[Cites 47, Cited by 0]
Karnataka High Court
Sri M.G.Dattathreya vs M Manoj Kumar on 19 December, 2025
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OSA No. 22 of 2009
C/W OSA No. 23 of 2009
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 19TH DAY OF DECEMBER, 2025
PRESENT
THE HON'BLE MR. JUSTICE D K SINGH
AND
®
THE HON'BLE MR. JUSTICE VENKATESH NAIK T
ORIGINAL SIDE APPEAL NO. 22 OF 2009
C/W
ORIGINAL SIDE APPEAL NO. 23 OF 2009
IN OSA No. 22/2009:
BETWEEN:
1. SRI M.G.DATTATHREYA
AGED ABOUT 49 YEARS,
S/O LATE SRI M.L GOPALA SHETTY
R/AT NO.146, 5TH CROSS
2ND BLOCK, JAYANAGAR
BANGALORE 11.
2. SRI M.G. CHANDRAMOHAN
Digitally AGED ABOUT 62 YEARS
signed by
VASANTHA S/O M L GOPALA SHETTY
KUMARY B K R/AT NO.444, MANONIDHI,
Location: 9TH CROSS, 1ST BLOCK,
HIGH
COURT OF JAYANAGAR BANGALORE 11.
KARNATAKA
...APPELLANTS
(BY SRI. R.V.S.NAIK, SENIOR COUNSEL FOR
SRI. NITIN PRASAD, ADVOCATE FOR A1 & A2)
AND:
1. M MANOJ KUMAR
S/O LATE S K MARIYAPPA
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OSA No. 22 of 2009
C/W OSA No. 23 of 2009
AGED ABOUT 27 YEARS,
NO.10, "DWARAKA NIALYA",
KALYAN HOUSING SOCIETY,
RPC LAYOUT, VIJAYANAGAR
BANGALORE 40
2. DR RAMAKANTH K DESHPANDE
S/O SHRI KRISHNAJI
AGED ABOUT 49 YEARS,
NO.801, RAHEJA EMPRESS
392, VEER SAVARKAR ROAD,
PRABHA DEVI, MUMBAI
OUT OF STATE
3. MR M P PRABHU
S/O LATE DR .R.PRABHU
SINCE DECEASED
REP.BY HIS LRS.
3(a) SMT SHASHIKALA PRABHU
W/O LATE M.P.PRABHU
SINCE DECEASED
REP. BY HER LRS 3(B)
3(b) SRI NARENDRA PRABHU
S/O LATE M P PRABHU
AGED 41 YEARS,
R/AT NO.405, SASHIPRABHA,
20TH MAIN ROAD, I BLOCK,
RAJAJINAGAR, BANGALORE-560010.
4. MR M VINODA RAO
S/O LATE SHRE B MADAVA SHENOY
AGED ABOUT 63 YEARS,
"MADHAVA KRUPA",NO.883/1, VANI VILAS ROAD,
MYSORE 570 004, MYSORE.
5. M/S KARNATAKA LEASING AND
COMMERCIAL CORPORATION LTD., (IN LIQDN.)
REP.BY OFFICIAL LIQUIDATOR, 4TH FLOOR
D & F WING, KENDRIYA SADAN
KORAMANGALA, BANGALORE 34
PRESENTLY AT NO.26, 12TH FLOOR RAHEJA
BUILDING, M.G.ROAD, BANGALORE 1
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OSA No. 22 of 2009
C/W OSA No. 23 of 2009
6. SRI M R JAYASHANKAR
AGED ABOUT 52 YEARS,
S/O R RAMACHANDRA SHETTY
R/AT SHANTINIKETAN NO.15/3-1, PALACE ROAD,
BANGALORE 52.
...RESPONDENTS
(BY SRI. G.KRISHNAMURTHY, SENIOR COUNSEL
ASSISTED BY SRI.K.M.SAI APABHARANA,
KOUSHIK, S.KAREGOUDAR FOR
SMT.G.K.BHAVANA R-1, R-2, 3(b), 4;
SRI. K.S.MAHADEVAN, ADVOCATE FOR OL/R-5; INDUS
LAW FOR R-6)
THIS O.S.A IS FILED UNDER SECTION 4 OF THE
KARNATAKA HIGH COURT ACT, 1961 READ WITH
SECTION 391(7) OF THE COMPANIES ACT, AGAINST THE
ORDER DATED 19.06.2009 PASSED IN COMPANY
PETITION NO.102 OF 2006.
IN OSA NO. 23/2009:
BETWEEN:
1. SRI M.G.DATTATHREYA
AGED ABOUT 49 YEARS,
S/O LATE SRI M.L GOPALA SHETTY
R/AT NO.146, 5TH CROSS 2ND BLOCK,
JAYANAGAR BANGALORE 11.
2. SRI M.G. CHANDRAMOHAN
AGED ABOUT 62 YEARS,
S/O M L GOPALA SHETTY
R/AT NO.444, MANONIDHI, 9TH CROSS,
1ST BLOCK, JAYANAGAR BANGALORE 11.
...APPELLANTS
(BY SRI. R.V.S.NAIK, SENIOR COUNSEL FOR
SRI. NITIN PRASAD, ADVOCATE)
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OSA No. 22 of 2009
C/W OSA No. 23 of 2009
AND:
1. M MANOJ KUMAR
S/O LATE S K MARIYAPPA
AGED ABOUT 27 YEARS,
NO.10, "DWARAKA NIALYA",
KALYAN HOUSING SOCIETY,
RPC LAYOUT, VIJAYANAGAR
BANGALORE 560040
2. DR RAMAKANTH K DESHPANDE
S/O SHRI KRISHNAJI
AGED ABOUT 49 YEARS,
NO.801, RAHEJA EMPRESS
392, VEER SAVARKAR ROAD,
PRABHA DEVI, MUMBAI
OUT OF STATE
3. MR M P PRABHU
S/O LATE DR .R.PRABHU
SINCE DECEASED
REP.BY HIS LRS.
3(a) SMT SHASHIKALA PRABHU
W/O LATE M.P.PRABHU
SINCE DECEASED
REP. BY HER LRS 3(B)
3(b) SRI NARENDRA PRABHU
S/O LATE M P PRABHU
AGED 41 YEARS,
R/AT NO.405, SASHIPRABHA,
20TH MAIN ROAD, I BLOCK,
RAJAJINAGAR, BANGALORE-560010.
4. MR M VINODA RAO
S/O LATE SHRE B MADAVA SHENOY
AGED ABOUT 63 YEARS,
"MADHAVA KRUPA",NO.883/1, VANI VILAS ROAD,
MYSORE 570 004, MYSORE.
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OSA No. 22 of 2009
C/W OSA No. 23 of 2009
5. M/S KARNATAKA LEASING AND
COMMERCIAL CORPORATION LTD., (IN LIQDN.)
REP.BY OFFICIAL LIQUIDATOR, 4TH FLOOR
D & F WING, KENDRIYA SADAN
KORAMANGALA, BANGALORE 34
PRESENTLY AT NO.26, 12TH FLOOR RAHEJA
BUILDING, M.G.ROAD, BANGALORE 1
6. SRI M R JAYASHANKAR
AGED ABOUT 52 YEARS,
S/O R RAMACHANDRA SHETTY
R/AT SHANTINIKETAN NO.15/3-1, PALACE ROAD,
BANGALORE 52.
...RESPONDENTS
(BY SRI. SRI.G.KRISHNAMURTHY, SENIOR COUNSEL
ASSISTED BY SRI K.M.SAI APABHARANA,
SRI KOUSHIK, SRI S.KAREGOUDAR FOR
SMT.G.K.BHAVANA R-1 TO R-4;
SRI.K.S.MAHADEVAN, ADVOCATE FOR OL/R-5;
INDUS LAW FOR R-6)
THIS O.S.A IS FILED UNDER SECTION 4 OF THE
KARNATAKA HIGH COURT ACT, 1961 AGAINST THE
ORDER DATED 19.6.2009 PASSED IN COMPANY
APPLICATION NO.1183 OF 2008.
THESE APPEALS HAVING BEEN HEARD AND
RESERVED FOR ORDERS ON 16.09.2025, COMING ON
FOR PRONOUNCEMENT THIS DAY, HON'BLE
MR. JUSTICE D K SINGH PRONOUNCED THE
FOLLOWING:
CORAM: HON'BLE MR. JUSTICE D K SINGH
and
HON'BLE MR. JUSTICE VENKATESH NAIK T
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OSA No. 22 of 2009
C/W OSA No. 23 of 2009
CAV JUDGMENT
(PER: HON'BLE MR. JUSTICE D K SINGH)
The present Original Side Appeal Nos.22 and
23/2009 are filed impugning the judgment and order
dated 19.06.2009 passed by the learned Single Judge
in Company Petition No.102/2006 connected with
Company Application Nos.640/2001, 899/2008,
900/2008, 864/2008, 1069/2008, 31/2009,
1372/2006, 265/2007, 1183/2008, 777/2006 and
925/2006, filed by different parties.
2. By the impugned judgment and order, the
learned Single Judge sanctioned the scheme for
revival of the Karnataka Leasing and Commercial
Corporation Ltd., (for brevity referred as 'the
KLCCL'). The KLCCL was incorporated under the
Companies Act, 1956 (for brevity referred as 'the
Act'). The Company had paid up share capital of
Rs.51.49 lakhs divided into 5,14,900 equity shares of
Rs.10/- each. The Company was incorporated to carry
on the business of Non-Banking Financial Company
viz., leasing, sub-leasing, hire purchase, trading and
other allied activities.
3. Respondent No.3 held 1,36,800 equity shares
and respondent No. 4 held 1,12,500 equity shares, in
5th respondent Company i.e., KLCCL. Altogether
2,49,300 equity shares were held by respondent
Nos. 3 and 4.
4. The appellants are the members of the
Company. The 1st appellant holds 7500 shares and
the 2nd appellant holds 50 shares and claims that they
had acquired 2000 shares by succession from their
father. Their total share holding is 1.47%. The
Company Petition No.43/1992 was filed under Section
433(e) of the Companies Act by a few unsecured
creditors/depositors of the Company for winding-up of
the said Company. Company Court vide order dated
29.10.1996 ordered for winding up of the Company.
OSA No.35/1996 was preferred against the said order
of winding-up of the Company by the Chairman and
Managing Director of the Company. In the said
appeal, a scheme for revival of the Company was
proposed. Learned Division Bench of this Court
directed the Managing Director of the Company,
Sri S.K. Mariyappa, the father of the 1st respondent to
deposit a sum of Rs.50.00 Lakhs, and the said
amount was deposited. The learned Division Bench
had further directed to deposit a sum of Rs.1.00
Crore on or before 31.08.1998 and Rs.3.00 Crores on
or before 31.10.1998, further sum of Rs.2.00 Crores
on or before 31.12.1998. Since, the said amounts as
directed by the learned Division Bench were not
deposited, the interim order granted earlier came to
be vacated vide order dated 30.11.1998.
5. Further direction was given to proceed for the
liquidation proceedings. Finally, the OSA No.35/1996
came to be rejected by the Division Bench vide, order
dated 13.04.2005. However, the Division Bench
while rejecting the OSA No.35/1996 reserved liberty
to the legal representatives of late S.K. Mariyappa,
the then Chairman and Managing Director of the
Company, to file an appropriate application for orders
before the learned Single Judge.
6. Respondent Nos.1 to 4 - Sri M. Manoj Kumar,
S/o.S.K. Mariyappa, Dr. Ramakanth K. Deshpande,
M.P. Prabhu and Sri.M. Vinoda Rao respectively filed
Application No.93/2006 in Company Petition
No.43/1992 under Section 391 of the Act before the
learned Company Court to convene a meeting of the
members, and creditors to consider a scheme of
arrangement between the members, creditors and
respondent Company. The application came to be
allowed on 21.06.2006 directing that the meeting be
held on 07.08.2006. In compliance of the said order
dated 21.06.2006 passed in Company Application
No.93/2006, a meeting of the Members of the
Company and creditors was held.
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7. The appellants herein attended the meeting of
the members and voted against the scheme.
Respondent Nos.3 and 4 and other members of the
Company voted in favour of the scheme. The
Chairman of the Meeting submitted his report dated
19.08.2006 stating that 15 shareholders holding
2,52,000 shares i.e., 91.27% in value, voted in
favour of the scheme and 6 shareholders holding
24,100 shares voted against the scheme.
