1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY SCHEME PETITION NO.155 OF 2010 CONNECTED WITH COMPANY SUMMONS FOR DIRECTION NO.6 OF 2010 Cairn India Limited, a company incorporated under the Companies Act, 1956 having its registered office at 101, West View, Veer Savarkar Marg, Prabhadevi, Mumbai-400025 ....Petitioner Company Mr.I.M. Chagla, Senior Counsel with Mr.J.D. Dwarkadas, Senior Counsel, Mr.Virag V. Tulzapurkar, Senior Counsel, Mr.J.C. Perreira and Mr.Ankit Lohia i/b Rajesh Shah & Co. for the Petitioner. Mr.J.P. Avasia with Mr.R.I. Chagla for the Regional Director. Mr.Dinesh V. Lakhani for the Objector. Ms.Alpana Ghone with Mr.Kamlesh Khavade i/b India Law Alliance for the Objectionist. CORAM : S.J. VAZIFDAR, J. DATE : 22ND JUNE, 2010. ORAL JUDGMENT :- The Petitioner seeks an order sanctioning a scheme of arrangement between itself and four transferor companies Cairn Energy India Pvt. Ltd. (“CEIPL”), Cairn Energy India West B.V., (“CE India West”), Cairn Energy Cambay B.V. (“CE Cambay”) and Cairn Energy Gujarat B.V. (“CE Gujarat”). The first transferor company is incorporated in Australia and the others are incorporated in Netherlands. Under the scheme, the entire business relating to the Indian undertakings of the transferor 2 companies are to stand transferred to and vested in the Petitioner with effect from the appointed date without any further act or deed pursuant to the provisions of 391 and 394 of the Companies Act, 1956. 2. The Petitioner is listed on the Bombay Stock Exchange and the National Stock Exchange of India limit. The issued, subscribed and paid up capital of the Petitioner prior to 31.3.2009 was Rs.18,966,678,160 comprising of 189,66,67,816 equity shares of Rs.10/- each. After 31.3.2009 the same increased to Rs.18,967,892,270/- on account of ESOPs. 3. The Petitioner is primarily engaged in the business of surveying, prospecting, drilling, exploring and dealing in minerals, natural oils, petroleum, gas and related products. The transferor companies are the Petitioner’s subsidiaries. The transferor companies also carry on business activities in India through their project offices. Each of the transferor companies is a participant in various oil and gas blocks granted by the Government of India through production sharing contracts entered into with the Government of India and other joint venture parties. 4. A copy of the audited statement of accounts as of 31.3.2009 and unaudited statement of accounts as on 30.9.2009 of each of the transferor companies has been annexed to the petition. Further a copy of the audited statement of accounts in foreign currency of each of the transferor companies as on 31.12.2008 is also filed with the petition. The Petitioner has furnished the rational for the proposed scheme. According to the Petitioner, a multiple layered structure, comprising various foreign subsidiaries, between it and the Indian undertakings is administratively burdensome. The scheme proposes to simplify and consolidate the 3 structure and business operations by transferring the entire oil and gas exploration, development and production business of the transferor companies in India into the transferee company. Consequently, it is contended that there would be greater efficiency in the cash management of the transferee company and unfettered access to the cash flow generated by the Indian company of the transferor companies with its own benefits. There are also the usual benefits arising from such a scheme such as administrative convenience by reducing the legal and regulatory compliances. 5. The Board of Directors of the respective companies considered and proposed the scheme and by a resolution dated 9.12.2009 approved the same. It is a composite scheme under sections 78, 100 to 103 and 391 to 394 of the Companies Act, 1956. I will refer to some of the provisions of the scheme which have been questioned by one of the shareholders. 6. By an order dated 8.1.2010, this Court directed the Petitioner to convene and hold a meeting of the equity shareholders for the purpose of considering the said scheme. By the said order, Mr.Justice M.H. Kania (Retired Chief Justice of India) was appointed as a Chairman of the meeting. Meeting of the secured and unsecured creditors were dispensed with. Notice of the meeting of the equity shareholders was dispatched individually to the equity shareholders along with the necessary documents. A notice convening the meeting was also advertised as directed by the said order. 7. A meeting of the equity shareholders was convened and held 4 pursuant to the said order dated 8.1.2010. The Chairman reported the result thereat by filing his report dated 19.2.2010 along with the affidavit in verification thereof. The scrutineers noted 412 ballots representing 164,96,85,353 equity shares were cast. Two ballots representing 445 equity shares were found to be invalid. 