In Re: Mafatlal Industries Limited

R. Balia, J.—This appeal is against the order dated November 14, 1994 [See In Re: Mafatlal Industries Ltd., , of the learned company

judge in Company Petition No. 22 of 1994, by which the objections filed by the present appellant in respect of the scheme proposed by Mafatlal

Industries Limited (hereinafter referred to as ""the MIL"") under which a scheme amalgamating Mafatlal Fine Spinning the Manufacturing Company

Limited (hereinafter referred to as ""M. Fine"") with the petitioner, MIL, was approved and sanctioned.

MIL moved the company court for sanction of the scheme under which M. Fine, the transferor-company was to amalgamate with the petitioner

MIL, with effect from April 1, 1993. The application was moved on December 16, 1993, which was numbered as Company Application No. 872

of 19963. On December 22, 1993, the learned company judge issued directors for convening meetings in accordance with section 391(1) of the

Companies Act, 1956 (hereinafter referred to as ""the Act""), and appointed Shri A.N. Mafatlal to preside over the meetings to be convened in

pursuance thereof. In pursuance of this direction, after notices were issued to individual shareholders as well as to the public, an extraordinary

general meeting was held on January 22, 1994, in which the proposed scheme was approved by a majority representing more than three-fourths in

value of the members present and voting either in person or by proxies. After such approval, Company Petition No. 22 of 1994 for sanction of the

scheme was presented on February 8, 1994. In pursuance of the notice of the company petition, the present appellant who is a member of the

Mafatlal family filed his objections opposing the scheme before this court. The transferor-company, M. Fine, having its registered office in the State

of Maharashtra had also moved a similar application before the Bombay High Court. The present objector who is also a shareholder in the said

transferor-company had neither participated in the meeting of shareholders held in pursuance of section 391(2) in the proceedings of application

filed by M. Fine nor did he object to sanctioning of the scheme by the Bombay High Court. The scheme ultimately came to be sanctioned by the

Bombay High Court on the petition filed by M. Fine and had become final, no appeal having been filed against that order. The court also issued

notice to the Central Government u/s 394A of the Act in response to which learned counsel for the Central Government had informed the court

that the Central Government had decided not to make any representation in favour or against the proposed scheme of amalgamation. A report of

the appropriate authority was also submitted that the affairs of the company have been conducted in a manner not prejudicial to the interest of its

members or public interest.

The objections which were raised before the learned company judge were summarised in the following manner in the order under appeal (at

page 248 of 84 Comp Cas) :

Objection No. 1 : The scheme is not for the avowed purpose or objects for which it is proposed.

Objection No. 2 : Consequently, as the scheme is not for the purpose for which it is proclaimed to be, I submit it is for an ulterior motive which is

explained hereinafter in detail.

Objection No. 3 : That the scheme even otherwise is not in the interest of Mafatlal Industries Limited.

Objection No. 4 : Miheer H. Mafatlal, in his personal capacity and as karta of his HUF and as trustee of trusts and his family members are the

shareholders of MIL holding 5 per cent. of the total share capital of MIL. He, therefore, claims that he and his family members are of a distinct

class of shareholders having interest in the petitioner-company, MIL, of a distinct nature in view of the family arrangement dated March 1, 1979,

and, therefore, they were required to be treated as a separate and distinct class of shareholders and their separate meeting was required to be

called for in approving the proposed scheme as the scheme vitally affects the rights of this class of shareholders. In the absence of such meeting,

the scheme ought not to be sanctioned.

Objection No. 5 : The scheme of amalgamation and arrangement was approved at a meeting of shareholders only held under the chairmanship of

Arvind N. Mafatlal. The said Arvind N. Mafatlal is a person who is personally interested in getting the scheme approved and sanctioned. In the

circumstances, he having a personal interest in the scheme, could not have chaired the meeting and at the same time, obtained proxies to vote in

favour of the scheme. The court, in the circumstances, ought not to sanction the scheme.

Objection 6 : The scheme of amalgamation and arrangement along with the explanatory statement thereto, was sent to the shareholders of MIL.

The scheme and the explanatory statement do not disclose all material facts relating to MIL and M. Fine and in the absence of all material facts

being placed before the shareholders, the shareholders are not and were not in a position to exercise an intelligent judgment as to whether they

should vote in favour of the scheme or against it. The notice, the consequential meeting and the resolution passed therein, therefore, are of no effect

and the scheme, in the circumstances, ought not to be sanctioned by this honourable court.

Objection No. 7 : The scheme of amalgamation is passed at a meeting of shareholders which, inter alia, included shareholders like NOCIL and

Sushrupada Investments Pvt. Ltd. whose allotment is illegal and contrary to and in violation of the order of the City Civil Court at Ahmedabad.

