Holding

The scheme of amalgamation is not unfair, the director’s personal interest need not be disclosed, no separate meeting of the minority class is required, and the exchange ratio is reasonable, so the sanction of the scheme stands.

Summary

Mafatlal Industries Ltd (the transferee) sought to amalgamate with Mafatlal Fine Spinning and Manufacturing Co Ltd (the transferor) under a scheme of arrangement approved by a meeting of equity shareholders. The appellant, Miheer H. Mafatlal, a 5% shareholder and director of the transferor, objected under Section 391 of the Companies Act, 1956, alleging non‑disclosure of a director’s special interest, unfairness to the minority, the need for a separate meeting of his class, and an unreasonable exchange ratio. The High Court sanctioned the scheme, which was affirmed by a Division Bench, leading to the present appeal. The Supreme Court examined the limited supervisory jurisdiction of the Company Court, emphasizing compliance with Sections 391 and 393, the requirement of material disclosure, bona‑fide majority action, and fairness to the whole class. It held that the director’s personal family dispute did not constitute a special interest requiring disclosure, that the overwhelming majority vote negated any claim of coercion, that no separate meeting of a sub‑class was necessary, and that the expert‑determined exchange ratio was reasonable. Consequently, the appeal was dismissed and the amalgamation scheme upheld.

Issues considered

Whether the non‑disclosure of a director’s personal interest under Section 393(1)(a) vitiated the shareholders' approval of the scheme.
Whether the scheme was unfair or unreasonable to the minority shareholders.
Whether a separate meeting of the appellant’s minority shareholders was required.
Whether the exchange ratio of shares was ex facie unfair to the transferee’s shareholders.
Whether the scheme amounted to suppression of minority shareholders.

Legislation cited

Companies Act, 1956s. 391, s. 392, s. 393, s. 394A, s. 82, s. 86

Headnote

Company Law : Companies Act, 1956: Sections 391 to 393. Amalgamation-Scheme of-Sanction-Granting of-Factors to be considered-By Company Court-Jurisdiction of-Broad contours laid down--Creditors or. members must anive at inf onned decision based on relevant material for approving schemc:-Scheme as A B c D Amalgamation-Scheme of-Approved by majority shareholde1"j~ Sanction of-By Company Cowt-Alleged bona fide action of maj01ity shareholders or supression by the minority shareholders-Consideration for-Held : Bona fides of majolity shareholde1"j' acting as group to be ex

Subjects

amalgamationscheme of arrangementminority shareholdersspecial interest disclosureexchange ratioCompanies Act 391bona fide majoritycorporate law

Judgment

MJHEER H. MAFATLAL A
v.
MAFATLAL INDUSTRIES LTD.,

SEPTEMBER 11, 1996

[N.P. SINGH AND S.B. MAJMUDAR, JJ.] B

Company Law :

Companies Act, 1956: Sections 391 to 393.

Amalgamation-Scheme of-Sanction-Granting of-Factors to be
c
considered-By Company Court-Jurisdiction of-Broad contours laid
down--Creditors or. members must anive at infonned decision based on
relevant material for approving schemc:-Scheme as a whole was to be just,
fair and reasonable to creditors or members without coercing mi1101ity.
D
Amalgamation-Scheme of-Approved by majority shareholde1"j~
Sanction of-By Company Cowt-Alleged bona fide action of maj01ity
shareholders or supression by the minority shareholders-Consideration
for-Held : Bona fides of majolity shareholde1"j' acting as group to be ex-
amined-Not bona fides of pe1w11 whose personal interest might be different E
from that of voters as a class-Fwthe1; glievance of bona fides of maj01ity
voiced before General Body meeting itself-In the circumstances of the case,
Scheme of Amalgamation could not be said to be unfair to min01ity
shareholders.

Amalgamation-Scheme of-Mi1101ity equity shareholders-Convening F
of separate meeting of-Held : No separate meeting of the sub-class of
min01ity shareholders to be convened unless different type of scheme of
compromise offered to them-If same scheme offered to entire class of equity
shareholders no separate meeting of 111in01ity shareholders required to be
convened.
G
The respondent transferee-company was a large multi- Division,
multi-locational company carrying on diversified activities including
manufacturing and sale of textiles. The appellant was a director in the
transferor-company which had been carrying on the business of manufac-
ture and sale of textile piece goods and chemicals. H
1
2 SUPREME COURT REPORTS (1996] SUPP. 6 S.C.R.

A The transferee-company moved an application before the High Court
for sanctioning lofa scheme of Amalgamation of the transferor-company
with the transferee-company. H was at this sfage that ~he appellant who ·
was one of the shareholders of the transferee-company filed his objections
under Section 391 of the Companies Act, Earlier the High Court directed
convening of a meeting of equity shareholders of the respondent trans-
B
feree-company. In the meeting an overwhelming majority of equity
shareholders approved the scheme of Amalgamation. Thereafter the
respondent transferee-company filed Company Petition before the High
Court under Section 391(2) of the Act. The Single Judge sanctioned the

--
said scheme of Amalgamation which was confirmed in appeal by the
C Division Bench of the High Court. Being aggrieved the appellant preferred
the present appeal.

On behalf of the appellant it was contended that the respondent
transferee-company was guilty of hiding the special interest of its director
D from the shareholders thereby the voting by the equity shareholders got
vitiated; that the scheme of Amalgamation was unfair, unreasonable and
amounted to supression of minority shareholders represented by the ap·
pellant and hence liable to be rejected; that a separate meeting of minority
shareholders represented by the appellant was required to be convened on
the basis that the appeJiant's group represented a special class of equity
E shareholders; and that the exchange ratio of equity shares of the transferor
and transferee companies was ex f acie unfair and unreasonable to the
shareholders of the transferee-company.

On behalf of the respondent transferee-company it was contended
F that the personal disputes between the directors of the transferee and
transferor. eompanies were out of con·sideration of the equity shareholders
and in any case non~disclosure of such disputes had no adverse effect on the
decision ofthe majority shareholders who had approvedthe Scheme with a
thumping majqrity of a about 95% and the appellant who was objecting to
G the Scheme was in microscopic minority of 5% of the total voting strength;
that the appellant never cared even fo be present at the meeting of the equity
shareholders to put forward his objection and he only sent proxies who had
no right to speak at the meeting; that the exchange ratio was suggested by
experts and approved by an overwhelming majority of the equity
shareholders; and that the appellant himself who was the director of the
H transferor-company had approved the scheme of Amalgamation.
MIHEERH.MAFATIAL v. MAFATLALINDS.LTD. 3

Dismissing the appeal, this Court A
HELD: 1.1. The provisions of Sections 391and393 of the Companies
)., Act, 1956 show that compromise Qr 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 B
another. When such a scheme is put fonvard by a company for the sanction
of the Court in the first instance the Court has to direct holding of meeting
of creditors of class of creditors or members or class of members who are
concerned with such a scheme to accord their approval. The Company
Court which is called upon to sanction such a scheme has not merely to go
by the ipse dixit of the majority of the shareholders or creditors or their
c
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. 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 D
,.. . by the concerned company, cannot act merely as a rubber stamp and
automatically put its seal of approval on such a scheme. [24-A-G; 25-B]

1.2. The following broad contours of the jurisdiction of the Company
Court in granting sanction to the scheme have emerged :
E
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. [31-H; 32-A]
F
2. That the scheme put up for sanction of .the Court is backed up by
the requisite majority vote as required by Section 391 (2). [32-B]

3. That the concerned meetings of the creditors or members or any
class of them had the relevant material to enable the voters to arrive at an
informed decision for approving the scheme in question. That the majority G
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.
[32-C]
4. That all necessary material indicated by Section 393(l)(a) is
placed before the voters at the concerned meetings as contemplates by H
4 SUPREME COURT REPORTS [1996) SUPP. 6 S.C.R.

A Section 391(1). [32-C-D]

5. That all the requisite material contemplated by the proviso to
Section 391(2) of the Act is placed before the Court by the concerned
applicant seeking sanction•for such a scheme and the Court gets satisfied
about the same. [32-D]
B
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
c veil of apparent corporate purpose underlying the scheme and can judi-
ciously X-ray the same. [32-E]

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
D in order to promote any interest adverse to that of the latter comprising
of the same class whom they purported to represent. [32-F] - 1

8. That the scheme as a whole is also found to be just, fair and
reasonable from the point of vies of prudent men of business taking a
commercial decision beneficial to the class represented by them for whom
E
the scheme is meant. [32-G]

9. Once the aforesaid board parameters about. the requirements of
the scheme for getting sanction of the Court are found to have been met,
the Court will ha•e no further jurisdiction to sit in appeal over the
F 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
G the Court exercising appellant jurisdiction over the scheme rather than its
supervisory jurisdiction. [32-H; 33-A-B]

1.3. 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
H in view by the Court. The Court certainly would not act as a court of appeal
MIHEER H. MAFATIAL v. MAFATLAL INDS. LID. 5

and sit in judgment over the informed view of the concerned parties to the A
compromise as the same would be in the realm of corporate and commer-
cial wisdom of the con~erned parties. 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 B
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 umprie. The supervisory jurisdiction of the Company Court can
also be culled out from the provisions, of Section 392 of the Act. Of course C
this Section deals with post- sanction supervision. But the said provisions
itself clearly earmarks the field in which the sanction of the Court operates.
The supervisor cannot ever treated as the author or a policy maker. Con-
sequently the propriety and the merits of the Compromise or arrangement
have to be judged by the parties who as sui juris their open eyes and fully
informed about the pros and cons of the Scheme arrive at their own D
reasoned judgment and agree to be bound by such compromise or arran-
.. gement. The aforesaid parameters of the scope and ambit of the jurisdic-
tion of the Company Court which is called upon to sanction a Scheme of
Compromise and Arrangement are not exhaustive but only broadly il-
lustrative of the contours of the Court's jurisdiction. E
[25-H; 26-A·C; 27-A-B]
Alabama New Orleans Texas and Pacific Junction Railway Company,
Re, (1891) 1 Chancery Division 213 andAnglo- Continental Supply Co. Ltd.,
Re, (1992) 2 Ch. 723, referred to.
F
Mankam Investments Ltd. and Others, Re., (1995) 4 Comp. W 330
(cal.), approved.

Hindustan Lever Employees' Union v. Hindustan Lever Ltd. and Other,
[1995] Supp. 1 SCC 499, relied on.
G
_.. Hoare & Co. Ltd., Re, (1933) All ER Rep. 105, Ch. D and Bugle Press
Ltd., Re, (1961) Ch. 270, cited.

Bucklay on the Companies Act, 14th Edition, referred to.
•
2.1. Section 393(1)(a) of the Act shows that the special interest of H
6 SUPREME COURT REPORTS [1996] SUPP. 6 S.C.R.

--· A director which is required -to be brought home to the voters m~st satisfy
the following requirements of the Section before it can be treated to be a
relevant special interest of the director which.is required to be.communi-
cated to the voters : [34-E-F] ·

1. The director's interest 1_!1.Ustbe a special interest different frQm the
B interest of other members who are the voters at the meeting. [34-E-F-GJ

2. The compromise or arrangement which is put to vote must have
an effect on such special interest of the director. [34-G]

___ c 3. Such effect must be different from the effect of compromise and
arrangement on similar interest of other persons who are called upon to
vote at the meeting. [~4-F-H]

2.2. When a scheme of Compromise and Arrangement which involves
two companies, namely, the transferor-company and the transferee-com-
D pany and their shareholders and creditors is on the anvil of scrutiny before
the sanctioning Court, the Court has to see that the interest of the class
of creditors or shareholders to whom the Scheme is offe17ed for approval
is any way likely to be affected by the suppression of special interest of t6'~
director in connection with such a scheme which is on the anvil. Two
independent bodies which are represented by their shareholders or
E creditors as a class, as the case may be, have to take commercial decisions
strictly with a view to seeing that the concerned Scheme of Compromise
or Arrangement is beneficial to the shareholders or creditors as a class
vis-a-vis the company which is a corporate entity in so far as company's
relations with these class of creditors and shareholders are concerned. If
F the special interest which the director has is in any way likely to be affected
by the Scheme and if non-disclosure of such an interest is likely to affect
the voting pattern of the class of creditors or shareholders who are. called
upon to vote on the scheme, then only such special interest of the director
is required to be communicated to the voters as per Section 393(1)(a) of
G the Act. [36-E-GJ

2.3. The personal family dispute between the appellant on the one
hand and his uncle, director or the transferee-company on the other
regarding the right to hold shares in the company cannot have any linkage
-
or nexus with the Scheme of Amalgamation of these two companies which
H was put to vote before the equity shareholders. The equity shareholders of
MIHEER H. MAFATLAL v. MAFA'ILALINDS. LTD. 7

the transferee-company had to decide in their commercial wisdom whether A
it is worthwhile to have a larger body of shareholders on account of the
merger so that apart from the share-holding of the transferee-company its
objects would also get diversified and its field of operation would be
enlarged with the prospect of hike in the dividend available to these
shareholders after the economic and Industrial activities of both the
B
companies so amalgamated would get elongated and whether the value of
their shares in such consolidated companies were likely to get a boost in
the stock market. While deciding whether transferor-company should be
merged with the transferee-company and the transferee company's
economic and industrial activity should be permitted to be enlarged as.a
result of such merger the equity shareholders least concerned whether the C
appellant would purchase in future the share of his uncle, t!le present
director or vice versa. That was entirely their personal dispute which was
still not adjudicated upon and its decision one way or the other had no
impact on the pattern of voting of the equity shareholders of the respon-
dent- company as a class of prudent businessmen and investors so far as D
the Scheme was concerned. Consequently, it must be held that mention
about the personal interest was outside the statutory requirements of
Section 393(1)(a) of the Act. [36-H; 37-A; C; H; 38-A-B; CJ

3.1. While considering the question of bona fides of the majority
voters and whether they were unfair to the appellant it has to be kept
E
in view that bona fides of the majority acting as a group has 'to be

... examined vis-a-vis the Scheme in question and not the bona fides of the
person whose personal interest might be different from the interests of
the voters as a class. Bona fide of person can only be relevant if it can
be established with reasonable certainty that he represents majority or F
is controller of majority. The director of the transferee-company cannot
be visited with such a charge. The question of bona fide of the majority
shareholders or .the alleged suppression by them of the minority
shareholders or their attempt to suffocate their interest has to be judged
from the pc,int of view of the class as a whole. Question is whether the G
majority equity shareholders while acting on behalf of the class as a
whole had exhibited any adverse interest against the appellant's minority
shareholders also having similar interest as members of the same clas's,
while approving the Scheme or had acted with any oblique motive to
whittle down such a class interest of the minority. [41-E-F] H
8 SUPREME COURT REPORTS (1996) SUPP. 6 S.C.R.

