Case: All India Blue Star Employees Federation & Another Vs. Blue Star Limited

B.N. SRIKRISHNA, J.Appeals admitted.2.Respondents waive service through respective Counsel. By consent, all three appeals are taken up for final hearing.3.These three appeals under section 391(7) of the Companies Act, 1956 (hereinafter referred to as "the Act") are inter-connected and arise out of three petitions under section 394 of the Act and hence they can be conveniently disposed of by a common judgment.4.Appeal No.2 of 2000 is directed against the Order of the learned Single Judge in Company Petition No.1007 of 1998 dated 7th December, 1999 which is the principal judgment in which the learned Single Judge has given elaborate reasons for allowing the Company Petition No.1007 of 1998. By two other orders of the same date, made in Company Petition Nos.1008 and 1009 of 1998, the learned Single Judge, following his reasoning in the first order, allowed the petitions by short orders. Basically, what is under challenge in these three appeals is the reasoning of the learned Single Judge in the lengthy judgment in Company Petition No.1007 of 1998. We shall, hereinafter, refer to the judgment of the learned Single Judge in Company Petition No.1007 of 1998 as the judgment under appeal.5.We have been taken through the judgment under appeal, and we find that the learned Single Judge has elaborately set out the facts of the three company petitions. It is not, therefore, necessary for us to set out or refer to the facts in detail. Nonetheless, we shall refer to the necessary and material facts to deal with the contentions that were urged in support of the appeals by the learned Counsel for the appellants.6.The appellant is a trade union of Federation of the Employees of the company known as "BLUE STAR LIMITED" (B.S.L.). The appellant is registered as a trade union under the provisions of the Indian Trade Unions Act and claims to represent its member employees. B.S.L. was initially a company which did business in Air conditioners, but later developed a division known as "International Software Division" (I.S.D.) which was found to be very profitable in view of the boom in information technology. The company, for reasons of viability and cashing in on the boom in Information Technology, decided to spin off its extremely profitable I.S.D. into a separate company and transfer the ISDs assets to the said company. For this purpose, a scheme of amalgamation was proposed. The scheme of amalgamation made provision for protecting the interests of the employees of B.S.L., provided for reduction of the capital of B.S.L. by 25% and also for issuance of shares of the newly formed company "BLUE STAR INFOTECH LIMITED" (B.S.I.L.) in certain ratio. This scheme was approved by an overwhelming majority of the shareholders representing about 99.98% in value. It was also approved by the Financial Institutions who are creditors of the B.S.L. and hold about 9% stake in the shares of B.S.L. The scheme was however opposed by the appellant who is stated to represent shareholders of about 00.007% in value and creditors to the extent of about 50 lacs. We may mention here that as far as the creditors to the extent of 50 lacs are concerned, it was agreed by the respondent-company that their interests would be secured by a Bank Guarantee and such Bank Guarantee has been given so that creditors represented by the appellant are fully secured. The appellant thus represents shareholders who hold together shares in value of 0.007% to oppose the scheme on several grounds.7.As a fall out of the scheme, an application under section 100 of the Companies Act was also made for reduction of the share capital of B.S.L. vide Company Petition No.1009 of 1998.8.A number of contentions were urged before the learned Single Judge to contend that the scheme was bad and could not be approved by the Company Court under section 394 of the Act. After considering all the contentions, the learned Single Judge was satisfied that there was no inherent flaw in the scheme and that the scheme appeared to be beneficial from the point of view of the shareholders who had overwhelmingly voted in favour of the scheme. Consequently, the learned Judge, by the orders under appeal, approved the scheme in Company Petition Nos.1007 and 1008 of 1998 and permitted B.S.L. to reduce its capital by making the Company Petition No.1009 of 1998 absolute. Though a large number of contentions were urged before the learned Single Judge, the appellants pressed only the following contentions to which we shall hereinafter refer.9.The first contention urged by the learned Counsel for the appellant is that the scheme presented to the Company Court prejudicially affects the workmen of B.S.L. inasmuch as there is insufficient protection given to the interests of the workmen of the B.S.L. in the scheme.10.As a matter of fact, Clauses 3.8.1 to 3.8.5 deal with the employees of B.S.L. and what would happen to them upon the scheme coming into operation. On a careful perusal of these clauses, we are satisfied that none of the