Moreover, the rights issues of 1987 and 1992 being under a cloud the allottees of shares under the said issue or their transferees could not have

participated in the meeting of shareholders and passed the resolution favouring amalgamation and hence also the scheme cannot be sanctioned.

Objection No. 8 : The scheme of amalgamation is supported in so far as the fair exchange ratio is concerned by the report of C.C. Chokshi and

Co. and ICICI both of whom being interested parties could not have given any such report and in any event the scheme based on the exchange

ratio fixed on the basis of such report ought not to be sanctioned by this court.

Objection No. 9 : The scheme vitally affects the secured and unsecured creditors and in view of the fact that necessary meeting of such class of

creditors has not been called, this honourable court ought not to grant sanction to the scheme of amalgamation.

It was objected to on behalf of the petitioner-company that the objector having not raised any demur before the Bombay High Court against

sanctioning of the proposed scheme and the objector on account of his conduct and also on account of the fact that he had agreed at one stage to

transfer his shareholding in MIL in favour of Arvind N. Mafatlal or his assignees, he is estopped from raising any objections and the court could not

have entertained such objections in respect of the proposed scheme of amalgamation at the instance of the present objector. The learned company

judge, after noticing the conduct of the objector in relation to participation in the scheme and in dealing with the shares under the alleged family

arrangements was not prepared to reject such objections on that ground and decided to examine each of the objections raised by the appellant in

detail. All the objections were overruled except part of objection No. 7. The court held that allotment of shares out of the rights issue of 1987 to

NOCIL and Sushrupada Investments Private Limited were contrary to and in violation of the stay order of the City Civil Court, Ahmedabad, in

Civil Suits Nos. 3181 and 3182 of 1987, and to the extent of such shareholding the allottees could not have been allowed to participate in the

meeting held in pursuance of the directions of this court dated December 22, 1993. In spite of the aforesaid finding having been recorded against

the petitioner-company that it had allotted certain shares of the rights issue of 1987 in favour of NOCIL and Sushrupada Investments Private Ltd.

contrary to and in violation of order of the City Civil Court operating against the company, the court came to the conclusion that from the material

on record even after exclusion of such illegally issued shares from the consideration, the remaining majority fulfils the statutory requirement of

approving the scheme u/s 391(2) of the Act. Therefore, the result of the meeting was not materially affected so as to affect the validity of the

scheme for non-compliance with the statutory provision relating to the required majority to agree with the proposed scheme. In respect of the

finding recorded against the petitioner-company about allotment of shares out of the rights issue of 1987 in favour of NOCIL and Sushrupada

Investments Private Limited, MIL has preferred cross-objections.

Two preliminary objections have been raised on behalf of the respondents.

Mr. Vakil, learned counsel for the respondent-company, at the outset objects to the maintainability of the appeal at the instance of objector-

appellant, Mihir H. Mafatlal. The reason advanced for this objection is conduct of Mihir H. Mafatlal in not objecting to according of sanction to the

proposed scheme before the Bombay High Court in the petition filed by M. Fine; when he is a shareholder of M. Fine also and had opportunity to

raise such objection. In fact, this was also the plea before the learned single judge to the entertaining of any objections at his instance. He also

submitted that his conduct in not himself remaining present in person in the meeting of shareholders and having not raised objections before the

meeting of shareholders, when he had an opportunity to do so, is now estopped from raising those objections before the court. The court ought not

to entertain such objection. Secondly, in appeal, the appellant is not entitled to raise any new ground whether of fact or law which had not been

raised before the learned company judge particularly when such new contentions are founded on facts not pleaded and needs enquiry into new

facts.

So far as the first objection is concerned, the learned company judge himself has not found it sufficient reason for not examining objections

raised by the present appellant notwithstanding the finding that the appellant had failed to raise such objection when he had an opportunity to do

so. The fact that the Bombay High Court has sanctioned the scheme on the petition filed by M. Fine has little relevance to the maintainability of the

objections or locus standi of the present objector to raise objections to the petition filed by MIL before this court. As discussed in detail by the

learned single judge that is the situation usual to arise in cases where in a scheme of amalgamation the companies involved are situated within the

jurisdiction of different High Courts, necessitating the filing of petitions in separate High Courts, for seeking accord of sanction in respect of a

proposed scheme of amalgamation, which has been approved by members of the concerned companies. This inheres independent application of

mind by two different courts at different times. One is not bound by the finding of the other. Approval by all the concerned courts to the scheme

proposed by the company under its jurisdiction is necessary. It may be that refusal by one results in infructuating the scheme, and may not require

consideration by the other court, the issue becoming of academic importance. But that being the position of law requiring approval from High

