1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY PETITION NO.382 OF 2008 CONNECTED WITH COMPANY APPLICATION NO.253 OF 2008 In the matter of the Companies Act 1 of 1956; And In the matter of Sections 391 to 394 of the Companies Act, 1956; And In the matter of scheme of amalgamation o Niulab Equipment Company Pvt. Ltd. With Ashco Industries Ltd. Niulab Equipment Co. Pvt. Ltd. ..Petitioner Company. WITH COMPANY PETITION NO.383 OF 2008 CONNECTED WITH COMPANY APPLICATION NO.254 OF 2008 In the matter of the Companies Act 1 of 1956; And 2 In the matter of Sections 391 to 394 of the Companies Act, 1956; And In the matter of scheme of amalgamation of Niulab Equipment Company Pvt. Ltd. With Ashco Industries Ltd. Ashco Industries Ltd. ..Petitioner Company. Mr.Shyam Mehta with Mr. Rajesh Shah i/b. M/s.Rajesh Shah & Co. or the Petitioners. Mr.C. J. Joy with Ms. Bharati Mahant i/b. M/s. S.K. Mohapatra for Regional Director. CORAM : S.J. VAZIFDAR, J. DATE : 24TH MARCH, 2009. ORAL JUDGMENT :- 1. The Petitioners seek the sanction of this Court to a scheme of amalgamation. The Petitioner in Company Petition No.382 of 2008, Niulab Equipment Company Pvt. Ltd., is the transferor company and the Petitioner in Company Petition No.383 of 2008, Ashok Industries Ltd., is the transferee company. 2. The provisions of the scheme as such have not been challenged or even questioned. It is not necessary therefore to deal with it in any detail. Suffice it to state, that under the scheme, the 3 entire undertaking of the transferor company is to stand transferred to and vested in the transferee company as a going concern, subject to the same being sanctioned by this Court. Under the scheme, two equity shares of Rs.10/- each credited as fully paid up capital of the transferee company are to be issued and allotted to all the equity shareholders of the transferor company for every one equity share of the face value of Rs.1/- each, held by them of the transferor company. 3. The Petitioners are under the same management. This was so stated in the Company Application as well as in the Company Petition. 4. Company Application No.253 of 2008 was taken out by the transferor company and Company Application No.254 of 2008 was filed by the transferee company. The Company Applications were disposed of by orders dated 22.2.2008. 5(A). In Company Application No.253 of 2008 the learned Judge dispensed with the convening and holding of the meeting of the equity shareholders of the transferor company in view of the consent given by all equity shareholders agreeing to the scheme of amalgamation. By the said order, the convening and holding of the meeting of the 4 only secured creditor of the transferor company was also dispensed with in view of the averment in paragraph 15 of the Company Application, that there was only one secured creditor viz. Punjab National Bank of the value of Rs.4,43,92,831/- who would not in any way be affected by the scheme as the assets of the transferor company after the proposed amalgamation would be far more than its liabilities and, as such, sufficient to discharge the liabilities and the undertaking to give notice of the date of hearing of the petition by RPAD to the Punjab National Bank. The transferor company was however directed to convene a meeting of the unsecured creditors for the purpose of considering and, if thought it, approving, with or without modification, the scheme of amalgamation. The order directed one Ashok Kotwani, director of the transferor company and, failing him, Mrs. Kanchan A. Kotwani, also a director of the company, to be the Chairman of the said meeting, who, in turn, was directed to report the result thereof within 30 days of the meeting. 5 (B). There is no dispute that the procedure as well as the above order were duly complied with. The unsecured creditors unanimously approved the scheme. (C). By an order dated 25.4.2008 the above petition was admitted, fixed for hearing on 27.6.2008 and the usual directions regarding the public notices and notice to the Regional director, the Official Liquidator and the secured creditor were given. The petition now comes up for final hearing. 6(A). In Company Application No.254 of 2008, the order dated 22.2.2008 directed the transferee company to convene a meeting of the equity shareholders and the unsecured creditors for the purpose of considering and, if thought fit, approving with or without modification, the scheme of amalgamation. The order appointed the said Ashok Kotwani and failing him, the said Mrs. Kanchan A. Kotwani, to be the Chairman of the meeting. The meeting of the secured creditors however was dispensed with in view of what was stated in paragraph 15 of the Company Application viz. that there were four secured creditors of the value of Rs.1,53,647,678/- who would not be affected by the 6 proposed scheme of amalgamation, and the undertaking of the transferee company to give individual notices of the date of hearing of the petition through RPAD to all the secured creditors. (B). There is no dispute that the procedure as well as the above orders were duly complied with. The equity shareholders and the unsecured creditors approved the scheme. (C). By an order dated 25.4.2008 in the above petition, directions were passed in similar terms as those in respect of the transferor company. This petition therefore comes up for final hearing. 7. The Official Liquidator has filed an affidavit in Company Petition No. 382 of 2008 stating that the affairs of the transferor company had been conducted in a proper manner and that the transferor company may be ordered to be dissolved by this Court. The Official Liquidator has not opposed the scheme being sanctioned. 