Supreme Court of India
SESA INDUSTRIES LTD.versusKRISHNA H. BAJAJ AND ORS.
- Citation
- 2011 INSC 103
- Decided
- 7 February 2011
- Disposal
- Appeal(s) allowed
- Bench
- D K JAIN
Holding
The Supreme Court restored the sanction of the amalgamation scheme, holding that despite the Official Liquidator’s lapse, the Court had all material facts and pending inspection or investigation does not bar sanction where the scheme is just, fair and reasonable.
Summary
Sesa Industries Ltd. (SIL), a subsidiary of Sesa Goa Ltd. (SGL), sought court sanction for a scheme of amalgamation with SGL. The sole dissenting shareholder, Krishna H. Bajaj, intervened, highlighting an inspection report under s.209A that alleged financial irregularities and siphoning of funds. The High Court’s Single Judge sanctioned the scheme, but a Division Bench set aside the sanction, holding that the Official Liquidator had failed to disclose material facts and that pending investigations barred approval. The Supreme Court held that the Court must ensure statutory compliance and disclosure, but the existence of inspection proceedings or the Official Liquidator’s lapse does not, per se, invalidate a scheme when the Court has all material facts and the scheme is just, fair and reasonable. Consequently, the Supreme Court restored the Single Judge’s sanction, noting that the scheme does not preclude any civil or criminal actions arising from the inspection or investigation.
Issues considered
- The Court must determine whether pendency of an inspection under s.209A must be disclosed under the proviso to s.391(2).
- Whether the Official Liquidator’s failure to disclose material facts under the second proviso to s.394(1) invalidates the sanction of the amalgamation scheme.
- Whether the conduct or alleged misdemeanour of the Official Liquidator can be a ground to set aside a scheme of amalgamation.
- Whether pending investigations under s.209A and s.235 preclude the Court from sanctioning the scheme.
- The correctness of the Division Bench’s revocation of the Single Judge’s order on the basis of alleged statutory non‑compliance.
Legislation cited
- Companies Act, 1956s. 209A, s. 235, s. 237, s. 391, s. 393, s. 394, s. 395, s. 398, s. 401, s. 402, s. 406, s. 448(1)(a), s. 542
Subjects
amalgamationscheme of amalgamationCompanies Act 1956official liquidatordisclosurepublic policyminority shareholderscorporate governanceinspection reportSection 209ASection 391Section 394
Judgment
[2011] 3 S.C.R. 317
SESA INDUSTRIES LTD. A
V.
KRISHNA H. BAJAJ AND ORS.
(Civil Appeal Nos.1430-1431 of 2011)
FEBRUARY 7, 2011
B
[D.K. JAIN AND H.L. DATTU, JJ.]
Companies Act, 1956:
ss.391 and 394 - Amalgamation of companies - c
Amalgamation/merger scheme put up for sanction of Court -
Obligation and jurisdiction of the Court - Held: The Court
would not act as a court of appeal and sit in judgment over
the informed view of the concerned parties to the scheme, as
the same is best left to the corporate.and commercial wisdom D
of the parties concerned, yet the Court is not expected to put
its sea/ of approval on the scheme merely because majority
of the shareholders have voted in favour of the scheme -
Before according its sanction to a scheme of amalgamation,
the Court has to see that the provisions of the Act have been
duly complied with; the statutory majority has been acting bona E
fide and in good faith and are not coercing the minority in
order to promote any interest adverse to that of the latter
comprising the same class whom they purport to represent
and the scheme as a whole is just, fair and reasonable from
the point of view of a prudent and reasonable businessman F
taking a commercial decision.
ss.391 and 394 - Amalgamation of companies -
Scheme of amalgamation between appellant company and
anothi:.r company - Single Judge of High Court sanctioned G
the schen;~ - Division Bench, however, revoked the sanction
- On appeal, ,,.Ad: The Official Liquidator, though aware of the
inspection report under s. 209A containing adverse comments
on the affairs of both the companies, relied only on the report
317 H
318 SUPREME COURT REPORTS [2011] 3 S.C.R.
A of the auditors, which admittedly was not even verified - The
findings in the report under s.209A were nonetheless placed
before the Single Judge, and he had considered the same
while sanctioning the scheme of amalgamation - Therefore,
the Single Judge had, before him, all material facts which had
B a direct bearing on the sanction of the amalgamation scheme,
despite the aforestated lapse on the part of the Official
Liquidator- In this view of the matter, the Single Judge, having
examined all material facts, was justified in sanctioning the
scheme of amalgamation.
c s.391(2), proviso and ss.209A, 235 and 237 -
Amalgamation of companies - Amalgamationlmerqer
scheme put up for sanction of Court - Requirement of
disclosing material facts relating to the companies - Whetrer
existence of inspection proceedings under s.209A mu->1 be
D disclosed in terms of the proviso to s.391(2) - Held, Yes -
Though inspection under s. 209A, .:;trictly speaking, may not
be in the nature of an investigation, but at the same time it
cannot be construed as an innocuous exercise for record,
inasmuch as if anything objectionable or fraudulent in the
E conduct of tho affairs of the company is detected during the
course of inspection, it may lay the foundation for the purpose
of investigations under ss.235 and 237.
s.394(1), second proviso - Amalgamation of companies
F - Amalgamation/ merger scheme put up for sanction of Court
- Duty of the Official Liquidator - Held: An Official Liquidator
acts as a watchdog of the Company Court - His duty is to
satisfy the Court that the affairs of the company, being
dissolved, have not been carried out in a manner prejudicial
G to the interests of its members and the interest of the public
at large - Only upon consideration of the amalgamation
scheme, together with the report of the Official Liquidator, that
the Court can arrive at a final conclusion.
s.394(1), second proviso - Amalgamation of companies
H - Amalgamation/ merger scheme put up for sanction of Court
SESA INDUSTRIES LTD. v. KRISHNAH. BAJAJ AND 319
ORS.
- Effect of misdemeanour on the parl of the Official liquidator A
- Whether sanction of a scheme of amalgamation can be held
up merely beca1,1se the conduct of an Official Liquidator is
·found to be blameworthy - Held: It is neither proper nor
le<J[$ible to lay down absolute parameters in this behalf - The
effect of misciemeanour, on the part of the Official Liquidator B
on the scheme as. such would depend on tne facts obtaining
in each case and ordinarily the Company Judge should be
the final arbiter on that issue.
Words and Phrases - Expression "public policy" -
. Meaning of - Held: The expression is incapable of precise C
definition - It connotes some matter which concerns the public
good and the public interest.
The appellant-company viz. Sesa Industries Ltd. {SIL)
was a subsidiary of Sesa Goa Limited (SGL), a public D
company. A resolution was passed by the. Board .of
·Directors of SIL to amalgamate SIL with SGL. In ·
pursuance thereof, SIL and SGL filed respective company
. petitions in the High Court seeking the Court.'s
per_mission to convene a general. body. meeting. E
. Respond~nt No.1, holder of 0.29% of the shares in SIL,
filed. an affidavit intervening in the afore~11.1entioned
company petitions. Subsequently, respondent No.1 also
filed a letter issued by the Director' of Inspection and
Investigation, Ministry of Company Affairs, Government F
of India, respondent No.3 , addressed to the Regional
Director, respol"!dent No.2, together with a copy of the
in~pection report under Section 209A of the Companies
Act, 1956. Ignoring the objections raised by respondent·
No.1, the High Court, allowed SIL and SGL to convene
meeting~"' for ~eeking approval of shareholders. for the G
saidamalgc:,. :ation. The shareholders of Slland SGL, by
·.99% majority, approved ti.le scheme of amalgamation, and
respondent No.1 was the sole shareholder who objected
to the said scheme. SIL and SGL both --filed petitions in
H
320 SUPREME COURT REPORTS [2011] 3 S.C.R.
A the High Court for according approval to the
amalgamation scheme. The Single Judge of High Court
sanctioned the scheme of amalgamation between SGL
and SIL. Aggrieved, respondent No.1 preferred intra-court
appeal before the Division Bench which set aside the
B order of the Single Judge and revoked the sanction to
the amalgamation scheme. Hence the instant appeals by
SIL.
