IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY PETITION No 232 of 2002 For Approval and Signature: Hon'ble MR.JUSTICE KUNDAN SINGH ============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the concerned : NO Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals? -------------------------------------------------------------- GUJARAT AMBUJA EXPORTS LTD., Versus .. -------------------------------------------------------------- Appearance: Mr. Saurabh Soparkar, Senior counsel for MRS SWATI SOPARKAR for the Petitioner. MS PJ DAVAWALA for the Respondent. -------------------------------------------------------------- CORAM : MR.JUSTICE KUNDAN SINGH Date of decision:19.2.2003 CAV JUDGEMENT The present petition is filed under section 391(2) of the Companies Act, 1956 (hereinafter referred to as "The Act") seeking sanction of the Scheme of Compromise and/or arrangement between the petitioner and two different classes of its shareholders. The historical background and objectives and need for such scheme have been narrated in para 9 of the petition and read as under: 1.1. Gujarat Ambuja Exports Limited is a listed public limited company. It is engaged in the business of manufacturing and export of various Agro processed commodities. It is engaged in the manufacturing of 100% Cotton Yarn from Cotton, Starch, Liquid Glucose, Dextrose Monohydrate Powder, Malto Dextrin Powder and other products from Maize, De-oiled Cakes/Extraction and Edible Oil from various Oil Seeds, Wheat Flour and other products from Wheat and various other commodities. It is also engaged in the activities of Merchant Exports and it has the major presence in the International market for its products. The company has a turnover of Rs. 524.43 crores and profits of Rs. 4.40 crores and the reserve of more than 166 crores during the financial year ended on 31.3.2002. Substantial contribution in the turnover is due to the exports which is around 50% of the total turnover of the company. Due to the presence of the company in highly volatile Agro Commodities and Agro Processing Business the company has been able to give the dividend at the rate of only 5% per annum in the last two years. 1.2. The applicant company has more than 2,80,000 shareholders where average holding per share of these shareholders is around 67 shares. The cost of services of these shareholders is around Rs. 30/- per folio and goes on increasing every year. The applicant company's equity shares are tradable under the compulsory dematerialised form and therefore, the shareholders who hold on an average negligible shares are put to lot of difficulties and inconvenience as well as the costs in relation to conversion of their physical holding into dematerialised holding as well as holding cost which is being charged by various depository participants. The market value of the shares of the applicant company held by these shareholders is many a times less than even the annual cost. Due to this prohibitive cost, large number of shareholders have not got their shares dematerialised and still hold them in physical form. This deprives them to trade in the Stock Exchange and even if traded would fetch very negligible amount because of discounted rate offered in case of physical shares. Taking into consideration all these factors the shareholders of the applicant company are not able to even encash the present market value of the shares. Further considering the profitability, the company has been declaring dividends in the range of 5% to 6% per annum in the last few years. However, because of very low holdings per folio, the shareholders situated in the remote area have not been able to even encash the dividends. The company, therefore, intends to reduce the wide base of its equity share capital in order to be cost effective and pay back to the small shareholders their investments at reasonable price. The present scheme therefore is for the mutual benefit of the comapny and its shareholders. 1.3. In these above circumstances, the applicant company has proposed a scheme of arrangement for reduction of capital by paying back the existing small shareholders holding upto 99 equity shares per folio in physical form and extinguishing the same. This will provide an exit route for those shareholders who would like to get the benefit of getting something better than the general market value of their investments without going into the administrative hassel of getting their physical shares dematerialised and also getting better market value than the existing average market rate prevalent for the equity shares of the applicant company. The applicant company has offered to purchase the shares at par as against the average market price of last six months being Rs. 8.40 per share. 1.4. Accordingly, the Board of Directors of the applicant company resolved that subject to such approvals of the shareholders, secured creditors and unsecured creditors of the company and subject to such sanctions of the appropriate courts, as may be required in law, and subject to such consents and permissions of the Central Government and other authorities as may be necessary, the scheme of arrangement be made between the applicant company and the equity shareholders of the company on the broad basis referred to in the Scheme of Arrangement. 