Courts of respective jurisdiction, in each court proceedings are independent and the decision by one court does not take away the jurisdiction of

the other to decide the other way round. Section 391 envisages a scheme or arrangement between a company and its members or its creditors or

a class of them. In the case of such scheme of arrangement envisaging amalgamation of two or more companies, what goes before the company is

not the proposal between the two or more companies amalgamating with each other but the scheme in the case of each company and its members

approving such amalgamation. Therefore, the scheme between each company and its members has to be approved through separate proceedings

whether before the same court or separate courts. The same has to be viewed independently, keeping in focus primarily the interests attached with

the petitioner-company, its members and creditors. The fact that simultaneous proceedings before the same court are more convenient and

expedient which result in avoiding duplicity of enquiry and viewing the scheme by the court in the whole perspective, does not make the two

proceedings one.

The exercise of right by any member of a company to object to the scheme proposed by company, which is a matter between him and the

company, is independent of the exercise of the right of members of the other company involved. The fact that a person may be member of both the

companies cannot alter the position about his locus to raise objection to the scheme proposed by the company and not by another company as that

is the independent exercise of a right to object depending upon one''s interest each company vis a vis one''s shareholding in that company.

One has to discern between locus to raise objection to the proposed scheme, and weight to be attached to it. Conduct vis-a-vis a scheme

proposed by company A cannot affect the former, but may be relevant to evaluate the weight to be attached to it.

In fact the main contention of the objector is that the scheme as a whole is heavily loaded in favour of M. Fine and against the interests of MIL.

Therefore, the fact that the objector as a shareholder of M. Fine has not objected to the scheme proposed by M. Fine and approved by its

members, if he has decided to object to the scheme as a shareholder of MIL, when proposed by it, cannot affect his locus to do so. If two

different persons as shareholders of the two companies could lead to the raising of such objections, in spite of sanction by the Bombay High Court,

it cannot affect the locus of Mihir, simply because he happens to be shareholder in both the companies having separate and independent business

interests in the two concerned companies.

The reason is obvious. A scheme of amalgamation is primarily a matter of agreement between the parties thereto. Ordinarily, in the field of

entering into a contract, intervention of the court is not envisaged. The very fact that under the statutory provisions where a compromise or

arrangement is proposed between the company and its creditors or any class of them or between the company and its members or any class of

them, it is required to be sanctioned by the court before it can become operative, even after it has been approved by a requisite majority in

accordance with the requirement under sub-section (2) of section 391 and that the court is not made to act as a rubber stamp to put its seal over

the resolution of the creditors or members, as the case may be, representing the requisite majority of two-thirds; but is required to sanction or

reject the scheme on being satisfied about the fairness and justness of the scheme and the public interest which is likely to be affected thereby

makes it obligatory upon the court to examine the fairness, justness and viability of the scheme as a commercial proposition before it nods its head

in approval. It is a duty cast on the court and is not subject to the raising of any objection from any quarters. Not raising of any voice against it may

be a circumstance which may go in favour of holding the scheme to be just and fair to all interests affected by it and may be approved by the court.

That cannot by itself be a ground for the court to shut its eyes, if anything is pointed out or brought to its notice from whatever source which may

affect the decision of the court in evaluating the justness and fairness of the scheme for the purpose of granting or withholding the sanction. It is only

after the scheme is sanctioned by the court that it becomes binding and enforceable. Therefore, when the jurisdiction of the court to examine the

scheme does not depend on the raising of objections by any particular person or from any particular quarter, the mere fact that the person, who

has come forward to object before the court about the intrinsic worth of the scheme, had failed to do so when he had opportunity to raise such

objections at earlier stage, or his past conduct embellishes his true intention in raising the objections cannot take away the court''s right to look into

these objections. It may affect the evaluation of such objections.

The right of appeal to the person aggrieved by the order of the court also cannot be taken away. We may point out that the right of appeal

under sub-section (7) of section 391 of the Act is not confined to a person who had appeared before the court to oppose or support the proposed

scheme or arrangement. The tenor of the aforesaid provision leaves no room of doubt that any person aggrieved by the order of sanction or

withholding sanction to the proposed scheme can file an appeal. He need not be a person who has actually raised objection before the learned

company judge. Jurisdiction u/s 391 of the Act is not in the nature of settling disputes between the objector and the proposer of the scheme, but is

of sentinel character in the nature of duty cast upon the court to examine the fairness and justness of the proposed scheme to all the interests which

are likely to be affected by the scheme. Therefore, all the persons whose interests are affected are the affected parties by the order and if they have

any grievance against the order passed by the court they have a right to appeal.