Allowing the appeals, the Court
C HELD:1.1. Section 391 of the Companies Act, 1956,
clothes the Court with the power to sanction a
compromise or arrangements made by a company with
its creditors and members. Section 394 of the Act, lays
down the procedure for facilitating reconstruction "'nd
D amalgamation of companies. It is plain from the said
provisions that when a scheme of amalgamation/merger
of a company is placed before the Court for its sanction,
in the first instance the Court has to direct holding of
meetings in the manner stipulated in Section 391 of the
E Act. Thereafter before sanctioning such a scheme, even
though approved by a majority of the concerned
members or creditors, 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
F 391 has disclosed all the relevant matters mentioned in
the proviso to the said sub-section. First proviso to
Section 394 of the Act stipulates that no scheme of
amalgamation of a company, which is being wound up,
with any other company, shall be sanctioned by the Court
G unless the Court has received a report from the Company
Law Board or the Registrar to the effect that the affairs
of the company hzve not been conducted in a manner
prejudicial to the interests of Its members or to public
interest. Similarly, second proviso to the said Section
provides that no order for the dissolution of any
H
SESA INDUSTRIES LTD. v. KRISHNAH. BAJAJ AND 321
ORS ..
transferor company under clause (iv) of sub-section (1) A
of Section 394 of the Act shall be made unless the official
liquidator has, on scrutiny of the books and papers of the
company, ·made a report to the Court that the affairs of
the company have not been conducted in a manner
prejudicial to the interests of its members or to public B
interest. Thus, Section 394 of the Act casts an obligation
on Hie Court to be satisfied that the scheme of
amalgamation or merger is not prejudicial to the interest
of its members or to public interest. [Paras 32, 33] [342-
G-H; 344-B; 346-A-F] C
1.2. While it is trite to say that the court called upon
to sanction a scheme of amalgamation would not act as
a court of appeal and sit in judgment over the informed
view of the concerned parties to the scheme, as the same
is best left to the corporate and commercial wisdom of D
the parties concerned, yet it is clearly discernible from a
conjoint reading of the aforesaid provisions that the Court
before whom the scheme is placed, is not expected to put
its seal of approval on the scheme merely because the
majority of the shareholders have voted in favour of the E
scheme. Since the scheme which gets sanctioned by the
court would be binding on the dissenting minority
shareholders or creditors, the court is obliged to examine
the scheme in its proper perspective together with its
various manifestations and ramifications with a view to F
finding out whether the scheme is fair, just and
reasonable to the concerned members and is not
contrary to any law or public policy. The expression
"public policy" is not defined in the Act. The expression
is incapable of precise definition. It connotes some G
matter which concerns the public good and the public
interest. [Para 34) [346-G-H; 347-A-C]
1.3. It is manifest that before according its sanction
to a scheme of amalgamation, the Court has to see that
H
322 SUPREME COURT REPORTS [2011) 3 S.C.R.
A the provisions of the Act have been duly complied with;
the statutory majority has been ac:tlng bona fide and in
good faith and are not coercing the minority In order to
promote any interest adverse to that of the latter
comprising the sam~ class whom they purport to
8 represent and the scheme as a whole is just, fair and
reasonable from the point of view of a prudent and
reasonable businessman taking a commercial decision.
[Para 36] [349-C-D]
c 1.4. The proviso to Section 391 (2) requires a
company to "disclose pendency of any investigation in
relation to the company under Sections 235 to 351, and
the like". Though it is true that inspection under Section
209A of the Act, strictly speaking, may not be in the nature
of an investigation, but at the same time it cannot be
0
construed as an innocuous exercise for record, in as
much as if anything objectionable or fraudulent in the
conduct of the affairs of the company is detected during
the course of inspection, it may lay the foundation for the
purpose of investigations under Sections 235 and 237 of
E the Act, as is the case here. Therefore, existence of
proceedings under Section 209A must be disclosed in
terms of the proviso to Section 391(2). In any event, since
the said issue is a question of fact, based on appreciation
of evidence, and both the Courts below have held that
F the information supplied (by the appellant and SGL to the
shareholders so as to enable them to arrive at an informed
decision) was sufficient, particularly in light of the order
passed by the Single Judge, this Court is not inclined to
disturb the said concurrent finding of the Courts below,
G particularly when it is not shown that the said finding
suffers from any demonstrable perversity. [Para 37] [349-
E-H; 350-A-B]
1.5. As regards the issue as to whether the Division
H Bench was correct in holding that the affidavit filed by the
SESA INDUSTRIES LTD. v. KRISHNA H. BAJAJ AND 323
ORS.
Official Liquidator was vitiated on account of non- A
disclosure of all material facts, from a bare perusal of the
affidavit, it is manifest, ex facie, that before filing the
affidavit, the said official had not examined and applied
its mind to the findings contained in the Inspection report
under Section 209A of the Act. While it is true that it was B
not within the domain of the Official Liquidator to ·
determine the relevancy or otherwise of the said report,
ye~ .ie was obliged to incorporate in his affidavit the
contents of the inspection report. Clearly; the official
liquidator had failed to discharge the statutory burden c
.placed on him under the second proviso to Section 394(1)
of the Act. [Para 38] [350-B·D]
1.6. An Official Liquidator acts as a watchdog of the
Company Court, reposed with the duty of satisfying the
Court that the affairs of the company, being dissolved, D
have not been carried out in a manner prejudicial to the
interests of its members and the interest of the public at
large. In essence, the Official Liquidator assists the Court
in appreciating the other side of the picture before it, and
it is only upon consideration of the amalgamation E
scheme, together with the report of the Official Liquidator,
that the Court can arrive at a final conclusion that the
scheme is in keeping with the mandate of the Act and
that of public interest in general. It, therefore, follows that
for examining the questions as to why the transferor- F
company came into existence; for what purpose it was
set up; who were its promoters; who were controlling it;
what object was sought to be achieved by dissolving it
and merging with another company, by way of a scheme
of amalgamation, the report of an official liquidator is of G
seminal importance and in fact facilitates the Company
Judge to record its satisfaction as to whether or not the
affairs of the transferor company had been carried on in
a manner prejudicial to the interest of the minority and to
the pubi;.::, interest. [Para39] (350-E-G; 351-A-B]
324 SUPREME COURT REPORTS [2011] 3 S.C.R.
A 1.7. In the present case, one is unable to appreciate
why the Official Liquidator, who was aware of the
inspection report under Section 209A containing adverse
comments on the affairs of both the companies, relied
only on the report of the auditors, which admittedly was
B not even verified. One can only lament the conduct of
the official liquidator. [Para 40) [351-C]
1.8. As regards the further issue as to whether
sanction of a scheme of amalgamation can be held up
C merely because the conduct of an Official Liquidator is
found to be blameworthy, this Court is of the view that it
will neither be proper nor feasible to lay down absolute
parameters in this behalf. The effect of misdemeanour on
the part of the official liquidator on the scheme as such
would depend on the facts obtaining in each case and
D ordinarily the Company Judge should be the final arbiter
on that issue. In the instant case, indubitably, the
findings in the report under Section 209A of the Act were
placed before the Company Judge (i.e. the Single Judge
of the High Court), and he had considered the same while
E sanctioning the scheme of amalgamation. Therefore, in
the facts and circumstances of the present case, the
Company Judge had, before him, all material facts which
had a direct bearing on the sanction of the amalgamation
scheme, despite the aforestated lapse on the part of the
F Official Liquidator. In this view of the matter, this Court
Is of the considered opinion that the Company Judge,
having examined all material facts, was justified in
sanctioning the scheme of amalgamation, particularly
when the current Investigation under Section 235 of the
G Act was initiated pursuant to a complaint filed by
respondent No.1 subsequent to the order of the
Company Judge sanctioning the scheme. [Para 41) [351·
D-H; 352-A]
1.9. The order passed by the Company Judge (i.e. the
H
SESA INDUSTRIES LTD. v. KRISHNA H. BAJAJ AND 325
ORS.