conditions of service applicable to any workmen or employees of B.S.L. would, in any way, be prejudiced, if the scheme is permitted to become effective. The employees are to be carried over as employees of BSL with the same conditions of service which they enjoyed before the scheme. Their services shall not be treated as broken or interrupted for all purposes including for terminable benefits. As far as the employees of BSIL are concerned, only such of the employees who are willing to be transferred to BSIL have been given the choice of being absorbed as employees of BSIL. Here again, option is given to the employees as to whether they would continue as employees of BSL or BSIL. In these circumstances, the scheme as such does not contain any provision which would affect the conditions of service of the workmen of BSL whom the appellant represents.11.Learned Counsel for the appellant, however, contended that, as a consequence of the spin off of the ISD, the profitability of the parent company (i.e. BSL) would substantially reduce and so would the employment potential. Hence, there would be imminent danger of the workmen and employees of BSL losing their employment. In our view, this is too far fetched a contingency to be accepted. The company Court is not concerned with such hypothetical situations, which might occur even if the scheme were not proposed. The Court is only concerned with scanning the provisions of the scheme put forward for its approval to ensure that the scheme, if implemented as a whole, does not prejudice any of the existing rights of the workmen.12.It is also contended on behalf of the appellants that, soon after the scheme was approved by the learned Single Judge, the BSL has issued a notice of change under section 9-A of the Industrial Disputes Act, 1947, proposing to prejudicially change some of the conditions of service of the existing workmen. As rightly held by the learned Single Judge, this contention has no substance. The issuance of notice under section 9-A of the Industrial Disputes Act is no part of the scheme itself. That is an independent act altogether. Even if it be assumed that approval of the scheme gave the management of BSL some ground for issuing the notice under section 9-A of the Industrial Disputes Act, that is a matter which is independently capable of being contested on its own merit in industrial adjudication. We are, therefore, unable to accept the contention that the scheme approved by the learned Single Judge in any way prejudices the interests of the workmen and employees of BSL.13.The second contention is that the provisions of section 393(1)(a) of the Act have not been complied with. It is urged that as a result of the scheme being approved some of the directors, who are in control of BSL, would obtain controlling interest in BSIL and this has not been specifically disclosed in the explanatory statement attached to the notice calling for meeting of creditors and shareholders. We agree with the learned Single Judges view that there is misapprehension as to the provisions of section 393(1)(a) on the part of the appellant. What section 391(1)(a) requires is that, if any director has any material interest in the terms of compromise arrangement and the interest of the director is of a different nature than the interest of the shareholders, and the compromise has different effect on the interest of the shareholders as compared to the interest of the director, then such material interest has to be disclosed. The appellants have failed to produce any material whatsoever before the learned Single Judge that any of the directors of BSI, had any such "material interest" in the terms of the scheme or that the terms in the compromise were likely to have any effect on such interest in a manner different from their effect on the interests of other shareholders. The learned Single Judge was therefore right in not countenancing this argument of the appellants.14.It is also urged that there was non-disclosure of facts, namely, that a director by name Ashok Advani held 36,04,590 shares of BSL, but that in the explanatory statement accompanying the notice of the shareholders and creditors, his shareholding in BSL has been shown only as 16,47,700. This, according to the learned Counsel for the appellants, is a deliberate untrue statement intended to mislead the shareholders and the Court. This would amount to contravention of the provisions of section 393(1)(a), in the submission of the learned Counsel. We are unable to accept this contention. We have already pointed out that requirement of section 393(1)(a) is to disclose any special interest that any or all the directors have under the compromise and also how the terms of the compromise would affect such special interest. In other words, the obligation under section 393(1)(a) is to disclose what could not have been freely available to shareholders otherwise. The shareholding of any particular director, is information which can be gathered from the Register of Members which is to be statutorily kept by the company in its registered