Coming to the second preliminary objection, we have no hesitation in accepting in principle that ordinarily no new point of fact or question of

law can be raised by an appellant before the appellate court as a matter of right, and as a matter of practice, ordinarily the appellate court does not

permit the raising of any new questions before it. However, it is equally well settled that where a new plea involving a pure question of law is raised

and it goes to the root of the matter or even where pleas involving questions of fact are raised before the appellate court and the court is of the

opinion that it is necessary to go into such questions so that it may not occasion failure of justice or if new pleas are raised on existing and admitted

material which is already on record, it can permit the raising of such new pleas. Ultimately, it is a matter which rests with the discretion of the court

whether to permit or not to permit the raising of new pleas before it. In this connection, we may also point out that merely raising of another new

objection does not necessarily amount to a new plea. If may be extension or expansion of the plea already raised and discussed by a court from

whose order the appeal is preferred. In such an event arguing an issue in a multiple aspect on the existing material cannot be considered to be

raising of a new plea. The fundamental principles governing such cases are that ordinarily new pleas are not allowed to be raised, which require

investigating new facts; where a new plea is allowed to be raised, the other party must have adequate opportunity to meet the new plea so as not

to cause prejudice to any party. We, therefore, do not propose to reject or uphold the aforesaid objection on abstract principle; but shall bear in

mind the aforesaid principles while considering the various issues raised before us.

In great detail, arguments were prefaced on behalf of both the sides about the ambit and scope of power of the court to enquire into the

matters germane for consideration of sanctioning scheme of compromise or arrangement. We think that, as is indicated in the provisions

themselves, grant of sanction is not a mere formality. Section 391 envisages precisely that compromise or arrangement may be proposed between

a company and its creditors or any class of creditors or between a company and its members or any class of its members or any composite

combination of the company, its members and its creditors. The ordinary principle is that any compromise or arrangement is the outcome of an

agreement between two or more parties and only the parties, who have agreed to such compromise arrangement are bound by it. But, in order that

such compromise be binding not merely on those who are parties to the compromise but on others also who may or may not be agreeable to it for

the larger interest of the company or its members or class of members or creditors or class of creditors, examination by the court, an institution

entrusted with administration of justice and repository of trust that it protects all interests in consonance with the principles of justice and fairplay,

which permeates all its functions in various spheres, is envisaged, whose approval puts a seal of its binding character on all concerned. Once a

compromise or arrangement scheme is proposed by any one or more of the parties, in the first instance, an application is required to be moved

before the court by the company or any of the creditors or members of the company or where the company is wound up, by the liquidator. On

such application being made, the court directs a meeting of the creditors or class of creditors or members or class of members, as the case may be,

to be held and conducted in such a manner, as the court directs. That is the indication that, at the stage of making the application, the court

exercises its power for calling for a meeting to be conducted in a manner in which the court thinks it proper. Thereafter, in the meeting called as per

the direction of the court, 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 by proxy, at the meeting, agree to such

compromise or arrangement, that is the expression of consent or dissent of parties. The process does not end there. Where the compromise or

arrangement has the approval of the required majority the matter is to be brought before court for its sanction. Thereafter, when the compromise

so approved by the requisite majority is sanctioned by the court it becomes binding on all the creditors or all the creditors of the class, or 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. This is another indication that mere requisite majority approving the proposed compromise or

arrangement is not sufficient to make it binding on all concerned. It is further required to be sanctioned by the court. No doubt it is true that

approval accorded to a proposed scheme by an overwhelming majority is a very vital factor while it is considered by the court whether to sanction

it or not and, ordinarily, the court does not substitute its wisdom for the collective wisdom of the shareholders or creditors, as the case may be, in

the matter of effecting any compromise or arrangement between them and the company. Nonetheless the court does not function as a mere rubber

stamp to put its seal on the approval of the majority. It is to be noticed that sub-section (2) of section 391 does not speak merely of sanctioning of

the scheme approved by the requisite majority but forbids from sanctioning any compromise or arrangement unless the court is satisfied that the

company or any other person by whom an application has been made under sub-section (1) has disclosed to the court, 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 and 251 and the like. This requirement is

further indicative of the fact that in respect of a scheme approved by the requisite majority, before the court may at all sanction the scheme, it must

be satisfied about the disclosure of all material facts related to the company by the applicant before it. The very fact that the material facts are

required to be disclosed or in other words the court is required to be satisfied about disclosure of all the facts which are material in its opinion for

the purpose of according sanction, cannot be a requirement of a mere form. Before sanctioning, the court is required to satisfy itself about the

fulfillment of the statutory requirements as well as about the affairs of the company in respect of whom any proposal for compromise or

arrangement is to be made, more particularly about its latest financial position, as may be disclosed from the materials placed by the applicant or

the auditor''s report or otherwise and also about the nature of any investigation that may be pending against the company under sections 235 and