.A Hellenic and General Tmst Limited, Re, (1976) 1 WLR 123, referred
to.

3.2. In the instant case it cannot be said that the voting pattern was
dominated by the share-holding of the director of the transferee-company
_..(
and his group. Nor could it be said that the Scheme as put to vote was in
B any way unfair to appellant or that the majority shareholders acting as a
class had not behaved in a bona fide manner for protecting the interest of
the class as a whole and were in any way inimical to the appellant. It was
not the contention of the appellant that while voting by majority in favour
of the Scheme the majority had acted with any oblique motive to fructify
c any adverse commercial interest qua him and his group when it consisted
of outsiders like financial institutions or that there was any possibility of <::.
their surrendering their economic interest in the scheme at the dictates of
shareholder-director of the transferee-company and his group. The Board
of DirectfJrs of the respective companies, namely, the transferor-company
as well as the transferee-company had approved that Scheme of Amal-
D gamation before it was imt to vote. The appellant was himself one of the
directors of the transferee-company who had no objection to the Scheme of
Amalgamation from the point of view of the transferor-company. So far as
the transferee-company is concerned though appellant was not a director
he was 5% shareholder who did not think it fit to personally remain present
at the time of voting and simply relied upon proxy~ If the appellant was
E
feeling that the Scheme was unfair ~o 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 the Scheme. It is, therefore, too late in the day for him to contend
F that the Scheme was unfair to him and that the family of the director of
transferee-company had tried to dominate and engineer any adverse pat·
tern of voting at the meeting of the equity shareholders. Apart from the
· pattern of voting at the meeting of the equity shareholders, even the share-
holding pattern of the respondent-company belies the submission put for·
G ward on behalf of the appellant that the group of the transferee-company's
director dominated the constitution of the company and could control the
decisions of the shareholders. The scheme of the Amalgamation cannot be
said to be unfair and, amounting to suppression of minority shareholders
represented by the appellant. [41-D; 42-C-F; 43-G]

H 4. Even though the Companies Act or the Article of Association do

'6
MIHEER H. MAFATLAL v. MAFATLAL INDS. LTD. 9

not provided for such a class within the class of equity shareholders, in a A
given contingency it may be contended by a group of shareholders that
because of their separate and conflicting interests vis-a-vis other equity
shareholders with whom they formed a wider class, a separate meeting of
such separately interested shareholders should have been convened. On
the express language of Section 391(1) it becomes clear that where a B
compromise or arrangement -is proposed between a company and its
members or any class of them a meeting of such members or class of them
has to be convened. This clearly presupposes that if the Scheme of Arran-
gement or Compromise is offered to the members as a class and no
separate Scheme is offered to any sub- clause of members which lms a
separate Scheme to consider, no question of holding a separate meeting of
c
such a sub-class would at all survive. In the instant case when one the same
Scheme is offered to the entire class of e(1uity shareholders for their
consideration :md when commercial interest of the appellant so far as the
Scheme is concerned is common with other equity shareholders he would
have a common cause \\1th them either to accept or to reject the Scheme D
from c;Jmmercial point of view. Consequently there was no occasion for
convening a separate class meeting of the minority equity shareholders
represented by the appellant and his group. [46-G-H; 47-E; G-H]

Palmer 011 Company Law 24th Edition, referred to. E
S. Valuation of shares is a technical and. complex problem which can

- be appropriately left to the consideration of experts in the filed of account-
ancy. Many imponderables enter the exercise of valuation of shares. Which
exchange ratio is better is in the realm of commercial decision of well
informed equity shareholders. It is not for the Court to sit in appeal over
F
this value judgment of equity shareholders who are supposed to be men of
the world and reasonable persons who know their own benefit and interest
underlying any proposed scheme and who with open eyes have okayed this
ratio and the entire Scheme. [49-D; SO-A; 51-B]
G
Kamala Sugar Mills Ltd. 55 Company Cases, 308 (Guj), approved.

CWT. v. Mahadeo Jalan, [1973] 3 SCC 157, relied on.

Penington : Plinciples of Company Law, referred to. H
10 SUPREMECqURTREPORTS [1996) SUPP. 6S.C.R.

A CIVIL APPELLATE JURISDICTION : Civil Appeal No. 11879 of
1996.

. From the Judgment and Order dated 12.7.96 of the Gujarat High
Court in O.J.A. No. 16 of 1994.

B Shanti Bhusan, Miheer Thakur, Darshan Parekh, Jay Salve, and J.K.
Das for the Appellant.

Soli J. Sorabjee, S.B. Vakil, S. Ganesh, P.N. Kapadia, U.A. Rana and
Rajiv Tyagi for Gagrat & Co. for the Respondent.

c The Judgment of the Court was delivered by

S.B. MAJMUDAR, J. Leave granted.

By consent of learned advocate of parties this appeal was taken up
for final hearing. We have heard the learned advocates of parties. The
D appeal is being disposed of by this judgment.

This appeal by special leave arises out of the judgment and order of
a Division Bench of High Court of Gujarat in Original Jurisdiction Appeal
No. 16 of 1994 decided on 12 July 1996. The Division Bench by the said
E impugned judgment dismissed the appeal of the appellant and confirmed
the order of the learned Single Judge in Company Petition No. 22 of 1994
and s_anctioned a Scheme of Amalgamation of two Public Limited _com- .
panies, namely Mafatlal Industries Limited ('MIL' for short) being the
transferee-company with which Mafatlal Fine Spinning and Manufacturing
Company Limited ('MFL' for short) being the transferor-company was to
F be amalgamated. The iearned Single Judge granted requisite sanction to
the applicant transferee-company MIL to amalgamate in it the transferor-
compan y MFL under Section: 391(2) of the Companies Act, 1956
(hereinafter referred to as 'the Act'). In order to appreciate the grievance
of the appellant who objected to the Scheme moved by the respondent-
G company MIL, as ventilated before us by its learned senior counsel Shri
Shanti Bhusan, assisted by learned counsel Shri M.J. Thakore, it will be
necessary to glance through a few relevant background facts.

Background Facts

H The respondent-company MIL which was the petitioner before the
MIHEER H. M.Af<ATLAL v. MAI'A11.AL INDS. LTD. [S.B. MAJMUDAR, J.] 11

learned Single Judge has its registered office at Ahmedabad in Gujarat A
State. It was incorporated on 20th January 1913 under the name 'The New
Shorrock Spinning & Manufacturing Co. Limited' and its name was sub-
sequently changed to 'Mafatlal Industries Limited' as per the fresh Certifi-
cate of Incorporation dated 24 January 1974 consequent upon change of
name, as sanctioned by the Registrar of Companies, Gujarat, Ahmedabad.
The objects of the transferee-company MIL as per its Memorandum of
B
Association, inter a/ia, included activity of carrying on all or any of the
businesses such as cotton spinners and doublers, wool, silk, flax, jute and
hemp spinners and doublers, linen manufactures, to work spinning and
weaving mills, cotton mills, jute mills and mills of any other description.
The Authorised Share Capital of the respondent-company was Rs. c
100,00,00,000 (Rupees one hundred crores only) divided into 30,05,500
equity shares of Rs. 100 each and 69,94,500 unclassified shares of Rs. 100
each. The subscribed Share Capital of the respondent-company as on 31st
March 1993 was Rs. 26.30 crores (Rupees twenty six crores thirty lacs only)
divided into 26,90,000 equity shares of Rs. 100 each.
D

... The respondent-company commenced the business of textiles and
had been carrying on the same since incorporation. The respondent-com-
pany is a large multi-Division, Multi-locational company carryiny on diver-
sified activities including manufacturing and sale textiles, dyes
intermediates and chemicals, professional grade connectors, plastic E
processing machineries and promoting various companies through Project
Promotion Division.

The MFL being transferor-company was incorporated on 20th April
1931 under the Baroda State Companies Act and had been carrying on the F
busines.s of manufacture and sale of textile piece goods and chemicals. Its
registered office was situated at Mafatlal Centre, Nariman Point, Bombay.
It was engaged in the manufacture and sale of textiles and fluorines based
chemicals. There were three units of the Textiles Division situated at (1)
Vejalpur Road, Navsari, (2) Mazagon, Bombay and (3) Lower Parel,
Bombay and the unit of the Chemicals Division was situated at Bhestan, G
District Surat.

The Authorised Share Capital of the transferor-company as on 31st
March 1993 was Rs. 30 crores (Rupees thirty crores only) divided into
30,00,000 ordinary shares of Rs. 100 each. The Subscribed Share Capital H
12 SUPREME COURT REPORTS [1996} SUPP. 6 S.C.R.

A of the transferor-company as on 31st March 1993 was Rs. 26,25,77,100
(Rupees twenty six crores twenty five lacs seventy seven thousand and one
hundred only) divided into 26,25,771 ordinary shares of Rs. 100 each.
Subsequent to 31st March 1993 the the transferor-company had allotted
382 ordinary sh:ires of Rs. 100 each. The transferor-company had also
issued and allotted further 1,00,000 ordinary shares of Rs. 100 each at a
B premium of Rs. 200 per share on conversion of 1,00,000 Partly Convertible
Debentures of the face value of Rs. 2,000 each issued to Financial Institu-
tions with effect from 1st February 1994 by the transferor-company.

The transferor-company MFL is proposed to be amalgamated with
C the respondent-company MIL under the following circumstances and for
the following reasons :

(1) The proposed amalgamation will pave the way for batter,
more efficient and economical control in the running of
operation.
D
(2) Economies in administrative and management costs will im-
prove in combined profitability.

(3) The amalgamated company will have the benefit of the com-
bined reserves, manufacturing assets, manpower and
E
cashflows of the two companies. The combined technological,
managerial and financial resources are expected to enhance
the capability of the amalgamated company-to invest in larger
and sophisticated projects to ensure rapid growth.

F (4) The amalgamated company will have a strong and large re
source base. With a strong resource base, the risk bearing
capacity of the amalgamated Company will be substantial.
Hitherto, with limited resources and capacity, either company
had to forego business opportunities which would otherwise
have been profitable to the group.
G
(5) "Exports" have been identified a 'thrust' area for both the
companies and response in time to customers needs is con-
sidered to be critical in this area of 'operations. An amal-
gamated company will be strategically better placed to reduce
H the response time. Customers' confidence in dealing with such
MIHEERH.MAfi\TLAL v. MAf"ATLALINDS. LID. [S.B.MAfMUDAR,J.j 13

a mega company ensures timely delivery of large orders. A
(6) The amalgamated company will be able to source and absorb
new technology and spend on Research and Development,
Market Surveys etc. More comprehensively.

(7) More particularly in the Textiles Division, with .5 operating B
units at the company's disposal, the flexibility in operations
will be very much pronounced. The Managers will not be
inhibited by capacity constraints and will have the freedom
of choosing from various options.