387 equity shareholders holding 164,96,84,906 equity shares constituting 94.91% in number and representing 99.88% in value present and voting in person or by proxy or by authorised representatives voted in favour of the scheme. Twenty three equity shareholders holding 19,300 equity shares representing in value a sum of Rs.1,93,000/- constituting 5.61% in number and representing 0.12% in value present and voting in person or by proxy or by authorised representatives voted against the scheme. Thus the overwhelming majority of the equity shareholders voted in favour of the scheme. 8. The Bombay Stock Exchange and the National Stock Exchange issued certificates stating that they had no objection to the scheme. 9. The Petitioner thereafter filed the present Petition on 2.3.2010. 10. The Regional Director has filed an affidavit stating that the scheme is not prejudicial to the interest of the shareholders and the public. However, two objections were raised in a further affidavit filed on behalf of the Regional Director. 11. Mr.Avasia, the learned counsel appearing on behalf of the Regional Director submitted that under the provisions of the scheme the appointed date is uncertain as the scheme does not provide for a specific 5 “effective date”. He submitted therefore that the Petitioner ought to be directed to provide for a specific effective date in the scheme or that this Court ought to provide such date. Clauses 1.2, 1.9 and 20.2 of the scheme referred to by Mr.Avasia in this regard read as under :- “1.2 “Appointed Date” means January 1, 2010 or any such other later date prior to or including the effective date as may be approved by the Board of Directors of the respective Transferor Companies and Transferee Company. 1.9 “Effective Date” means the date of the resolution by the Board of Directors of the Transferee Company and the respective Transferor Companies, resolving that a particular Part of the Scheme has become effective in terms of Clause 20 of the Scheme, but not before filing : . with respect to Part B with the Registrar of Companies, Maharashtra, at Mumbai and Registrar of Companies, Tamil Nadu, at Chennai ; and . with respect to Part C with the Registrar of Companies, Maharashtra at Mumbai References in this scheme to the date of ‘coming into effect of this scheme” or “effectiveness of this scheme” shall mean the Effective Date.” 20.2 Each Part of the Scheme is independent. Each Part of the Scheme would be effective as and when the aforesaid requisite approvals with respect to the said Part are received. Therefore, the non implementability of any of the said Part for non receipt of necessary approvals of that Part shall not affect the implementationbility or otherwise of the other Part of the Scheme, wherein requisite approvals are obtained. The Board of Directors of CIL and the respective Transferor Companies shall mutually resolve as to whether and when each Part of the Scheme becomes effective.” 12. Mr.Avasia’s submission is well founded. The above clauses do leave the appointed date uncertain as it is left to be determined by the Board of Directors of the said companies. Indeed, theoretically there may 6 even be different dates fixed by each company although in practical terms this eventuality may not arise. The defect however, can be cured by deleting in clause 1.9 the words “............ of the resolution by the Board of Directors of the Transferee Company and the respective Transferor Companies, resolving that .............” and the last sentence in clause 20.2. It is so ordered. 13. Mr.Avasia further submitted that clause 19.1 cannot be permitted as it stands, for it authorizes the Board of Directors of the companies to modify the scheme without the sanction of the Court. He submitted that the power to modify the same after its sanction lies only with the High Court that sanctions such scheme. 14. Although this may not have been the intention of the said companies, the clause certainly requires modification to eliminate the defect rightly pointed out by Mr.Avasia. 15. In the circumstances, clause 19.1 is modified by deleting the words “or any other authority” appearing between the words “High Court(s)” and “may deem fit” and also by deleting the words “or which may otherwise be considered necessary, desirable or appropriate by them (i.e. the Board of Directors or a Committee thereof and resolve all issues that may arise for carrying out the Scheme”, appearing between the words “ or impose” and the words “and do all acts ................” It is so ordered. 