8. Pursuant to this, Company Petition No.102/2006
was filed under Section 391(2) and 392 and 394 of
the Companies Act, by respondent Nos.1 to 4,
praying for sanction of the scheme of arrangement as
approved by the majority shareholders. A number of
objections were filed by different parties, including
the appellants. The appellants filed Company
Application No.1183/2008 under Rule 9 of the
Companies (Court) Rules 1959 seeking a direction to
the Official Liquidator to exercise his powers under
Section 457(1)(c) of the Act, to sell all assets of the
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Company by public auction and distribute the
dividends after selling the Company's properties.
9. The appellants herein filed objections before the
learned Company Judge against the scheme stating
that respondent Nos.1 and 2 are the real Propounders
of the scheme and they are neither members nor
creditors of the Company and therefore, they had no
locus under Section 391 of the Act.
10. Learned Company Court had allowed the
Company Petition No.102/2006 vide judgment and
order dated 19.06.2009 for revival of the Company
and sanctioned the scheme with certain conditions,
which read as under :-
"(1) Till the implementation of the scheme to its
last detail, the petitioners and the company
shall not alienate the assets of the company.
(2) The Secured Creditor, Corporation Bank,
shall appropriate the amount of Rs.8.65 Crore
from the date of this order and the petitioners
shall pay interest on the same at 9% per annum
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from 15.12.2007 till the date of payment, within
15 days from to-day.
(3) (a) The petitioners shall pay interest to the
Depositors at the rate of 14% on the amount of
Rs.6,85,82,203/- from 1.7.1991 to 29.10.1996.
(b) At the rate of 9% per annum on
Rs.6,85,82,203/-from 29.10.1996 to 21.6.2001.
(c) At the rate of 9% per
annum on Rs.3,65,19,884/-(Rs.6,85,82,203-
Rs.3,20,62,319) from 22.6.2001 to 21.6.2001
(d) At the rate of 9% per annum on
Rs.3,65,19,884/- from 5.9.2006 till date of
payment.
The amounts due and payable in terms of (a)
and (b) above shall be paid within 30 days from
the date of this order. And the amounts due in
terms of (c) and (d) along with the principal
amount within 60 days from the date of this
order. Any disputed amounts to be deposited
with this Court.
(4) The employees' dues in a sum of
Rs.39,88,404.87 shall be paid with interest.
(a) from 29.10.1996 to 21.6.2001 @ 9% per
annum on Rs. 56,97,720/-.
(b) And from 22.6.2001 till date of payment on
Rs.39,88,404.87 @ 9% per annum.
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The above dues along with interest shall be paid
within 30 days from this order.
The petitioners shall re-employ any of the
erstwhile employees who had continued in
employment as on the date of order of winding-
up and who are eligible for such employment.
(5) The petitioners shall settle all property taxes
and other statutory claims such as Provident
Fund within 90 days from the date of this order.
(6) The share holders dues @ Rs.30/- per share
shall be paid or deposited within 90 days from
the date of this order.
(7) The petitioners as well as the company shall
file a report of the working of the company and
the implementation of the scheme every
quarter, till the Scheme is fully implemented.
(8) The order of winding-up passed by this
Court is hereby re-called.
(9) The Official Liquidator is directed to hand
over all the assets of the company to the
petitioner."
11. The learned Senior Counsel on behalf of the
appellants submitted that Chapter V of the Act deals
with Arbitration, Compromises, Arrangements and
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Reconstructions. A reading of provisions of Section
391(1) of the Act, makes it evidently clear that the
proposed compromise/arrangement should be
between the Company and its creditors or any class
of them or between the Company and its Members or
any class of them. The Propounders of the scheme of
compromise/arrangement should only be the
creditors or any class of the creditors or members or
any class of them. In addition, it is also provided that
in the case of a Company which is being wound up,
the liquidator may also propound a scheme of
compromise arrangement.
12. In the present case, the Liquidator has not
propounded any scheme. The propounders of the
scheme are respondent No.1 M. Manoj Kumar and
respondent No.2 Dr. Ramakanth K Deshpande.
Respondent No.3 and respondent No.4 viz.,
M.P. Prabhu and M. Vinoda Rao were only the
facilitators. The scheme contemplates respondent
Nos.1 and 2 or their nominees taking over the entire
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shareholding of the Company including the
shareholding of Respondent Nos.3 and 4, at an
agreed price of Rs.30/- per share.
13. The submission is that the petitioners in the
Company Petition No.102/2006 had no locus standi to
maintain the petition.
14. In support of their submissions, learned counsel
for the appellants has placed reliance on the
judgment in S. K. GUPTA AND ANOTHER VS. K. P.
JAIN AND ANOTHER (1979) 3 SCC 54.
15. The learned Senior Counsel for the Appellants
has also placed reliance on the judgment in the case
of KASHINATH DIKSHIT AND ANOTHER VS.
SURGICALS AND PHARMACEUTICALS COMPANY
(MYSORE) LTD., (ILR 2002 KAR 5191). The
submission is that the real Propounders of the
scheme were neither the members of the Company
nor the creditors and they were ranked as outsiders.
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16. The Official Liquidator attached to the High
Court filed objection opposing the scheme of the
arrangement on the ground that though petitioner
No.1 was the Member of the Company in liquidation,
but was not Propounder of the scheme, petitioner
No.2 who was the propounder of the scheme was
neither a shareholder nor creditor of the Company in
liquidation. Therefore, neither a member nor a
creditor of the Company could maintain the petition
filed under Section 391 of the Companies Act.
17. The learned counsel for the appellants further
submits that the question of locus standi of the
petitioners in the Company Petition No.102/2006 was
raised before the Company Court by and on behalf of
the objectors. The learned Company Judge, though
heard the submissions of the learned counsel for the
objectors has failed to record any findings on this
issue.
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18. It is further submitted that the material facts as
contemplated in the proviso to Section 391(2) of the
Act, were not placed either in the meeting or before
the Court. Therefore, sanction to the proposed
scheme ought not to have been granted. It is further
submitted that the learned Company Judge has failed
to consider the continuation of the winding-up
proceedings and sale of Company's Assets would
have been more advantageous to the shareholders.
Petitioners in the Company Petition had admitted in
their affidavit dated 12.01.2009 that the liabilities of
the Company was around Rs.26.50 Crores. However,
the value of the Company's asset being Bangalore
property and Mysore property was valued at
Rs.29,82,80,000/- i.e., in excess of the liabilities.
19. The learned counsel for the appellants submit
that the Company Judge has failed to consider that
the real purpose of the scheme was to dispose of the
assets of the Company in favour of the respondents.
The scheme was a ruse to dispose of the assets of the
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Company in liquidation. The Court should have
satisfied itself with the scheme, and the element of
public interest and the commercial morality, as
sanctioning the scheme would result in stopping or
recalling of the winding up order.
20. In support of the said submission, the learned
Senior Counsel for the appellants has placed reliance
on the judgment in the case of MEGHAL HOMES (P)
LTD. VS. SHREE NIWAS GIRNI K. K. SAMITI AND
OTHERS, [(2007) 7 SCC 753]. The learned Senior
Counsel has submitted that the scheme propounded
was not one for revival of the Company, but it was
only a takeover of the shares of the Company at a
price of Rs.30/- as agreed by the respondents inter se
without any basis whatsoever.
21. Company Application No.640/2001 was filed by
the Official Liquidator against respondent Nos.1 and 2
and other Directors. The Official Liquidator had made
a series of allegations of misfeasance against
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respondent Nos.3 and 4 including the allegations
that:
I. The Ex-Directors of the Company are
solely responsible for not recovering the
amount of Rs.7,27,79,086/- given as loan
and advances to various Companies and
individuals,
II. Advancing an amount of
Rs.3,17,09,840.91 to various group
concerns in which either respondent No.3
or respondent No. 4 or both had substantial
interest.
III. Company Application in great details
narrates this misfeasance against the
Directors including respondent Nos.3 and 4
based on various materials.
IV. Learned Company Judge ought to have
rejected the Petition on the sole ground
that if the scheme is sanctioned, it amounts
to terminating the pending misfeasance
proceedings against the Propounders/
Directors by reports to promoting the
scheme and therefore, such scheme ought
not to be sanctioned.
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V. Reliance is placed on the judgment in
APURVA J. PRAKASH JAI PRAKASH VS. ESCHEN
COMPUTER reported in COMPANY CASES 121
(GUJARAT).
VI. The Company Judge has failed to notice
that the respondent Nos.1 and 2 on the one
hand and the respondent Nos.3 and 4 on
the other hand, had technical
understanding and respondent No.3 and
respondent No.4 were to be benefited in
some manner or the other outside the
scheme.
22. Learned counsel for the appellants has further
submitted that the Company Court failed to
appreciate that there were criminal proceedings
pending against respondent Nos.3 and 4 in Criminal
Case No.90/1997 and as such the scheme ought not
to have been sanctioned.
23. It is further submitted that the Company was in
liquidation and was represented by the Official
Liquidator. The learned Company Judge has noted at
page No.31 of the impugned judgment that the
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Official Liquidator was significantly absent at the
meeting of the shareholders held on 07.08.2006.
Thus, there was no representation of the Company in
liquidation and the Members present had
disadvantage as to the current affairs of the Company
in liquidation, which was wholly within the knowledge
of the Official Liquidator. The learned Company Judge
has also taken note of the fact that the Official
Liquidator filed OLR No.783/2006 in Company Petition
No.102/2006, but had remained absent and not
raised any objections to the scheme.
24. Learned Senior Counsel therefore, submitted
that respondents/petitioners being outsiders had no
locus standi to maintain the petition and the Official
Liquidator was silent with regard to the petitioners'
locus standi. It is further submitted that the valuation
of shares at the rate of Rs.30/- per share was
meagre. In fact the appellants had submitted an
application under Order XL1 Rule 27 of the CPC,
placing on record valuation report prepared by
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M/s.Colliers India Private Limited, Bangalore. The said
valuer had placed valuation report of
Rs.113,10,00,000/- for the Bangalore property as on
29.06.2022 and at Rs.58.05 crores in the year 2009.
25. On the other hand, Sri G. Krishna Murthy
learned Senior Advocate appearing for the
respondents has submitted that the Division Bench,
while rejecting the OSA No.35/1996 vide judgment
and order dated 13.04.2005 had granted liberty to
respondent No.1, the alleged outsider to file
appropriate application before the Company Court.
The judgment and order dated 13.04.2005 passed in
OSA No.35/1996 remained unchallenged and attained
finality.
26. In pursuance to the liberty granted by the
Division Bench, Company Application No.93/2006 was
filed under Section 391 of the Act, seeking permission
to convene a meeting of the shareholders of the
Company to propose the scheme. Vide order dated
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21.06.2006, the Company Court permitted
respondent Nos.1 to 4 to convene a meeting of the
shareholders, secured and unsecured creditors. The
said order was also never challenged by the
appellants. In fact, they had participated in the
meeting on 07.08.2006 and voted against the
scheme.
27. The Chairman report, disclosing approval of the
scheme by overwhelming majority of the
shareholders and secured and unsecured creditors
had been accepted by the learned Company Judge
vide order dated 19.08.2006 in Company Application
No.93/2006. The said order accepting the report of
the Chairman has never been challenged.
28. The learned Senior Counsel appearing for the
respondents has submitted that there is no merit in
the submission and that the scheme of revival is a
scheme to transfer valuable assets of the Company
including the immovable properties at Church Street,
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Bangalore and two properties at Mysore for a pittance
to respondent Nos.1 and 2. It is submitted that two
valuers were appointed by the learned Company
Judge vide order dated 19.01.2009. The Bangalore
property was valued at Rs.24,52,80,000/- and the
two properties at Mysore were valued at
Rs.2,70,00,000/- and Rs.2,60,00,000/- respectively.
The scheme had been approved relying upon the
valuation arrived at, by the said valuers.
29. It is further submitted that no valuation report,
valuing the property to the contrary was ever
produced by the appellants. The scheme had already
been approved by the shareholders, creditors and the
employees using their commercial wisdom and no
proof disclosing undervaluation was produced by the
appellants before the Company Court. Therefore, the
appellants who are holding insignificant number of
shares cannot question the valuation at this stage,
wherein the scheme has been fully complied with.
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30. It is further submitted that in the cases of
MIHEER H. MAFATLAL VS. MAFATLAL INDUSTRIES
LTD., [(1997) 1 SCC 579] and IN HINDUSTAN LEVER
AND ANOTHER VS. STATE OF MAHARASHTRA AND
ANOTHER [(2004) 9 SCC 438], it has been held that
the Court would not act as a Court of appeal and sit in
judgment over the informed decision of the parties in
a scheme of compromise and the commercial wisdom
of these parties. Similar view has been taken by a
Division Bench of the Bombay High Court in LARSEN
AND TOUBRO LIMITED, IN RE [2004 SCC ONLINE
BOM 1082].