Single Judge of the High Court) sanctioning the scheme A
of amalgamation is restored. However, it is made clear
that the scheme of amalgamation will not come in the way
of any civil or criminal proceedings which may arise
pursuant to the action initiated under Sections 209A or
235 of the Act, or any criminal proceedings filed by B
respondent No.1. [Para 42] [352·B·C]
Hindustan Lever Employees Union v. Hindustan Lever
Ltd. & Ors. 1995 Supp (1) SCC 499; Central Inland Water
Transport Corporation Limited & Anr. v. Brojo Nath Gangu/y C
& Anr. (1986) 3 SCC 156; Miheer H. Mafatlal v. Mafatlal
Industries Ltd. (1997) 1 SCC 579; Firm Sriniwas Ram Kumar
v. Mahabir Prasad & Ors. 1951 SCR 277; Ganga Bishnu
Swaika v. Calcutta Pinjrapole Society AIR 1968 SC 615 -
relied on.
D
Reliance Petroleum Ltd., In re (2003) 46 SCL 38 (Guj);
Programme Asia Trading Company Limited, In re (2005) 125
Comp Cas 297 (Born); Core Health Caro Ltd., In re (2007)
138 Comp Cas 204 (Guj); Regional Director, Company Law
Board, Government of India Vs. Mysore Galvanising Co. Pvt. E
Ltd. & Ors. (1976) 46 Comp Cas 639 (Kar); Sugarcane
Growers & Sakthi Sugars Shareholders' Association Vs.
Sakthi Sugars Ltd. (1998) 93 Comp Cas 646 (Mad);
Marybong and Kye/ Tea Estate Ltd., In re (1977) 47 Comp
Cas 802 (Cal); Mathew Philip & Ors. Vs. Malayalam F
Plantations (India) Ltd. & Anr. (1994) 81 Comp Cas 38 (Ker);
Ranjitsing Brahmajeetsing Sharma Vs. State of Maharashtra
& Anr. (2005) 5 SCC 294; Search Chem Industries Ltd., ·In
re (2006) 129 Comp Cas 471 (Guj); Banaras Beads Ltd., In
re (2006) 132 Comp Cas 548 (All); Life Insurance
Corporation of India Vs. Escorts Ltd. & Ors. (1986) 1 SCC G
264; Wood Polymer Limited, In re (1977) 47 Comp Cas 597;
Bedrock Ltd., In re (2000) 101 Comp Cas 343 (Born); T.
Mathew Vs. Smt. Saroj G. Poddar (1996) 22 CLA 200 (Born);
Securities and exchange Board of India Vs. Sterlite Industries
H -
326 SUPREME COURT REPORTS [2011) 3 S.C.R.
A (India) Ltd. (2003) 113 Comp Cas 273; Modus Analysis and
Information P. Ltd. & Ors. In re (2008) 142 Comp Cas 410
(Cal); Larsen and Toubro Limited, In re (2004) 121 Comp
Cas 523; Carona Ltd. Vs. Parvathy Swaminathan & Sons
(2007) 8 SCC 559; J. S. Javar and Anr. v. Dr. Shankar Vishnu
B Marathe and Ors. AIR 1967 Born. 456; Calcutta Industrial
Bank Ltrl. In re (1948) 18 Comp Cas 144; Travancore
National & Qui/on Bank Ltd., In re A.l.R. 1940 Mad 139 -
referred to.
Case Law Reference:
c
(2003) 46 SCL 38 (Guj) referred to Para 16
(2005) 125 Comp Cas 297 (Born) referred to Para 16
(2007) 138 Comp Cas 204 (Guj) referred to Para 16
D
(1976) 46 Comp Cas 639 (Kar) referred to Para 17
(1998)'93 Comp Cas 646 (Mad) referred to Para 17
(1977) 47 Comp Cas 802 (Cal) referred to Para 17
E (1994) 81 Comp Cas 38 (Ker) referred to Para 17
(2005) s sec 294 referred to Para 18
(2006) 129 Comp Cas 471 (Guj) referred to Para 19
F (2006) 132 Comp Cas 548 (All) referred to Para 19
(1986) 1 sec 264 referred to Para 22
(1977) 47 Comp Cas 697 referred to Para 23
(1997) 1 sec 579 rolled on Para 25
G
(2000) 101 Comp Cas 343 (Born) referred to Para 26
(1996) 22 CLA 200 (Born) referred to Para 26
(2003) 113 Comp Cas 273 referred to Para 27
H
SESA INDUSTRIES LTD. v. KRISHNA H. BAJAJ AND 327
ORS.
(2008) 142 Comp Cas 410 (Cal) referred to Para 27 A
(2004) 121 Comp Cas 523 referred to Para 27
AIR 1967 Born. 456 referred to Para 29
(2007) 8 sec 559 referred to Para 27
8
(1948) 18 Comp Cas 144 referred to Para 29
A.l.R. 1940 Mad 139 referred to Para 29
1995 supp (1) sec 499 relied on Para 34
(1986) 3 sec 156 relied on Para 34
c
1951 SCR 277 relied on Para 38
AIR 1968 SC 615 relied on Para 38
CIVIL APPELLATE JURISDICTION : Civil Appeal No. D
1430-1431 of 2011.
From the Judgment & Order dated 21.2.2009 of the High
Court of Bombay at Goa Bench in Comparr 1 Appeal No. 4 of
2008 with Application No. 48 of 2008. e
H.P. Rawal, ASG, K.K. Venugopal, Riaz Chagla, B.
Vljayalakshml Menon, Ravi Gandhi, Ekta Kapll, Anlsh Kapur,
Ankur Talwar, A.K. Srivastava, Aman Ahluwalia, Anlrudh
Sharma, Sushma Suri, Varun Sarin, Amar Dave, Gaurav Goel, ,F
Mahesh Agarwal, Rlshl Agrawala, E.C. Agrawla for the
appearing parties.
The Judgment of the Court was delivered by
D.K. JAIN, J, 1. Leave granted. G
2. These appeals, by special leave, are directed against
the judgment dated 21st February, 2009 delivered by a Division "
Bench of the High Court of Bombay at Goa whereby the Division
Bench has set aside the judg;vient of the learned Slngle Judge
H
328 SUPREME COURT REPORTS [2011] 3 S.C.R.
A dated 18th December, 2008, sanctioning a scheme of
amalgamation between the appellant company and Sesa Goa
Limited (for short "SGL"), the Transferee Company.
.3. Shorn of unnecessary details, the facts material for th~
. adjudication of these appeals may be stated thus:
8
SGL was incorporated on 25th June, 1965 as a private
limited company, and thereafter, on 16th April, 1991 became
a public company. The appellant company viz. Sesa Industries
Ltd. (for short "SIL") was incorporated on 17th May, 1993 as a
C subsidiary of SGL with the latter holding 88.85% of the shares
in the former.
4. on 26th July, 2005, a resolution was passed by the
Board of Directors of SIL to amalgamate SIL with SGL, effective
D from 1st April, 2005. In pursuance thereof, on 12th January,
2006, SIL and SGL filed respective company applications in
the Bombay High Court seeking the Court's permission to
convene a general body meeting.
5. Respondent No. 1 herein, holder of 0.29% of the shares
E in SIL, filed an affidavit on 18th January, 2006 intervening in
the afore-mentioned company petitions. Subsequently, on 6th
March, 2006, re~pondent No. 1 also filed a letter dated 17th
February, 2006 issued by the Director of Inspection and
Investigation, Ministry of Company Affairs, Government of lndla,
F respondent No.3 herein, addressed to the Regional Director,
respondent No.2 in these appeals, together with a copy of the
inspection report under Section 209A of the Companies Act,
1956 (for short "the Act"). At this juncture, it would be useful to
extract relevant portion of the said report, which reads as
G follows:
"It will he apparent from the various findings of the
Inspection Report that the entire control of the day to day
working of the company is being managed by Mitsui &
Co. Ltd., Japan whereby huge turnover and profits are
H
SESA INDUSTRIES LTD. v. KRISHNA H. BAJAJ AND 329
ORS. (D.K. JAIN, J.]
being siphoned away through systematic under invoicing A
of international financial transactions and over invoicing of
import of coal. As regards inter-se transactions between
SGL & SIL, systematic efforts have been made by SGL
to put SIL into weal financial position by siphoning of the
funds from SIL to SGL by over invoicing the price of iron B
ore and coke. In the process the minority shareholders of
SIL have been deprived of their reasonabli:;l return in the
forms of dividend or gains out of fair price of its shares.