office. If the appellant, or any of its member-shareholders, had scrutinised the Register of Members, the actual shareholding of Ashok Advani could have been discovered. We do not read section 393(1)(a) as casting an obligation on the company to disclose shareholding of each individual director. It is true that this information has been given in the explanatory statement accompanying the notice calling the meeting of creditors and shareholders. That is wholly redundant and irrelevant. Even assuming it to be erroneous, in our view, it cannot be held that the provisions of section 393(1)(a) of the Act have been contravened. In any event, Mr. Tulzapurkar, learned Counsel for the respondent company, points out that even on the correctness of the figure 36,04,590, there is some confusion on the part of the appellants. At the meeting called to approve the terms of the scheme, Ashok Advani had voted on behalf of the shareholders holding 36,04,590 shares, though he actually owns only 16,47,700 shares of BSL, as he was exercising voting rights on behalf of other shareholders either in the capacity as a corporate authorised agent or a trustee or a proxy holder or a karta of an HUF. The figure of his shareholding could not change thereby. The figure of his shareholding given in the explanatory statement is correct. For this reason also, we are not inclined to accept the contention of the appellants.15.It is next contended that there is no disclosure of the method by which the shares were valued and, therefore, there was no "informed consent" on the part of the shareholders when they approved the terms of the scheme in the meeting specially called for that purpose. In our view, this contention has no merit. It cannot be gainsaid that this was not a case where BSL was merging into another company, nor was this a situation where, as a result of merging, the shares of BSL were to become extinct. It was also not a situation where there was any compromise of merger with another company, whose shares were listed on the Stock Exchange and had certain market value. It was a unique situation in which ISD, which was part and parcel of BSL, was spun off into another company known as BSIL and the BSL shareholders were entitled to cash compensation for the consequent decrease in their capital by 25%. Instead of cash compensation being handed over to the shareholders, and the shareholders thereafter applying for shares of BSIL, the scheme propounded a package deal by which the cash payment due to the shareholders would be deemed to have been paid if one paid up share of Rs.10/- of BSIL was issued against the cash compensation for reduction of 25% in the value of 4 shares of BSL.16.Mr. Narula, learned Counsel for the appellant, criticised the compromise on the ground that the issuance of shares by BSIL was not done by a proper valuation of the shares of BSL by any known method of valuation. In our view, this was wholly irrelevant and unnecessary. Whatever the value of the shares of BSL in the market, the terms of the scheme proceed on the footing of valuation of the assets as at book value to determine the extent to which the capital of BSL stands reduced. It was also not a situation where shares of BSL were being swapped for the shares of BSIL. Instead of BSIL handing over cash payment to the shareholders of BSL for proportionate reduction in their share value, and the shareholders thereafter making payment to BSIL for subscribing to the shares of BSIL, the scheme makes a composite arrangement by which shares of BSIL are allotted to the shareholders of BSL in the ratio as aforesaid. We see nothing unconscionable in the bargain which has been approved by an overwhelming majority who held about 99.98% of the shareholding and by the Financial Institutions who held about 9% of the stake. The argument does not sound well from the mouth of the appellants who hardly hold 0.007% of the stock and whose dues to the tune of 54 lacs have been fully secured by the Bank Guarantee.17.It is then contended for the appellants that the provisions of section 391(2) have been contravened inasmuch as the report made by the Chairman of the special meeting does not disclose the number of persons who were present, and the number of persons who were present and voted, separately.18.In the Affidavit filed by the Chairman of the meeting, it is stated that 266 shareholders were present and had voted and that shareholders accounting for an aggregate share value of Rs. 13,19,36,810 had participated in the poll. Section 391(2) requires agreement to the terms of the compromise by a majority in number representing three-fourths in the 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, by proxies, at the meeting. Rule 78 of the Company Court Rules provides that the Chairman of the meeting shall, within 7 days of the conclusion of the meeting, report the result thereof to the Court, stating clearly the number of creditors or class of creditors or the number of members or class as the case may be, "who were present and who voted" at the meeting either in person