31. It is well settled law that the scheme is required
to be sanctioned if the Court arrives at a finding that
the scheme is fair, just and reasonable and the
scheme is approved by the requisite majority. The
following judgments have been relied in support of
the aforesaid submission:-
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a.UNIT TRUST OF INDIA AND ANOTHER VS.
GARWARE POLYESTER LIMITED [(2005) 10
SCC 682].
b. IN RE: HINDUSTAN GENERAL ELECTRIC
CORPORATION LTD., [1958 SCC Online Cal
201].
32. The Court is required to see before sanctioning
of the scheme that whether the scheme contemplates
the revival of business of the Company, makes
provision for paying off creditors, satisfying their
claims as agreed by them and for meeting the
liabilities of the workers. All these criteria have been
considered by the learned Single Judge in the
impugned judgment and order before sanctioning the
scheme that the scheme is fair, just, reasonable,
bona fide and the reasons mentioned in the scheme.
In support of the aforesaid submission, the learned
counsel has placed reliance on the judgment in
MEGHAL HOMES (P) LTD. VS. SHREE NIWAS GIRNI
K. K. SAMITI AND OTHERS [(2007) 7 SCC 753]. The
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scheme cannot be scrutinized in a manner of a
carping cryptic, a hair splitting expert, a meticulous
accountant or a fastidious counsel. The effort is not
to emphasise loopholes, technical mistakes, and the
accounting errors. So the perspective has to be that
of the ordinary shareholder exercising discretion in a
reasonable and business like manner. ALSTOM
POWER BOILERS LTD. VS. STATE BANK OF INDIA
AND ORS. [MANU/MH/0493/2002]. It is also
submitted that Section 391 of the Act is a complete
code and it is intended to be in the nature of a single
window clearance system to ensure that the parties
are not put to avoidable, unnecessary and
cumbersome procedure of making repeated
applications to the Court for various other alteration
and changes, which may not be needed to effectively
implement the sanction scheme, whose overall
fairness and feasibility has been judged by the Court
under Section 394 of the Act. Considering the fact
that the scheme has been approved by the majority
- 28 -
of the members, depositors and creditors in
accordance with the various provisions under the Act,
after taking into consideration all objections raised by
the objectors including the appellants, questioning the
sanctioned scheme before this Court is to be rejected.
It is further submitted that the properties of the
Companies are valued by an independent Court
Appointed Valuer. Therefore, the commercial wisdom
of the shareholders, depositors and creditors cannot
be interfered with. It is further submitted the
allegation that the scheme is a ruse to absolve
respondent Nos.3 and 4 of their liabilities in respect of
the misfeasance proceedings in Company Application
No.640/2001 under Section 543(1) of the Companies
Act, has no merit.
33. It is submitted that the scheme itself makes no
reference to the misfeasance proceedings as initiated
in Company Application No.640/2001 as the said
proceedings were dismissed on the ground that the
proceedings were still in the stage of notice being
- 29 -
served on the respondents, despite completing 9
years since filing of the petition and one of the
Directors/respondent in the said proceedings had died
during such time. The Official Liquidator had not
raised any objection to the scheme or petition citing
Company Application No.640/2001 filed by him. The
irregularities discovered in the audit, basis of the
Company Application No.640/2001 were only of prime
facie in nature. There had been no independent
application of mind by the Official Liquidator.
34. In view of the aforesaid, and having regard to
the final order passed in the Company Petition
No.102/2006, the Company Application No.640/2001
came to be dismissed.
35. One of the Directors against whom Company
Application No.640/2001 for misfeasance was
initiated was Sri. Gopala Shetty, the father of the
appellants. The 2nd appellant had filed the above
petition claiming that he held 50 shares in the
- 30 -
Company, in addition to 2000 shares to which he had
succeeded under the Will of his late father Sri Gopala
Shetty, which are yet to be transferred to him. The
learned counsel for the respondents has submitted
that Sri Gopala Shetty had purchased the said shares
of the Company through funds of the Company. The
very basis of the appellants approaching this Court by
preferring an appeal is that they had inherited shares
from their father against whom also the misfeasance
proceedings were initiated. When the misfeasance
proceedings do not come in the way of them filing the
appeal, it would also not come in the way of the
scheme being approved.
36. The respondent Nos.3 and 4 are not alive as of
today. The scheme had already been complied with
and therefore, it is submitted that the appeals are
liable to be dismissed.
37. The learned Senior Counsel for the respondents
has further submitted that the allegation that
respondents had not disclosed about filing of the
- 31 -
Company Application No.640/2001 and not filed the
latest financial position before the Court and
therefore, had violated proviso to Section 393(1)(a)
and 391(2) of the Act, does not merit consideration
inasmuch as Section 393 of the Act requires notice to
be sent to the members or creditors calling for a
meeting, along with statement explaining material
interests of a Director.
38. Company Application No.640/2001 would not
qualify as a 'material interest under Section 393 of
the Companies Act'. Once the scheme has been
approved it does not make reference to Company
Application No.640/2001. The approval of the
scheme had resulted in dismissal of Company
Application No.640/2001.
39. It is further submitted that the Company has
been carrying on its activities post its revival and the
judgment and order dated 19.06.2009 passed by the
learned Single Judge impugned in this appeal has not
- 32 -
been stayed and therefore, re-visiting the scheme,
which has worked out for last 15 years or more,
would prejudice the rights and interests of the
respondents, creditors, unsecured creditors, and
shareholders.
40. It is further submitted that paid up share capital
of the Company then was Rs.51,49,000/- of 5,14,900
shares of Rs.10/- each. The share holding of the
appellant No.1 is 7500 shares and the share holding
of appellant No.2 was 50 shares. The face value of
the combined share holding would come to
Rs.75,500/-. The scheme had provided Rs.30/- per
share and therefore, the total entitlement of the
appellants would be Rs.2,26,500/- and the said
amount had already been deposited in the Court on
16.09.2009. Their share holding is 1.47%, hence such
a minuscule shareholders should not be allowed to
stall the activities of the Company. Details of
payment made by the Company is as follows:-
"I. DETAILS OF PAYMENTS MADE BY RESPONDENT:
- 33 -
Sl. PARTICULARS AMOUNT(Rs.)
No.
1 CORPORATION BANK (Secured Creditor)- 9,53,01,226
Claim is Rs.16,59,90,483 as on
06.08.2006 along with 21.25% PA
compounded quarterly. However, they
have agreed for the reduced amount in
view of the efforts of the Respondent at
settlement.
2 EMPLOYEES CLAIM along with Provident 32,90,283
Fund
3 PROPERTY TAX Details: 10,71,70,002
a. On account subject to assessment:
40,00,000/-
b. On account: 25,00,000/-
c. As per the Direction of the High Court:
1,50,00,000
d. As per the Order of the Civil Court in
MA No. 01/2013 dated 29.07.2013:
2,76,82,452
e. Up to date tax :
2,01,71,140.
f. BBMP Demand on measurement is Rs.
1,88,13,522.
g. As per the compromise (OTS)
Rs.1,46,86,252 in MA No. 01/2013 as
against the demanded amount of
- 34 -
Rs. 6,90,21,114 + equal amount of
penalty
h. Mysore Property Tax: 43,16,636
4 DEPOSITORS CLAIMS 10,23,68,161
5 SHAREHOLDERS PAYMENT for 5,14,900 1,54,47,000
shares of RS. 10/- each i.e.,
Rs. 51,49,000/-.
As per scheme paid: Rs. 86,31,500/-
Deposited as per the Order of the Court
including that of the Appellants:
Rs. 68,15,500/-
TOTAL 32,35,76,672
6 AMOUNT SPENT FOR RENOVATION, 11,18,31,683
UPGRADATION OF THE PROPERTIES &
AMOUNT INVESTED FOR
INFRASTRUCTURE AND ASSET
PROCUREMENT FOR THE COMPANY
II. IF THE COMPANY WAS WOUND UP ON 19.06.2009, THE
FOLLOWING WOULD BE THE CONSEQUENCES:
Sl. PARTICULARS AMOUNT(Rs.)
No.
1 Valuation of the Assets of the Company as per 29,82,80,000
Valuation Report vide Order dated 19.01.2009.
2 Less: Corporation Bank(Secured Creditor Claim) 28,83,16,189
16,59,90,483 x 21.25% PA (compounded
quarterly)
3 Less: Employees Claim along with Provident 32,90,283
Fund.
4 Less: Property Tax 6,94,65,422
- 35 -
5 Less: Depositors' Claim (as per scheme). If 10,23,68,151
interest is applied as per agreement, it will be
much more.
TOTAL DEDUCTION 46,34,40,055
TOTAL -
(16,51,60,055)
NOTE:
1. Once company is wound up the amount realised on selling the
properties has to be distributed in accordance with Section 529, 529A
and 530 of the Companies Act, 1956.
a. Preference as per Section 529A:
i. Workmen's dues & Secured Creditor's Debt
ii. All Revenues & Taxes
iii. Employees Provident Funds and due payable to employees.
iv. If anything left out after discharging all the debt, the balance will be
divided by the Paid-up share capital and such amount will be payable to
the respective shareholders.
In the instant case, preferences are:
Sl. PARTICULARS AMOUNT(Rs.)
No. AMOUNT
1 Value of the assets 29,82,80,000
2 Less: Secured creditor 28,83,16,189
(Corporation Bank) due
3 Less: Employees Dues 32,90,283
29,16,06,472
AMOUNT AVAILABLE FOR 66,73,528
PAYMENT
- 36 -
4 Less: Property Tax up to 6,94,65,422
19.06.2009
NO AMOUNT IS AVAILABLE TO
PAY EVEN THE TAX DUES.
5 DEPOSITORS DUES 10,23,68,168
Amount will not be available even to pay the property tax and principal
amount of the depositors. Hence, shareholders would not receive any
amount.
III. IF THE COMPANY IS ORDERED TO BE WOUND UP IN THIS
APPEAL, THE FOLLOWING WOULD BE THE CONSEQUENCES:
Sl. PARTICULARS AMOUNT(Rs.)
No.
1 CORPORATION BANK (Secured Creditor Claim) 7,26,30,24,930
16,59,90,483 x 21.25% PA (compounded
quarterly) as per Recovery Certificate
2 PROPERTY TAX, even as on 19.06.2009 6,94,65,422
3 EMPLOYEES DUES, even as on 19.06.2009 32,90,283
4 DEPOSITOR CLAIMS due as per the scheme. (If 10,23,68,161
the contract rate of interest is charged, it will be
more than 20,00,00,000/-)
5 AMOUNT SPENT FOR RENOVATION, 11,18,31,683
UPGRADATION OF THE PROPERTIES &
AMOUNT INVESTED FOR INFRASTRUCTURE
AND ASSET PROCUREMENT FOR THE
COMPANY
41. If the Company is wound-up, there would be
huge deficit and propounders' investment also have
to be refunded. Therefore, interfering with the
scheme as approved by the learned Single Judge
- 37 -
would have disastrous consequences and therefore, it
is prayed that the appeals be dismissed.
42. We have considered the submissions advanced
on behalf of learned counsels for both the parties and
perused the record.
43. It would be relevant to take note of the
important facts as stated above in brief, before culling
out the issues involved in the present appeal for
answering, by this Court. The respondent No.1, an
alleged outsider, in association with other
respondents and also with the support of
shareholders i.e., respondent Nos.3 and 4 had filed
Company Application No.109/1998 in Company
Petition No.43/1992 seeking leave of the Court to
convene the meeting. The same was allowed by the
learned Company Court on 21.06.2006, permitting to
convene the meeting on 07.08.2006. As per the
direction of the Court, propounders of the scheme
had deposited Rs.6.00 Crores to show their bona fide
on 12.07.2006. The appellants never challenged the
- 38 -
order dated 21.06.2006 and in fact they participated
in the meeting of the Company held on 06.08.2006,
for approval of the scheme of arrangements for
revival of the Company. As stated above 91.27%
shareholders voted in favour of the scheme and only
8.73% against the scheme. The Company Petition
No.102/2006 was filed by respondent Nos.1 to 4
under Sections 391(2), 392 and 394 of the
Companies Act along with the amended scheme. In
response to the advertisement issued under the order
of the Court, several Company Applications came to
be filed including the objections filed by the
appellants. Besides filing the objections, they also
filed Application No.1183/2008 under Rule 9 of the
Companies (Court), Rules 1959, seeking a direction to
the Official Liquidator to exercise his powers under
Section 457(1)(c) of the Companies Act to sell all the
assets of the Company by public auction.
