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

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 underappellant 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 thethat 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.

Court's reasoning:
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.