or by proxy, their individual values and the way they voted. The report shall be in Form No. 39. Our attention was also drawn to Form No. 39 prescribed under the Company Court Rules, particularly to Clause 1 thereof which reads:"1. The said meeting was attended either personally or by proxy by (here state the number of creditors or the class of creditors or the number of members or the class of members as the case may be, who attended the meeting) of the said company entitled together to.... (here mention the total value of the debts, or debentures, where the meeting was of creditors, and the total number and value of the shares, where the meeting was of members, of those who attended the meeting.)"It is urged that Clause 1 of this form would require that the Chairmans report must indicate that total number of persons who attended as well as the total number of persons of each category who attended and voted. We regret, we cannot accept this contention. Accepting that contention would mean that the form requires something, which neither section 391(2) requires, nor does Rule 78 of the Company Court Rules. We must therefore read Clause 1 of Form No.39 consistently with the parent rule and the parent statute. Thus read, the requirement is only to state the number of persons "present and voted" at the meeting. The reason behind this is obvious for the Court has to be satisfied that, irrespective of the number of heads counted, the total shareholding in the prescribed percentage had lent its support to the terms of the scheme. In the present case, this has been complied with and we agree with the learned Single Judge that there is no contravention of the provisions of section 391(2).19.Two judgments of the Supreme Court were relied upon by both sides. The first is Hindustan Lever Employees Union v. Hindustan Lever Limited and others, reported in 1994 (4) Comp.L.J. 267 (S.C.). The second is Miheer H. Mafatlal v. Mafatlal Industries Ltd., reported in 87 Company Cases 792 . In our view, the learned Single Judge was right in holding that all contentions urged by the appellants were fully answered and concluded by the said two judgments of the Supreme Court. In fact, in the later judgment in Miheer Mafatlals case (supra) the Supreme Court reiterated what had been observed in the Hindustan Lever Limiteds case (supra) and pointed out that a compromise of this nature is a commercial decision and where an overwhelming majority of the shareholders and financial institutions holding large stakes in the company, who are presumably well versed on aspects of valuation of shares and their own commercial interests, approve of such a compromise or scheme after considering all imponderable and implicit factors which the shareholders have to keep in view for deciding whether to approve the scheme or not, it is not the function of the Company Court to nitpick the scheme and be astute to discover flaws in the scheme. The Supreme Court in Miheer Mafatlals case indicated the broad parameters of the jurisdiction of the Company Court in dealing with an application under section 394 of the Act in the following words :"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 procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by section 391(1)(a) have been held.(2) That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by section 391(2).(3) That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class.(4) That all necessary material indicated by section 393(1)(a) is placed before the voters at the concerned meetings as contemplated by section 391(1) .(5) That all the requisite material contemplated by the proviso to sub-section (2) of section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same.(6) That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously x-ray the same.(7) That the company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bonafide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent.(8) That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant.(9) Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there could be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction.The aforesaid parameters of the scope and ambit of the jurisdiction of the Company Court which is called upon to sanction a scheme of compromise and arrangement are not exhaustive but only broadly illustrative of the contours of the Courts jurisdiction."20.Applying the principles laid down by the Supreme Court in the said two judgments, the learned Single Judge was satisfied that there was no merit in the objections raised to the scheme propounded before him. Despite the lengthy hearing given to the appellants in the matter, we too are not satisfied that there is any merit in any of the objections raised to the scheme. It was an overall package and 99.9% of the shareholders, and the financial institutions, voted in favour of the scheme. We do not find that the scheme in any way falls foul of the provisions of the Companies Act. There are no grounds of public policy on which we could be persuaded to hold that the scheme is bad.