2. Earlier the petitioner had moved an application seeking direction for convening the meetings of its shareholders and creditors for considering and if thought fit, approving the Scheme of Compromise. The learned Single Judge of this Court, however, rejected the said application. Against the said order the petitioner preferred an appeal being O.J.Appeal no. 26 of 2002 and the Division Bench of this Court vide its order dated 21.9.2002 permitted the petitioner to convene the different meetings of its shareholders and creditors for the purpose of considering, and if thought fit approving the said Scheme of Compromise. 3. Pursuant to the court's order dated 21.9.2002 for convening meeting, the notices of the meetings were also advertised as directed by the said order in "The Times of India-English daily(Ahmedabad, Mumbai, Delhi, Bangalore, Calcutta, Lucknow, Hyderabad and Pune editions), Economic Times (Chennai edition) and Sandesh Gujarati daily, Ahmedabad of 26.10.2002. 4. On 21.11.2003, the said meetings of the Eligible and other Equity shareholders, Secured and Unsecured Creditors of the Company were duly convened in accordance with the said order and Shri Vijaykumar D.Gupta acted as the Chairman of the same. Said Shri Vijaykumar D.Gupta has reported the results of the meetings to this Hon'ble Court vide the affidavit dated 26.11.2002. 5. The said meeting of the Eligible Equity Shareholders of the company was attended by 1732 members in person and through proxies and the total value of their shares if Rs. 8,55,950/- being 85,595 shares of Rs. 10/- each. Said scheme of Arrangement and Restructure was taken as read at the request of the shareholders present at the meeting. The detailed discussions and deliberations were made on the proposed scheme. The poll was taken to ascertain the wishes of the Equity shareholders which showed the following result. 1704(One thousand Seven hundred and four) equity shareholders present in person or through proxy in the meeting representing the value of Rs. 8,51,240/voted in favour of the proposed resolution. Whereas 4(four) equity share holders present in person or through proxy in the meeting representing the value of Rs. 1,470/- voted against the proposed resolution. Thus, the resolution approving the scheme of arrangement was carried by 99.76% of the members present and 99.83% in value which is much more than the statutory requisite majority and it was resolved as follows: "Resolved that the compromise or arrangement in the nature of the Scheme of Arrangement between Gujarat Ambuja Exports Limited and its Equity shareholders sent alongwith the notice dated 10th October, 2002 for convening this meeting, be and is hereby approved." 6. The said meeting of the Other Equity shareholders of the company was attended by 53 members in person and through proxies and the total value of their shares is Rs.12,00,92,600/- being 1,20,09,260 shares of Rs. 10/- each. Said Scheme of Arrangement and Restructure was taken as read at the request of the shareholders present at the meeting. The detailed discussions and deliberations were made on the proposed scheme. The poll was taken to ascertain the wishes of the Equity shareholders which showed the following result. 51(Fiftyone) equity shareholders present in person or through proxy in the meeting representing the value of Rs. 12,00,92,140/- voted in favour of the proposed resolution. Whereas the ballot used by 2(two) equity shareholders present in person or through proxy in the meeting representing the value of Rs. 460/- were found to be invalid. Thus, the resolution approving the scheme of arrangement was carried unanimously by the members present and voting and it was resolved as follows: "Resolved that the compromise or arrangement in the nature of the Scheme of Arrangement between Gujarat Ambuja Exports Limited and its equity shareholders sent alongwith the notice dated 10th October, 2002 for convening this meeting, be and is hereby approved." 7. The said meeting of the Secured Creditors of the Company was attended by 02(two) secured creditors in person and through proxies and the total value of their debts is Rs. 92,11,38,109.97. Said scheme of Arrangement was taken as read with the permission of all the creditors present at the meeting. The detailed discussions and deliberations were made on the proposed scheme. The poll was taken to ascertain the wishes of the Secured creditors which showed the following result. Both the Secured Creditors present in person representing the value of Rs. 92,11,38,109.97 voted in favour of the proposed resolution. Whereas none of the secured creditors present at the meeting voted against the proposed resolution. Hence, the resolution approving the scheme of arrangement was carried unanimously and it was resolved as follows: "Resolved that the compromise or arrangement in the nature of the Scheme of Arrangement between Gujarat Ambuja Exports Limited and its Equity Shareholders and Secured Creditors of the company sent alongwith the notice dated 10th October, 2002 for convening this meeting, be and is hereby approved." 8. The said meeting of the Unsecured Creditors of the Company was attended by 29(twentynine) unsecured creditors in person and through proxies and the total value of their debts is Rs. 10,55,71,993.83. Said Scheme of Arrangement was taken as read with the permission of all the creditors present at the meeting. The detailed discussions and deliberations were made on the proposed scheme. The poll was taken to ascertain the wishes of the Unsecured creditors which showed the following result. Unsecured Creditors present in person or proxy representing value of Rs. 10,55,71,993.83 ps. voted in favour of the proposed resolution. Whereas none of the unsecured creditors present at the meeting voted against the proposed resolution. Hence, the resolution approving the scheme of arrangement was carried unanimously and it was resolved as follows: "Resolved that the compromise or arrangement in the nature of the Scheme of Arrangement between Gujarat Ambuja Exports Limited and its equity shareholders and Unsecured Creditors of the company sent alongwith the notice dated 10th October, 2002 for convening this meeting, be and is hereby approved." 