(8) Both the companies have been subject to the pressures of raw
c
material price fluctuations and of adverse market conditions
in their respective product mix. Hence, the amalgamation will
neutralise the adverse effects of contrary business cycles. The
operations of one unit will be complementary to the other
and a stable profitability will be achieved. D

The director of the respondent-company MIL and transferor- com-
pany MFL approved the proposal for amalgamation of the MFL with MIL
and pursuant to the respective Resolutions passed by them the detailed
Scheme of Amalgamation was finalised. The directors of both the com-
panies of the opinion that such amalgamation was in the interest do both
E
the companies.
1~-
It is pertinent to note at this stage that the appellant who has
objected to the amalgamation before the High Court in the present
proceedings so far as the amalgamation of the transferee-company is F
concerned, is himself one of the directors of the transferor- company being
MFL. So far as the transferor-company MFL is concerned as its registered
office is located at Bombay the corresponding application on behalf of the
transferor-company for sanctioning this very Scheme of Amalgamation was.
moved in the Bombay High Court. The appellant at this stage did not
object to this very Scheme for amalgamation on behalf of the transferor- G
company of which he was one of the directors and party to the Resolution
approving the said am;:tlgamation. Learned Single Judge of the Bombay
High Court sanctioned the said Scheme on behalf of transferor-company. ,
It is not in dispute between the parties that Bombay High Court had
already sanctioned this very Scheme on behalf of the transferor-company. H
14 SUPREME COURT REPORTS (1996] SUPP. 6 S.C.R.

A As the registered office of the transferee-company is located at
Ahmedabad the respondent transferee-company had approached the High
Court of Gujarat for sanctioning this very Scheme of Amalgamation on
behalf of the transferee-company and that application was moved on 8th ___..

February 1994. It is at this stage that the appellant who was one of the
shareholders. of the transferee-company filed his objection to the Scheme
B of Amalgamation moved under Section 391 of the Act. Earlier the learned
Single Judge directed convening of meeting of equity shareholders of the
respondent-company. In the meeting of equity shareholders convened pur-
suant to the order of the High Court, overwhelming majority of the equity
shareholders approved the Scheme in the meeting of 22nd January 1994
convened at Premabhai Hall, Bhadra, Ahmedabad. The said meeting was
c attended by 5522 members present in person or by proxy, holding 20, 48,
513 fully paid equity shares of Rs. 100 each aggregating to Rs. 20,48,51,300.
At the said meeting, resolution was passed without modification by the
requisite majority as 5298 members holding 19, 36, 964 fully paid equity
shares vokd in favour of the Scheme and 143 members holding 86, 061
D fully paid equity shares voted against the Scheme. In short, the said meeting
by requisite majority approved the proposed Scheme of Amalgamation and
report of the Chairman was submitted to the High Court. Thereafter the
respondent-company MIL filed Company Petition No. 22 of 1994 under
Section 391(2) of the Act. That application was ordered to be published in
local newspapers as well as in the Bombay edition ofthe said newspaper.
E Notice was also issued to Regional Director, Company Law Board,
Western Region, Bombay.

In response to the notice issued to the Central Government under
Section 394A of the Act the learned Additional Central Government
F Standing Counsel appeared before the High Court and submitted to the
orders of the Court making it clear that the Central Government is not to
make any representation in favour or against the proposed Scheme.

Pursuant to the public advertisement only the present appellant, the
G shareholder of transferee-company holding 40, 567 share in MIL filed
affidavit opposing the Scheme of Amalgamation and Arrangement between
the respondent transferee-company MIL and transferor-company MFL of
which, as noted earlier, he himself was one of the directors and the High
Court of Bombay which sanctioned this very Scheme on behalf of the
transferor-company had sanctioned· the Scheme without any objection
H being taken by the appellant at that stage.
MlHEERH.MAFATLAL v. MAFATLALINDS.LTD.(S.B.MAJMUDAR,J.] 15

Nine objections were raised by the appellant against the proposed A
Scheme of Amalgamation as shareholder of the transferee-company. At
this stage we may not mention all these nine objections as ultimately only
four objections have survived for our consideration in the present proceed-
ings and to which we will make a detailed reference hereinafter. Suffice it
to state at this stage that after a prolonged hearing the learned Single Judge B
S.D. Shah, J., over-ruled these objections and by a detailed as exhaustive
judgment running over 254 pages covering various aspects of the matters
; canvassed before him sanctioned the said Scheme moved on behalf of the
respondent transferee-company.
...a
The Division Bench of the High Court to which the appellant carried C
the matter in appeal confirmed the aforesaid decision of the learned Single
Judge by well considered Judgment which also ran into 136 pages and that
is how the appellant, original objector, is before us in this appeal.

Family Hist01y
D
In order to properly appreciate the grievance of the appellant against
the proposed Scheme and his roie as an objector it will be necessary to
note the family history of the appellant and two of the directors of the
respondent transferee-company who have a comm~n ancestor Mafatlal
Gagalbhai. The Family Tree of Mafatlal Gagalbhai projects the following E
picture:
<
Family Tree of Mafat/al Gagalblzai
<~

Seth Mafatlal Gagalbhai
(Died on 19.07.1944)
F
Bhagubhai Pransukhlal
Navinchandra
(Died (Deceased)
(Died 31.08.1955)
30.09.1944) (No issues)
Arvind Yogindra Rasesh
Hemant
Padmanabh (Died on G
(Died on Hrishikesh Atulya Pradeep 16.08.1971)
29.07.1990)
Miheer
(Born on
27.05.1958)
H
·~

16 SUPREME COURT REPORTS [1996] SUPP. 6 S.C.R.

A As the aforesaid Family Tree shows, the appellant Miheer is the son of
cousin brother of Arvind Navinchandra who is said to be at the helm of
affairs of the transferee-company along with his son Hrishikesh. As seen
from the Family Tree the common ancestor Mafatlal Gagalbhai who was
himself a very astute businessman and entrepreneur had three sons Pran-
sukhlal. Navinchandra and Bhagubhai. The eldest son Pransukhlal got out
B of the family prior to the death of Mafatlal Gagalbhai and he died without
leaving any issue. Mafatlal Gagalbhai expired on 19th July 1944 and was
survived by his two sons Navinchandra and Bhagubhai. On 30th September
1944, the said Bhagubhai died leaving him surviving Hemant, then aged 9
as his only male issue. On 31st August 1955, Navinchandra Mafatlal died
c leaving him surviving the three sons. Arvind Mafatlal. Yogindra Mafatlal
and Rasesh mafatlal as his male issues. On 16th August 1971, said Hemant
expired leaving behind him only male issue, present objector Miheer, them
aged 13.

D The said Mafatlal Gagalbhai started different business undertakings
and with passage of time, the family of said Mafatlal consisting to
Navinchandra and Bhagubhai expanded their business undertakings. The
said family held controlli!lg interest in 'different business concerns run
throug~ public limited_ or private limited companies and the members of
the family were also partners in partnership firms. The pattern which was
E maintained throughout was thatthe two sons Navinchandra and Bhagubhai
and their families would respectively have an equal interest in companies
or in partnership firms. At the time of the death of the said Bhagubhai the
said Hemant was just 9 years of age. The business of Mafatlal Group was
therefore for all practical purposes managed by the said Navinchandra. At
F the time to the death of _Navinchandra the shareholding of.the branch of
Hemant Mafatlal in Mafatlal Group of Industries was equal to aggregate
shareholding of Arvind Mafatlal, Yogindra Mafatlal and Rasesh Mafatlal.
On the death of Navinchandra, the Mafatlal Group was managed by Arvind
Mafatlal, Yogindra Mafatlal, Rasesh Mafatlal and late Hemant Mafatlal.
Arvind Mafatlal was, however the eldest male member in the family who
G was always looked upon by Yogindra, Rasesh and late Hemant as an elder
in the family and respected.

On 16th August 1971, Hemant Mafatlal died at the young age of 36
years leaving behind him his widowed mother, his wife, his son Miheer
H (then aged 13) and his two daughters (then aged 11 and 6). At that time,
MIHEERH.MAFATLAL v. MAFATLALINDS.LTD.[S.B.MAIMUDAR,J.] 17

the Mafatlal family, i.e., the families of Navinchandra and Bhagubhai were A·
running 3 apex companies (1) Mafatlal Gagalbhai & Company Private
Limited, (2) Surat Cotton Spinning and Weaving Mills Private Limited and
(3) Pransukhlal & Company Private Limited.

It is the case of Miheer that when his father expired, the New
Shorrock Spinning and Manufacturing Co. Limited was being controlled B
and managed by Mafatlal Gagalbhai & Co. Limited in which his father and
his family had 46.47% shares vis-a-vis 43.66% shares held by the family of
Navinchandra Mafatlal. After the death of his father, when Miheer was
minor, it was decided to amalgamate Mafatlal Gagalbhai & Co. Pvt.
Limited with the New Shorrock Spinning & Manufacturing Co. Limited on C
24th January 1974 January 1974 :.i.nd the name of the company was changed
to present name i.e. MIL.

According to the appellant Miheer in or around 1979, there were
certain disputes and difference amongst Arvind Mafatlal, Yogindra Mafat- D
Ial and Rasesh Mafatlal and it was felt that some arrangement should be
worked put, whereby there would be a separation and division of the family
business concerns amongst the four branches viz. Miheer Branch known as
MHM Group, family of Arvind Mafatlal known as ANM Group, family of
Yogindra Mafatlal known as YNM Group and family of Rasesh Mafatlal
known as RNM Group. It is his further case that Shri C.C. Chokshi, a E
reputed chartered accountant was requested to prepare a Scheme for
division of family business concerns. According to the appellant. Shri C.C.
Chokshi prepared Note dated 23rd February 1979 making six suggestions
for the division of Mafatlal Group of Industries into four groups as there
were four family groups. The appellant contends that as per the aforesaid F
family arrangement the transferee-company, i.e., MIL was agreed to be put
to his share and the other groups which were holding shares in the said
transferee-company were to transfer their share-holdings in favour of the
appellant. The appellant contends that however because of some family
disputes the appellant fell from the grace of Shri Arvind Mafatlal who was
the eldest male member monitoring all these industries belonging to all the G
groups of the same family, and consequently the family arrangement was
not give effect to and that the transferee-company was not handed over in
management to the appellant.

On the other hand the case of the other group headed by Shri Arvind H
18 SUPREME COURT REPORTS [1996] SUPP. 6 S.C.R.

A Mafatlal was to the effect that the said family arrangement of 1979 was
given a go-by and the appellant himself agreed to sell his share-holding in
the transferee-company MIL in favour of Arvind Mafatlal''.: Group. Num-
ber of litigations took place between the parties in the second half of 1980s.
That on 6th April 1987 Arvind Mafatlal filed Suit No. 10 of 1987 in the
High Court of .Judicature at Bombay for a declaration that there was a
B valid, subsisting and binding contract to sell shares held by Rasesh Mafat-
lal, Yogindra Mafatlal and Miheer Mafatlal, the appellant herein, groups
to Shri Arvind Mafatlal's group and for a direction that they should sell
that shares at a price to be determined by the arbitrator. In the said suit
the appellant Miheer filed a counter-claim praying that the family arran-
c gement of 1979 should should be enforced and the share-holding of Shri
Arvind Mafatlal's group and other groups in the transferee- company MIL
should be sold by way of specific performance to the appellant. The
aforesaid suit by Arvind Mafatlal and the counter- claim by the appellant
are pending for adjudication in the High Court of Judicature at Bombay.
D It is in the background of the aforesaid history of family feud between these
warring groups descended from the common ancestor Shri Mafatlal
Gagalbhai that the grievance voiced by the appellant in these proceedings
has to be appreciated.

Rival Contentions
E
As noted earlier though a battle royal was fought between the
contesting parties before the learned Single Judge wherein nine objections
were raised for adjudication by the appellant, at this stage, the dispute
centered round a limited number of contentions which were canvassed for
F our consideration by learned senior counsel for the appellant. Four-fold.
submissions for opposing the Scheme were canvassed on behalf of the
appellant before us by Shri Shanti Bhushan, learned senior counsel. In the
first place he contended that the respondent-company while putting the
Scheme for approval of the equity shareholders in their meeting did not
G disclose the interest of the directors, namely, Shri Arvind Mafatlal and Shri
Hrishikesh Mafatlal belonging to the camp of Arvind Mafatlal in the
explanatory statement supporting the Scheme and consequently the +.'
shareholders were misled and could not come to an informed decision
regarding the approval of the said Scheme with the result that the approval
by the majority of equity shareholders to the said Scheme has got vitiated;
H (2) The Scheme as proposed was unfair to the minority shareholders
MIHEERH.MAFATLAL v. MAFATLALINDS.LID.[S.B.MATMUDAR,J.) 19

represented by the appellant and consequently it ought not to have been A
sanctioned by the Court; (3) The Scheme was otherwise unfair to ·the equity
shareholders as the exchange ratio of equity shares of the transferor and
transferee companies was ex facie unreasonable and unfair to the
shareholders of the transferee-company MIL in so far as it provides under
the Scheme that two equity shares of the transferee company will be • B
allotted against five equity shares of the transferor-company at their
respective face value of Rs. 100 per share; and (4) That the appellant
represented a distinct class of equity shareholders so far as the respondent
transferee-company is concerned and consequently separate meeting_ so far
as his group is concerned should have been convened by the Company
Court and as that has not been done the Scheme is liable to be rejected. C

As a corollary to the aforesaid contention Shri M.J. Thakore, learned
counsel appearing for the appellant in addition submitted that the voting
pattern as adopted in the meeting of equity shareholders which had ap-
proved the Scheme by majority, resulted in coercing the minority repre- D
sented by the appellant and that has rendered the Scheme unfair and
unreasonable and consequently it is required to be rejected.