The minority shareholders of (sic) SIL have been cheated
through the systematically siphoning the funds by SGL to C
the ultimate holding company i.e. M/s Mitsui & Co. Ltd.,
Japan. The 1.0. has suggested for redressal of grievances
of SIL by SGL in rescinding (sic.) the contract of purchase
of shares at under value price of Rs. 30/- per share."
6. Ignoring the objections raised by respondent No.1, vide D
order dated 18th March, 2006, the High Court, allowed SIL and
SGL to convene meetings for seeking approval of shareholders
for the said amalgamation, and directed the companies to
disclose, as part of the Explanatory Statement to be sent with
individual notices, the following observations from the inspection E
report:
"The Central Government has Issued a letter dated 17th
February, 2006 to various governmental agencies
Including the Regional Director (Western Region) F
enclosing a copy of the inspection report and recording that
during the course of the inspection the inspecting officer
has pointed out contraventions of Section 269 read with
Section 198/309, contravention of Section,289 read with
Article no. 111 and 140 of the Articles, contravention of G
Section 260 and 313, contravention of Section 268 read
with Section 256 and contravention of Section 628 of the
· Act. The Investigating Officer has suggested invoking the
provisions of Section 397 and 398 read with Section 3888,
H
330 SUPREME COURT REPORTS [2011] 3 S.C.R.
A 401, 402 and 406 of the Act including that of Section 542
of the Act. The Inspection report has also pointed out
financial irregularities and also examined the complaints
of Mrs. Kalpana Bhandari and Mrs. Krishna H. Bajaj which
have been reported in Part "A" of the Inspection Report.
B Contrav1 ntion of Section 297 of the Act has been reported
in Part · 3" of the Inspection Report. It has also been
suggested Part "D" of the Inspection Report for references
to be made to the Ministry of Finance and SEBI.
Accordingly, the Central Government has requested the
c addressees to examine the report and take appropriate
action."
7. Thereafter, on 8th May, 2006, the shareholders of SIL
and SGL, by 99% majority, approved the scheme of
amalgamation, and respondent No.1 was the sole shareholder
D who objected to the said scheme. SIL and SGL both filed
peti~ions in the High Court for according approval to the
amalgamation scheme.
8. On 10th August, 2006, the Registrar of Companies, Goa
E filed an affidavit as the delegate of the Regional Director stating
that SIL ano SGL were inspected under Section 209A of the
Act by the Inspecting Officers of the Ministry of Company Affairs
during the year 2005 and "any violation which may be noticed
during the course of inspection, there will be no dilution for
F initiating legal action under the Act and that will not In any way
affect the amalgamation". The Registrar stated save and except
the observations In para 4 of the affidavit; which Included
forwarding of two complaints received from respondent No.1,
he had !'IO objection to the scheme of amalgamation.
G 9. On the same day, Official Liquidator, respondent No.1
In these appeals, also filed a report In the High Court, Inter alla,
stating that In light of the Auditor's report dated 2nd August
2006, according to him the affairs of the transferor company
have not been conducted in a manner prejudicial to the interest
H
SESA INDUSTRIES LTD. v. KRISHNAH. BAJAJ AND 331
ORS. [D.K. JAIN, J.]
of its members or the public. Respondent No.1 filed an affidavit A
objecting to the sanctioning of the scheme.
10. On 24th August, 2006 respondent No. 1 filed
Application No. 56 of 2006 praying for production and/or
inspection of some documents, including joint valuation report 8
submitted by Mis. N.M. Raiji and M/s. Hairbhakti & Co.; the
aforementioned Inspection Report relating to SGL and SIL, and
issuance of notice to the Bombay Stock Exchange and the
National Stock Exchange; the Ministry of Company Affairs and
the Cen~ral Government. On 9th February, 2009, while partly
allowing the said application the Company Court directed SGL C
and SIL to place on record the joint valuation reports, the proxy
register alongwith relevant proxies held on 8th May, 2006.
However, as regards other prayers, the application was
dismissed. Being aggrieved, respondent No.1 preferred an
appeal before the Division Bench. Vide order dated 25th April, D
2007, the Division Bench dismissed the appeal preferred by
respondent No.1, observing that:
"We have gone through the two reports. We are of the
opinion that the learned Company Judge should take into E
consideration the said reports before passing any final
orders in the matter of approving the scheme of
amalgamation of the two companies for considering the
· purpose of it relevancy, in order to grant approval."
11. Thereafter, respondent No.1 filed yet another Company F
Application No. 24 of 2007, praying that the reports dated 17th
February, 2006 and 20th March, 2006 sent to the Regional
Director by the Ministry of Company Affairs be furnished to her.
Vlde order dated 13th July, 2007., the Single Judge allowed the
application. Being aggrieved, SIL preferred an appeal before G
the Division Bench. Admlttln'1 the appeal, vlde order dated 23rd
August, 2007, the Division Bench granted Interim stay of the
order dated 13th July, 200i. The order reads: ·
H
332 SUPREME COURT REPORTS (2011] 3 S.C.R.
A "Perusal of the impugned order, however, nowhere
discloses consideration of the said aspect of the relevancy
of the document for the purpose of deciding the issue
relating to amalgamation of the company. We, however,
make it clear that the process regarding amalgamation
B shall proceed further in accordance with the provisions of
law and in terms of direction in order dated 25.4.07
.J regarding relevancy of the said report."
12. Finally, vide judgment dated 18th December, 2008,
the learned Company Judge sanctioned the scheme of
C amalgamation between SGL and SIL, inter alia, observing that:
(i) since inspection proceedings under Section 209A of the Act
are different from an investigation carried out in terms of Section
235 of the Act, they are not required to be disclosed under the
proviso to Section 391 of the Act; (ii) in any event, SIL and SGL
D have not suppressed any material facts as the letter dated 17th
February, 2006 was made part of the individual notices sent
to the shareholders; (iii) inspections carried out under Section
209A of the Act cannot come in the way of sanctioning of
amalgamation, as they can only result in criminal prosecution
E of those responsible for contravention of various Sections of
the Act; (iv) three years have elapsed since the inspections but
the Central Government has not taken any further actions in
terms of the inspection reports, which shows that investigations
or action in terms of Section 401 of the Act was not in the offing;
F (v) the Central Government has, through the Regional Director,
clarified that the merger would not come in the way of any action
to be taken pursuant to the two inspection reports, (vi} non-
disclosure of pending criminal complaints is also not fatal to
sanctioning of the scheme as the Objector did not raise this
G contention earlier; pendency of criminal complaints cannot be
equated to "material facts" in terms of the proviso to Section
391 of the Act'and the r..erger will have no effect on the criminal
complaints; (vii) merely because the Registrar has failed to
perform his duties, it cannot be said that the scheme of
H amalgamation, which has been approved by a majority of the
-
___.
SESA INDUSTRIES LTD. v. KRISHNAH. BAJAJ AND 333
ORS. [D.K. JAIN, J.]
shareholders, should be rejected; (viii) the onus is on the A
Objector to prove that a scheme is contrary to public interest
and is not just, fair and reasonable, and in the instant case, the
Objector has not discharged the burden cast on her; (ix) the
objection in relation to the share valuat!on was not well-founded
in as much as the Objector has not placed any material to show B
that the valuation was unfair, especially when an oveiwhelming
majority of shareholders have approved the share valuation; (x)
violation of Section 73 of the Act is not sufficient to stall an
amalgamation as the persons responsible for the violation can
be effectively dealt with even after the merger and (xi) the c
objection that the proposed scheme is unconscionable
deserves to be rejected, as the scheme has been approved
by majority of the shareholders, as also the Central
Government. The learned Judge also clarified that the
sanctioning of the scheme will not come in the way of either D
civil or criminal proceedings which may be initiated pursuant
to the inspection reports as well as further progress of criminal
complaints filed by the objector.