16. The objections raised on behalf of the Regional Director are thus taken care of. 17. One of the shareholders Mr.D.V. Lakhani objected to the scheme on several grounds. He holds 8000 equity shares which 7 represents 0.000422% of the issued, subscribed and paid up equity capital of the company. 18. Mr.Lakhani submitted that the names of all the joint holders of the shares are required to be mentioned in Form-39. He further submitted that the name of the joint holders present and voting at the meeting is also required to be mentioned in separate columns. This, he submitted was to weed out multiple voting. He submitted that the Petitioner had mentioned only the first shareholders name in the scrutineers’ report and was therefore not as per the provisions of Rule 78 of the Company Court Rules. 19. Rule 78 reads as follows :- 78. Report of the result of the meeting . - The Chairman of the meeting, (or where there are separate meetings, the Chairman of each meeting) shall, within the time fixed by the Judge, or where no time has been fixed, within seven days after conclusion of the meeting, report the result thereof to the Court. The report shall state accurately the number of creditors or class of creditors or the number of members or class of members, 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.” A plain reading of Rule 78 does not support Mr.Lakhani’s submission. It merely requires the Chairman’s Report to state accurately the number inter-alia of persons who were present and who voted at the meeting either in person or by proxy, their individual values and the way they voted. It does not require the names of all the joint holders of the shares to be mentioned. Form-39 also does not support the submission. It merely requires the report to mention inter-alia the names of the members who attended the meeting, their addresses, the number of shares held by them 8 and the way they voted. Mr.Lakhani’s submission, if accepted, would require the rule to be re-written and the form to be amended. 20. Mr.Lakhani relied upon an order dated 13.1.2006 I passed in Company Petition No.639 of 2005 in Re. :- Chemidye Manufacturing Co. Pvt. Ltd. The same were however on the basis of counsels statement and does not constitute a judgment on this point. 21. Mr.Lakhani’s reliance upon the judgment of a learned single Judge in Re. : German Remedies Ltd. (2004) 1 LJ SOFT 104 = (2005) 125 CC 615 is not only not well founded but against this submission. Paragraph 7 relied upon by him reads as under :- “Rule 78 of the Company (Court) Rules, 1959 requires Chairman of the meeting to submit his report of the result of the meeting in Form No.39 giving all the details including the names and address of the members who attended the meeting. The objectors submitted that the Chairman's report gives the number of share holders, their authorised representatives and proxies who attended the meeting but, does not give the individual names and address of the members and therefore, the report is not consonance with Rule 78 and Form No.39. In IndusInd Enterprises & Finance Limited, Company Petition No. 1085/2002 decided on 5th June, 2003, reported in 2003 (8) LJSOFT 47 = 2003 (4) Bom.C.R. 482 = 2003 (4) ALL MR 606, following the decision of the Calcutta High Court in Darjeeling Commercial Company Ltd. v. Pandam Tea Company Ltd., reported in 1983 (54) Company Cases 814, this Court held that Court should not take pedantric and strict view while considering the rules and the forms but, Court should be liberal and substantial compliance of the procedural rules would be enough. The petitioner has filed on record the names and address of the members their authorised representatives and proxies who attended the meeting also giving the manner in which they voted along with the affidavit dated 25th April, 2003 sworn in by Ms. Romy Kaizhi Bilkodivala, Chairman of the meeting. Thus, there has been a substantial compliance of Rule No.78. Initial deficiency, if any, in not giving the names 9 and addresses of the members in the Chairman's Report submitted to the Court is cured. Thus, the scheme cannot be rejected on account of this technicality.” The judgment holds that Rule 78 and/read with Form 39 requires the Chairman to furnish details of the “members who attended the meeting”. 22. The apprehension regarding more than one joint holder voting repeatedly is unfounded. Scrutineers are appointed at such meeting. They are bound to ensure that the voting is in accordance with law. It is always open to them to check any impropriety or dishonesty in this regard. If the circumstances warrant the Court can also investigate complaints in this regard. However, the submission based on an interpretation of the said provisions is not well founded. 