44. The issues which arises for consideration before
this Court in these appeals are:
- 39 -
a. Whether respondents Nos. 1 and 2, who
are alleged outsiders, fall outside the scope
of Section 391 of the Companies Act and
they could not have propounded the scheme
along with respondent Nos.3 and 4
(shareholders)?
b. Whether the scheme of revival is a
scheme to transfer valuable assets of the
Company including the immovable
properties at Church Street, Bangalore and
two properties at Mysore for a pittance to
respondent Nos.1 and 2?
c. Whether the scheme is a ruse to
absolve respondent Nos.3 and 4 of their
liabilities in respect of the misfeasance
proceedings in Company Application
No.640/2001 filed under Section 543 of the
Act, initiated by the Official Liquidator?
45. RE: ISSUE No.1:
- 40 -
(a) Section 391 of the Companies Act, 1956 reads as
under :-
"Sec 391 - Power to compromise or make
arrangements with creditors and
members.
(1) Where a compromise or arrangement is
proposed
(a) between a company and its creditors or any
class of them ; or
(b) between a company and its members or
any class of them ;
the Court may, on the application of the
company or of any creditor or member of the
company, or, in the case of a company which is
being wound up, of the liquidator, order a
meeting of the creditors or class of creditors,
or of the members or class of members, as the
case may be, to be called, held and conducted
in such manner as the Court directs.
(2) If a majority in number representing three-
fourths in value of the creditors, or class of
creditors, or members, or class of members, as
the case may be, present and voting either in
person or, where proxies are allowed under the
rules made under section 643, by proxy, at the
meeting, agree to any compromise or
arrangement, the compromise or arrangement
shall, if sanctioned by the Court, be binding on
all the creditors, all the creditors of the class,
all the members, or all the members of the
class, as the case may be, and also on the
company, or, in the case of a company which is
being wound up, on the liquidator and
contributories of the company :
Provided that no order sanctioning any
compromise or arrangement shall be made by
- 41 -
the Court unless the Court is satisfied that the
company or any other person by whom an
application has been made under sub-section
(1) has disclosed to the Court, by affidavit or
otherwise, all material facts relating to the
company, such as the latest financial position
of the company, the latest auditor's report on
the accounts of the company, the pendency of
any investigation proceedings in relation to the
company under sections 235 to 251, and the
like.
(3) An order made by the Court under sub-
section (2) shall have no effect until a certified
copy of the order has been filed with the
Registrar.
(4) A copy of every such order shall be
annexed to every copy of the memorandum of
the company issued after the certified copy of
the order has been filed as aforesaid, or in the
case of a company not having a memorandum,
to every copy so issued of the instrument
constituting or defining the constitution of the
company.
(5) If default is made in complying with sub-
section (4), the company, and every officer of
the company who is in default, shall be
punishable with fine which may extend to one
hundred rupees for each copy in respect of
which default is made.
(6) The Court may, at any time after an
application has been made to it under this
section, stay the commencement or
continuation of any suit or proceeding against
the company on such terms as the Court thinks
fit, until the application is finally disposed of."
(b) The learned Senior Counsel for the appellants
has submitted that in view of the language employed
- 42 -
in Section 391 of the Act, the compromise
arrangement has to be between the Company and its
creditors or any class of them or between a Company
and its members or any class of them.
(c) A person, who is not the creditor or member
(shareholder) cannot propound a scheme of
compromise or arrangement. It may be taken note
that in OSA No.35/1996 filed against the order dated
29.10.1996 passed in Company Petition No.43/1992
under Section 433(e)(f) of the Act, while dismissing
the said appeal by the Division Bench, liberty was
granted to respondent No.1 to file an appropriate
application before the Company Court. The said
order had remained unchallenged, and it had attained
finality. It may also be noted that Company
Application No.93/2006 was filed under Section 391
of the Act, seeking permission to convene a meeting
to propose the scheme and the learned Company
Court allowed the said application vide order dated
21.06.2006, permitting the respondent Nos.1 to 4 to
- 43 -
convene the meeting of shareholders, secured and
unsecured creditors. The said order also remained
unchallenged and in fact the appellants had
participated in the meeting.
(d) In S. K. GUPTA AND ANOTHER (supra), it has
been held that an application proposing compromise
or arrangement cannot be moved by anyone other
than those specified in Section 391(1) of the Act.
(e) The Supreme Court in the said judgment has
also held that Section 392(1) of the Act confers power
of widest amplitude on the High Court (Tribunal) as
the case may be, to give directions and if necessary,
to modify the scheme. The only limitation is that such
directions or modifications must be for the proper
working of the compromise/arrangement. Sub section
(2) of Section 392 provides the legislative exposition
as to who can move the Court for taking action under
Section 392 of the Companies Act. The High Court
can act suo motu as contemplated by Section 392(1)
or it may act on an application of 'any person
- 44 -
interested in the affairs of the Company.' this would
include persons mentioned in Section 391 and would
also include even a non-member or a non-creditor.
Paragraphs 12, 14 to 16 are extracted hereunder :-
"12. Section 391 envisages a compromise or
arrangement being proposed for consideration
by members and/or creditors of a company
liable to be wound up under the Companies
Act, 1956. Compromise or arrangement has to
be between creditors and/or members of the
company and the company, as the case may
be. It was always open to the company to
offer a compromise to any of the creditors or
enter into arrangement with each of the
members. The scheme in this case is
essentially a compromise between the
company and its unsecured creditors. The
scheme when sanctioned does not merely
operate as an agreement between the parties
but has statutory force and is binding not only
on the company but even dissenting creditors
or members, as the case may be. The effect of
the sanctioned scheme is "to supply by
recourse to the procedure thereby prescribed
the absence of that individual agreement by
every member of the class to be bound by the
scheme which would otherwise be necessary
- 45 -
to give it validity" [see J.K. (Bombay) Pvt. Ltd.
v. New Kaiser-i-Hind Spg. & Wvg. Co. Ltd..
Further Section 391(1) itself, by a specific and
positive provision, prescribes who can move
an application under it. Only the creditor or
member of that company or a liquidator in the
case of a company being wound up is entitled
to move an application proposing a
compromise or arrangement. By necessary
implication any one other than those specified
in the section would not be entitled to move
such an application.
13....................xxxxxxxxxx.............xxxxxx....
14. Sub-section (2) provides the legislative
exposition as to who can move the Court for
taking action under Section 392. Reference to
Section 391 in sub-section (2) of Section 392
merely indicates which compromise or
arrangement can be brought before the Court
for taking action under Section 392. The
reference to Section 391 does not mean that
all the limitations or restrictions on the right of
an individual to move the Court while
proposing a scheme of compromise or
arrangement have to be read in sub-section
(2) merely because Section 391 is referred to
therein. Unlike Section 391, Section 392 does
not specify that a member or creditor or in the
- 46 -
case of a company being wound up, its
liquidator, can move the Court under Section
392. On the other hand, the legislature uses
the expression "any person interested in the
affairs of the company" which has wider
denotation than a member or creditor or
liquidator of a company. In fact, the ambit of
the power to act under Section 392(2) can be
gauged from the fact that the Court can suo
motu act to take action as contemplated by
Section 392(1) or it may act on an application
of any person interested in the affairs of the
company.
15. In this context the observations of the
Gujarat High Court, extracted hereunder, in
Mansukhlal v. M.V. Shah can be referred to
with advantage as it precisely lays bare the
ambit and width of Court's power under
Section 392:
"The framers of the company law in India have
conferred statutory powers on the High Court
to make such modifications in the compromise
or arrangement as the Court may consider
necessary for the proper working of the
compromise and arrangement. The power of
the widest amplitude has been conferred on
the Court under Section 392(1)(b) and the
width and the magnitude of the power can be
gauged from the language employed in
- 47 -
Section 392(1)(a) which confers a sort of a
supervisory role on the Court during the
period the scheme of compromise or
arrangement is being implemented. Reading
clauses (a) and (b) of sub-section (1) of
Section 392, it appears that Parliament did not
want the Court to be functus officio as soon as
the scheme of compromise and arrangement
is sanctioned by it. The Court has a continuing
supervision over the implementation of
compromise and arrangement. Unenvisaged,
unanticipated, unforeseen or even
unimaginable hitches, obstruction and
impediments may arise in the course of
implementation of a scheme of compromise
and arrangement and if on every such
occasion, sponsors have to go back to the
parties concerned for seeking their approval
for a modification and then seek the approval
of the Court, it would be a long-drawn out,
protracted, time-consuming process with no
guarantee of result and the whole scheme of
compromise and arrangement may be
mutilated in the process. Parliament has,
therefore, thought it fit to trust the wisdom of
the Court rather than go back to the
interested parties. If the parties have several
times to decide the modification with the
democratic process, the good part of an
- 48 -
election machinery apart, the dirt may step in,
the conflicting interests may be bought and
sold, and, in the process, the whole scheme of
compromise and arrangement may be
jettisoned. In order, therefore, to guard
against this eventuality and situation, which is
clearly envisageable, Parliament has conferred
power on the Court, not only to make
modifications even at the time of sanctioning
the scheme, but at any time thereafter during
the period the scheme is being implemented.
Conceding that, before the Court sanctions the
scheme, it partakes the character of an
emerging contract between the company and
the creditors and members; once the Court
approves it, it becomes a statutorily
enforceable contract even on dissidents, with
power in the Court to modify, amend or
correct or revise the contract the outer
periphery or the limit on the power being that,
after testing it on the anvil of probabilities,
surrounding circumstances and the prevalent
state of affairs, it can be done for the proper
working of the compromise and arrangement,
and subject to this limit on the Court's power,
the power seems to be absolute and of the
widest amplitude and it would be unwise to
curtail it by process of interpretation."
- 49 -
16. If the Court can suo motu act, it is
immaterial as to who drew the attention of the
Court to a situation which necessitated Court's
intervention. Where the power is conferred on
the Court to take action on its own motion the
information emanating from whatever source
which calls for Court's attention can as well be
obtained from any person without questioning
his credentials, moving an application drawing
attention of the Court to a situation where it
must act. Undoubtedly, the Court may decline
to act at the instance of a busy body but if the
action proposed to be taken is justified, valid,
legal or called for, the capacity or credentials
of the person who brought the situation calling
for Court's intervention is hardly relevant nor
would it invalidate the resultant action only on
that ground. Therefore, when sub-section (2)
confers power on the Court to act on its own
motion, the question of locus standi hardly
arises. The High Court while examining the
question of locus standi, after combing the
provision contained in sub-section (2), wholly
overlooked the important provision therein
contained that the High Court can act on its
own motion. It was, however, said in passing
that sub-section (2) enables the Court to wind
up the company and, therefore, the Court may
act on its own motion or on the application of
- 50 -
any person interested in the affairs of the
company not for modifying the scheme or for
any directions but for winding-up the
company. But when the Court is required to
act under Section 392(1), the limitations and
restrictions imposed upon the Court under
Section 391(1) must be read in Section 392(1)
because the sections are complementary to
each other. This submission overlooks the two
different stages at which Sections 391 and 392
operate though they may be complementary
to each other. Two sub-sections of Section 392
have to be harmoniously read and sub-section
(2) clearly indicates the power of Court to take
action suo motu while taking action under sub-
section (1). Again this approach is inconsistent
with the language employed in Section 392(2)
in that the Court can wind up the company
under Section 392(2) if and only if it is
satisfied that the compromise and/or
arrangement sanctioned by it cannot be
satisfactorily worked with or without
modifications. The Court has to reach an
affirmative conclusion before acting under
Section 392(2) that the compromise and/or
arrangement cannot be worked satisfactorily
with or without modification [see J.K.
(Bombay) P. Ltd.]. It follows as a corrolary
that if the compromise or arrangement can be
- 51 -
worked as it is or by making modifications, the
Court will have no power to wind up the
company under Section 392(2). Now, if the
arrangement or compromise can be worked
with or without modification, the Court must
undertake the exercise to find out what
modifications are necessary to make the
compromise or arrangement workable and
that it can do so on its own motion or on the
application of any person interested in the
affairs of the company. If such be the power
conferred on the Court, it is difficult to
entertain the submission that an application
for directions or modification cannot be
entertained except when made by a member
or creditor. It would whittle down the power of
the Court in that it cannot do so on its own
motion."
(f) Thus, a scheme when sanctioned it would not
operate as an agreement between the parties, but
has statutory force. It would be binding not only on
the Company but even the dissenting creditors or
members, as the case may be. When a scheme is
considered by the Court under Section 392 of the Act,
it gives power to the High Court/Tribunal, providing
- 52 -
for effective working of the compromise/
arrangements once sanctioned, for which the Court is
required to exercise continuous supervision, and for
modification of the scheme, for its effective working.