8. As noted above, the entire procedure has been followed. Notices have been give to all the concerned parties. There has been no objection raised by any shareholder or creditor or any other person to the scheme being sanctioned. 7 9. The Regional director however has filed a common affidavit in the above Company Petitions stating that subject to what is stated in paragraphs (viii) and (ix), the scheme appears to be in order. Paragraphs (viii) and (ix) of the affidavit read as under :- “(viii) That affidavits vide dated 16/12/2008, Mr. Ashok Kotwani Managing Director of the Transferee Company admitted that the company and its directors, having regard to the legal opinion and certificates of Company Secretaries, have violated provisions of section 297 of the Companies Act 1956 during the last 3 years. Copy of the said affidavits enclosed herewith and marked as Exhibit `E-1' & `E-2'. The Transferee Company had also moved an application for compounding of the said offence. (ix) Deponent further submits that, a further affidavit dated 16/12/2008 was filed by the said Mr. Ashok Kotwani Managing Director of the Transferee Company, also admitting violation of section 295 of the Companies Act 1956 in respect of the issue of a Corporate Guarantee of Rs. 765 lacs by the company, on behalf of the Transferor Company (which is a private limited company of the promoters of the Transferee Company) to the Punjab National Bank for the credit facilities extended to the Transferor Company without previous approval of the Central Government. Further it has not charged any commission/ quid pro quo for extending the Corporate guarantee, which action was deemed prejudicial to the Transferee Company by the Statutory 8 Auditors in their Report vide Annexure to the Auditors Report dated 30/06/2007. That it may be noted that consequent to the said violation, the office of director held by the Managing Director and other directors fell vacant as the provisions of section 283(1)(h) of the Act stood attracted. In view of the above, the Registrar of Companies is being directed to take necessary penal action for the default under section 295, 297nd section 283 (1)(h) of the Act by the Transferee Company. As the Transferee Company is a listed public limited company, the above facts, being material having a bearing on the affairs of the company in the context of `Corporate Governance', are brought to the notice of this Hon'ble High Court. The letter dated 11/10/2008 and 17/12/2008 of M/s Ashco Industries Limited are annexed hereto and marked as Exhibit `F-1' & `F-2'.” 10. The Punjab National Bank had granted a loan of Rs.765 crores to the transferor company which was secured inter-alia by a guarantee issued by the transferee company. It was contended that the said Ashok Kotwani and Mrs. Kotwani being directors of both the transferor and the transferee companies, the guarantee was issued contrary to and in violation of Section 295. 11. Section 295 reads as under :- “295. Loan to directors etc.—(1) Save as otherwise provided in sub-section (2), no company (hereinafter in this section referred 9 to as “the lending company”) [without obtaining the previous approval of the Central Government in that behalf shall, directly or indirectly,] make any loan to, or give any guarantee or provide any security in connection with a loan made by any other person to, or to any other person by,— (a) any director of the lending company or of a company which is its holding company or any partner or relative of any such director; (b) any firm in which any such director or relative is a partner; (c ) any private company of which any such director is a director, or member; (d) any body corporate at a general meeting of which not less than twenty-five per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors together; or (e) any body Corporate, the Board of directors, managing director, [* * *] or manager whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company. [(2) Sub-section (1) shall not apply to— (a) any loan made, guarantee given or security provided— (i) by a private company unless it is a subsidiary of public company, or (ii) by a banking company; [(b) any loan made by a holding company to its subsidiary company;] 10 [(c) any guarantee given or security provided by a holding company in respect of any loan made to its subsidiary company.] 12. The guarantee issued by the transferee company in favour of the Punjab National Bank is therefore contrary to Section 295(1)(c). 13. Mr. Joy submitted that in view of the violation under Section 295, the said Ashok Kotwani and Mrs. Kotwani had by virtue of the provisions of Section 283(1)(h) vacated office as directors. He submitted that the resolution of the Board of Directors of the transferee company proposing the scheme is therefore void having been passed at a meeting without the requisite quorum. Accordingly, he submitted, all subsequent steps leading to this petition are void. He further submitted that though a violation under Section 295 would not by itself be a ground for rejecting the scheme, it ought to be brought to the notice of the shareholders and creditors. In other words, Mr. Joy, relying upon Section 391(2), submitted that the moment there is a violation under Section 295 the same must be brought to the notice of the shareholders and creditors and that if the same is not done, the matter must be again placed before the shareholders and the creditors disclosing the same to seek their 11 approval afresh. 