On the other hand learned senior counsel Shri Sorabjee appearing
for th respondent transferee-company contended that there was to illegality
either procedural or substantive vitiating the Scheme and that there was E
no suppression of relevant material from the shareholders when the
Scheme was put to vote. That the personal disputes between the worring
groups of the family, namely, Arvind Mafatlal on the one hand and the
appellant on the other and which were subject-matter of the pending
litigation in Bombay High Court had nothing to do with the question of F
sanctioning the Scheme for its better economic viability with which the
shareholders were concerned and that as the transferor-company and the
transferee-company were juristic persons and corporate bodies, while con-
sidering the question of approving the said Scheme such personal disputes
between the directors of the transferee-company and the director of trans- G
feror-company were completely irrelevant and were out of consideration
of the equity shareholders who were not at all c9ncerned with this type of
internal feuds and in any case non-disclosure of such disputes had no
adverse effect on the decision of the majority share_holders who had
approved the Scheme with a thumping majority of about 95% and the
appellant who was objecting to the Scheme was in microscopic minority of H
20 SUPREME COURT REPORTS [1996) SUPP. 6 S.C.R.

A 5% of the total voting strength. It was also contended by learned senior
counsel for the respondent that it is wrong to assume that the transferee-
company was family concerned and was managed by families. That Shri
Arvind Mafatlal and Hrishikesh Mafatlal were only two direcfors out of
thirteen directors of respondent-company. These eleven directors did not
belong to his family. That even shareholding of Arvind Mafatlal's group in
B
the respondent-company was not substantial and on the contrary about
40% shares were held by outside financial institutions. Even otherwise
there was no question of any unfairness underlying the proposed Scheme
or that in any way it was unfair to the appellant who never cared even to
remain present personally at time of the meeting of the equity shareholders
c to put forward his objections and he only sent proxies who had no right to
speak at the meeting. That therefore all these objections which he ultimate-
ly raised before the High Court were an afterthought. It was also contended
that there was nothing wrong with the exchange ration as C.C. Chokshi &
Co., a firm of reputed chartered accountants, had considered all the pros
and cons underlying the Scheme and had suggested the exchange ratio and
D
such an expert opinion was endorsed by another financial institution ICICI.
That the appellant had not chosen to controvert this expert opinion by
leading any evidence in rebuttal by any other expert in the field who could
have suggested the exchange ratio differently. That the appellant's conten-
tion that the exchange ratio should have been one share of transferee
E company against six shares of the transferor company was in the realm of
mere conjecture and ipse di.xit. It was not supported by any expert opinion.
Consequently the High Court was justified in taking the view both at the
stage of learned Single Judge as well as in appeal by the Division Bench
that the exchange ratio could not be said to be unfair or unreasonable
F especially when by as overwhelming majority the equity shareholders ap-
proved the said Scheme along with said exchange ratio and had no objec-
tion to the allotment of two equity shares of the transferee-company in
exchange for five equity shares of transferor-company. It was also con-
tended that the appellant himself who was the director of the transferor-
company had approved the same exchange ratio while he acted on behalf
G of the transferor-company. He was, therefore, playing hide and seek when
it came to the enforcement of the very same exchange ratio at the end of
the transferee-company wherein he was not a director but only shareholder
of merely 5% shares.

H It was next contended that the appellant was also an equity
MIHEERH.MAFA1LAL v. MAFA1LALINDS.LTD.(S.B.MAJMUDAR,J.] 21

shareholder and so far as the other equity shareholders were concerned A
they constituted the same class as the appellant. That there was no inter se
conflict between the rest of the equity shareholders representing 95% of
the voting strength which approved the Scheme and the appellant who
. ._ represented dissenting 5% votes and consequently there was no question
of holding as separate meeting so far as the appellant was concerned. Even · B
otherwise such a separate meeting would not have made any impact on the
voting pattern projected by the equity shareholders approving the said
Scheme by overwhelming majority. Repelling the additional contention
canvassed by learned counsel for the appellant it was submitted by Shri
Sorabjee learned senior counsel for the respondent that there was no
question of coercing any minority by the majority as in the meeting of the C
equity shareholders the appellant had not thought fit even to remain
present personally and had only got represented through proxy for submit-
ting his objection by voting against the Scheme without having any right to
address the meeting. Thus the contention regarding alleged suppression by
the majority was purely an afterthought especially when in the meeting the D
group of Arvind Mafatlal had not represented an absolute majority and
40% of the voting was by financial institutions who had no axe to grind
against the appellant and who had voted by keeping in view purely com-
mercial and economic interests of equity shareholders and had approved
the Scheme in that light. It was, therefore, submitted that the contention
raised on behalf of the appellant deserve to be rejected and the appeal E
consequently also deserve to be dismissed.

In view of the aforesaid rival contentions the following points arise
for our determination :
F
1. Whether the respondent-company was guilty of hiding the special
interest of its director Shri Arvind Mafatlal from the shareholders while
circulating the explanatory statement supporting the Scheme and whether
thereby the voting by the equity shareholders got vitiated.

2. Whether the Scheme is unfair and unreasonable to the minority G
shareholders represented by the appellant.

3. Whether the proposed Scheme of Amalgamation was unfair and
amounted to suppression of minority shareholders represented by the
appelJant and hence liable to be rejected. H
22 SUPREME COURT REPORTS (1996] SUPP. 6 S.C.R.

A 4. Whether separate meeting of minority shareholders represented
by the appellant was required to be convened on the basis that the
appellant's group represented a special class of equity shareholders.

5. Whether the exchange ratio of two equity shares of MIL for five
equity shares of MFL was ex f acie unfair and unreasonable to the equity
B shareholders of MIL and consequently the Scheme of Amalgamation on
that account was liable to be rejected.

However before we deal with the aforesaid. points for determination
seriatim, it will be necessary to keep in view the limited scope of the
C jurisdiction of the Company Court which is called upon to sanction the
Scheme of Amalgamation as per the provisions of Section 391 read with
Section ~93 of the Act.

Scope of inte1ference by the Company
Cowt in sanction proceedings
D
The relevant proyisions of the Companies Act, 1956 are found in
Chapter V of Part VI dealing with 'Arbitration, Compromises, Arrange-
ments and Reconstructions'. In the present proceedings we will be con-
cerned with Sections 391 and 393 of the Act. The relevant provisions
thereof read as under :
E
"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;
F
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
G
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 mem-
bers, as the case may be, present and voting either in person or,
H . where proxies are allowed under the rules made u.nder section 643,
MIHEER H. MAFATLAL v. MAFATLALINDS. LID. [S.B. MNMUDAR, J.] 23

by proxy, at the meeting, agree to any compromise or arrangement, A
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 :
B
Provided that no order sanctioning any compromise or arran-
gement 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, C
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 D
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 E
setting forth the terms of the compromise or arrangement and
explaining its effect : and in particular, stating any material
interests of the directors, managing director, managing agent,
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, F
of the compromise or arrangement, if, and in so far 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 adver- G
tisement, there shall be included either such a statement as
aforesaid on 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 H
24 SUPREME C,OURT REPORTS (1996) SUPP. 6 S.C.R.

. A 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 amalgama-
tion/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
B 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
c. accord their approval to any compromise or 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 membc:rs, 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
D 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
E 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 infor-
mation. as contemplated by the said provision is also required to be placed
for consideration of the concerned voters so that the parties concerned
before \Vhom the scheme is placed for voting can take an informed and
F 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
sanction such a scheme has not merely to by go by the ipse di.xit of the
majority of the shareholders or creditors or their respective classes who
G 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
H is required to receive the imprimature of a court of law. No court of law
MIHEER H. MAFATLAL v. MAFATLAL INDS. LTD. (S.B. MAJMUDAR, J.] 25

would ever countenance any scheme of compromise or arrangement ar- A
rived 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 shareholder 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 B
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 concerned
company has to act merely as a rubber stamp and must almost automat-
ically put its seal of approval on such a scheme. It is trite to say that once
the scheme gets sanctioned by the Court it would bind even the dissenting
minority shareholders or creditors. Therefore, the fairness of the scheme
c
qua them also has to be kept in view by the Company Court while putting
its seal of approval on the concerned scheme 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 D
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 E
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 required majority
vote. F

However further question remains whether the Court has jurisdiction
like an appellate authority to minutely scrutinies the scheme and to arrive
at an independent conclusion whether the scheme should be permitted to
go through or not when the majority of the creditors or members or their
respective classes have
.
approved
,
the schemeI
as required by Section 391 G
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 and informed decision about the usefulness and propriety of the
scheme by supporting it by the requisite majority vote that has to be kept H
26 SUPREME COURT REPORTS (1996) SUPP. 6 S.C.R.

A in view by the Court. The Court certainly would not act as a court of appeal
nd sit in judgment over the informed view of the concerned parties to the
compromise as the same would be in the realm of corporate and commer-
cial wisdom of the concerned parties. The Court has neithe~ 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
B 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 umprie 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
c the players and not to the umpire. The supervis~ry 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
D company, it -

(a) shall have power to supervise the carrying out of the com-
promise or arrangement; and

(b) may, at the time of making such order or at any time there-
E
after, 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 com-
promise or arrangement.

F (2) If the Court aforesaid is satisfied that a compromise or arran-
gement sanctioned under section 391 cannot be worked satisfac-
torily 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
G
of this Act.

(3) The provisions of this section shall, so far as may be, also apply
to a company in respect of which an order has been made before
the commencement of this Act under section 153 of the Indian
H Companies Act, 1913 (7 of 1913), sanctioning a compromise or an
MIHEERH.MAFATLAL v._MAFATLALINDS.LID.[S.B.MAJMUDAR,J.]27
I

arrangement." A

Of course this Section deals with post-sanction supervision. But the said
provision itself clearly earmarks the filed 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
B
juris with their open eye 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 place for its sanction which a view
to finding out whether a better scheme could have been adopted by the c
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 the their best commercial and
economic interest by majority agree to give green single to such a com-
promise or arrangement. The aforesaid statutory scheme which is clearly D
discernible from the relevant provisions of the Act, as seen above, has been
subjected to a series of decisions of different High Courts and this Court
as well as by the courts in England which had also occasion to consider
schemes under pari materia English Company Law. We will briefly refer to
the relevant decisions on the point. But before we do so we may also
usefully refer to the observations found in the oft-quoted passage in Bucklay E
on the Companies Act, 14th Edition. 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 F
and that statutory majority are acting bona fide and are not coerc-
ing 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 ciass concerned and acting in respect of his interest, might
reasonably approve. G

The court does not sit merely to see that the majority are acting
bona fide and thereupon to register the decision of the meeting,
but at the same time, the court Will be slow to differ from the
meeting, unless either the class has not been properly consulted, H
28 SUPREME COURT REPORTS [1996) SUPP. 6 S.C.R.

A 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 Re. Alabama, New Orleans Texas and Pacific junction
Railway Company reported in 1891 (1) Chancery Division 213 the relevant
B 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 creditor 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
c of that statute have been complied with; and, secondly, that the
minority has been-acting bonafide. 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
D 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 reasonable 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
bonafide, and whether they are coercing the minority in order to
E 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."
F To the similar ef\¢ct 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 com-
promise or arrangement? I shall not attempt to define what ele-
G
ments 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 l~ve 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
H proposal was at least so far fair and reasonable, as that an intel-
MIHEER H. MAFATLAL v. MAFATLALINDS. LID. [S.B. MAJMUDAR, J.] 29

ligent and honest man, who is a member of that class, and acting A
alone in respect of his interest as such a member, might approve
of it. What other circumstances the court may take into considera-
tion I will not attempt to forecast."

In Anglo-Continental Supply Co. Ltd., Re. (1992) 2 Ch. 723 Ashtury, J., a
century later reiterated the very same propositions as under : B

"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 tile meeting and that the statutory majority are acting
bona fide and are not coercing the minority in order to promote
c
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."

Learned Single Judge of the Calcutta High Court in the case of Re. D
Mankam Investments Ltd. and Others (1995) 4 Comp U 330 (Cal.) relying
on a catena of decisions of the English Courts and Indian High Courts
observed as under on the power and jurisdiction of the Company Court
which is called upon to sanction a scheme of merger and amalgamation of
companies:
E
"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 F
defraud the other shareholders. Whethe.r 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 G
and various other matters. However, the court is really not con-
cerned 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." H
30 SUPREME COURT REPORTS (1996] SUPP. 6 S.C.R.