13. Aggrieved, respondent No.1 preferred an intra-court
appeal before a Division Bench of the Court. The Division E
Bench has, vide the impugned judgment, set aside the order
of the learned Single Judge and revoked the sanction to the
amalgamation scheme. The division bench has, inter-alia,
observed that: (i) when serious irregularities have been found
in the inspection report and when the proceedings on the basis F
of the said inspection report are still pending and. no further
decision has been taken in this behalf and the Registrar as a
delegate of the Regional Director who was in possession of
such inspection report, should not have filed affidavits both, as
1:1e Official Liquidator as well as the Registrar as the delegate
of t::~ Regional Director; (ii) once it is found that the report/
affidavit on behalf of the Registrar/Regional Director is not in
conformity with the statutory provisions, this Court mechanically
cannot sanction the scheme simply because the majority of the
shareholders have approved th"' scheme and the majority
-----
334 SUPREME COURT REPORTS [2011] 3 S.C.R.
A shareholders in their wisdom have accepted the valuation
regarding exchan1:ia ratio; (iii) as per the provisions of Section
393, the Registrar as well as the Liquidator, both are required
to submit their separate reports and both are, therefore,
functioning in a different capacity. It is surprising as to how the
B Official Liquidator who was the incharge of the Registrar could
have filed the affidavits one in the capacity as a delegate of the
Regional Director and the other in the capacity as the Official
Liquidator; (iv) the Affidavit of the Registrar is absolutely
noncommittal. In the affidavit of the Official Liquidator, he has
c mentioned that the affairs of the company are not being
conducted in a manner prejudicial to the interests of its
members or to public interest. But when the same persnn filed
affidavit as Registrar, this aspect is clearly omitted in his renlv
and (v) the learned Company Judge himself has found that from
D the stand taken by the Registrar, he has failed in his dl.llt and it
cannot be said that the requirement of Section 394 has been
complied with. In fact, two contradictory affidavits have been
filed by the same gentleman, one in his capacity as the delegate
of the Regional Director and the other in his capacity as the
E Official Liquidator. When the law requires that there should be
two independent reports, it is clear that the statutory provision
has not been complied with.
14. Hence these appe2ls by SIL.
F 15. We heard Mr. K.K. Venugopal, Senior Advocate for the
appellant, Mr. H.P. Raval, learned Additional Solicitor General
of India on behalf of respondent Nos.2 to 4 and Mr. Amar Dave,
learned Advocate on behalf cf respontlent No.1 at considerable
length.
G 16. Mr. K.K. Venugopal, learned senior counsel strenuously
urged that once a scheme of amalgamation has been approved
by a majority of the shareholders after sufficient disclosure in
the explanatory statement regarding the pendency of an
inspection under Section 209A of the Act, it is neither expedient
H nor desirable for Courts to sit in judgment over a commercial
SESA INDUSTRIES LTD. v. KRISHNA H. BAJAJ AND 335
ORS. [D.K. JAIN, J.]
decision of the shareholders. Relying on the decisions in A
Reliance Petroleum Ltd., In re1, Programme Asia Trading
Company Limited, In re 2 and Core Health Care Ltd., In re 3,
learned counsel contended that it is settled that pendency of an
inspection under Section 209A or under Section 235 of the Act
should not stall a scheme of amalgamation. B
17. Learned counsel submitted that the Division Bench
erred in rejecting the scheme of amalgamation on the sole
ground that the requirement of the first proviso to Section 394(1)
of the Act has not been complied with, as it is settled that the C
said proviso only applies to the amalgamation of a company
which is being wound up. Learned counsel stressed that in the
instant case, the pmyer in the amalgamation petition was for
"dissolution without winding up" and hence only the second
proviso to Section 394(1) was applicable. Relying on the
decisions of this Court in Regional Director, Company Law D
Board, Government of India Vs. Mysore Galvanising Co. Pvt.
Ltd. & Ors. 4 , Sugarcane Growers & Sakthi Sugars
Shareholders' Association Vs. Sakthi Sugars Ltd. 5, Marybong
and Kye/ Tea Estate Ltd., In re6 and Mathew Philip & Ors. Vs.
Malayalam Plantations (India) Ltd. & Anr. 7, learned counsel E
contended that the use of the word "further" in the second
proviso to Section 394(1) of the Act does not indicate that the
said proviso is an additional provision in relation to the situation
contemplated under the first proviso.
F
18. While pointing out that the current investigation under
Section 235 of the Act was initiated in July, 2009, after the
1. [2003] 46 SCL 38 (Guj).
2. Y2005] 125 Comp Cas 297 (Born).
G
3. [2u.:'7] 138 Comp Cas 204 (Guj).
4. [1976] •. _ .::amp Cas 639 (Kar).
5. [1998) 93 Comp Cas 646 (Mad).
6. [1977) 47 Comp Cas 802 (Cal).
7. [1994] 81 Comp Cas 38 (Ker). H
336 SUPREME COURT REPORTS (2011] 3 S.C.R.
-
..__
A impugned judgment was delivered and was based on a fresh
complaint by respondent No.1, learned counsel urged that
these investigations are at a preliminary stage of mere
allegations and the final report/accusation, if any, the trial, its
outcome and.appeals etc., would all be a long drawn process,
B which cannot hold up the amalgamation, as was opined by the
Company Judge. Learned counsel argued that the said finding
of the Company Judge having not been disturbed by the
appellate bench, the same has attained finality. Drawing an
analogy with cases under the Election laws, learned counsel
c pleaded that unless a person is convicted, no adverse inference
can be drawn against him. In support of the proposition,
reliance was placed on the decision of this Court in ~anjitsing
Brahmajeetsing Sharma Vs. State of Maharashtra & ,,.,,rs.
19. Reliance was placed on the decisions in S1;~,vh Chem
D Industries Ltd., In re 9 and Banaras Beads Ltd., In re 10 to
contend that the pendency of the investigation cannot come in
the way of amalgamation in as much as even if the allegations
are found to be true, the same will lead only to a report under
Section 241 of the Act and ultimately a prosecution under
E Section 242 of the Act against the Directors/Principal officers
of the company, which would not dilute or affect the scheme of
. amalgamation.
20. Highlighting the advantages of the amalgamation,
F learned counsel submitted that SIL being a subsidiary of SGL,
the amalgamation between both the said companies would
entail several benefits for both the companies, including
consolidation of the management, control and operation of both
companies thereby resulting in considerable savings by
G elimination of duplication of administrative expenses etc.
Moreover, according to the learned counsel, the shareholders
of SIL, irrcluding the appellant, will also stand to gain
8. c2oos) s sec 294.
9. [2006] 129 Comp Cas 471 (Guj).
H 10. [2006] 132 Comp Cas 548 (AIQ.
-
SESA INDUSTRIES LTD. v. KRISHNA H. BAJAJ AND 337
ORS. [D.K. JAIN, J.]
tremendously by allotment of shares of SGL, a very healthy A
company. As per the amalgamation scheme, the shareholders
of SIL will get one share of SGL against five shares held by
them in SIL. Learned counsel submitted ·that 99.68% of the
shareholders of both the appellants, viz. SIL and SGL having
approved the sc~.eme, allowing a scheme of amalgamation to B
be stalled due to the pendency of an investigation or inspection
would le.ad to :a situation whereby any scheme for amalgamation
can be held to ransom by a minority shareholder, like in the
instant case., where the first respondent/complainant had
voluntarily offloaded 5,31,950 shares pursuant to a voluntary c
offer made by SGL out of total 5,89,400/- shares held by him
in SIL.
21. Assailing the observation of the appellate Bench that '
the same person viz. the Registrar of Companies ought not to
have filed both Affidavits himself as delegate of Regional D
Director as well as the Official Liquidator, learned counsel
urged that as Section 448(1 )(a) of the Act contemplates the
possibility of part time Official Liquidators, there was nothing
improper in the approach of the Registrar in as·much as the
Registrar had filed both the affidavits on 10th August, 2006, and E
the same had to be read together, which disclosed all relevant
materials. Additionally, it was urged that the Single Judge had
rightly concluded that a scheme of amalgamation, which is just
and fair, cannot be rejected merely because the Official
Liquidator had failed in his duty in placing the correct position F
before the Court.