The Court may exercise its suo motu power or any
person interested in the affairs of the Company other
than those mentioned in Section 391 of the Act is also
empowered to move the High Court/Tribunal for
necessary directions/ modification.
(g) In KASHINATH DIKSHIT (supra) the learned
Single Judge of this Court has rejected the scheme
propounded at the instance of a person, who was
neither a shareholder nor a creditor or a member of
the Company in liquidation and therefore, he would
not have any interest in the affairs of the Company.
Paragraphs 14, 15, 16, 18 and 20 of the said
judgment are extracted hereunder :-
14. A plain reading of the Section clearly
indicates that the legislature intended that if
any compromise or arrangement is proposed,
the company, or any creditor or any member of
- 53 -
the company will be entitled to make the
necessary application/petition and in case
where the company is being wound up, as the
Board of Directors has ceased to function and
the company is represented by the liquidator,
the liquidator wilt also be entitled to make the
necessary application/petition. The right, which
is conferred on the contributories or the
creditors. Is not intended to be taken away
when the company has gone into liquidation
and in such a case, an additional right is also
conferred on the liquidator.
15. The provisions contained in the Companies
(court) Rules, 1959, in Rules 67 and 68, the
forms prescribed under the said rules also
clearly go to indicate that even in the case of
company in liquidation, the contributories and
the creditors of the company are entitled to
make an application under Section 391 of the
Act.
16. The Section is intended to confer rights
both on the company and on the creditors and
the members of the company when it is a going
concern. The object is to avoid the winding up
of the company and even after a winding up
order is made, an application/Petition can be
filed to recall the winding up order and to
sanction the scheme of arrangement and allow
the company to resume its normal business,
- 54 -
since it is the creditors and members of the
company, who are interested in the life of the
company and they are the best judges of their
interest. Therefore, to maintain an
application/petition under Section 391 read
with Section 395 of the Act, the petition must
be by a company or by any creditor or a
member of the company and where the
company is in liquidation, apart from the above
person, the liquidator is an additional person to
whom the right to frame such a scheme and
move the Court for sanction under Section 391
of the Act is provided.
17................xxxxxxxxxxx............xxxxxxxxxxxx.....
18. One of the shareholders of the company in
liquidation is the first petitioner in this company
petition. He has identified the second petitioner
to revive the company in liquidation. This
clearly shows that he is not the propounder of
the scheme of arrangement for revival of the
company. The second petitioner is neither a
member nor a creditor of the company. He is
willing to settle the claims of the creditors of
the company with a view to revive the
company in liquidation, provided the entire
share capital of the company is transferred in
his favour and his nominees. In order to attract
Section 391 of the Act, it is necessary that a
compromise or arrangement between a
- 55 -
company and its creditors or any class of them,
or between the company or its members or
class of them should propose a compromise or
arrangement. When such a scheme is
proposed, and the sanction is requested, the
court will have to be satisfied as to the prima
facie, that the scheme of arrangement is
genuine, bonafide and would be in the interest
of the company and its creditors and the
application is filed by a person, who is
authorised under the provisions of Section 391
of the Act. The Apex Court in the case of S.K
Gupta v. K.P Jain . 1979 49 Company Cases
342, while considering the scope of Section
391(1) of the Act and who can move the
application under that Section was pleased to
observe:
"Section 391 enables a member or a creditor of
the company or a company which is being
wound up, its liquidator, to make an application
to the Court proposing a compromise or
arrangement between the company and its
creditors or any class of them or between the
company and its members of any class of them
and seeking directors of the Court to convene a
meeting of each class of creditors and/or each
class of members to whom the compromise or
arrangement is offered. On the Courts giving
the directions, the meeting would be convened
- 56 -
in which the proposed scheme of compromise
and/or arrangement would be submitted for
consideration and each class will have to vote
upon it and if the scheme is accepted by a
majority in number representing three-fourths
in value of the creditors or members or class of
members, as the case may be, present and
voting either in person or where proxy is
allowed by proxy, such approved scheme has
to be placed before the Court for sanction of
the Court as envisaged in Section 391(2)."
19. ..............xxxxxxxxxx........xxxxxxxxx.........
20. The second petitioner, who is the
propounder for the sanction of scheme of
arrangement is neither a member nor a
creditor of the company. He has no interest in
the affairs of the company. He has only come
forward to purchase the assets and liabilities of
the company in liquidation by filing an
application styled one under Section 391 of the
Act. The first petitioner though a member of
the company in liquidation, is not the
propounder under the scheme. He is only an
intermediary in assisting the second petitioner
to purchase the assets of the company in
liquidation. Therefore, in my opinion, the
petition filed for sanction of scheme of
arrangement is not maintainable under Section
391 of the Act."
- 57 -
(h) We note that the said judgment of the learned
Single Judge was affirmed by the Division Bench vide
judgment dated 11.06.2003 passed in OSA
No.110/2002.
(i) The facts in the present case are different to
that of in S.K.GUPTA and KASHINATH DIKSHIT
(supra). In the present case, the Division Bench had
granted liberty to respondent No.1 to file an
appropriate application before the Company Court.
The order dated 21.06.2006 passed by the learned
Company Judge in Company Application No.93/2006
filed under Section 391 of the Act seeking permission
to convene the meeting for considering the proposed
scheme was never challenged. The Chairman in his
report disclosed the approval of the scheme by
overwhelming majority of the shareholders, secured
and unsecured creditors and that they had accepted
the scheme, which is evident from the order dated
19.08.2006 passed by the learned Company Judge in
Company Application No.93/2006. The said order also
- 58 -
remained unchallenged. Therefore, it is too late in the
day to challenge the scheme approved
overwhelmingly by majority shareholders on the
ground that the scheme was propounded by
respondent Nos.1 and 2 (outsiders). The respondent
Nos.1 and 2 along with respondent Nos.3 and 4
propounded the scheme in view of the liberty granted
by the Division Bench to file an appropriate
application before the Company Court. Therefore, we
are of the view, that the said objection at this stage,
does not merit consideration.
46. RE: ISSUE NO.2:
(a) The learned Senior Counsel for the appellants
has submitted that no material facts as contemplated
in proviso to Section 391(2) were placed either in the
meeting of the Company or before the Court. While
considering the scheme in respect of a Company in
liquidation, the Court should consider whether the
scheme is genuinely for revival of whole or part of the
- 59 -
business or is a ruse to dispose of the assets of the
Company in liquidation.
(b) The learned Senior Counsel further submitted
the Court must satisfy that the meeting of the
creditors was duly held and the creditors or members
were provided with relevant material to enable them
to take an informed decision as to whether the
scheme is just and fair. The Court must also conclude
that the proposed scheme of compromise/
arrangement is not violative of any provisions of law
and not contrary to the public policy. It is further
submitted that before sanctioning the scheme, the
Court must consider whether the scheme is genuinely
for revival of the whole or part of the business of the
Company, makes provision for paying off creditors or
for satisfying their claims as agreed to them and for
meeting liability of workers under Sections 529 and
529A of the Act. The Court is required to see the
bona fide of the scheme and to ensure that the
scheme put forward is not a ruse to dispose off the
- 60 -
assets of the Company in liquidation, and whether
such a proposal satisfies the elements of public
interest and commercial morality.
(c) Learned counsel for the appellants has placed
reliance on INTEGRATED FINANCE CO. LTD. VS. RBI
ETC., ETC. [(2015) 13 SCC 772. Paragraphs 44 and
45 read as under:-
"44. In view of the aforesaid, it needs to be
considered as to whether a scheme which does
not comply with the provisions of Section 45-
QA of the RBI Act can be sanctioned. The High
Court on a careful consideration of the entire
matter has concluded that the Scheme must
fail as it does not comply with the provisions
contained in Section 45-QA(1) of the RBI Act.
To get over this difficulty, the learned counsel
for the appellant has submitted that Chapter
III-B of the RBI Act is not a complete code.
This apart, the RBI Act and the Companies Act
must be read in their own sphere since both
operate in different fields, altogether. We are
unable to agree with the aforesaid submission
of the learned Senior Counsel for the parties.
45. Chapter III-B of the RBI Act was
incorporated through the RBI (Amendment)
- 61 -
Ordinance, 1997, subsequently replaced by the
RBI (Amendment) Act, 1997. The Statement of
Objects and Reasons make it abundantly clear
that before the amendment, the
unincorporated bodies circumvented the
statutory restrictions by floating different
partnership firms as and when a firm reached
the level of 250 depositors. It was also
reiterated that several unincorporated bodies
were advertising aggressively through various
media, soliciting deposits from public by
offering high rates of interest and other
incentives. The Amendment Act provides
several safeguards for NBFCs so as to ensure
their viability. This includes compulsory
registration of NBFCs with RBI, stipulation of
minimum need in the funds requirements,
creation of reserved funds and transfer of
certain percentage of profits every year to the
fund; and prescription of liquidity
requirements. The RBI has also been vested
with powers to issue guidelines intended to
ensure sound and healthy operations and the
quality of assets of these companies. The RBI
was also empowered to issue directions to
Auditors of NBFCs to order special audits in
NBFCs, prohibited acceptance of deposits by
NBFCs and make applications for winding up of
NBFCs. It is specifically noticed that earlier the
- 62 -
only recourse available to the depositors was to
approach the court of law for redressal of
grievances. However by the amendment,
powers have been vested with the Company
Law Board for directing the defaulter NBFCs to
make repayment for the deposit interest with a
view to protect the interest of the depositors.
The NBFCs have been totally prohibited from
accepting deposits for the purpose other than
for personal use, if unincorporated. They have
been permitted to continue to take deposit
after incorporating themselves within the
regulatory framework. The unincorporated
bodies have also been specifically prohibited for
issuing any advertisements in any form. The
real intent is set out in Para 6, which is as
under:
"6. There are reports of several finance
companies and unincorporated bodies having
failed to repay the deposits collected from
unsuspecting depositors who have been
tempted by the attractive returns and
incentives offered. Concern has been expressed
in several quarters on the need to take urgent
steps to regulate the activities of such
companies and unincorporated bodies."
(d) Regarding the factors to be considered by the
Company Court, while sanctioning the scheme
- 63 -
including the commercial morality and bona fide of
the scheme, it is not a ruse for disposing off the
assets of the Company and whether the proposal of
revival of the Company satisfies the element of public
interest and commercial morality, the learned Senior
Counsel has placed reliance on judgment in MEGHAL
HOMES (supra) paragraphs 30 to 37, 47, and 50 to
52, which would read as under :-
"30. We are not inclined to go into the charges
and counter-charges as to which of the
Somanis has been got at and by whom, since
we consider those allegations to be irrelevant
for our purpose. Suffice it to say that, we are
not inclined to accept the argument on behalf
of the respondents that Rangnath Somani is
estopped from filing an appeal against the
decision of the Division Bench. Anyway, since
we have held that the appeals by the other two
appellants are maintainable, the question that
arises will have to be examined by this Court
and in that context, we find it not proper to
turn away Rangnath Somani from the portals of
this Court on the ground of estoppel. Thus, we
overrule the objections to the maintainability of
these appeals.
- 64 -
31. Now to recapitulate, the Company was
ordered to be wound up on 25-7-1984 and the
Official Liquidator was directed to take
possession of the assets of the Company. Once
an order of liquidation had been passed on an
application under Section 433 of the
Companies Act, the winding up has to be either
stayed altogether or for a limited time, on such
terms and conditions as the court thinks fit in
terms of Section 466 of the Act. If no such stay
is granted, the proceedings have to go on and
the court has to finally pass an order under
Section 481 of the Act dissolving the Company.
In other words, when the affairs of the
Company had been completely wound up or the
court finds that the Official Liquidator cannot
proceed with the winding up of the Company
for want of funds or for any other reason, the
court can make an order dissolving the
Company from the date of that order. This puts
an end to the winding-up process.
32. Winding up is dealt with in Part VII of the
Companies Act and Sections 433 to 483 occur
in Chapter II of that Part. Part VI deals with
management and administration of a company
and Chapter V thereof deals with arbitrations,
compromises, arrangements and
reconstructions. In that Chapter occur Sections
- 65 -
390 to 396-A of the Act with which we are
concerned. While defining a company for the
purpose of Sections 391 and 393, Section 390
clarifies that company means any company
liable to be wound up under the Companies
Act. SCML was a company that was ordered to
be wound up on 25-7-1984. Therefore, when
the scheme was originally presented on 3-10-
1994, it was at a time when the winding-up
order was already in existence.