9. The outcome of the Option forms sent to all the eligible equity shareholders for exercising the option for the willingness to continue their shareholding or opt for the repayment as proposed is attched as exhibit "F". In light of the amounts arrived at considering the response of the shareholders, the total amount of the Share capital that will be reduced, on the scheme being effective, comes to Rs. 6,21,70,840/-. The Special Resolution passed at the General meeting of the company for this purpose as referred earlier is also attached as Exhibit "D". 10. Pursuant to the court's order, the petitioner convened different meetings on 21st November, 2002 as is pointed out above. The said scheme has been approved by more than 99% of the eligible shareholders. So far as the meetings of other shareholders, unsecured creditors and secured creditors are concerned, they have approved the said scheme unanimously in their respective meetings. In view of this, the scheme has been approved by the requisite statutory majority in different meetings. After the present petition was filed on 10.12.2002, the same was admitted and notice of hearing was ordered to be published in newspapers. The same has been done and an affidavit to that effect has already been filed before this Court. Notice of the petition has also been served upon the Central Government and Ms. P.J.Davawala, the Additional Central Government Standing Counsel has appeared on its behalf. 11. The petition was taken up for hearing and final disposal before this Court. At that time, Mr. S.N.Soparkar, Senior Advocate appearing on behalf of the petitioner submitted that considering the facts and circumstances of the case the petition is required to be allowed and the scheme deserves to be sanctioned. For this purpose, he firstly relied upon the judgment of Supreme Court of India in the case of Miheer H. Mafatlal vs. Mafatlal Industries Ltd. (AIR 1997 SC, 506), wherein the Supreme Court of India has laid down following principles to be considered while approving the Scheme of Compromise under section 391 of the Act. "(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 if 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 391(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 and veil of apparent corporate purpose underlying the scheme and can judiciously x-ray the same. (7) That the company could has also to satisfy itself that members or class of members or creditors or class of creditors, as the cas may be, were acting bonafide and in good faith and were not coercing the minority in order to promise 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 of 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 or person who with their open eyes have given their approval to the scheme even if the view of the court there could be a better scheme for the company and its members or creditors for whom the scheme on that grounds it would otherwise amount to the court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction". 12. He also pointed out that pursuant to the published advertisement only two shareholders have lodged their objections which are not of any significant value. He also referred to the observations made by the Central Government in the letter dated 13.1.2003 addressed by the Regional Director, Department of Company Affairs to the Registrar of Companies, Gujarat, Ahmedabad and submitted that the observations have no substance in law. However, Ms. Davawala referred to this observation and submitted that the same are required to be taken into consideration while considering the sanction of the Scheme. 13. Having heard the learned counsel appearing the parties, in my view the scheme requires tobe sanctioned. As is pointed out by the Supreme Court in the case of Miheer Mafatlal (Supra) this court, while sanctioning the scheme does not sit in appeal over the commercial wisdom of majority of the class of persons who with their open eyes have given their approval to the scheme and this court cannot refuse the scheme on the ground that the better scheme for the benefit of the members or creditors could have been formed. 14. In light of the limited role which the court has to perform at this stage, I propose to consider the objections of two shareholders as also the observations of the Central Government. 15. Pursuant to the published advertisement petitions have been filed by one Smt. Ratna Sainathan as also by one Smt. Manjurani Agrawal. Broadly stated, according to them, the proposed scheme is not fair and that the shareholders should be given better offer. The petitioner has adequately dealt with these objections by filing affidavit on 8.1.2003 and in particular, it is pointed that the scheme is not mandatory at all-if any one does not want his share to be bought over, he was required to indicate to the company his choice of continuing with the company as its shareholder and in that case notwithstanding the scheme he would be continued to be shareholder having the identical rights to which he is entitled today. In other words, the scheme is optional and those who do not want to take the benefit may as well decline to take the same. In that view of the matter, in