14. Sections 391(1) and 393(1)(a) read as under : - “391. Power to compromise or make arrangements with creditors and members. —(1) Where a compromise or arrangement is proposed— (a) between a company and its creditors or any class of them; or (b) between a company and its members or any class of them; the [Tribunal] may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the [Tribunal] directs. (2) If a majority in number representing three- fourths in value of the creditors, or class of creditors, or members, or class of members, as the case may be, present and voting either in person or, where proxies are allowed [under the rules made under Section 643], by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the [Tribunal], be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company: 12 [Provided that no order sanctioning any compromise or arrangement shall be made by the [Tribunal] unless the [Tribunal] is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the [Tribunal], by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor’s report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under Sections 235 to 251, and the like.]” “393. Information as to compromises or arrangements with creditors and members. —(1) Where a meeting of creditors or any class of creditors, or of members or any class of members, is called under Section 391: (a) with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect; and in particular, stating any material interests of the directors, managing director, [* * *] or manager of the company, whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on those interests, of the compromise or arrangement, if, and in so far as, it is different from the effect on the like interests of other persons; and (b) .......................................................” 15. The mere fact of a violation of the provisions of Sections 13 235 to 351 by itself does not invalidate or warrant the Court refusing to sanction a scheme of arrangement under Sections 391 to 394, including a scheme of amalgamation. It is not every violation of these sections that disentitles a scheme being proposed or sanctioned. It is only those violations which adversely reflect upon or affect the scheme that would persuade the Court not to sanction the scheme. That Section 391(2) only requires the disclosure of all material facts to the Court, establishes this. If it were otherwise, Section 391, and in particular, sub-section (2) thereof, would have been worded differently. The purport of Section 391(2) is that all the material facts relating to the company including the pendency of any investigation proceedings in relation to the company under Sections 235 to 351 and the like, ought to be disclosed to the Court in order to enable the Court to decide whether or not the scheme ought to be sanctioned in view of such facts. The manner of exercise of discretion would then depend upon the facts of each case. 16. This is fortified by the fact that it is not necessary that a scheme under Sections 391 and 394 is proposed only by the company or its directors or promoters. It may be proposed by others 14 also, such as the members or creditors of the company. Indeed, a scheme could also be proposed by the Official Liquidator of a company. If, for instance, there is a violation of the provisions of Sections 235 to 351 or any one or more of them by a given director, the same would not bar the company or any member or creditor of the company from proposing a scheme under Sections 391 and 394. Even if, for instance, a company is adversely affected due to any acts on the part of its directors, it would not be unusual for an arrangement to be arrived at between the company and its creditors. 17. In a given case the Court may well order any additional facts not earlier noticed, to be placed before the members and/or the creditors of the company to enable them to reconsider their decision to support the scheme. This would depend upon the answer to two questions. Is the fact a material one, to wit, is it relevant or material to the scheme that is proposed. If the answer is in the affirmative, the next question is whether there was an adequate disclosure of the facts to the members, shareholders and other concerned persons. If the answer to either of the questions is in the negative there does not arise the necessity of placing the material before the concerned 15 persons. 18. In the present case, the fact of the guarantee issued by the transferee company to the Punjab National Bank in respect of the loans advanced by the bank to the transferor company and the details of the Board of Directors of both the companies would constitute material facts qua both the companies. 19. The question then is whether there was an adequate disclosure of the facts to the concerned persons. I am of the opinion that there was. 20. Firstly, I do not find the guarantee having been given by the transferee company in respect of the facilities granted by the Punjab National Bank to the transferor company, by itself, to warrant a refusal to the scheme being sanctioned. Mr.Joy has not indicated that the same adversely reflects upon the scheme or that it would adversely affect the members or the creditors or the companies if the scheme is sanctioned. It is not contended that the directors of the two companies had any interest in the scheme except as shareholders in general. The violation of Section 295 does not indicate the same. There is nothing on record which suggests the same either. 