33. The argument that Section 391 would not
apply to a company which has already been
ordered to be wound up, cannot be accepted in
view of the language of Section 391(1) of the
Act, which speaks of a company which is being
wound up. If we substitute the definition in
Section 390(a) of the Act, this would mean a
company liable to be wound up and which is
being wound up. It also does not appear to be
necessary to restrict the scope of that provision
considering the purpose for which it is enacted,
namely, the revival of a company including a
company that is liable to be wound up or is
being wound up and normally, the attempt
must be to ensure that rather than dissolving a
company it is allowed to revive. Moreover,
Section 391(1)(b) gives a right to the liquidator
in the case of a company which is being wound
- 66 -
up, to propose a compromise or arrangement
with creditors and members indicating that the
provision would apply even in a case where an
order of winding up has been made and a
liquidator had been appointed. Equally, it does
not appear to be necessary to go elaborately
into the question whether in the case of a
company in liquidation, only the Official
Liquidator could propose a compromise or
arrangement with the creditors and members
as contemplated by Section 391 of the Act or
any of the contributories or creditors also can
come forward with such an application.
34. By and large, the High Courts are seen to
have taken the view that the right of the
Official Liquidator to make an application under
Section 391 of the Act was in addition to the
right inhering in the creditors, the
contributories or members and the power need
not be restricted to a motion only by the
liquidator. For the purpose of this case, we do
not think that it is necessary to examine this
question also in depth. We are inclined to
proceed on the basis that the Somanis, as
contributories or the members of the Company,
are entitled to make an application to the
Company Court in terms of Section 391 of the
Act for the purpose of acceptance of a
- 67 -
compromise or arrangement with the creditors
and members.
35. The question in this case really is whether
the compromise put forward under Section
391 of the Companies Act could be accepted
by the court without reference to the fact that
it is a company in liquidation and without
considering whether the compromise proposed
as intending to take the company out of
liquidation, contemplates the revival of the
company and whether it puts forward a
proposal for revival and whether such a
proposal also satisfies the elements of public
interest and commercial morality, the
elements required to be satisfied for the court
to stop the winding-up proceeding in terms of
Section 466 of the Act.
36. In the present case, the Company Court
was of the view that the compromise or
arrangement that is put forward by the
Somanis in conjunction with LBPL was not a
scheme or proposal for revival of the company
or the mills, but it is one for disposal of the
assets of the company and in that situation, it
would be proper that the assets are disposed of
by the Official Liquidator by inviting offers from
the public in that behalf and maintaining
- 68 -
transparency. But, the Division Bench accepted
the contention that it was not mandatory in law
that a compromise or arrangement has to be
for revival of the very activity in which the
company was engaged in at the time of
winding up and the anxiety of the court while
sanctioning the scheme which is approved by
all classes should be to see that the company is
permitted to continue its corporate existence.
The Division Bench also took the view that the
judgment of the earlier Division Bench dated 4-
4-1995 did not stand in the way of accepting
the present scheme, and that since the
Company Court had no jurisdiction to sit in
appeal over the decision of the creditors,
members and contributories of the company,
the proposal put forward was liable to be
accepted especially in the context of its finding
that the interveners have no locus standi to
oppose the proceedings.
37. Learned counsel argued before us whether
in the case of a company which had been
ordered to be wound up, a compromise or
arrangement made under Section 391 of the
Act could be accepted on the basis that the
said arrangement has been approved by the
relevant meeting of the creditors, members
and so on and whether the court was
concerned with anything more than such a
- 69 -
decision taken by the members and creditors of
the company concerned. In the case of a
company ordered to be wound up, a
compromise or arrangement that could
normally be accepted by the Company Court
could be either paying off all dues by
liquidation of assets or an arrangement for
revival of the company and its business. That is
the rationale of the order dated 4-4-1995 by
which the Division Bench directed consideration
of the various aspects pointed out therein.
38 TO 46.............XXXXXXXXXX.....................
47. When a company is ordered to be wound
up, the assets of it are put in possession of the
Official Liquidator. The assets become custodia
legis. The follow-up, in the absence of a revival
of the company, is the realisation of the assets
of the company by the Official Liquidator and
distribution of the proceeds to the creditors,
workers and contributories of the company
ultimately resulting in the death of the
company by an order under Section 481 of the
Act, being passed. But, nothing stands in the
way of the Company Court, before the ultimate
step is taken or before the assets are disposed
of, to accept a scheme or proposal for revival
of the Company. In that context, the court has
necessarily to see whether the scheme
- 70 -
contemplates revival of the business of the
company, makes provisions for paying off
creditors or for satisfying their claims as agreed
to by them and for meeting the liability of the
workers in terms of Section 529 and Section
529-A of the Act. Of course, the court has to
see to the bona fides of the scheme and to
ensure that what is put forward is not a ruse to
dispose of the assets of the company in
liquidation.
48..................XXXXXXXXXXX.......................
49....................XXXXXXXXX........................
50. It is a well-settled rule of interpretation
that provisions in an enactment must be read
as a whole before ascertaining the scope of any
particular provision. This Court has held that it
is a rule now firmly established that the
intention of the legislature must be found by
reading the statute as a whole. In Principles of
Statutory Interpretation by Justice G.P. Singh,
it is stated:
"The rule is referred to as an 'elementary rule'
by Viscount Simonds; a 'compelling rule' by
Lord Somervell of Harrow; and a 'settled rule'
by B.K. Mukherjee, J."
(See pp. 31 and 32 of the Tenth Edn.)
When we accept this principle, what we have to
do is to read Sections 391 to 394-A not in
- 71 -
isolation as canvassed for by learned counsel
for the respondents, but with reference to the
other relevant provisions of the Act.
51. We see no difficulty in reconciling the need
to satisfy the requirements of both Sections
391 to 394-A and Section 466 of the
Companies Act while dealing with a company
which has been ordered to be wound up. In
other words, we find no incongruity in looking
into aspects of public interest, commercial
morality and the bona fide intention to revive a
company while considering whether a
compromise or arrangement put forward in
terms of Section 391 of the Companies Act
should be accepted or not. We see no conflict
in applying both the provisions and in
harmoniously construing them and in finding
that while the court will not sit in appeal over
the commercial wisdom of the shareholders of
a company, it will certainly consider whether
there is a genuine attempt to revive the
company that has gone into liquidation and
whether such revival is in public interest and
conforms to commercial morality.
52. We cannot understand the decision in
Miheer H. Mafatlal v. Mafatlal Industries Ltd. as
standing in the way of understanding the scope
of the provisions of the Act in the above
- 72 -
manner. We are therefore satisfied that the
Company Court was bound to consider whether
the liquidation was liable to be stayed for a
period or permanently while adverting to the
question whether the scheme is one for revival
of the company or that part of the business of
the company which it is permissible to revive
under the relevant laws or whether it is a ruse
to dispose of the assets of the company by a
private arrangement. If it comes to the latter
conclusion, then it is the duty of the court in
which the properties are vested on liquidation,
to dispose of the properties, realise the assets
and distribute the same in accordance with
law."
(e) As stated above, two valuers were appointed by
the learned Company Judge vide order dated
19.01.2009 wherein the Bangalore property was
valued at Rs.24,52,80,000/- and two properties at
Mysore were valued at Rs.2,70,00,000/- and
Rs.2,60,00,000/- respectively. No valuation report
valuing the property to the contrary was produced by
any of the objectors including the appellants. The said
scheme had already been accepted by overwhelming
- 73 -
majority of the shareholders, creditors and employees
using their commercial wisdom and no proof
disclosing undervaluation was produced by the
appellants. At this stage, questioning the valuation
by the appellants who have miniscule share holdings
cannot be considered, particularly, when the scheme
has been fully complied with and worked out. The
Supreme Court in the case of MIHEER H MAFATLAL
(supra) held that the Company Court is not required
to act as a Court of appeal and sit in judgment over
the informed decision taken by the shareholders,
members and creditors of the Company and the
commercial wisdom exercised by the parties.
Paragraphs 28 to 30 of the said judgment, which are
relevant are extracted hereunder:
"Scope of interference by the Company Court in
sanction proceedings
28. The relevant provisions of the Companies
Act, 1956 are found in Chapter V of Part VI
dealing with "Arbitration, Compromises,
Arrangements and Reconstructions". In the
present proceedings we will be concerned with
- 74 -
Sections 391 and 393 of the Act. The relevant
provisions thereof read as under:
"391. (1) Where a compromise or arrangement
is proposed--
(a) between a company and its creditors or any
class of them; or
(b) between a company and its members or any
class of them;
the Court may, on the application of the
company or of any creditor or member of the
company, or in the case of a company which is
being wound up, of the liquidator, order a
meeting of the creditors or class of creditors, or
of the members or class of members, as the
case may be, to be called, held and conducted
in such manner as the Court directs.
(2) If a majority in number representing three-
fourths in value of the creditors, or class of
creditors, or members, or class of members as
the case may be, present and voting either in
person or, where proxies are allowed under the
rules made under Section 643, by proxy, at the
meeting, agree to any compromise or
arrangement, the compromise or arrangement
shall, if sanctioned by the Court, be binding on
all the creditors, all the creditors of the class, all
the members, or all the members of the class,
as the case may be, and also on the company,
or, in the case of a company which is being
- 75 -
wound up, on the liquidator and contributories
of the company:
Provided that no order sanctioning any
compromise or arrangement shall be made by
the Court unless the Court is satisfied that the
company or any other person by whom an
application has been made under sub-section
(1) has disclosed to the Court, by affidavit or
otherwise, all material facts relating to the
company, such as the latest financial position of
the company, the latest auditor's report on the
accounts of the company, the pendency of any
investigation proceedings in relation to the
company under Sections 235 to 251, and the
like.
393. (1) Where a meeting of creditors or any
class of creditors, or of members or any class of
members, is called under Section 391,--
(a) with every notice calling the meeting which
is sent to a creditor or member, there shall be
sent also a statement setting forth the terms of
the compromise or arrangement and explaining
its effect, and in particular, stating any material
interests of the directors, managing directors,
managing agents, secretaries and treasurers or
manager of the company, whether in their
capacity as such or as members or creditors of
the company or otherwise, and the effect on
those interests, of the compromise or
- 76 -
arrangement, if, and insofar as, it is different
from the effect on the like interests of other
persons; and
(b) in every notice calling the meeting which is
given by advertisement, there shall be included
either such a statement as aforesaid or a
notification of the place at which and the
manner in which creditors or members entitled
to attend the meeting may obtain copies of
such a statement as aforesaid."
The aforesaid provisions of the Act show that
compromise or arrangement can be proposed
between a company and its creditors or any
class of them or between a company and its
members or any class of them. Such a
compromise would also take in its sweep any
scheme of amalgamation/merger of one
company with another. When such a scheme is
put forward by a company for the sanction of
the Court in the first instance the Court has to
direct holding of meetings of creditors or class
of creditors or members or class of members
who are concerned with such a scheme and
once the majority in number representing
three-fourths in value of creditors or class of
creditors or members or class of members, as
the case may be, present or voting either in
person or by proxy at such a meeting accord
their approval to any compromise or
- 77 -
arrangement thus put to vote, and once such
compromise is sanctioned by the Court, it would
be binding to all creditors or class of creditors
or members or class of members, as the case
may be, which would also necessarily mean that
even to dissenting creditors or class of creditors
or dissenting members or class of members
such sanctioned scheme would remain binding.
Before sanctioning such a scheme even though
approved by a majority of the concerned
creditors or members the Court has to be
satisfied that the company or any other person
moving such an application for sanction under
sub-section (2) of Section 391 has disclosed all
the relevant matters mentioned in the proviso
to sub-section (2) of that section. So far as the
meetings of the creditors or members, or their
respective classes for whom the Scheme is
proposed are concerned, it is enjoined by
Section 391(1)(a) that the requisite information
as contemplated by the said provision is also
required to be placed for consideration of the
voters concerned so that the parties concerned
before whom the scheme is placed for voting
can take an informed and objective decision
whether to vote for the scheme or against it. On
a conjoint reading of the relevant provisions of
Sections 391 and 393 it becomes at once clear
that the Company Court which is called upon to
- 78 -
sanction such a scheme has not merely to go by
the ipse dixit of the majority of the shareholders
or creditors or their respective classes who
might have voted in favour of the scheme by
requisite majority but the Court has to consider
the pros and cons of the scheme with a view to
finding out whether the scheme is fair, just and
reasonable and is not contrary to any provisions
of law and it does not violate any public policy.