my view, these objections have no merits. There was nothing which compelled the objectors to offer their shares for purchase and if the objectors wanted to continue as shareholders, they should have chosen the same. In that matter, in my view, these objections are illegal and accordingly the same are rejected. Ms. Davawala has placed on record a letter dated 13.1.2003 which contains certain observations of the Central Government. For the sake of clarity, the same are reproduced hereunder: "With reference to the above, I have to state that the petition in respect of scheme of arrangement of the above company have been examined. It is seen that the scheme involves buy back of shares for which the company should have adopted the procedure laid down under section 77A of the Companies Act, 1956. The option in Form A given to shareholders who are eligible shareholders is that they have to sign and send the form if they wish to continue as shareholders. Those who do not exercise the option to continue as shareholders would in effect be treated as having opted to receive payment against the cancellation of shares. This involves negative option and against the interest of small shareholders and as such the above matter may be brought to the notice of the Hon'ble Court at the time of hearing." 16. At the outset, it may be noted that according to the communication contained in the letter these are not the objections of the Central Government at all. As a matter of fact, according to this letter the Central Government does not object to the scheme but has only required this Court to notice the facts stated above. 17. Two aspects are highlighted by the Central Government which are dealt with hereinafter. According to the Central Government, the scheme involves buy back of shares for which the petitioner should have adopted the procedure laid down under section 77A of the Act. At the outset, it may be noted that Ms. Davawala, the learned Additional Standing Counsel for the Central Government read out the objection of the Central Government and contended that in the absence of giving reply to the company for opting to continue as shareholder, the company should not have presumed that the shareholder is ready to buy back of his share, but in case no reply is sent by the shareholder, it should be presumed that the shareholder is ready to continue as a shareholder. Negative option should be treated as ready to continue as a shareholder. Mr. Soparkar, learned Senior Advocate appearing for the petitioner company submitted that these observation in the letter and her contentions are legally unsustainable. It was pointed out that such a scheme cannot be framed under section 77A because section 77A envisages buy back of shares from all the present shareholders on a proportionate basis. In other words, every shareholder has to be offered buy back on proportionate basis. It was submitted before me that in the present scheme the only "Eligible shareholders" are offered the scheme. The eligible shareholders, in brief, are who hold less than 100 shares in physical form are not required to spend money for the purpose of getting their shares in DEMAT form at a cost and should not suffer loss when they sell the shares on stock market because they would not realise the full market price. It was pointed out that such a scheme cannot be covered under section 77-A of the Act. This is nothing but a compromise and an arrangement between the petitioner and its two classes of its shareholders, which would fall squarely under section 391 of the Act. For this purpose, he relied upon the decision of Division Bench Judgment of the Bombay High Court dated 15.7.2002 in the case of Securities and Exchange Board of India vs. Sterlite Industries (India) Ltd. in Appeal Lodging no. 520 of 2002 in Company Petition No. 203 of 2002 in Company Application No. 18 of 2002. The relevant portion reads as under: "The submission of the appellant that the non-obstante clause in section 77A gives precedence to that section over the provisions of sections 100-104, section 391 is misconceived. The non-obstante clause in section 77A namely "Notwithstanding anything contained in this Act.." only mean that notwithstanding the provisions of section 77 and sections 100-104, the company can buy back its shares subject to compliance with the conditions mentioned in that section without approaching the court under sections 100-104 or section 391. There is nothing in the provision of section 77A to indicate that the jurisdiction of the court under section 391 or 394 has been taken away or substituted. It is well settled that the exclusion of the jurisdiction of the court should not readily be inferred, such exclusion should be explicitly or clearly implied. There is nothing in the language of section 77 that gives rise to such an inference. We are, therefore, inclined to hold that section 77A is merely an enabling provision and Court's powers under sections 100-104 and section 391 are not in any way affected. The conditions provided in section 77A are applicable only to buy back of shares effected under section 77A. The conditions applicable to sections 100-104 and section 391 cannot be imported into or made applicable to a buy-back under section 77A. Similarly, the conditions for a buy-back under section 77A cannot be applied to a scheme under section 100-104 and section391. The two operate in independent fields. It is not disputed before us that reduction in the capital can be effected under section 77 read with sections 100-104 and 391 even in the case of buy-back of