16 21. There admittedly is no investigation proceeding pending in relation to the Petitioners, under Sections 235 to 351 including under Section 295 and 297 and the question therefore of disclosing the same does not arise. 22. I am satisfied that there was sufficient material before the members and the shareholders in regard to the guarantee issued by the transferee company to the Punjab National Bank and the details of the directors of the companies to have enabled them to take an informed decision as to whether the scheme ought or ought not to have been sanctioned. (A). The Petitioners in both the Company Applications and both the Company Petitions expressly stated that they were under the same management. 17 (B). The Annual Report of the transferee company for the financial year 2006-07 also contains an important disclosure. Schedule “S” containing the notes to the consolidated accounts refers to the outstanding bank guarantees under the caption “contingent liabilities”. The guarantee by the transferee company on behalf of the transferor company to the Punjab National Bank for the credit limit of Rs.765 crores is specifically referred to therein. Schedule “S” also contains details of “related party disclosures” as under :- “7) RELATED PARTY DISCLOSURES : i) SUBSIDIARY :- Aschco Niulab Exports Limited ii) ASSOCIATE COMPANIES :- Niulab Equipment Company Private Limited ANKK Media Arts Private Limited iii) KEY MANAGEMENT PERSONNEL AND RELATIVES:- Mr.Ashok K. Kotwani Mrs.Kanchan A. Kotwani Mr.Bhagwan K. Kotwani Mr. Manohar K. Kotwani Mr. Ankuish A. Kotwani 18 Ms. Neha A. Kotwani M/s. Sayuj Telcom M/s. Dolly Designs Mrs.Kavita Godhwani (emphasis supplied) (C). The annexure to the Auditor's Report for the year ended 31.3.2007 discloses the opinion of the auditors that the terms and conditions on which the guarantees given by the transferee company for the loan taken by others from the bank are, prima-facie, prejudicial to the company. This was a part of the 21st Annual Report for the year 2006-2007 which was circulated to all the shareholders. The shareholders therefore had the necessary material before them regarding the guarantee. (D). The Annual Report for the financial year 2006-07 of the transferor company in Schedule “C”, which forms part of the balance- sheet with details of secured loans, refers to the guarantee furnished by the transferee company in respect of the facilities granted by the Punjab National Bank. (E). The notice of the meeting convened by the Court by the aforesaid order dated 22.2.2008 in the petition filed by the transferee company, to the shareholders and the unsecured creditors discloses the names of the said Ashok Kotwani and Mrs. Kanchan Kotwani as 19 directors of the transferee company as well as the transferor company and also furnishes details of their shareholdings in both the companies. The said notices state that the directors of the transferee company as well as of the transferor company have no interest in the scheme except as shareholders in general. 23. In the circumstances, I see no reason to compel the facts regarding the violation under Section 295 to be placed before the members or the creditors again. 24(A). Mr. Joy relied upon the judgment of a learned Single Judge of the Kerala High Court in St. Mary' s Finance Ltd. v. R. G. Jayaprakash & Ors., (2000) 99 Company Cases, 359. The judgment is of no relevance to the present case. In that case, the learned Judge found that the scheme itself was fraudulent, unfair and with a view to benefit another company St. Mary's Properties Ltd., to which it had advanced a sum of about Rs. 7.68 crores. The scheme there proposed a compromise between the company and its creditors whereby the amount proposed to be paid to the creditors in installments were far lower than what they were entitled to. Several creditors opposed the scheme. It was found that the relevant fact about the indebtness of 20 the other company had not been brought to the notice of the creditors. It was also held that a director of the company had virtually forced the creditors to issue proxies enabling him to vote in favour of the scheme on the basis of a letter circulated to the creditors, the contents whereof were found to be unfair. The advances to the other company were in fact illegal as the company was admittedly a nidhi company. In the passage at page 370 of the report, relied upon by Mr.Joy, it is in fact expressly held that because of the compromise there, the real beneficiary was St. Mary's Properties Ltd., to whom the company had heavily advanced and that the company had withheld that valid information from the creditors. In the circumstances, it was held that the meeting, at which the company managed to obtain through “compelled proxies” had no validity in the eye of law. The learned Judge referred to the observations of the judgment of the Gujarat High Court in the case of Sidhpur Mills Co. Ltd. In re, AIR 1962 Gujarat, 305 where it was observed that if the director possesses any interest of whatever kind in the scheme, then that interest must be stated in the statement accompanying the scheme. In that case, it was found that the directors in fact 21 possessed an interest in the scheme other than merely as shareholders of the company and that the same had not been disclosed. (B). In the present case, as mentioned earlier, there is nothing to indicate that the directors possessed any interest of any kind in the scheme other than as shareholders of the two companies. Further, the fact of the guarantees and the extent of the liabilities have been disclosed to the shareholders and the members as well as to