22. Learned counsel then submitted that in Life Insurance
Corporation of India Vs. Escorts Ltd. & Ors. 11 , this Court had
held that the functioning of a company was akin to that of a G
parliamentary democracy wherein the overall control is
exercised by the majority of the shareholders. lh the instant
case, majority of the shareholders had approved the scheme
of amalgamation despite having full knowledge of the
11. (1986) 1 sec 264. H
338 SUPREME COURT REPORTS (2011] 3 S.C.R.
A proceedings against the Companies and the prima facie
findings. Moreover, Section 395 of the Act provides the power
to acquire shares of the shareholders dissenting from the
scheme if the said scheme has been approved by the holders
of not less than nine-tenth in value of the shares of whose
B transfer is involved.
23. Mr. Raval, the learned Additional Solicitor General, on
the other hand, relying on a decision of the Gujarat High Court
in. Wood Polymer Limited, In re, 12 submitted that since the
sanctioning of a scheme of amalgamation has the effect of
C imposing it on dissenting members, before exercising the
power conferred on it by Section 391(2) of the Act, the Court
needs to examine the scheme in its proper perspective.
Learned counsel urged that it cannot be argued that merely
because statutory formalities are duly carried out, the Court has
D no option but to sanction the scheme. Learned counsel also
submitted that since inspection reports had been received by
the Registrar of Companies and Official Liquidator, respectively
on 19th October, 2006 and 15th November, 2006, i.e. after the
filing of affidavit by them on 10th August, 2006, under Section
E 394 of the Act, no fault can be found with their affidavits. It was
asserted that since serious irregularities had been found in the
affairs of both SGL and SIL, cheating the minority shareholders
of SIL, the order sanctioning amalgamation of the said
companies cannot be permitted to be used for thwarting the
F investigations. Thus, the learned Additional Solicitor- General
supported the impugned order.
24. Mr. Amar Dave, learned counsel appearing for
respondent No.1, contended that the provisions of Chapter V
G of Part VI of the Act were intended to introduce a system of
checks and balances to promote the interests of shareholders,
creditors and society at large so as to promote a healthy
corporate governance culture, and the Courts should adopt an
interpretation that advances this object.
H 12. {1977] 47 Comp Cas 597.
- SESA INDUSTRIES LTD. v. KRISHNA H. BAJAJ AND 339
ORS. [D.K. JAIN, J.]
25. Learned counsel urged that in the instant case the A
provisions of Section 39.3(1 )(a) of the Act had not been
complied with in as much as all material facts were not placed
before the shareholders, in particular the preliminary letters of
findings addressed to the Managing Director of SIL by the
Inspector pursuant to the inspection under Section 209A of the B
Act on 28th September, 2005. According to the learned
counsel, a mere enclosure of an extract of covering letter dated
17th February, 2006 cannot be construed as sufficient
compliance with the mandate of Section 393(1)(a), as the said
letter did not disclose the details of the findings to the effect c
that the affairs of the company had been conducted in a manner
which was prejudicial to the interests of its members. Relying
on the decision of this Court in Miheer H. Mafatlal Vs. Mafatlal
Industries Ltd., 13 learned counsel contended that sufficient
information had not been disclosed to the shareholders so as D
to enable them to take an informed decision.
26. Learned counsel contended that in light of the dictum
laid down in Miheer H. Mafatlal (supra); Bedrock Ltd., In re14
and T. Mathew Vs. Smt. Saroj G. Poddar15, the companies had
violated the provisions of the proviso to Section 391 (2) of the E
Act in as much as SIL and SGL had not disclosed the pendency
of the criminal proceedings against the companies and its
directors, and of proceedings under Section 209A of the Act.
Learned counsel submitted that proceedings under Section
209A of the Act would fall under the category "and of the like" F
as mentioned in the proviso to Section 391 (2) of the Act, as
every material fact which could affect the Company Court's
discretion has to be disclosed. Moreover, both the Companies
had not disclosed the final inspection. repprts under Section
209A of the Act, and the same was brought on record by G
respondent No.1. Learned counsel further submitted that the
petitioner hasfailed to disclose even before this Court, that the
13. (1997) 1 .sec 579.
14. [2000] 101 Comp .Cas 343 (Born).
15. (1996] 22 CLA 200 (Born). H
340 SUPREME COURT REPORTS [2011] 3 S.C.R.
A Serious Fraud Investigation Office (SFIO) was conducting an
investigation into the affairs of the company under the
provisions of Section 235 of the Act, and even though the said
investigation proceedings arose later, the obligation under the
proviso of Section 391 (2) is a continuing obligation and,
B therefore, the appellant was obliged to disclose the same
before this Court as well.
27. Learned counsel strenuously urged that the reports
submitted by the Registrar as delegate of the Regional Director
C and as Official Liquidator were clearly in violation of the
mandate of the proviso to Section 394(1) of the Act, in as much
as despite being in possession of the inspection reports
prepared by the Inspecting Officer of the Ministry of Company
Affairs, the Official Liquidator filed a misleading affidavit before
the Company Court, reporting "that the affairs of the transferor
D Company were not being conducted in a manner prejudicial to
the interests of its members or to the public interest". It was
alleged that the affidavit submitted by the Official Liquidator
was solely based on the report of one Mis S.R. Kenkre &
Associates, Chartered Accountants, who in turn had based their
E entire report on the information supplied by the Company,
without any independent verification. Relying on the decisions
in Securities and Exchange Board of India Vs. Sterlite
Industries (India) Ltd. 16 ; Modus Analysis and Information P.
Ltd. & Ors, In re 17; Miheer H. Mafatlal (supra); Larsen and
F Toubro Limited, In re 16; Wood Polymer (supra) and T. Mathew
(supra), learned counsel argued that the Division Bench had
rightly concluded that the mandate of Section 394 had not been
complied with thereby raising a statutory embargo on the
approval of the scheme of amalgamation. Further, the
G disclosure of all material information to the shareholders, which
included the pendency of criminal proceedings; inspection
proceedings under Section 209A of the Act, and proceedings
16. (2003) 113 Comp Cas 273.
17. (2008) 142 Comp Cas 410 (Cal).
H 18. (2004) 121 Comp Cas 523.
--
SESA INDUSTRIES LTD. v. KRISHNAH. BAJAJ AND 341
ORS. [D.K. JAIN, J.]
under Section 235 of the Act in the report of the Official A
Liquidator under Section 394(1) of the Act constitute
jurisdictional requirements, and unless all of them were ·
satisfied, the Company Court had no jurisdiction to sanction the
scheme. In support, reliance was placed on the decision of this
Court in Carona Ltd. Vs. Parvathy Swaminathan & Sons19 • B
28. Learned counsel then contended that the fact of huge
siphoning off the funds from the transferor company (SIL) to the
transferee company (SGL) being within the knowledge of the
Company Court, it should not have S!ilnctioned the scheme, as
the distinction between the wrongdoer and the beneficiary gets C
effaced due to sanctions of law. Learned counsel also argued
that under the attending circumstances the swap ratio of 1 share
of the transferee company for 5 shares of the transferor
company was also unfair, especially when the valuers did not ,
have an opportunity to examine the inspection reports under D
Section 209A of the Act.
29. Reliance was placed on the decisions in J.S. Davar
& Anr. Vs. Dr. Shankar Vishnu Mara the & Ors. 20 ; T. Mathew
(supra); Calcutta Industrial Bank Ltd., In re21 and Travancore E
National & Qui/on Bank Ltd., In re 22, to contend that the
proposed scheme was a ruse to stifle further inquiry into the
affairs of the transferor and transferee company and their
managements which have been initiated by the Ministry of
Company Affairs, as also criminal and civil proceedings that F
may arise thereafter because after the amalgamation, it may
not be possible to initiate any proceedings against the
transferor company as it would cease to exist. Moreover, the
proceedings under Sections 244, 397, 398, 401, 402, 406 and
542 of the Act against the transferor company cannot be G
initiated against the transferee company even if the transferee
10. c2001) 8 sec 559.
20. A.l.R. 1967 Born. 456.
21. [1948] 18 Comp Cas 144.