This is implicit in the very concept of
compromise or arrangement which is required
to receive the imprimatur of a court of law. No
court of law would ever countenance any
scheme of compromise or arrangement arrived
at between the parties and which might be
supported by the requisite majority if the Court
finds that it is an unconscionable or an illegal
scheme or is otherwise unfair or unjust to the
class of shareholders or creditors for whom it is
meant. Consequently it cannot be said that a
Company Court before whom an application is
moved for sanctioning such a scheme which
might have got the requisite majority support of
the creditors or members or any class of them
for whom the scheme is mooted by the
company concerned, has to act merely as a
rubber stamp and must almost automatically
put its seal of approval on such a scheme. It is
trite to say that once the scheme gets
- 79 -
sanctioned by the Court it would bind even the
dissenting minority shareholders or creditors.
Therefore, the fairness of the scheme qua them
also has to be kept in view by the Company
Court while putting its seal of approval on the
scheme concerned placed for its sanction. It is,
of course, true that so far as the Company
Court is concerned as per the statutory
provisions of Sections 391 and 393 of the Act
the question of voidability of the scheme will
have to be judged subject to the rider that a
scheme sanctioned by majority will remain
binding to a dissenting minority of creditors or
members, as the case may be, even though
they have not consented to such a scheme and
to that extent absence of their consent will have
no effect on the scheme. It can be postulated
that even in case of such a scheme of
compromise and arrangement put up for
sanction of a Company Court it will have to be
seen whether the proposed scheme is lawful
and just and fair to the whole class of creditors
or members including the dissenting minority to
whom it is offered for approval and which has
been approved by such class of persons with
requisite majority vote.
29. However further question remains whether
the Court has jurisdiction like an appellate
authority to minutely scrutinise the scheme and
- 80 -
to arrive at an independent conclusion whether
the scheme should be permitted to go through
or not when the majority of the creditors or
members or their respective classes have
approved the scheme as required by Section
391 sub-section (2). On this aspect the nature
of compromise or arrangement between the
company and the creditors and members has to
be kept in view. It is the commercial wisdom of
the parties to the scheme who have taken an
informed decision about the usefulness and
propriety of the scheme by supporting it by the
requisite majority vote that has to be kept in
view by the Court. The Court certainly would
not act as a court of appeal and sit in judgment
over the informed view of the parties concerned
to the compromise as the same would be in the
realm of corporate and commercial wisdom of
the parties concerned. The Court has neither
the expertise nor the jurisdiction to delve deep
into the commercial wisdom exercised by the
creditors and members of the company who
have ratified the Scheme by the requisite
majority. Consequently the Company Court's
jurisdiction to that extent is peripheral and
supervisory and not appellate. The Court acts
like an umpire in a game of cricket who has to
see that both the teams play their game
according to the rules and do not overstep the
- 81 -
limits. But subject to that how best the game is
to be played is left to the players and not to the
umpire. The supervisory jurisdiction of the
Company Court can also be culled out from the
provisions of Section 392 of the Act which reads
as under:
"392. (1) Where a High Court makes an order
under Section 391 sanctioning a compromise or
an arrangement in respect of a company, it--
(a) shall have power to supervise the carrying
out of the compromise or arrangement; and
(b) may, at the time of making such order or at
any time thereafter, give such directions in
regard to any matter or make such
modifications in the compromise or
arrangement as it may consider necessary for
the proper working of the compromise or
arrangement.
(2) If the Court aforesaid is satisfied that a
compromise or arrangement sanctioned under
Section 391 cannot be worked satisfactorily
with or without modifications, it may, either on
its own motion or on the application of any
person interested in the affairs of the company,
make an order winding up the company, and
such an order shall be deemed to be an order
made under Section 433 of this Act.
(3) The provisions of this section shall, so far as
may be, also apply to a company in respect of
- 82 -
which an order has been made before the
commencement of this Act under Section 153 of
the Indian Companies Act, 1913 (7 of 1913),
sanctioning a compromise or an arrangement."
Of course this section deals with post-sanction
supervision. But the said provision itself clearly
earmarks the field in which the sanction of the
Court operates. It is obvious that the supervisor
cannot ever be treated as the author or a
policy-maker. Consequently the propriety and
the merits of the compromise or arrangement
have to be judged by the parties who as sui
juris with their open eyes and fully informed
about the pros and cons of the scheme arrive at
their own reasoned judgment and agree to be
bound by such compromise or arrangement.
The Court cannot, therefore, undertake the
exercise of scrutinising the scheme placed for
its sanction with a view to finding out whether a
better scheme could have been adopted by the
parties. This exercise remains only for the
parties and is in the realm of commercial
democracy permeating the activities of the
concerned creditors and members of the
company who in their best commercial and
economic interest by majority agree to give
green signal to such a compromise or
arrangement. The aforesaid statutory scheme
which is clearly discernible from the relevant
- 83 -
provisions of the Act, as seen above, has been
subjected to a series of decisions of different
High Courts and this Court as well as by the
courts in England which had also occasion to
consider schemes under pari materia English
Company Law. We will briefly refer to the
relevant decisions on the point. But before we
do so we may also usefully refer to the
observations found in the oft-quoted passage in
Buckley on the Companies Act, 14th Edn. They
are as under:
"In exercising its power of sanction the court
will see, first that the provisions of the statute
have been complied with, second, that the class
was fairly represented by those who attended
the meeting and that the statutory majority are
acting bona fide and are not coercing the
minority in order to promote interest adverse to
those of the class whom they purport to
represent, and thirdly, that the arrangement is
such as an intelligent and honest man, a
member of the class concerned and acting in
respect of his interest, might reasonably
approve.
The court does not sit merely to see that the
majority are acting bona fide and thereupon to
register the decision of the meeting, but at the
same time, the court will be slow to differ from
the meeting, unless either the class has not
- 84 -
been properly consulted, or the meeting has not
considered the matter with a view to the
interest of the class which it is empowered to
bind, or some blot is found in the scheme."
In the case of Alabama, New Orleans, Texas
and Pacific Junction Rly. Co., Re the relevant
observations regarding the power and
jurisdiction of the Company Court which is
called upon to sanction a scheme of
arrangement or compromise between the
company and its creditors or shareholders were
made by Lindley, L.J. as under:
"What the court has to do is to see, first of all,
that the provisions of that statute have been
complied with; and, secondly, that the minority
has been acting bona fide. The court also has to
see that the minority is not being overriden by
a majority having interests of its own clashing
with those of the minority whom they seek to
coerce. Further than that, the court has to look
at the scheme and see whether it is one as to
which persons acting honestly, and viewing the
scheme laid before them in the interests of
those whom they represent, take a view which
can reasonably be taken by businessmen. The
court must look at the scheme, and see
whether the Act has been complied with,
whether the majority are acting bona fide, and
whether they are coercing the minority in order
- 85 -
to promote interests adverse to those of the
class whom they purport to represent; and then
see whether the scheme is a reasonable one or
whether there is any reasonable objection to it,
or such an objection to it as that any
reasonable man might say that he could not
approve it."
To a similar effect were the observations of Fry,
L.J., which read as under:
"The next enquiry is: Under what circumstances
is the court to sanction a resolution which has
been passed approving of a compromise or
arrangement? I shall not attempt to define what
elements may enter into the consideration of
the court beyond this, that I do not doubt for a
moment that the court is bound to ascertain
that all the conditions required by the statute
have been complied with; it is bound to be
satisfied that the proposition was made in good
faith; and, further, it must be satisfied that the
proposal was at least so far fair and reasonable,
as that an intelligent and honest man, who is a
member of that class, and acting alone in
respect of his interest as such a member, might
approve of it. What other circumstances the
court may take into consideration I will not
attempt to forecast."
- 86 -
In Anglo-Continental Supply Co. Ltd., Re
Ashtury, J., a century later reiterated the very
same propositions as under:
"Before giving its sanction to a scheme of
arrangement the court will see firstly that the
provisions of the statute have been complied
with; secondly that the class was fairly
represented by those who attended the meeting
and that the statutory majority are acting bona
fide and are not coercing the minority in order
to promote interests adverse to those of the
class whom they purport to represent; and,
thirdly, that the arrangement is such as a man
of business would reasonably approve."
The learned Single Judge of the Calcutta High
Court in the case of Mankam Investments Ltd.,
Re relying on a catena of decisions of the
English courts and Indian High Courts observed
as under on the power and jurisdiction of the
Company Court which is called upon to sanction
a scheme of merger and amalgamation of
companies:
"It is a matter for the shareholders to consider
commercially whether amalgamation or merger
is beneficial or not. The court is really not
concerned with the commercial decision of the
shareholders until and unless the court feels
that the proposed merger is manifestly unfair or
is being proposed unfairly and/or to defraud the
- 87 -
other shareholders. Whether the merged
companies will be ultimately benefited or will be
able to economise in the matter of expenses is
a matter for the shareholders to consider. If
three companies are amalgamated, certainly,
there will be some economies in the matter of
maintaining accounts, filing of returns and
various other matters. However, the court is
really not concerned with the exact details of
the matter and if the shareholders approved the
scheme by the requisite majority, then the
court only looks into the scheme as to find out
that it is not manifestly unfair and/or is not
intended to defraud or do injustice to the other
shareholders."
We may also in this connection profitably refer
to the judgment of this Court in the case of
Employees' Union v. Hindustan Lever Ltd.
wherein a Bench of three learned Judges
speaking through Sen, J. on behalf of himself
and Venkatachaliah, C.J., and with which
decision Sahai, J., concurred, Sahai, J., in his
concurring judgment in the aforesaid case has
made the following pertinent observations in
this connection in the Report: (SCC pp. 506-08,
paras 3-6)
"But what was lost sight of was that the
jurisdiction of the court in sanctioning a claim of
merger is not to ascertain with mathematical
- 88 -
accuracy if the determination satisfied the
arithmetical test. A company court does not
exercise an appellate jurisdiction.
***
Section 394 casts an obligation on the court to
be satisfied that the scheme for amalgamation
or merger was not contrary to public interest.
The basic principle of such satisfaction is none
other than the broad and general principles
inherent in any compromise or settlement
entered between parties that it should not be
unfair or contrary to public policy or
unconscionable. In amalgamation of companies,
the courts have evolved, the principle of
'prudent business management test' or that the
scheme should not be a device to evade law.
But when the court is concerned with a scheme
of merger with a subsidiary of a foreign
company then the test is not only whether the
scheme shall result in maximising profits of the
shareholders or whether the interest of
employees was protected but it has to ensure
that merger shall not result in impeding
promotion of industry or shall obstruct growth
of national economy. Liberalised economic
policy is to achieve this goal. The merger,
therefore, should not be contrary to this
objective. Reliance on English decisions Hoare &
Co. Ltd., Re and Bugle Press Ltd., Re that the
- 89 -
power of the court is to be satisfied only
whether the provisions of the Act have been
complied with or that the class or classes were
fully represented and the arrangement was
such as a man of business would reasonably
approve between two private companies may
be correct and may normally be adhered to but
when the merger is with a subsidiary of a
foreign company then economic interest of the
country may have to be given precedence. The
jurisdiction of the court in this regard is
comprehensive."
Sen, J., speaking for himself and
Venkatachaliah, C.J., also towed the line
indicated by Sahai, J., about the jurisdiction of
the Company Court while sanctioning the
scheme and made the following pertinent
observations: (SCC p. 528, para 84)
"An argument was also made that as a result of
the amalgamation, a large share of the market
will be captured by HLL. But there is nothing
unlawful or illegal about this. The Court will
decline to sanction a scheme of merger, if any
tax fraud or any other illegality is involved. But
that is not the case here. A company may, on
its own, grow up to capture a large share of the
market. But unless it is shown that there is
some illegality or fraud involved in the scheme,
the Court cannot decline to sanction a scheme
- 90 -
of amalgamation. It has to be borne in mind
that this proposal of amalgamation arose out of
a sharp decline in the business of TOMCO. Dr
Dhavan has argued that TOMCO is not yet a
sick company. That may be right, but TOMCO at
this rate will become a sick Company, unless
something can be done to improve its
performance. In the last two years, it has sold
its investments and other properties. If this
proposal of amalgamation is not sanctioned, the
consequence for TOMCO may be very serious.
The shareholders, the employees, the creditors
will all suffer. The argument that the Company
has large assets is really meaningless. Very
many cotton mills and jute mills in India have
become sick and are on the verge of liquidation,
even though they have large assets. The
Scheme has been sanctioned almost
unanimously by the shareholders, debenture-
holders, secured creditors, unsecured creditors
and preference shareholders of both the
Companies. There must exist very strong
reasons for withholding sanction to such a
scheme. Withholding of sanction may turn out
to be disastrous for 60,000 shareholders of
TOMCO and also a large number of its
employees."
