL‟ - Rs.2.30 per share (share of
Rs.10 each)"
On the aforesaid basis, the share exchange ratio in
reverse merger of „HPL‟ into „SHRL‟ translates into 16533
shares of „SHRL‟ of Rs.10 each being issued for each
share held in „HPL‟.
The present share capital of „HPL‟ is 18,180 shares of
Rs.100 each aggregating to Rs.18,18,000. If the above
share exchange ratio is maintained, it would mean issue
by „SHRL‟ 30,05,69,940 shares of Rs.10 each to the
shareholders of „HPL‟ in lieu of the shares held in „HPL‟.
The aggregate share capital of „SHRL‟ in such a case
would exceed Rs.300 crores, post amalgamation and the
expanded equity share capital of „SHRL‟ after allotment of
shares to the shareholders of „HPL‟ would make it
extremely difficult for the company to service its
shareholders."
23. Mr. Vohra may be right in his submission that the events had
taken place after the amalgamation and the circumstances
under which profitability of the company has increased cannot
be relevant consideration for valuation of the shares or to
judge the profitability of the company at the time when the
decision for amalgamation was taken for the stake holders.
Therefore, the report filed by the applicants also cannot be
accepted.
35. We may also refer to the following observations of the Supreme
Court in the case of Hindustan Lever Employees Union v.
Hindustan Lever Limited [1995] (Suppl.) (1) SCC 499:
"The Court's obligation is to be satisfied that the
valuation was in accordance with law and it was
carried out by an independent body.... The
valuation of shares is a technical matter. It
requires considerable skill and experience.
There are bound to be differences of opinion
among accountants as to what is the correct
value of the shares of a company. It was
emphasised that more than 99% of the share
holders had approved the valuation. The test of
fairness of this valuation is not whether the
offer is fair to a particular shareholder.... Mr.
Jajoo may have reasons of his own for not
agreeing to the valuation of the shares, but the
overwhelming majority of the share holders
have approved of the valuation. The Court
should not interfere with such valuation."
24. Apart from showing the effect of this amalgamation, the
applicants have not been able to show ulterior motives. We,
thus, do not find any merit in these applications, which are
accordingly dismissed.
(A.K. SIKRI)
JUDGE
June 01, 2012
pmc
.