A We may also in this connection profitably refer to the judgment of this
Court in the case of Hindustan Lever Employee's Union v. Hindustan Lever
Ltd. and Others, [1995) Supp. 1 SCC 499 wherein a Bench of three learned
judges speaking through Sen, J. on behalf of himself and Venkatachaliah,
CJ., and with which decision Sahai, J., concurred. Sahai, J., in his concur-
ring judgment in the aforesaid case has made the folloWing pertinent
B
observations in this connection in paras 3. and 6 of the Report :

"But what was lost sight of was that the jurisdiction of the Court
in sanctioning a claim of merger is not to ascertain with mathe-
matical accuracy if the determination satisfied the arithmetical test.
c 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
D 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. "prudent busi-
ness management test" or that the scheme should not be a device
E to evade law. But when the court is concerned with a scheme of
merger with a subsidiary of a foreign company then test is not only
whether the scheme shall result in maximizing profits of the
shareholders or whether the interest of employees was protected
but it has to ensure that merger shall not ·result in impeding
F promotion of industry or shall obstruct growth of national
economy. Liberalised economic policy is to achieve this goal. The
merger, therefore, should not be contrary to this objective.
Reliance on English decisions Hoare & Co. Ltd., Re 1933 All ER
Rep 105, Ch ·D and Bugle Press Ltd.. Re. 1961 Ch 270 that the
power of the court is to be satisfied only whether the provisions
G .P( .tl!t?. .~f::tJg1xe J?eeru:oi;nplied with· or, that therdassyor classes
1?bfrirl:WI~r.e MIY.:rf!pr.esent1,:;p a1'-P!the .wrangemeqbwas;suthras,a man of
1r, nu l;>µsjQ.~SliJW.OHl.dirJ(~l>OJ:!(/:b]y ~pprove bt;tween.two1private1e~_mpanies

nu ; tµ~YHQ~nCPfi.fieft !ian,4 Jn;J;ay normally; be1:a4her¢d (to ibJ.lt 11when the
, > :.Al.:le!;ge!. 1~~~~th :<!-'.:Sl\bsiflU.ry :.Pf <i 1fo.reign;90mpany th¢P, 1ei:;onomic
H interest of the country may have to be giYeniiJ)rete<;fence. The
MIHEER H. MAFATLAL v. MAFATLALINDS. LTD. [S.B. MAIMUDAR, J.) 31

jurisdiction of the court in this regard is comprehensive." A
Sen, J ., speaking for himself and Venkatachaliah, CJ., also towed the line
indicated by Sahai, J ., about the jurisdiction of the Company Court while
sanctioning the scheme and made the following pertinent observations in
paragraph 84 at page 528 of the Report :
B
"An argument was also made that as a result of the amalgama-
tion, 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.
c
But unless it is shown that there is some illegality or fraud involved
in the scheme, the Court cannot decline to sanction a scheme of
amalgamation. It has to be borne in mind that this proposal of
amalgamation arose out of a sharp decline in the business of
TOMCO. Dr. Dhavan has argued that TOMCO is not yet a sick D
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 sanc-
tioned, the consequence for TOMCO may be very serious. The E
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 F
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 dis-
astrous for 60,000 shareholders of TOMCO and also a large
number of its employees." G
In view of the aforesaid settled legal position, therefore, the scope and
ambit of the 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 H
32 SUPREME COURT REPORTS [1996) SUPP. 6 S.C.R.

A procedure for supporting such a scheme has been complied with and that
the requisite meetings as contemplated by Section ·39l(l)(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).
B
3. That the concerned meetings of the creditors or members or any
class of them had the relevant material to enable the voters to arrive at an
informed decision for approving the scheme in question. That the majority
decision of the concerned class of voters is just and fair to the class as a
whole so as to leg,itimately bind even the dissenting members of that class.
c
4. That all necessary material indicated by Section 393(1)(a) is placed
before the voters at the concerned meetings as contemplated by Section
391 sub-Section (1).

D 5. That all the requisite material contemplated by the proviso of
sub-Section (2) of Section 391 of the Act is placed before the Court by the
concerned appllicant 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
E 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 th~ scheme and can judiciously
· X-ray the same.

F 7. That the Company Court has also to satisfy itself that members or
class of members or creditors or class of creditors, as the case may be,
were acting bona fide and in good faith and were .not coercing the minority
in order to promote any interest adverse to that of the latter comprising of
the same class whom they purported to represent.
G
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.

H 9. Once the aforesaid broad parameters about the requirements of a
34 SUPREME COURT REPORTS (1996) SUPP. 6 S.C.R. )

A better, more efficient and economic control in the running opera-
tions and would lead to economy in the administrative and manage-
ment cost, resulting in improving profitability. The amalgamated
company will have a strong and large resource funds. The com- I

B
bined Technological Managerial and financial resources would
enhance the capability of the amalgamated company to invest in
• '
l.

larger and sophisticated projects to ensure rapid growth. The
amalgamated company's Textiles Division with five operative units
at its disposal will have· flexibility in its operation." ...._
So far as the aforesaid explanatory statement is concerned it gives sufficient
c indication regardingJhe pliability and usefulness of the proposed Scheme
of Amalgamation of transferor-company MFL with the transferee-company
MIL. However the special grievance of the appellant voiced by his learned
counsel is to the effect that the real interest underlying the scheme of
merger was that of the director Shri Arvind Mafatlal and his group who
were at the helm of affairs of the transferee,company. Learned senior
D counsel Shri Shanti Bhushan in this connection submitted that under
Section 393(1)(a) of the Act the company is enjoined to mention in the
statement material interest of the director Shri Arvind Mafatlal in the .~
Scheme which is of a special nature as compared to the interest of other
shareholders and it was also necessary to mention the effect of the com-
E promise and arrangement on such special interest of Shri Arvind Mafatlal
and ~s that was not mentioned in the explanatory statement along with
which the copy of the Scheme was circulat.ed to the members the majority
vote became vitiated. Now a mere look at Section 393(1)(a) shows that the
special interest of the director which is required to be brought home to the
voters must satisfy the following requirements of the Section before it can
F be treated to be a relevant special interest of the director which is required
to be communicated to the voters :

1. The director's interest must be a special interest different from the
interest of other members who are the voters at the meeting.
.)

G
2. The compromise or arrangement which is put to vote must have
t
an effect on such special interest of the director.

3. Such effect must be different from the effect of compromise and
arrangement on similar interest of other persons who are called upon to
H vote at the meeting.
~
MIHEERH.MAFA11..AL v. MAFA11..ALINDS.LTD. [S.B.MAJMUDAR,J.] 35

When we enquired of Shri Shanti Bhushan, learned senior counsel for the A
appellant as to which special interest, according to him, of director Arvind
Mafatlal was required to be communicated to the voters as per Section
393(1)(a), he stated that there was a pending litigation between the appel-
lant on the one hand Shri Arvind Mafatlal on the other in Bombay High
Court. That Shri Arvind Mafatlal had sought a declaration in a pending
B
suit against the appellant that the latter was required to sell off his
share-holding in the transferee-company MIL to the plaintiff Arvind
Mafatlal who was director of MIL. In this very suit the appellant had filed
a counter-claim to the effect that· Shri Arvind Mafatlal and his group was
required to transfer their share-holding in the transferee-company in
favour of the appellant as per the Family Arrangement of 1979. Shri Shanti C
Bhushan in this connection submitted that though the learned Single Judge
had taken the view that this type of special interest of director Arvind
mafatlal was not relevant and germane to the requirement of Section
393(1)(a), the Division Bench in appeal had taken a contrary view and held
that such a special interest was required to be communicated to the equity D
shareholders in their meeting as per the said provision. In this connection
our attention was invited by Shri Shanti Bhushan to the observation of the
Division Bench of the High Court at page 325 of the paper book wherein
the Division Bench observed as under :

"Mihir H. Mafatlal was to get exclusive control to MIL to t~e E
exclusion of Arvind N. Mafatlal and his two brothers. Under the
proposed family arrangement M. Fine was to be hived off from
MIL and the control and management of the M. Fine was to be
held by Arvind N. Mafatlal and that of MIL was tc:i be handed over
,
to objector Mihir H. Mafatlal. This family arrangement has suf- F
fered rough weather. Suit No. 1010of1987 was filed by Arvind N.
Mafatlal against Mihir H. Mafatlal and others before the Bombay
High Court alleging that another agreement subsequent to the said
family arrangement has come into existence under which Mihir H.
Mafatlal and other brothers of Arvind had agreed to transfer all
their holdings in MIL to A.N. Mafatlal, drawing a curtain on the G
family arrangement of 1979. Mihir H. Mafatlal has filed counter
claim in that suit claiming enforcement of family arrangement of
1979. The said dispute and the outcome thereof will have direct
effect on the respective interest of the shares held by AN. Mafatlal,
Mihir H. Mafatlal and other members of the Mafatlal family, and H
-
36 SUPREME COURT REPORTS [1996) SUPP. 6 S.C.R.

A trusts. under them."

He also invited our attention to the observations of the Division Bench at
page 328 of the paper book to the effect that having cons;dered the rival
co.ntentions and closely examined the scheme of Section 393, they were
unable to sustain the conclusion that the facts about the interests under the
B alleged family arrangements and the effect of proposed arrangement for
amalgamation on such interests were not required to be disclosed under
section 393(1)(a).
.....
In our view the aforesaid observations of the Division Bench are not
C quite apposite in the light of the proposed Scheme of Compromise and
arrangement which was sought to be got sanctioned by the Court. On the
other hand the learned Single Judge was quite justified in taking the View
that this type of interest which was of personal nature so far as director
Arvind Mafatlal on the one hand and appellant on the other hand were
D concerned was not at all germane to the question relating to sanctioning
of the Scheme of Compromise and Arrangement with which the Court was
concerned. It is obvious that when a. Scheme of Compromise and Arran-
gement which involves two companies, namely the transferor- company and
the transferee-company and their shareholders and creditors is on the anvil
of scrutiny before the sanctioning Court, the court has to see that the
E interest of the class of creditors or shareholders to whom the Scheme is
offered for approval is any way likely to be affected by the suppression of
special interest of the director in connection with such a scheme which is
on the anvil. Two independent bodies which are represented by their
shareholders or creditors as a class, as the case may be, have to take
F commercial decisions strictly with a view to seeing that the concerned
Scheme of Compromise or Arrangement is beneficial to the shareholders '
or creditors as a class vis-a-vis the company which is a corporate entity in
so far as company's relations with these class of creditors and shareholders
are concerned. If the special interest which the director has is in any way
likely to be affected by the Scheme and if non-disclosure of such an interest
G is likely to affect the voting pattern of the class of creditors or shareholders
who are called upon to vote on the scheme, then only such special interest
of the .director is required to be communicated to the voters as per Section
393(1)(a). We fail to appreciate how the personal family dispute between
the appellant on the one hand and Arvind Mafatlal, director of the trans-
H feree-company MIL on the other regarding the right to hold shares in the
MIHEER H.MAFAlLAL v. MAFKILALINDS. LID. [S.B. MATMUDAR, J.) 37

company can have any linkage or nexus with the Scheme of Amalgamation A
of these two companies which was put to vote before the equity
shareholders. It is easy to visualize that if the suit filed by Arvind Mafatlal
against the appellant succeeds and the appellant's counter-claim fails then
all that would happen is that the appellant will have to sell his share-hold-
ing which is only 5% in the transferee-company to the plaintiff Arvind
B
Mafatlal. That. has nothing to do with the equity shareholders as a class
which was called upon to decide whether the scheme of merging the
transferor-company MFL with the transferee-company was for the benefit
of the shareholders as a class. The equity shareholders of the transferee-
com pany had to ,decide in their commercial wisdom whether it is
worthwhile to have a larger body of shareholders on account of the merger c
so that apart from the shareholding of the transferee-company its objects
would also get diversified and its filed of operation would be enlarged with
the prospect of hike in the dividend available to these shareholders after
the economic and industrial activities of both the companies so amal-
gamated would get elongated and whether the value of their shares in such D
consolidated companies were likely to get a boost in the stock market. This
was the commercial decision which the equity shareholders of the trans-
feree-company .had to take. For taking this informed decision they were
least concern~d whether 5% share-holding of appellant in the company
remained or did not remain with him in future. Consequently if Arvind
Mafatlal's suit ultimately succeeded before the Bombay High Court and E
the appellant lbst in his counter-claim that would have no effect whatsoever
on the informed decision which the equity shareholders were called upon
to take while approving the scheme in question.

Conversely if the appellant succeeded in his counter-claim and direc- F
tor Arvind Mafatlal lost in his suit then all that would happen is that Arvind
Mafatlal will have to transfer his share- holding and share-holding of his
group in favour of appellant so far as the transferee-company is concerned.
That future possibility would have no impact on the decision making
process which the equity shareholders of transferee-company had to un- G
dertake at this stage while approving the Scheme. Consequently such an
eventuality was totally irrelevant for being brought to the notice of the
equity shareholders before whom the scheme was put to vote. While
deciding whether transferor-company should be merged with the trans-
feree-company and the transferee-company's economic and industrial ac-
tivity should be permitted to be enlarged as a result of such merger the H
38 SUPREME COURT REPORTS (1996) SUPP. 6 S.C.R.