In view of the aforesaid settled legal position,
therefore, the scope and ambit of the
- 91 -
jurisdiction of the Company Court has clearly
got earmarked. The following broad contours of
such jurisdiction have emerged:
1. The sanctioning court has to see to it that all
the requisite statutory procedure for supporting
such a scheme has been complied with and that
the requisite meetings as contemplated by
Section 391(1)(a) have been held.
2. That the scheme put up for sanction of the
Court is backed up by the requisite majority
vote as required by Section 391 sub-section
(2).
3. That the meetings concerned of the creditors
or members or any class of them had the
relevant material to enable the voters to arrive
at an informed decision for approving the
scheme in question. That the majority decision
of the concerned class of voters is just and fair
to the class as a whole so as to legitimately
bind even the dissenting members of that class.
4. That all necessary material indicated by
Section 393(1)(a) is placed before the voters at
the meetings concerned as contemplated by
Section 391 sub-section (1).
5. That all the requisite material contemplated
by the proviso of sub-section (2) of Section 391
of the Act is placed before the Court by the
applicant concerned seeking sanction for such a
- 92 -
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 the same class whom they
purported to represent.
8. That the scheme as a whole is also found to
be just, fair and reasonable from the point of
view of prudent men of business taking a
commercial decision beneficial to the class
represented by them for whom the scheme is
meant.
9. Once the aforesaid broad parameters about
the requirements of a scheme for getting
sanction of the Court are found to have been
met, the Court will have no further jurisdiction
- 93 -
to sit in appeal over the commercial wisdom of
the majority of the class of persons who with
their open eyes have given their approval to the
scheme even if in the view of the Court there
would be a better scheme for the company and
its members or creditors for whom the scheme
is framed. The Court cannot refuse to sanction
such a scheme on that ground as it would
otherwise amount to the Court exercising
appellate jurisdiction over the scheme rather
than its supervisory jurisdiction.
The aforesaid parameters of the scope and
ambit of the jurisdiction of the Company Court
which is called upon to sanction a scheme of
compromise and arrangement are not
exhaustive but only broadly illustrative of the
contours of the Court's jurisdiction.
30. In the light of the aforesaid settled legal
position we will now proceed to deal with the
main points for determination indicated
hereinabove."
(f) Similar view has been taken in HINDUSTAN
LEVER. (supra) in paragraphs 11 and 12, which are
extracted hereunder:
"11. While exercising its power in sanctioning a
scheme of agreement, the court has to
- 94 -
examine as to whether the provisions of the
statute have been complied with. Once the
court finds that the parameters set out in
Section 394 of the Companies Act have been
met then the court would have no further
jurisdiction to sit in appeal over the
commercial wisdom of the class of persons
who with their eyes open give their approval,
even if, in the view of the court a better
scheme could have been framed. This aspect
was examined in detail by this Court in Miheer
H. Mafatlal v. Mafatlal Industries Ltd. [(1997)
1 SCC 579] The Court laid down the following
broad contours of the jurisdiction of the
Company Court in granting sanction to the
scheme as follows: (SCC pp. 597-98 & 601-
02, para 29)
1. The sanctioning court has to see to it that all
the requisite statutory procedure for
supporting such a scheme has been complied
with and that the requisite meetings as
contemplated by Section 391(1)(a) have been
held.
2. That the scheme put up for sanction of the
Court is backed up by the requisite majority
vote as required by Section 391 sub-section
(2).
3. That the meetings concerned of the
creditors or members or any class of them
- 95 -
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 class of voters concerned 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 meetings concerned as contemplated
by Section 391 sub-section (1).
5. That all the requisite material contemplated
by the proviso of sub-section (2) of Section
391 of the Act is placed before the Court by
the applicant concerned 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
unconscionable, nor 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
- 96 -
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 the same class whom they
purported to represent.
8. That the scheme as a whole is also found to
be just, fair and reasonable from the point of
view of prudent men of business taking a
commercial decision beneficial to the class
represented by them for whom the scheme is
meant.
9. Once the aforesaid broad parameters about
the requirements of a scheme for getting
sanction of the Court are found to have been
met, the Court will have no further jurisdiction
to sit in appeal over the commercial wisdom
of the majority of the class of persons who
with their open eyes have given their approval
to the scheme even if in the view of the Court
there would be a better scheme for the
company and its members or creditors for
whom the scheme is framed. The Court
cannot refuse to sanction such a scheme on
that ground as it would otherwise amount to
the Court exercising appellate jurisdiction over
the scheme rather than its supervisory
jurisdiction. It is the commercial wisdom of
the parties to the scheme who have taken an
- 97 -
informed decision about the usefulness and
propriety of the scheme by supporting it by
the requisite majority vote that has to be kept
in view by the Court. The Court has neither
the expertise nor the jurisdiction to delve
deep into the commercial wisdom exercised
by the creditors and members of the company
who have ratified the scheme by the requisite
majority. Consequently the Company Court's
jurisdiction to that extent is peripheral and
supervisory and not appellate. The Court acts
like an umpire in a game of cricket who has to
see that both the teams play their game
according to the rules and do not overstep the
limits. But subject to that how best the game
is to be played is left to the players and not to
the umpire. The supervisory jurisdiction of the
Company Court can also be culled out from
the provisions of Section 392. Of course this
section deals with post-sanction supervision.
But the said provision itself clearly earmarks
the field in which the sanction of the Court
operates. The supervisor cannot ever be
treated as the author or a policy-maker.
Consequently the propriety and the merits of
the compromise or arrangement have to be
judged by the parties who as sui juris with
their open eyes and fully informed about the
pros and cons of the scheme arrive at their
- 98 -
own reasoned judgment and agree to be
bound by such compromise or arrangement.
12. Two broad principles underlying a scheme
of amalgamation which have been brought out
in this judgment are:
1. that the order passed by the court
amalgamating the company is based on a
compromise or arrangement arrived at
between the parties; and
2. that the jurisdiction of the Company Court
while sanctioning the scheme is supervisory
only i.e. to observe that the procedure set out
in the Act is met and complied with and that
the proposed scheme of compromise or
arrangement is not violative of any provision
of law, unconscionable or contrary to public
policy. The court is not to exercise the
appellate jurisdiction and examine the
commercial wisdom of the compromise or
arrangement arrived at between the parties.
The role of the court is that of an umpire in a
game, to see that the teams play their role as
per rules and do not overstep the limits.
Subject to that how best the game is to be
played is left to the players and not to the
umpire.
- 99 -
Both these principles indicate that there is no
adjudication by the court on the merits as
such."
(g) The Bombay High Court in LARSEN AND
TOUBRO LTD., (supra) at paragraphs 62 and 63 has
held that once the majority of the members and
creditors have accepted the scheme, their commercial
wisdom cannot be questioned by individual
shareholders. Paragraphs 62 and 63 of the said
judgment are extracted hereunder:
"62. In this case also, objections as raised
cannot be considered in view of the above dear
observations in this court.
63. A shareholder, in such circumstances,
cannot or should not extend his rights which
are available under the Companies Act, to
oppose such scheme of arrangement to
obstruct the whole object and purpose of such
scheme. The parties or shareholders attended
the meeting and suggested modifications and
once their modifications or suggestions were
rejected by majority, there is no reason further
to reconsider the same view or modification
suggested by such objectors espedally by the
court and to reverse the decision which has
- 100 -
been taken by the majority in their respective
meetings. Individual shareholders, in no way,
can raise any objection on behalf of the
creditors or unsecured creditors when
admittedly in this case, they have sanctioned
and approved the arrangement by unanimous
decision in their respective meetings. The
objections raised by the objectors in the
present case are, therefore, not bona fide and
not in the interest of the company at all. The
commercial wisdom of the shareholders to
approve such scheme in majority has to be
respected. Mere bald allegations that scheme is
not in the public interest, without material or
justification for the said allegation, cannot be
accepted. The majority shareholders have
taken into consideration the total scheme of
arrangement in question. The share exchange
ratio which has been fixed after the valuation
report of professional and expert auditors, the
effect of shares of Narmada Cement Company
Ltd. or transfer of cement division or the
alleged monopoly or concentration needs to be
rejected and for that reason, such scheme of
arrangement cannot be interfered with. It is
necessary to consider that objectors like Mr. V.
Ranganathan and Mr. R. Shekar, who have
admittedly not attended the meeting and have
not participated in any proceedings, now,
- 101 -
cannot be allowed to raise any objection in
such a cryptic manner. As per the practice and
procedure of the company rules, Mr. V.
Ranganathan and Mr. R. Shekhar have not
even filed affidavit or application in the
prescribed form and no leave of any kind was
obtained from the court. The allegations made
in their so-called objections are vague, bald
and without any supporting material and the
same cannot be considered and definitely
cannot be a reason to discard the present
scheme of arrangement. The apex court in
Miheer H. Mafatlal's case, particularised cases
like the objectors in question and their
objections which are as follows (page 828):
"So far as the transferee company is concerned
though the appellant was not a director he
was a 5 per cent, shareholder who did not
think it fit to personally remain present at the
time of voting and simply relied upon the
proxy. If he was feeling that the scheme was
unfair to him or was not going to protect his
interest as shareholder in the respondent-
company nothing prevented him from
remaining present and voicing his grievance
before the general body of the equity
shareholders and to apprise them of the
alleged pernicious effect of die scheme. It is,
therefore, too late in the day for him to
- 102 -
contend that the scheme was unfair to him and
that the family of Arvind Mafatlal had tried to
dominate and engineer any adverse pattern of
voting at the meeting of the equity
shareholders."
(g) If the Court finds that the scheme is just, fair
and reasonable and approved by the requisite
majority, the scheme has to be approved as held in
ADMINISTRATOR OF THE SPECIFIED UNDERTAKING
OF UNIT TRUST AND ANOTHER (supra) and
CALCUTTA HIGH COURT IN RE-HINDUSTAN
GENERAL ELECTRIC CORPORATION (supra). Even in
MEGHAL HOMES (supra) as cited by the learned
counsel for the appellants, it has been held that
before sanctioning the scheme the Court has to see
whether the scheme contemplates the revival of
business of the Company or makes provision for
paying off creditors or satisfying their claims as
agreed by them and for meeting the liability of the
workers, the scheme has to be approved. The learned
- 103 -
Single Judge has considered all these aspects before
sanctioning the scheme.
(h) The Bombay High Court in ALSTOM POWER
BOILERS LTD.,(supra) in paragraph 19 has held as
under:
19. My learned Brother Dr. Chandrachud J. in the
case of ION Exchange (India) Ltd., In re
MANU/MH/0330/2001 : [2001] 105 Comp Cas 115
(Bom) has very rightly cited the observations of the
learned single judge of the Gujarat High Court in
Sidhpur Mills Co. Ltd., The learned judge indeed
has ven succinctly described the jurisdiction of the
company court as under (page 126) :
".....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 businesslike 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 individuals
- 104 -
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, before, the court grants the seal
of its approval upon the proposed amalgamation."
(emphasis is given by me)"
47. RE: ISSUE No.3:
(a) It may be noted that the learned Company
Judge has rejected the Company Application
No.640/2001 on the ground that the proceedings
were at the stage of notice and notice had been
served on the respondents, despite completion of 9
years since filing of the petition and one of the
Directors/respondents in the said proceedings had
also died during such time. The Official Liquidator
never raised an objection to the scheme citing
pending Company Application No.640/2001 for
misfeasance. It may also be noted that father of the
appellants, late Gopala Shetty was one of the
Directors, against whom the misfeasance proceedings
were initiated in Company No.640/2001 and 2nd
- 105 -
appellant who held only 50 shares claims additional
2000 shares under the Will of his father, which were
allegedly purchased by the father of the appellants
from out of the funds of the Company. The
respondent Nos.3 and 4 are also not alive as of today.
It may also be noted that two independent valuers
have valued the properties and there is not a case
that the properties were undervalued. No objection
was filed by the appellants to the valuation report.
The Company meeting took place as per the
provisions of the Act. Notice under Section 393 of the
Act was issued and report of the Chairman discloses
that the scheme was approved by the members and
creditors overwhelmingly. In addition, the Company
has made payment of huge amounts as mentioned
above.
48. We therefore, do not find that the impugned
order dated 19.06.2009 passed by the learned
Company Court suffers from any illegality, which
requires an interference by this Court. Thus we
- 106 -
dismiss the appeal and affirm the order passed by
the learned Single Judge.
49. In view of dismissal of both the appeals, the
interim applications, if any, stand rejected.
Sd/-
(D K SINGH)
JUDGE
Sd/-
(VENKATESH NAIK T)
JUDGE
NG
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