23. I did not permit Mr.Lakhani to rely upon the course of action adopted by “some very high executives of reputed companies” in this regard. Their conduct would at the highest be in the nature of their opinions or perception of the provisions of the Companies Act. It is improper for the Court to consider the opinions given to the parties even by former Judges. 24. In the circumstances, the objection in this regard is also rejected. 25. Mr.Lakhani submitted that clause 11 of the scheme was unfair and unjust. Clause 11 reads a under :- “11. UTILISATION OF SECURITIES PREMIUM ACCOUNT OF CIL 11.1. The Goodwill arising pursuant to this Scheme shall be adjusted by CIL against the balance in the Securities Premium Account. 10 11.2 The utilisation of Securities Premium Account, as above, shall be effected as an integral part of the Scheme itself in accordance with the provisions of Section 78 and Sections 100 to 103 of the Act without following the process(es) under sections 100 to 103 of the Act separately as the same does not involve either diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid-up share capital and the order of the High Court(s) sanctioning the Scheme shall be deemed to be an order under Section 102 of the Act confirming the reduction. The provisions of Section 101 of the Act shall not apply.” 26. Mr.Lakhani submitted that the proposal to write off by adjusting the value of the goodwill against the securities premium account is unfair and unjust. He submitted that there was no compulsion on the Petitioner to write off the entire amount of goodwill by adjusting the same from the securities premium account at one stroke. He submitted that this ought to be done in installments. He referred to paragraph 8 of his additional affidavit in which it is stated that International Financial Reporting Standards which come into effect from 1.4.2011 also allows the companies to decide the period of write off and does not make it mandatory to write off at one stroke. 27. Absent any impropriety, mala-fides, fraud or absurdity these are decisions which are best left to the members. It is difficult for the Court to sit in appeal over their judgment in such matters namely whether to write off the amounts in installments or in one stroke. 28. Mr.Lakhani then submitted that the goodwill of the transferor companies which vested in the Petitioner was of the value of Rs.25,319 crores as appearing in the consolidated accounts of the Petitioner for the fifteen months period ending 31st March, 2009. He submitted that the 11 officers of the Petitioner informed the shareholders that the adjustments not exceeding Rs.15,000/- crores towards the goodwill from the securities premium account was only an enabling resolution and that the actual adjustment of that goodwill would be only about Rs.4000/- to Rs.5000/- crores. He submitted that if there is an adjustment of any amount from the share premium account, it would adversely affect his rights as a shareholder to receive bonus shares in future, as bonus shares are to be issued by adjusting the share premium account. 29. Firstly, the goodwill created pursuant to the scheme is being adjusted against the securities premium account. The net worth of the Petitioner remains intact and the adjustment does not affect the same. The apprehension expressed in respect of the entitlement to bonus shares in future being adversely affected as a result of this adjustment is not well founded. While considering whether to sanction the scheme or not, it would be incorrect to consider an application for sanction of a scheme on hypothetical on purely theoretical considerations. It must be remembered that the total reserves of the Petitioner are about Rs.30,100/- crores. The amounts lying in the share premium account is not used only for the purpose of issuing bonus shares. It can also be used towards such other expenses as are permissible even without the sanction of the Court. In other words, the balance in the share premium account is not deducted only towards the issuance of bonus shares. Thus the mere fact that the amounts are adjusted from the share premium account would not justify the conclusion that the ability of a company to issue bonus shares is thereby reduced. The very act of the share premium account being so 12 adjusted therefore, would not justify the Court rejecting the scheme on this ground. 30. Nor is there anything on record which indicates that the adjustment is proposed with a mala-fide motive of depriving the non- promoter shareholders from being issued bonus shares in future. Mr.Lakhani did not establish that the adjustment is proposed to avoid issuing bonus shares to any of the shareholders. 