A equity shareholders were least concerned whether the appellant would
purchase in future the share of the present director Arvind Mafatlal or vice
versa. That was entirely their personal dispute which was still not adjudi-
cated upon and its decision one way qr the other had no impact on the
pattern of voting of the equity shareholders of the respondent-company as
a class of prudent businessmen and investors so far as the Scheme was
B concerned. The Scheme of Compromise and Arrangement which was put
to vote was of such a nature that it had no impact or effect on the personal
interest of the director Arvind Mafatlal in connection with his present
share-holding in the transferee-c()mpany. Consequently it must be held that
mention about such an interest was outside the statutory requirements of
c Section 393(1)(a) as rightly held by the learned Single Judge whose view
was erroneously upset by the Division Bench. However in any case we are
in entire agreement with the subsequent reasoning of the Division Bench
for approving the decision of the learned Single Judge on this aspect,
namely, that such non-disclosure of interest had no impact on the voting
pattern adopted at the meeting by the equity shareholders who are called
D
upon to approve the scheme. It may also be noted in this connection that
the resolution of the equity shareholders approving the Scheme of Amal-
gamation was passed with overwhelming majority by members including
through proxies, present and voting. It projected the following picture :

E In favour Against Total
(i) No. of Members 5,298 143 5,441

(ii) No. of valid votes 19,36,964 86,061 20,23,025

F From the pattern ofvoting it became apparent that out of 100% of the
share capital 75.75 per cent in value participated of which 95.75 per cent
voted in favour of the proposed Scheme. Out of 95.75 per cent of the votes
in value, a paltry 8.43 per cent votes had been attributed to Arvind Mafatlal
group consisting of individuals and trust. 39.45 per cent were the votes
attributable to financial institutions which can be said to have no interest
G other than their own interests as men of business' in considering the
proposed Scheme. Over 23 per cent votes have been attributed to public
limited companies or private limited companies which held the shares of
MIL and in which Arvind Mafatlal was also alleged to have interests. Thus
non-mentioning of the private dispute between Arvind Mafatlal and objec-
H tor in connection with the holding of shares in the transferee-company had
·MIHEER H. MAFA'ILAL v. MAFATIAL INDS. LID. (S.B. MAJMUDAR, J.) 39

in fact no impact on the voting pattern of equity shareholders including the A
financial institutions which had nothing to do with this personal feud
between the warring groups. Consequently the non-mentioning of the
pending dispute between the appellant on the one and Arvind Mafatlal on
,_...,..._ the other which was pending adjudication in the Bombay High Court had
in fact no impact whatsoever on the result of the voting undertaken by the B
equity shareholders in their class meeting. Thus the requisite statutory
majority of votes approving the scheme could not have been adversely
affected by the non-mentioning of this pending litigation in the explanatory
note even assuming that the Division Bench was right in holding that it was
required to ·be informed to the voters as per the requirements of Section
393(1)(a). In either view of the matter, therefore, the non-mentioning of C
the pending litigation between. the director of the transferee-company
Arvind Mafatlal on the the one hand and the appellant on the other, had
no vitiating effect on the majority decision of the equity shareholders who
approved the Scheme with overwhelming majority of 95.75 per cent of votes
and when the dissenting vote on behalf of the appellant's group was in D
microscopic minority of less than 5%. It is also pertinent to note in this
connection that appellant who being a party to the civil litigation before
the Bombay High Court and who was very much keep to get more share-
holding in transferee-company and who had already filed his counter-claim
for enforcing the family arrangement of 1979, had not thought it- fit to
remain present in the meeting of equity shareholders and on the contrary E .
he got himself represented through proxy who had no night to speak. Thus
in substance the appellant himself never though that information about the
pendency of the litigation between Arvind Mafatlal, director or the respon-
dent-company and himself was so important that it was required to be
brought to the voters' notice even though he had opportunity to do so by F
0 remaining personally present in the meeting for that purpose. It, therefore,
clearly appears to be an afterthought when he put forward such an objec-
tion for the sake of it at the time of opposing the Scheme which was put
for sanction of the Court.

It may also be kept in view that the explanatory statement no way G
emphasised that it is the management of the transferee-company by Shri
Arvind Mafatlal which is going to be better monitored and managed by
him after the merger in question. In other words management of the
company is not at all a germane consideration for the Scheme. Consequent-
ly whether the management remains with Arvind Mafatlal or in future may H
40 SUPREME COURT REPORTS (1996) SUPP. 6 S.C.R.

.A met get changed and go in the hands of the appellant is not a consideration
which has any linkage or nexus with the Scheme. Consequently the interest
of Arvind Mafatlal in the share-holding or likely future impact thereon by
the litigation was de hors the Scheme in question and was not required to
be placed before the voters. The first point for determination is, therefore,
answered in the negative.
B
Point No. 2

..,. So far as this point is concerned Shri Shanti Bhushan, learned senior
counsel for the appellant, submitted that in modern days corporate bodies
c even.though public limited companies are mostly controlled by big, influen-
tial and economically powerful families, which have inherited
entrepreneurial skill and expertise from earlier generations which had
controlled such enterprises in past. That in the present case also the
director of the respondent-company Shri Arvirid Mafatlal, the eldest male
D member of the family, had descended from the common ancestor Mafatlal
Gagalbhai who had established this empire and which has further grown
with passage of years. That when such a powerful director who is the eldest
male member of the family of the family is at the helm of affairs the
minority interest of the appellant who, according to him, was entitled to
50% share in the family concerns as per the 1979 family settlement was
E likely to be voted out and cornered by the influence of such a towering
personality as Arvind Mafatlal in the meeting of equity shareholders.
Therefore, unfairness of the Scheme has to be judged also from the point
of view of its impact on the minority shareholder who has a common
ancestor Mafatlal Gagalbhai and who is sought to be cornered and
F deprived of his just share in the family concerns. by the machinations of
Shri Arvind Mafatlal. The Court has, therefore, to see whether the Scheme
of Amalgamation which is sought to be put through at the behest of the
director of the respondent-company is fair to the minority group of the
appellant who claims 50% share in the family concerns against the director
of the respondent-company Shri Arvind Mafatlal and his group. So far as
...
G this submission is concerned Shri Sorabjee, learned senior counsel for the
respondent joined issues and submitted that factually there is no basis for
such a contention as respondent-company is not controlled by Shri Arvind
Mafatlal who is one of the direct.ors along with his son Hrishikesh but there
are eleven outside directors and the share-holding of Arvind Mafatlal and
H his group is not even 50% even including the share-holding of other
MJHEERH.MAFATLALv.MAFATLALINDS.LTD.[S.B.MAfMUDAR,J.]41

subsidiary companies in which also Arvind Mafatlal and his group may be A ·
shareholders. We find considerable force in the aforesaid contention of
learned senior counsel for the respondent. The evidence produced in the
case shows that out of total majority vote of95.75 per cent which supported
- _, the Scheme at the meeting of equity shareholders even according to the
pattern disclosed by the appellant himself individual trust controlled by B
Arvind Mafatlal and private companies accounted to only 16% of the
shares voted in the meeting, about 44% of the share were represented by
financial institutions, employees and public taken together and two com-
panies stated to be from Mafatlal group had only 15% share. Consequently
it is too much to contend that the voting pattern was dominated by the
share-holding of Arvind of Mafatlal and his group when about 40% of the C
shares are held by financial institutions which had nothing to do with the
internal feuds of director Arvind Mafatlal on the one hand had the appel-
lant-objector on the other. It could not be said that the Scheme as put to
vote was in any way unfair to appellant or that the majority shareholders
acting as a class had not behave.cl in a bona fide manner for protecting the D
interest of the class as a while and were in any way inimical to the appellant.
While considering the question of bona fides of the majority voters and
whether they were unfair to the appellant it has to be kept in view that
bona fides. of the majority acting as a group has to be examined vis-a-vis
the Scheme in question and. not the bona fides of the person whose
persona!. interest might be different from the interest of the voters as a E
class. Bona fide of person can only be relevant if it can be established with
reasonable certainty that he represents majority or is controller of majority.
Arvind Mafatlal cannot be visited with such a charge. In this connection
we may usefully refer to a decision of English Court in the case of Hellenic
and General Trust Limited reported in (1976) 1 WLR 123. In that case the F
Court was concerned with a Scheme of Arrangement whereunder all the
ordinary shares of the company were to be cancelled and new shares were
to be issued to Hambros which would make the company as wholly owned
subsidiary of Hambros. Holders of such cancelled shares were to be paid
by Hambros at 48 pennies. In short it was an arrangement for taking over
of the company by Hambros. 53% shares of the Hellenic Company were G
held by another company MIT. MIT itself was a wholly owned subsidiary
company of Hambros. This situation led the Court to conclude that the
subsidiary company of Hambros which was holding such large number of
shares placed itself vis-a-vis Hambros in the position of vendor and the
H
42 SUPREME COURT REPORTS [1996) SUPP. 6 S.C.R.

A lifted veil of transaction showed it to be one of acquisition than of amal-
gamation. The aforesaid decision is a pointer to the fact that what was
required to be considered while sanctioning the scheme was bona fides of
the majority acting as a class and not of single person. It is, therefore, not
possible to agree with the coatention of learned senior counsel for the
appellant that the majority had acted unfairly to the appellant and had not
B protected his interest when what was to be protected was the class interest
of minority shareholders falling in the same class along with the majority.
It is not the contention of the appellant that while voting by majority in
favour of the Scheme the majority had acted with any oblique motive to
fructify any adverse commercial interest qua him and his group when it
c consisted of outsiders like financial institutions or that there was any
possibility of their surrendering their economic interest in the Scheme at
the dictates of shareholder-director Arvind Mafatlal and his group. It is
also to be kept in view that the Board of Directors of the respective
companies, namely, the transferor-company as well as the transferee-com-
D pany had approved the Scheme of Amalgamation before it was put to vote .
. The appellant was himself one of the directors of the transferor- company
who had no objection to the Scheme of Amalgamation from the point of
view of the transferor-company. So far as the transferee-company is con-
cerned though appellant was not a director he was 5% shareholder who
did not think it fit to personally remain present at the time of voting and
E simply relied upon proxy. If he was feeling that the Scheme was unfair to
him or was not going to protect his interest as shareholder in the respon-
dent-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 the Scheme. It is, therefore,
F too late in the day for him to 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.

In 'this connection we tried to know from Shri Shanti Bhushan,
learned senior counsel for the appellant as to how the appellant felt that
G the Scheme was unfair to him. He submitted that under the Scheme the
transferor-company was losing its identity and was getting merged in the
transferee-company. That in the pending litigation between the parties in
the Bombay High Court if the appellant succeeded in his counter-claim he
was likely to get larger share-holding in the transferee- company and if that
H was not possible he could have got the complete control of the transferor-
MIHEER H. MAFA1LAL v. MAFA1LALINDS. LID. [S.B. MATMUDAR, J.] 43

company as per the family arrangement. Now once the transferor-company A
loses its identity then his counter-claim was likely to be infructuous as the
subject-matter of the counter-claim will stand withdrawn from the possible
operation of the decree if at all granted in his favour in the counter-claim.

r
This submission was countered by learned senior counsel for the respon-
dent by pointing out that it had no factual basis. That as earlier noted in
B
the suit pending in Bombay High Court if Arvind Mafatlal succeeded then
appellant will have to transfer his even remaining 5% share-holding in
transferee-company in favour of Arvind Mafatlal. If on the other hand the
appellant succeeded in his counter-claim and Arvind Mafatlal's suit was
dismissed then the appellant may get the shares which are at present held
by Arvind Mafatlal and his group in the transferee-company. But there is c
no question of appellant getting any exclusive control of the transferor-
company. Therefore, impact of that litigation one way or the other is going
to be totally negative so far as the existence of the transferor-company or
otherwise is concerned. We find considerable force in the contention of
iearned counsel for the respondent. It is also pertinent to note that if the D
appellant felt that the Scheme was unfair inasmuch as he was likely to lose
his future interest, if any, and control, if any, in the transferor-company by
its merger and loss of identity on account of the Scheme it passes one's
comprehension how he as sitting director of the transferor-company ap-
proved of the Scheme, did not object to the Scheme and on the contrary
was a party to the resolution of the Board of Directors of transferor-com- E
pany to propose the Scheme of its amalgamation with the transferee
company. Not only that but even when that Scheme was put for sanction
before the Bombay High Court on behalf of the transferor-company the
appellant did not object meaning thereby appellant had no objection to the
transferor-company losing its identity and getting merged in the transferee- F
company pursuant to the proposed Scheme. The appellant's own conduct,
therefore, belies his apprehension that the Scheme as proposed was in any
was unfair to him or that there were any ma/a fides behind the Scheme
attributable to Shri Arvind Mafatlal who is the director of the transferee-
company. The second point for determination, therefore, also is found to
be factually not sustainable. It is, therefore, held that the Scheme of G
Compromise and Arrangement is neither unfair nor unreasonable to the
minority shareholders represented by the appellant.