22. A.l.R. 1940 Mad 139. H
--
342 SUPREME COURT REPORTS [2011) 3 S.C.R.
A company has undertaken to take over all the future liabilities of
the transferor company. Learned counsel thus, asserted that
in light of the serious findings in the inspection report under
Section 209A of the Act, sanction of the scheme would be
detrimental to public interest, more so when on sanction of the
a scheme of amalgamation, the transferor company would cease
to exist, losing its entity and in the process its functionaries will
go scot free.
30. Relying on Miheer H. Mafatlal (supra), learned counsel
contended that the proposed scheme of amalgamation was
C unconscionable, in as much as the minority shareholders of the
transferor company have been oppressed, and in fact the "exit
option" offered by the transferee company to the minority
shareholders of tran~feror company on 5th June 2003, at an
extremely undervalued price of · 30 per share was in violation
D of Section 395 of the Act.
31. Lastly, learned counsel urged that though the decision
of the majority of the shareholders, while sanctioning the
scheme, is of paramount importance, but in the instant case,
E since 99.80% of the votes of the transferor company were those
of the transferee company itself, the significance of the majority
decision was of no relevance and, therefore, under these
circumstances the Company Court was required to ensure that
the rights of the minority were not trammeled upon, as observed
F in Miheer H. Mafatlal (supra); Bedrock Ltd. (supra); T. Mathew
(supra); J.S. Davar (supra) and Calcutta Industrial Bank Ltd.
(supra).
32. Before addressing the issues raised, it will be useful
to survey the relevant provisions contained in Chapter V of Part
G VI of the Act, which deal with "Arbitrations, compromises,
arrangements and reconstructions". Section 391 of the Act,
clothes the Court with the power to sanction a compromise or
arrangements made by a company with its creditors and
members. It reads as follows:-
H
SESA INDUSTRIES LTD. v. KRISHNA H. BAJAJ AND 343
ORS. [D.K. JAIN, J.]
,
"S.391.Power to compromise or make arrangements with A
creditors and members.-(1) Where a compromise or
arrangement is proposed-
(a) between a company and its creditors or any class
of them; or B
(b) between a company and its members or any class
of them;
the Court may, on the application of the company or of any
creditor or member of the company, or in the case of a c
company which is being wound up, of the liquidator, order
a meeting of the creditors or class of creditors, or of the
members or class of members, as the case may be, to
be called, held and conducted in such manner as the
Court ·directs. o
..
(2) If a majority in number representing three-fourths in·
· value of the creditors, or class of creditors, or members,
or class of members as the case may be, present and
voting either in person or, where proxies are allowed under
the rules made under Section 643, by proxy, at th~ meeting, E
agree to any compromise or arrangement, the compromise
or arrangement shall, if sanctioned by the Court, be
binding on all the creditors, all the creditors of the class,
all the members, or all the members of the class, as the
case may be, and also on the company, or, in the case of F
a company which is being wound up, on the liquidator and
contributories of the company:
Provided that no order sanctioning any compromise or
arrangement shall be made by the Court unless the Court G
is satisfied that the company er any other person by whom
an application has been made under sub"section (1) has
disclosed to the Court, by affidavit or otherwise, all material
facts relating to the company, such as the latest financial
position of the company, the latest auditor's report on the H
344 SUPREME COURT REPORTS [2011] 3 S.C.R.
-......
A accounts of the company, the pendency of any investigation
proceedings in relation to the company under Sections 235
to 251, and the like."
Section 394 of the Act, lays down the procedure for facilitating
reconstruction and amalgamation of companies. It reads as
8
under:
"S.394. Provisions for facilitating reconstruction and
amalgamation of companies.-(1) Where an application
is made to the Court under Section 391 for the sanctioning
C of a compromise or arrangement proposed between a
company and any such persons as are mentioned in that
section, and it is shown to the Court-
(a) that the compromise or arrangement has been
D proposed for the purposes of, or in connection with,
a scheme for the reconstruction of any company or
companies, or the amalgamation of any two or
more companies; and
(b) that under the scheme the whole or any part of the
E undertaking, property or liabilities of any company
concerned in the scheme (in this section referred
to as a 'transferor company') is to be transferred
to another company (in this section referred to as
'the transferee company');
F
the Court may, either by the order sanctioning the
compromise or arrangement or by a subsequent order,
make provision for all or any of the following matters:-
(i) the transfer to the transferee company of the whole
G or any part of the undertaking, property or liabilities
of any transferor company;
(ii) the allotment or appropriation by the transferee
company of any shares, debentures, policies or
H other like interests in that company which, under the
-
--.
SESA INDUSTRIES LTD. v. KRISHNA H. BAJAJ AND 345 ·
ORS. [D.K. JAIN, J.]
compromise or arrangement, are to be allotted or A
appropriated by that company to or for any person;
(iii) the continuation by or against the transferee
company of any legal proceedings pending by or
against any transferor company; B
(iv) the dissolution, without winding up, of any transferor
company;
(v) the provision to be made for any persons who,
within such time and in such manner as the Court C
directs, dissent from the compromise on
arrangement; and
(vi) such incidental, consequential and supplemental
matters as are necessary to secure that the. D
reconstruction or amalgamation shall be fully and
effectively carried out:
Provided that no compromise or arrangement proposed
for the purposes of, or in connection with, a scheme for
the amalgamation of a company, which is being wound up, E
with any other company or companies, shall be sanctioned
by the Court unless the Court has received a report from
the Company Law Board or the Registrar that the affairs
of the company have not been conducted in a manner
prejudicial to the interests of its members or to public F
interest:
Provided further that no order for the dissolution of any
transferor company under clause (iv) shall be made by the
Court unless the Official Liquidator has, on scrutiny of the G
books and papers of the company, made a report to the
Court that the affairs of the company have not been
conducted in a manner prejudicial to the interests of its
members or to public interest.
..........................................................................." H
--
346 SUPREME COURT REPORTS [2011) 3 S.C.R.
A 33. It is plain from the afore-extracted provisions that when
a scheme of amalgam(ltion/merger of a company is placed
before the Court for its sanction, in the first instance the Court
has to direct holding of meetings in the manner stipulated in
Section 391 of the Act. Thereafter before sanctioning such a
B scheme, even though approved by a majority of the concerned
members or creditors, 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 the said sub-
C section. First proviso to Section 394 of the Act stipulates that
no scheme of amalgamation of a company, which is being
wound up, with any other company, shall be sanctioned by the
Court unless the Court has received a report from the Company
Law Board or the Registrar to the effect that the affairs of the
company have not been conducted in a manner prejudicial to
0
the interests of its members or to public interest. Similarly,
second proviso to the said Section provides that no order for
the dissolution of any transferor company under clause (iv) of
sub-section (1) of Section 394 of the Act shall be made unless
E the official liquidator has, on scrutiny of the books and papers
of the company, made a report to the Court that the affairs of
the company have not been conducted in a manner prejudicial
to the interests of its members or to public interest. Thus,
Section 394 of the Act casts an obligation on the Court to be
satisfied that the scheme of amalgamation or merger is not
F prejudicial to the interest of its members or to public interest.
34. Therefore, while it is trite to say that the court called
upon to sanction a scheme of amalgamation would not act as
a court of appeal and sit in judgment over the informed view of
G the concerned parties to the scheme, as the same is best left
to the corporate and commercial wisdom of the parties
concerned, yet it is clearly discernible from a conjoint reading
of the aforesaid provisions that the Court before whom the
scheme is placed, is not expected to put its seal of approval
H on the scheme merely because the majority of the shareholders
SESA INDUSTRIES LTD. v. KRISHNAH. BAJAJ AND 347
ORS. [D.K. JAIN, J.]
have voted in favour of the scheme. Since the scheme which A
gets sanctioned by the court would be binding on the dissenting
minority shareholders or creditors, the court is obliged to
examine the scheme in its proper perspective together with its
various manifestations and ramifications with a view to finding
out whether the scheme is fair, just and reasonable to the B
concerned members and is not contrary to any law or public
policy. (See: Hindustan Lever Employees Union Vs.
Hindustan Lever Ltd. & Ors. 23 ). The expression "public policy"
is not defined in the Act. The expression is incapable of
precise definition. It connotes some matter which concerns the c
public good and the public interest. (See: Central Inland Water
Transport Corporation Limited & Anr. Vs. Brojo Nath Ganguly
& Anr.24.)