31. The Petitioners undertaking to obtain the valuation report from an independent valuer to determine the fair value of CHIL is accepted. All the undertakings in the affidavit in rejoinder filed on behalf of the Petitioner dated 21.4.2010 and in particular those in paragraph 6 thereof including as to obtaining the valuation report from an independent valuer, using the same as the basis for determining the goodwill at the time of the scheme coming into effect, that the special resolution dated 2.3.2010 will not be relied on or utilized for any purpose except for adjustment of the goodwill arising pursuant to the scheme and to apply to this Court for confirmation of the minute of reduction of the securities premium account after the value of the goodwill to be adjusted is determined, are accepted. If the undertakings are violated the shareholders have a remedy. The undertakings/statements if followed adequately safeguard the interests of the members. 32. Mr.Lakhani “wondered” what would happen if the scheme is approved by this Court but the Government of India does not permit the transfer of the operating assets as contemplated under the scheme. The obvious answer is that if the permission from the Government of India, is 13 required, and is rejected, the scheme will fail. 33. Mr.Lakhani submitted that the company had not complied with the provisions of Section 391(2) of the Companies Act as it had failed to produce the latest financial position as on the date of the hearing of the petition. He submitted that the company had filed only the details of its financial position as on the date of the filing of the petition, but not thereafter. 34. The petition was filed on 2.3.2010 and admitted on 5.3.2010. The unaudited accounts of the Petitioner as on 30.9.2009 were annexed to the petition. Mr.Lakhani submitted that as the petition was heard after nine months on 9.6.2010, the company was bound to file the latest financial position as on 9.6.2010. Having failed to do so, according to him, the scheme cannot be sanctioned. 35. Mr.Lakhani raised this contention in his affidavits dated 13.4.2010 and 26.4.2010. He did not indicate any reason for apprehension on account of any change in the circumstances during the period 30.9.2009 to 13.4.2010 or even 9.6.2010. He merely stated that as a question of law, the petition ought to be rejected on the ground that the latest financial position i.e. the financial position as of 9.6.2010 was not made available by the Petitioner. He based this submission upon a judgment of a learned single Judge of this Court in the case of KEC International Ltd. v. Kamani Employees Union 109 COM CAS 659. There are however other judgments also on this point, to which my attention has been invited by Mr.Chagla and Mr.Avasia. It would be convenient to refer to these judgments chronologically. 14 36. In KEC International Ltd. v. Kamani Employees Union, a learned single Judge of this Court held as under :- “67. The next issue is with regard to non- disclosure of latest financial position. The proviso to Section 391(2) of the Companies Act makes it abundantly clear that no order of sanctioning any compromise or arrangement shall be made by the Court unless the Court is satisfied with regard to the latest financial position. Admittedly in this case the Petitioner has filed an audited financial report as on 31st March, 1997 and not subsequent thereto. The learned Counsel for the Petitioner sought to argue that what is contemplated as latest financial position is as at the time of the meeting and also at the time of filing of the present petition. It would be rather strange in the sense that if the petition were to be heard almost after two years and in that event to say that the Petitioner need not disclose the latest financial position would render the whole objective absurd. If one were to look at the provisions regarding amalgamation scheme the time appears to be the essence in approval of such Schemes. In fact, within the time prescribed, the meeting has to be held, and within 15 days the Chairman has to file his report in this Court and within a week thereof the Petition has to be presented in this Court so as to enable the Court to consider Amalgamation Scheme at the earliest. In a given case the Petition may come up for hearing after three or four years and to say that the Petitioner need not disclose the latest financial position of the Company would render the entire objective meaningless. It is pertinent to note that the words used "Court must be satisfied with regard to the latest financial position of the Company". In this context as mentioned earlier, the judgment of the Delhi High Court in Bhagwan Singh's case (supra) the meaning of words "latest financial position" has categorically been held as the financial position should be when the matter is due for sanction. Obviously, it means at the time of final hearing of the Petition and this requirement is statutory since the Supreme