Before parting with the discussion on this point it is also worthwhile
to note that apart from the pattern of voting at the meeting of the equity H
44 SUPREME COURT REPORTS [1996] SUPP. 6 S.C.R.

A shareholders, even the share-holding of the respondent-company belies the
submission put forward on behalf of the appellant that Arvind Mafatlal's
group dominated the constitution of the company and could control the
decisions of the shareholders. The evidence on record shows that the
share- holding of ANM Group can be worked out to 30.42% approximate-
ly. As against aforesaid share-holding the share-holding of financial institu-
B tions and MHM group in MIL would work out to 39.03% and that of
appellant's group works out at 29.05% while that of other shareholders
would work out to 34.34%. Hence it cannot be said that Arvind Mafatlal
is at the helm of affairs of the respondent- company or is in the driver's
seat or that his family is the virtual master of respondent-company. This is
c not a case where it can be urged with any emphasis that the respondent-
company is an alter ego of Arvind Mafatlal who is one of the directors of
the company and that he could create a show of the Scheme being
apparently beneficial to the shareholders but was in fact concealing any
covert and hidden device of augmenting his personal interest and interest
of his family which was adverse to the interest of innocent investors and
D
other equity shareholders including the appellant. It is also pertinent to
note that fina~cial institutions and statutory corporations held substantive
percentage of shares in respondent-company. This class of shareholders
who are naturally well informed about the business requirements and
economic meeds and the requirements of corporate finance in the light of
E their personal interest would not have wholly approved the Scheme if it
was contrary to the interest of shareholders as a class. Individual personal
interest of a minority shareholder like the appellant is absolutely out of
consideration when such class meeting acting for the benefit to the whole
class of equity shareholders take up the consideration of the Scheme for
its approval. Consequently it could not be said that the majority
F
shareholders had sacrificed the class interest of appellant minority
shareholders when they voted with overwhelming majority in favour of the
Scheme. Point No. 2 is accordingly answered in the negative. That takes us
to the consideration of Point No 3 for determination.

G Point No. 3

In a way the answer to point No. 2 necessarily results in negativing
this point also. Even that apart we fail to appreciate how the Scheme of
Amalgamation can be said to be unfair and amounting to suppression of
H minority shareholders represented by the appellant. It has to be kept in
MIHEERH.MAFAlLAL v. MAFAlLALINDS.LTD.[S.B.MAJMUDAR,J.] 45

view that by this proposed Scheme of Amalgamation the transferor-com- A
pany was getting merged in the transferee-company. Now even if it is held
that the appellant succeeds in his counter-claim in the suit pending in
Bombay High Court and if he is to get the share-holding of Arvind Mafatlal
and his group transferred to him so far as transferee- company is con-
cerned, the transferee-company because of the amalgamation will then be B
having more diversified activities and if at all according to the appellant
because of this future success, if any, in the counter-claim he is going to
replace A'l:vind Mafatlal and his group in the management of the respon-
dent-company he would have larger field to operate and larger company
to manage. We fair to appreciate as to how such a scheme from any point
of view can amount to suppression of appellant's minority interest in the c
share-holding of the company. This interest is not going to be in any way
adversely affected. If at all, his share-holding is going to increase in the
respondent-company if his counter-claim succeeds. If his counter-claim
fails he will have to get out lock, stock and barrel from the respondent-
company and he will have to wash his hands off the same. In either case D
the Scheme of Amalgamation will have no adverse impact on the
appellant's interest in the respondent-company. On the other hand the
Scheme of Amalgamation is likely to have a move beneficial effect on the
appellant's share-holding in the respondent-company if he succeeds in his
counter-claim in Bombay High Court. It has to be kept in view that the E
question of bona fide of the majority shareholders or the alleged suppres-
sion by them of the minority shareholders or their attempt to suffocate their
interest has to be judged from the point of view of the class as a whole.
Question is whether the majority equity shareholders while acting on behalf
of the class as a whole had eXhibited any adverse interest against the
F
appellant's minority shareholders also having similar interest as members
of the same class, while approving the Scheme or had acted with any
oblique motive to whittle down such a class interest of the minority. As we
have seen earlier no such situation ever existed both at the time when the
Scheme of Compromise and arrangement was cleared and proposed by the
Board of Directors of both the transferor and transferee companies and G
also at the stage when the Scheme was put to vote before the meeting of
equity shareholders forming a common class of which the app~llant was
also a member though a minority member. Consequently point No. 3 will
also have to be answered in the negative on the same lines and for the same
reasons on the basis of which point No. 2 is answered. H
46 SUPREME COURT REPORTS (1996) SUPP. 6 S.C.R.

A Point No. 4

So far as this point is concerned the relevant provis10ns of the
· Companies Act to which we have made a reference earlier indicate that
the Court has to order under Section 391(1) a meeting of creditors or class
of creditors or members or class of members to whom the Scheme of
B Compromise or Arrangement is offered by the company. The present
controversy centers round a meeting of members. Members of the company
are shareholders. Part IV of the Companies Act deals with 'Share Capital
and Debentures'. Section 82 provides that 'the shares or other interest of ,.
any member in a company shall be movable property, transferable in the
c manner provided by the articles of the company'. As per Section 86 the
share cap.ital of a company limited by shares formed after the commence-
ments of this Act, or issued after such commencement, shall be of two
kiQds only, namely, equity share capital and preference share capital. So
far as the Articles of Association of respondent-company are concerned
D they also contemplate two classes of shareholders, namely, equity and
preference shareholders. No separate class of equity shareholders is con-
templated either by the Act or by the Articles of Association of respon-
dent-company. Appellant is admittedly an equity sharehoWer. Therefore,
he would fall within the same class of equity shareholders whose meeting
was convened by the orders of the Company Court. However it ·is vehe-
E mently contended by learned counsel for the appellant that because of the
family arrangement of 1979 on which he relies he was a special class of
·minority equity shareholder who had separate rights against the director
of the company and whose special interest because of the pending litigation
between him and the director Shri Arvind Mafatlal was likely to be adver-
F sely affected by the Scheme, therefore, a separate meeting had to be
convened as he represented a class within the class of equity shareholders.
It is difficult to agree with this contention. Even though the Companies Act
or the Articles of Association do not provide for such a class within the
class of equity shareholders, in a given contingency it may be contended
G by a group of shareholders that because of their separate and conflicting
interest. vis-a-vis other equity shareholders with whom they formed a wider f '
class, a separate meeting of such separately interested shareholders should
have been con~ened. But such is not the case of the appellant. It is not his
case that his interest as an equity shareholder in respondent-company is in
any way conflicting with the general interest of the equity shareholders as
H
MIHEERH.MAFATLALv.MAFATLALINDS.LTD.[S.B.MATMUDAR,J.]47

a class. Consequently it could no be urged by him with any emphasis that A
the General Body of equity shareholders acting as a class while considering
the question of approval of the Scheme was likely to take a decision which
could adversely affect the commercial interest of the appellant as an equity
shareholder. His personal conflict of interests with the director was totally
foreign to the scope of class meeting which was convened to consider the B
Scheme in question as we have seen earlier while considering earlier points
for determination. It is also to be ~ept in view that the appellant would
have urged with some justification his contention for convening a separate
meeting representing for him and his group of dissenting equity
shareholders if it was his case that the Scheme of Compromise and Arran-
gement as offered to him and his group was in any way different from the c
Scheme of Compromise and Arrangement offered to other equity
shareholders who also belonged to the same class in the wider sense of the
term. On the express language of Section 391(1) it becomes clear that
where a compromise or arrangement is proposed between a company and
its members or any class of them a meeting of such members or class of D
them has to be convened. This clearly presupposes that if the Scheme of
Arrangement or Compromise is offered to the members as a class and no
separate Scheme is offered to any sub- class of members which has a
separate interest and a separate Scheme to consider, no question of
holding a separate meeting of such a sub-class would at all survive. Even E
otherwise it becomes obvious that as minority shareholder if the appellant
had to dissent from the Scheme his dissent representing 5% equity share-
holding would have been visible both in a separate meeting if any, of his
sub-class or in the composite meeting where also his 5% dissent would get
registered by appellant either remaining present in person or through
proxy. Consequently when one and the same Scheme is offered to the
F
entire class of equity shareholders for their consideration and when com-
mercial interest of the appellant so far as the Scheme is concerned is in
common with other equity shareholders he would have a common cause
with them either to accept or to reject the Scheme for commercial point
of view. Consequently there was no occasion for convening a separate class G
meeting of the minority equity shareholders represented by the appellant
and his group as tried to be suggested. It is also to be kept in view that it
is not the case of the appellant that any different terms of compromise were
offered to persons holding equity shares who were covering by the family
arrangement of 1979 or otherwise. In fact the entire proposal of the H
48 SUPREME COURT REPORTS [1996) SUPP. 6 S.C.R.

A Scheme of Arrangement was one affecting equally and in the like manner
all the existing equity shareholders of the respondent-company. In this
connection it is profitable to refer to what the learned author Palmer in
his Treatise Company Law 24th Edition, has to say :

"What constitutes a class :
B
The Court does not itself consider at this point what classes of
creditors or members should be made parties to the scheme. This
is for the Company to decide, in accordance with what the scheme
purports to achieve. The application for an order for meetings is
c a preliminary step, the applicant taking the risk that the classes
which are fixed by the judge, unusually on the applicant's request,
are sufficient for the ultimate purpose of the section, the risk being
that if in the result, and we emphasis the words 'in the result' they
reveal inadequacies, the scheme will not be approved. If e.q. rights
of ordinary shareholders are to be altered, but those of preference
D
shares are not touched, a meeting of ordinary shareholders will be
necessary but not of preference shareholders. If there are different
groups within a class the interests of which are different from the
rest of the class, or which are to be treated differently under the
Scheme, such groups must be treated as separate class for the
E purpose of the scheme. Moreover, when the Company has decided
what classes are necessary parties to the scheme, it may happen
that one class will consist of a small number of persons who will
all be willing to be bound by the scheme. In that case it is not the
practice to hold a meeting of that class, but to make the class a
F party to the scheme and to obtain the consent of all its members
to be bound. It is however, necessary for at least one class meeting
to be held in order to give the Court jurisdiction under the Section."

It is, therefore, obvious that unless a separate and different type of Scheme
of Compromise is offered to a sub-class of a class of creditors or
G shareholders otherwise equally circumscribed by the class no separate f
meeting of such sub-class of the main class of members or creditors is
required to be convened. On the facts of the present case the appellant
has not been able to make out a case for holding a separate meeting of
dissenting minority equity shareholders represented by his. The fourth
H point for determination, therefore, is answered in the negative. That takes
MIHEER H. MAFATLAL v. MAFATLAL INDS. LTD. [S.B. MAJMUDAR, J.] 49

us to the consideration of the last point for determination placed for our A
consideration by the learned senior counsel for appellant.

Point No. 5

It was submitted that the exchange ratio of equity shareholders so
far as the transferee-company is concerned works very unfairly and un- B
reasonably to them. As per the proposed Scheme 5 equity shares of
transferor-company are to be exchanged for 2 equity shares of transferee-
company. So far as this contention is concerned it has to be kept in view.
.... that before formulating the proposed Scheme of Compromise and Amal-
gamation an expert opinion was obtained by the respondent-company as
well as the transferor- company, namely, MFL on whose Board of Direc-
c
tor~ appellant himself was a members. M/S. C.C. Chokshi & Co., a reputed
firm of Chartered Accountants, having considered all the relevant aspects
suggested the aforesaid exchange ratio keeping in view the valuation of
shares of respective companies. It must at once be stated that valuation of
shares is a technical and complex problem which can he appropriately left D
to the consideration of experts in the filed of accountancy. Pennington in
his 'Principles for Company Law' mentions four factors which had to be
kept in mind in the valuation on shares :

"(1) Capital Cover,
E'
(2) Yield,

(3) Earning Capacity, and

(4) Marketability
F
For arriving at the fair value of share, three well known methods
are applied :

(1) The manageable profit basis method (the Earning Per Share
Method)
G
(2) The networth method or the break value method, anti

(3) The market value method."

So many imponderables enter the exercise of valuation of shares. M/s. C.C.
Chokshi & Co. considering all the relevant aspects and obviously keeping H
50 SUPREME COURT REP.ORTS (1996] SUPP. 6 S.C.R.