35. In Miheer H. Mafatlal (supra), this Court had, while .
examining the scope and ambit of jurisdiction of the Company D
Court, culled out the following broad contours of such
jurisdiction:
"1. The sancLioning court has to see to it that all the
requisite statutory procedure for supporting such a scheme E
has been complied with and that the requisite meetings
as contemplated by Section 391(1)(a) have been held.
2. That the scheme put up for sanction of the Court is
backed up by the-requisite majority vote as required by F
Section 391 sub-section (2).
3. That the meetings concerned of the creditors or
members or any class of them had the relevant material
to enable the voters to arrive at an informed decision for
approving the scheme in question. That the majority 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. · ·
23. 1995 Supp (1) sec 499.
24. (1986) 3 sec 156. H
348 SUPREME COURT REPORTS (2011] 3 S.C.R.
A 4. That all necessary material indicated by Section
393(1)(a) is placed before the voters at the meetings
concerned as contemplated by Section 391 sub-section
(1 ).
5. That all the requisite material contemplated by the
B
proviso of sub-section (2) of Section 391 of the Act is
placed before the Court by the applicant concerned
seeking sanction for such a scheme and the Court gets
satisfied about the same.
c 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
D the veil of apparent corporate purpose underlying the
scheme and can judiciously X-ray the same.
7. That the Company Court has also to satisfy itself that
members or class of members or creditors or class of
creditors, as the case may be, were acting bona fide and
E
in good faith and were not coercing the minority in order
to promote any interest adverse to that of the latter
comprising the same class whom they purported to
represent.
F 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.
G 9. Once the aforesaid broad parameters about the
requirements of a scheme for getting sanction of the Court
are found to have beAn met, the Court will have no further
jurisdiction to sit in appeal over the commercial wisdom
of the majority of the class of persons who with their open
eyes have given their approval to the scheme even if in
H
-- SESA INDUSTRIES LTD. v. KRISHNA H. BAJAJ AND 349
ORS. [D.K. JAIN, J.]
the view of the Court there would be a better scheme for A
the company and its members or creditors for whom the
scheme is framed. The Court cannot refuse to sanction
. such a scheme on that ground as it would .otherwise
amount to the Court ex~rcising appellate jurisdiction over
the scheme rather than its supervisory jurisdiction." B
36. It is manifest that before according its sanction to a
scheme of amalgamation, the Court has to see that the
provisions of the Act have been duly complied with; the statutory
majority has been acting bona fide and in good faith and are C
not coercing the minority in order to promote any interest
adverse to that of the latter comprising the same class whom
they purport to represent and the scheme as a whole is just,
fair an,d reasonable from the point of view of a prudent and
reasonable businessman taking a commercial decision.
D
37. Thus, the first question is as to whether the appellant
and SGL had disclosed sufficient information to the
shareholders so as to enable them to arrive at an informed
decision? The proviso to Section 391 (2) requires a company
to "disclose pendency of any investigation in relation to the E
company under Sections 235 to 351, and the like". Though it
is true that inspection under Section 209A of the Act, strictly
speaking, may not be in the nature of an investigation, but at
the same time it cannot be construed as an innocuous exercise
for record, in as much as if anything objectionable or fraudulent F
in the conduct of the affairs of the company is detected during
the course of inspection, it may lay the foundation for the
purpose of investigations under Sections 235 and 237 of the
Act, as is the case here. Therefore, existence of proceedings
unde;, Section 209A must be disclosed in terms of the proviso G
to Sectio1' 391 (2). In any event, we are of the opinion that since
the said issu . . ls a question of fact, based on appreciation of
evidence, and both the Courts below have held .that the
information supplied was sufficient, particularly in light of the
order passed by the Single Judge on 18th March, 2006, we H
350 SUPREME COURT REPORTS [2011] 3 S.C.R.
-
A are not inclined to disturb the said concurrent finding of the
Courts below, particularly when it is not shown that the said
finding suffers from any demonstrable perversity. (See: Firm
Sriniwas Ram Kumar Vs. Mahabir Prasad & Ors. 25 and Ganga
Bishnu Swaika Vs. Calcutta Pinjrapole Society. 26 )
B
38. The next issue that arises for our determination is
whether the Division Bench was correct in holding that the
affidavit filed by the Official Liquidator was vitiated on account
of non-disclosure of all material facts. From a bare perusal of
the affidavit dated 10th February, 2006, it is manifest, ex facie,
C that before filing the affidavit, the said official had not examined
and applied its mind to the findings contained in the inspection
report under Section 209A of the Act. While it is true tnat it
was not within the domain of the Official Liquidator to determii.~
the relvency or otherwise of the said report, yet he was r ~•iged
D to incorporate in his affidavit the contents of the inspection
report. We are convinced that the official liquidator had failed
to discharge the statutory burden placed on him under the
second proviso to Section 394(1) of the Act.
E 39. An Official Liquidator acts as a watchdog of the
Company Court, reposed with the duty of satisfying the Court
that the affairs of the company, being dissolved, have not been
carried out in a manner prejudicial to the interests of its
members and the interest of the public at large. In essence, the
F Official Liquidator assists the Court in appreciating the other
side of the picture before it, and it is only upon consideration
of the amalgamation scheme, together with the report of the
Official Liquidator, that the Court can arrive at a final conclusion
that the scheme is in keeping with the mandate of the Act and
G that of public interest in general. It, therefore, follows that for
examining the questions as to why the transferor-company
came into existence; for what purpose it was set up; who were
its promoters; who were controlling it; what object was sought
25. 1951 SCR 277.
H 26. AIR 1968 SC 615.
-- SESA INDUSTRIES LTD. v. KRISHNA H. BAJAJ AND 351
ORS. [D.K. JAIN, J.]
to be achieved by dissolving it and merging with another A
company, by way of a scheme of amalgamation, the report of
an official liquidator is of seminal importance and in fact
facilitates the Company Judge to record its satisfaction as to
whether or not the affairs of the transferor company had been
carried on in a manner prejudicial to the interest of the minority B
and to the public interest.
40. In the present case, we are unable to appreciate why
the Official Liquidator, who was aware of the inspection report
dated 17th February, 2006 under Section 209A containing
adverse comments on the affairs of both the companies, relied C
only on the report of the auditors, which admittedly was not even
verified. We can only lament the conduct of. the official
liquidator.
41. Having held that the Official Liquidator had failed to D
discharge the duty cast on him in terms of the second proviso
. to Section 394(1) of the Act, the next issue that requires
· consideration is whether sanction of a scheme of amalgamation
can be held up merely because the conduct of an Official
Liquidator is found to be blameworthy? We are of the view that E
it will neither be proper nor feasible to lay down absolute
parameters in this behalf. The effect of misdemeanour on the
part of the official liquidator on the scheme as such would
depend on the facts obtaining in each case and ordinarily the
Company Judge should be the final arbiter on that issue. In the F
instant case, indubitably, the findings in the report under Section
209A of the Act were placed before the Company Judge, and
he had considered the same while sanctioning the scheme of
amalgamation. Therefore, in the facts and circumstances of the
pre ...<Jnt case, the Company Judge had, before him, all material G
facts ~·'1ich had a direct bearing on the sanction of the
amalgamat: --: scheme; despite the aforestated lapse on the
part of the Official Liquidator; In this view of the matter, we are
of the considered opinion that the Company Judge, having
examined all material facts, was justified in sanctioning the H
-
352 SUPREME COURT REPORTS (2011) 3 S.C.R.
A scheme of amalgamation, particularly when the current
investigation under Section 235 of the Act was initiated
pursuant to a complaint filed by respondent No.1 subsequent
to the order of the Company Judge sanctioning the scheme.
42. For the foregoing reasons, the appeals are allowed;
8
and the impugned judgment is set aside. Consequently, the
order passed by the Company Judge sanctioning the scheme
of amalgamation is restored. However. it is made clear that the
scheme of amalgamation will not come in the way of any civil
or criminal proceedings which may arise pursuant to the action
C initiated under Sections 209A or 235 of the Act, or any criminal
proceedings filed by respondent No. 1.
43. In the facts and circumstances of the case, there will
be no order as to costs.
D
B.B.B. Appeals allowed.
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