Decision:
0[ds]On a careful perusal of these clauses, we are satisfied that none of the conditions of service applicable to any workmen or employees of B.S.L. would, in any way, be prejudiced, if the scheme is permitted to become effective. The employees are to be carried over as employees of BSL with the same conditions of service which they enjoyed before the scheme. Their services shall not be treated as broken or interrupted for all purposes including for terminable benefits. As far as the employees of BSIL are concerned, only such of the employees who are willing to be transferred to BSIL have been given the choice of being absorbed as employees of BSIL. Here again, option is given to the employees as to whether they would continue as employees of BSL or BSIL. In these circumstances, the scheme as such does not contain any provision which would affect the conditions of service of the workmen of BSL whom the appellant represents.11.LearnedCounsel for the appellant, however, contended that, as a consequence of the spin off of the ISD, the profitability of the parent company (i.e. BSL) would substantially reduce and so would the employment potential. Hence, there would be imminent danger of the workmen and employees of BSL losing theirissuance of notice under sectionof the Industrial Disputes Act is no part of the scheme itself. That is an independent act altogether. Even if it be assumed that approval of the scheme gave the management of BSL some ground for issuing the notice under sectionof the Industrial Disputes Act, that is a matter which is independently capable of being contested on its own merit in industrial adjudication. We are, therefore, unable to accept the contention that the scheme approved by the learned Single Judge in any way prejudices the interests of the workmen and employees ofagree with the learned Single Judges view that there is misapprehension as to the provisions of section 393(1)(a) on the part of the appellant. What section 391(1)(a) requires is that, if any director has any material interest in the terms of compromise arrangement and the interest of the director is of a different nature than the interest of the shareholders, and the compromise has different effect on the interest of the shareholders as compared to the interest of the director, then such material interest has to be disclosed. The appellants have failed to produce any material whatsoever before the learned Single Judge that any of the directors of BSI, had any such "material interest" in the terms of the scheme or that the terms in the compromise were likely to have any effect on such interest in a manner different from their effect on the interests of other shareholders. The learned Single Judge was therefore right in not countenancing this argument of the appellants.14.Itis also urged that there wasf facts, namely, that a director by name Ashok Advani held 36,04,590 shares of BSL, but that in the explanatory statement accompanying the notice of the shareholders and creditors, his shareholding in BSL has been shown only as 16,47,700. This, according to the learned Counsel for the appellants, is a deliberate untrue statement intended to mislead the shareholders and the Court. This would amount to contravention of the provisions of section 393(1)(a), in the submission of the learnedour view, this contention has no merit. It cannot be gainsaid that this was not a case where BSL was merging into another company, nor was this a situation where, as a result of merging, the shares of BSL were to become extinct. It was also not a situation where there was any compromise of merger with another company, whose shares were listed on the Stock Exchange and had certain market value. It was a unique situation in which ISD, which was part and parcel of BSL, was spun off into another company known as BSIL and the BSL shareholders were entitled to cash compensation for the consequent decrease in their capital by 25%. Instead of cash compensation being handed over to the shareholders, and the shareholders thereafter applying for shares of BSIL, the scheme propounded a package deal by which the cash payment due to the shareholders would be deemed to have been paid if one paid up share of Rs.10/of BSIL was issued against the cash compensation for reduction of 25% in the value of 4 shares ofour view, this was wholly irrelevant and unnecessary. Whatever the value of the shares of BSL in the market, the terms of the scheme proceed on the footing of valuation of the assets as at book value to determine the extent to which the capital of BSL stands reduced. It was also not a situation where shares of BSL were being swapped for the shares of BSIL. Instead of BSIL handing over cash payment to the shareholders of BSL for proportionate reduction in their share value, and the shareholders thereafter making payment to BSIL for subscribing to the shares of BSIL, the scheme makes a composite arrangement by which shares of BSIL are allotted to the shareholders of BSL in the ratio as aforesaid. We see nothing unconscionable in the bargain which has been approved by an overwhelming majority who held about 99.98% of the shareholding and by the Financial Institutions who held about 9% of the stake. The argument does not sound well from the mouth of the appellants who hardly hold 0.007% of the stock and whose dues to the tune of 54 lacs have been fully secured by the BankSupreme Court in Miheer Mafatlals case indicated the broad parameters of the jurisdiction of the Company Court in dealing with an application under section 394 of the Act in the following words :"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 procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by section 391(1)(a) have been held.(2) That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by section 391(2).(3) That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class.(4) That all necessary material indicated by section 393(1)(a) is placed before the voters at the concerned meetings as contemplated by section 391(1) .(5) That all the requisite material contemplated by the proviso to(2) of section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same.(6) That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciouslythe 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 bonafide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent.(8) That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant.(9) Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there could be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction.The aforesaid parameters of the scope and ambit of the jurisdiction of the Company Court which is called upon to sanction a scheme of compromise and arrangement are not exhaustive but only broadly illustrative of the contours of the Courts jurisdiction."20.Applying the principles laid down by the Supreme Court in the said two judgments, the learned Single Judge was satisfied that there was no merit in the objections raised to the scheme propounded before him. Despite the lengthy hearing given to the appellants in the matter, we too are not satisfied that there is any merit in any of the objections raised to the scheme. It was an overall package and 99.9% of the shareholders, and the financial institutions, voted in favour of the scheme. We do not find that the scheme in any way falls foul of the provisions of the Companies Act. There are no grounds of public policy on which we could be persuaded to hold that the scheme is bad.