A in view the accounting principles underlying the valuation of shares sug""
gested the said ratio which was found acceptable both by the Board ot
Directors of the respondent-company as well as th.e Board of Directors of
the transferor-company. That the appellant himself as a director of that
transferor-company gave green single to the Scheme and to this very ratio
B of exchange of shares. But Shri M.J. Thakore, appearing for the appellant
submitted that form the point of view of the transferor-company it was very
profitable to have two shares of transferee-company against five shares of
transferor- company. But the difficulty arises only from the point of view
of transferee-company shareholders. According to Shri Thakore the proper
c exchange ratio would be one share of transferee-company to six shares of
transferor-company. It is difficult to appreciate this contention of the
appellant. It has to be kept in view that appellant never bothered to
personally remain present in the meeting of equity shareholders for point-
ing out the unfairness of this exchange ratio to his brother equity
D shareholders who were likely to be affected by the very same ratio as the
appellant. His interest at least to that extent was entirely common and
parallel to that of other equity shareholders. But he had no time to remain
personally present. He sent his proxy only to record his dissent vote which
was in microscopic minority of 5% as compared to 95% majority vote. Not
only that even before the Court he did not submitted and contrary expert
E opinion regarding the valuation of shares of transferor and transferee
companies for supporting his ipse dixit that the correct ratio would be 6 :
1 so far as transferor .and transferee. companies were concerned. Shri
Shanti Bhushan, learned senior counsel for. the appellant having realised
this difficulty submitted that at last these proceedings are continuation of
F proceedings before the High Court, therefore, this Court may now in order
to satisfy itself send for the opinion of an expert. It is difficult to agree.
The appellant who was propounding this theory of correct exchange ratio
had nothing to offer in support of his contention both b~fore the learned
Single Judge as well as before the High Court. It has to be kept in view
G that the matter was fiercely contested on all permissible points before
learned Single Judge. 1:he proceedings were pending before the High t ,
Court for more than two years from 8th February 1994 till lZth July 1996
when the Division Bench disposed of the appeal. For all these years neither
before the learned Single Judge nor before the High Court in appeal the
H appellant thought it fit to request the Court to either call for the report of
MIHEERH.MAFA1LAL v. MAFA1LALINDS.LID. [S.B.MATMUDAR,J.) 51

any other expert on valuation of shares not did he himself get such report A
for placing for consideration of the Court in support of his supposed better
ratio. It has also to be kept in view that which exchange ratio is better is
in the realm of coinmercial decision of well informed equity shareholders.
It is not for the Court to sit in appeal over this value judgment of equity
shareholders who are supposed to be men of the world and reasonable B
persons who know their own benefit and interest underlying any proposed
scheme. With open eyes they have okayed this ratio and the entire Scheme.
40% of the majority shareholders were financial institutions who were
supposed to be well versed on the aspect of valuation of shares. They had
no objection to the exchange of 2 shares of transferee-company for 5 shares C
of transferor company. As stated earlier it was a sort of a package duly
· cdnsidering all imponderables and implicit factors which the shareholders
had to keep in view for deciding whether to approve the Scheme of
Amalgamation or not. The exchange ratio was only one of the itt!ms. They
though if fit in their commercial wisdom to ac;cept the Scheme as a whole D
along with the exchange ration presumaply in expectation of better profits
in years to come when the amalgamated companies would operate and
when there would be, according to the shareholders, better. prospects of
earning greater dividends. They willingly agreed to give in exchange two
shares of transferee-company for five share of transferor-company and
made them available to the shareholders of the transferor- company. The E
appellant was representing only 5% dissenting shareholders and his object
was almost a voice in the wilderness, which did not appeal to the majority
of his brother shareholders. Shri Shanti Bhushan, learned senior counsel
for the appellant in this connection invited our attention to the obser-
vation of the Division Bench in its judgment at page 375 wherein it has F
been observed that "if one were to examine the exactitude of exchange
ratio that may be offf'.red fairly on the arithmetic scale by taking into
consideration various details, there is some force in what were suggested
. by Mr. B.R. Shah on behalf of~e appellant. However, keeping in view the
scope of enquiry which the court is required to undertake and with whose G
findings we are concerned, it will not be ~ermissible for us in law to
undertake this exercise in the facts and circumstances of present case in
absence of bona fides". We fail to appreciate how this observation can be
of any avail to learned senior conceal for the appellant as all that the Court
wanted to suggest was that even assuming that some another exchange ratio H
52 SUPREME COURT REPORTS (1996] SUPP. 6 S.C.R.

A can be suggested to be better one, it was for the equity shareholders who
acted bona fide in the interest of their class as a whole to accept even a
less favourable ratio considering other benefits, that may offset such less
favourable ratio once an amalgamation goes through. We wholly concur
with this view. In this connection we may also refer to a decision of
B Maughm, J., in Re Hoare & Co. (No. 2) case (1933) All ER 105 wherein it
was laid down that where statutory majority had accepted the offer the
onus must rest on the applicants to satisfy the court that the price offered
is unfair. In this connection following pertinent observations were made by . 1

the learned Judge :

c "The other conclusion I draw is this X X X X X X the court ought
to regard the scheme as a fair one inasmuch as it seems me
impossible to suppose that the court, in the absence of any strong
grounds, is to be entitled to set up its own view of fairness of the
scheme in opposition to so very large a majority of shareholders
D who are concerned. Accordingly, without expressing a final opinion
on the matter because there may be special circumstances in
special cases, I am unable to see that 11 have any, right to order
otherwise in such a case as I have before me, unless it is affirm-
atively established that notwithstanding the views of a very large
E majority of shareholder, the scheme is unfair."

We may also refer to a decision of the Gujarat High Court in Kamala
Sugar Mills Limited 55 Company Cases p. 308 dealing with an identical
objection about the exchange ratio adopted in the Scheme of Compromise
F and Arrangement. The Court observed as under :

"Once the exchange ratio of the shares of the transferee-company
to be allotted to the shareholders of the transferor-company has
been worked out by a recognised firm of chartered accountants
who are experts in the field of valuation and if no mistake can be
G pointed out in the said valuation, it is not for the court to substitute
its exchange ratio, especially when the same has been accepted
without demur by the overwhelming majority of the shareholders
of the two companies or to say that the shareholders in their
collective wisdom should not have accepted the said exchange ratio
H on the ground that it will be detrimental to their interest."
MIHEERH. MAFATIAL v. MAFATIALINDS. LID. [S.B.MATMUDAR,J.] 53

These observations in our view represent the correct legal position on this A
aspect. We may also keep in view that in the present case not only expert
like M/s. C.C. Chokshi & Co. had suggested the ratio but another inde-
pendent body ICICI Security & Finance Company Limited reached the
"' same conclusion which was conveyed by its letter dated 10th November
1993 to the company approving of the entire Scheme along with suggested B
ratio. A mere look at the report of the Chartered Accountants M/s. C.C.
Chokshi & Co. shows that various factors underlying the Scheme of Com-
promise and Arrangement were taken into consideration while suggesting
the exchange ratio by the said reputed firm of chartered accountants. The
said opinion had taken into account the fact that on amalgamation shares C
have to be cancelled. Increase in share premium account in equity capital
of the MIL will also have to be taken into account as a result of final call
made in respect of Bond 1992 issue. It has also taken into account sig-
nificant increase in the paid-up equity of MIL as a result of issue of its
Bond in the international market. It has undertaken exercise in calculating D
net-worth of two companies. It has also referred to the method of valuation
of exchange ratio on the basis of earning per share of the two companies
by taking into account five years' working results of the two companies
making certain adjustments. Apart from taking into consideration the past
results of the two companies, the chartered accountants have taken into
account the potentiality of the two companies to earn profit in future, E
considering existing expansion and modernisation of projected and
planned expenditure by the MIL as well as subsidiary and sister concern
in hard. It has also taken into account the market price of equity shares
of past 24 months, declared dividend by the two companies the overall
effect of security scam in the market price, realisable investment and their F
market value. Taking into consideration multifarious considerations
detailed in the report, note was also taken of the fact that MIL held
substantial shares of MFL, which shall have to be cancelled on merger of
MFL with MIL. :rwo fully paid up equity shares of MIL of Rs. 100 each
for every five equity share of Rs. 100 each of MFL, was considered to he G
a fair exchange ratio to be offered as term of amalgamation. It was clarified
that, 'in absolute terms it would mean that the MIL is keeping considera-
tion of equity capital of par value of Rs. 7.77 crores which at the last issue
price of share amounts about to Rs. 38.84 crores and which at the correct
market price amounts to Rs. 57.4 crores. At the stage of dividend declared H
54 SUPREME COURT REPORTS [1996] SUPP. 6 S.C.R.

A . for 1992-93, it will result in a cost in terms of distributable profits of Rs.
2.72 crores. For an undertaking in a diversified business activity of textile
and chemicals with the tota_l infrastructure, knowhow, technology tie up
and range of established products and capacities and potential the
aforesaid cost to MIL can be regarded as fair and reasonable'.
B The aforesaid report of the chartered accountants heavily w~ighed
with the transferor-company's Board of Directors which comprised,
amongst others, the appellant himself but also the Board of Directors of
transferee-company and also weighed with tCe General Body of equity
shareholders who approved the Scheme and the ratio with overwhelming
c majority. No grievance, therefore, can be make by the appellant at the stage
of Company Petition proceedings.for demonstrating the ratio to be exfacie
unfair and unacceptable .as the appellant would like to have it.

Undeterred by this position Shri Thakore, learned counsel for the
D appellant in support of his contention that the exchange ratio was ex f acie
unfair to the shareholders. ·of the transferee- company, invited our attention
• to the statement showing the working results of both the transferor and
transferee companies as found at Annexures M and N of Vol. II of the
Paper Book at page 534 and 535. He submitted that these statements
E showing the working results of the company for the last five years ended
31st March 1993 showed that the earning per equity share after deprecia-
tion and tax so far as the respondent-company was concerned was Rs. 30
while earning of transferor-company Mafatlal Fine Spg. & Mfg. Company
Limited was only Rs. 7 for the relevant five years. He also invited our
attention to the break-up value of the shares of company on the basis of
F the Balance Sheet as on 31st March 1993 so far as respondent-company
was concerned. Annexure 'Q' at page 538 showed value per equity share t
of Rs. 100 each at Rs. 1,515 while so far as the transferor-company was
concerned the break-up value per equity share was Rs.259. That may be
so. But as a package deal when the Scheme as a whole is examined and
G found to be advantageous to the economic and commercial interest of
shareholders as a class only one or two item simplicitor for deciding the
exchange ratio cannot tilt the balance as so 'may factors and aspect would
enter that exercise. It was undertaken by expert body of chartered account-
ants like M/s. C.C. Chokshi & Co. Before parting with the discussion on
H this point it would be apposite to refer to the decision of this Court in
MIHEER H. MAFATLAL v. MAFATLALINDS. LTD. [S.B. MAJMUDAR, J.) 55

Hindustan Lever Employees' Union (supra). In paragraph 41 of the Report A
Justice Sen speaking for himself and Venkatachaliah, CJ, and to which
Sahai, J concurred has observed that the problem of valuation in the case
of amalgamation of two companies has been dealt with by Weinberg and
Blank in the book 'Take-overs and Mergers' in which it is stated that some
or all of the 8 listed factors will have to be taken into account in determin- B
ing the final share exchange ratio. The Court has also approved the fixation
of exchange ratio of the shares of the companies on the basis of adoption
of combination of two or more well-known methods of valuation of shares
out of many such methods. In para 37 of the Report it has been observed
that the question is what method should be adopted for arriving at a proper
exchange ratio. The usual rule is that shares of the going concern must be
c
taken at quoted market value. This principle was also recognised by this
Court in the case of CWT v. Mahadeo lalan, (1973) 3 SCC 157. It is not
.the case of the appellant that M/s. C.C. Chokshi & Co. had not taken into
consideration the quoted market value of shares of both the companies
which were going concerns and which were subjected to the Scheme of D
Amalgamation in question. For all these reasons, therefore, there is no
substance in this contention canvassed on behalf of the appellant that the
exchange ratio was ex f acie unfair to the equity shareholders of the trans-
feree- company. The fifth point for determination is also, therefore,
answered in the negative. E

Before parting with this appeal we may mention that written submis-
sions comprising of 69 pages have beeµ. submitted by learned counsel for
the appellant. We have gone through the written submissions. We may
mention that learned counsel for the appellant was permitted to file written
F
submissions spread over 4 to 5 pages while his written submission have
gone upto 69 pages. It may also be mentioned that there was an order
passed by us 21st August 1996 permitting filing of written statements within
two days but the learned counsel for the Appellant has filed written
submissions only on 27th August 1996. Therefore, ex f acie his written
submissions are not required to be considered. However in order to see G
that the appellant may not suffer on account of non-consideration of these
written submission we have gone through them and have considered them
in the interest of justice. But having gone through the same we find that
they involve repetition of the main contentions canvassed before us during
oral arguments by their learned senior counsel Shri Shanti Bhushan and by H
56 SUPREME COURT REPORTS (1996) SUPP. 6 S.C.R.

A their counsel Shri M.J. Thakore. Some additional points also appear to
have been raised in the written submissions pertaining to additional objec-
tions which were not pressed before us at the time of oral hearing and,
therefore, they obviously cannot be considered in support of the conten-
tions on which the appeal was pressed before us. The written submissions
in connection with the points which were already pressed before us are
B
already dealt with by us while considering the main points for determina-
tion in the earlier part of this judgment and, therefore, it is not necessary
to deal with the same once again.

These were the only contentions canvassed in support of the points
C for determination which have all been answered in the negative. The
inevitable result is that the appeal fails and is dismissed. Jn the facts and
circumstances of the case, however, there will be no order as to costs.

v.s.s. Appeal dismissed.