251 of the Act. Not only that, before sanction is accorded for the proposed compromise or arrangement for the purpose of or in connection with

the scheme for amalgamation of a company with other company or companies, the report of the Registrar of Companies is to be obtained

certifying that the affairs of the company have not been conducted in a manner prejudicial to the interest of its members or public interest and also

calling for a report from the official liquidator about the fact whether the affairs of the company, which is the transferor-company, and is to be

dissolved without winding up, have not been conducted in a manner prejudicial to the interest of the members or public interest. This provision

clearly implies that the court is not only to be satisfied that the proposed scheme has been approved by properly conducting meetings in pursuance

of its direction u/s 391(1) of the Act by the requisite majority as is required u/s 391(2) of the Act, but is also to be satisfied about various other

aspects of the matter, namely, the financial position of the companies involved, the fact whether the affairs of the company have not been

conducted in a manner prejudicial to the interest of the members or public interest. Satisfaction about all these affairs is not dependent on raising

objection by any person concerned but is a duty cast upon the court while considering the issue about according sanction.

Undoubtedly, the statute gives wide discretion to approve any arrangement between a company and its shareholders or a company or its

creditors. The guiding factors for the exercise of discretion are now fairly well settled by a catena of decisions. The following principles can be

culled out from various precedents, which guide the courts.

(i) Firstly, the court must be satisfied that the provisions of the statute have been complied with, which means that the court should be satisfied that

the resolutions are passed by the statutory majority in value and in number in accordance with section 391(2) of the Act at a meeting or meetings

duly convened and held. The resolution by the requisite majority is a jurisdictional fact. In the absence of approval of the scheme by the requisite

majority of the members or the creditors in value and in number in accordance with section 391(2), the proposal does not proceed further and the

stage is not at all reached where the court can be called upon to exercise its jurisdiction to accord or withhold sanction. This entails enquiry into the

proper conduct of meetings of members or creditors or class of them, if so required. Ancillary enquiry becomes relevant to know what are the

interests affected by the proposed scheme for the purposes of proper classification.

(ii) The court should satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were fairly represented

by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote

interests adverse to those of the class whom they purport to represent. This requires an enquiry into proper disclosure of relevant facts to

members, creditors and to the courts.

(iii) The arrangement must be such as a man of business would reasonably approve. It is the function of the court to see that the scheme as a

whole, having regard to the general conditions and background and object of the scheme, is a reasonable one, that is to say, if the court is of the

opinion that there is such an objection to it as any reasonable man would say that he would not approve it, then the court may refuse to confirm the

scheme. Where the scheme as a whole is fair and reasonable, the court would not launch on an investigation upon the commercial merits or

demerits of the scheme, which is the function of those who are interested in the arrangement.

The principles have been clearly expressed by Lindley L.J. in Alabama, New Orleans, Texas and Pacific Junction Railway Co., In re [1891] 1

Ch 213, as under (at page 238) :

... what the court has to do is to see, first of all, that the provisions of the statute have been complied with : and, secondly, that the majority has

been acting bona fide. The court also has to see that the minority is not being overridden by a majority having interests of its own clashing with

those of the minority whom they seek to coerce. Further than that, the court has to look at the scheme and see whether it is one as to which

persons acting honestly, and viewing the scheme laid before them in the interests of those whom they represent, take a view which can reasonably

be taken by businessmen. The court must look at the scheme, and see whether the Act has been complied with, whether the majority are acting

bona fide, and whether they are coercing the minority in order to promote interests adverse to those of the class whom they purport to represent;

and then see whether the scheme is a reasonable one or whether there is any reasonable objection to it, or such an objection to it as that any

reasonable man might say that he could not approve of it.

Justice Fry, in his concurring opinion in this regard, said (at page 247) :

Then the next enquiry is - under what circumstances is the court to sanction a resolution which has been passed approving of a compromise or

arrangement ? I shall not attempt to define what elements may enter into the consideration of the court beyond this, that I do not doubt for a

moment that the court is bound to ascertain that all the conditions required by the statute have been complied with; it is bound to be satisfied that

the proposition was made in good faith; and, further, it must be satisfied that the proposal was at least so far fair and reasonable, as that an

intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it. What

other circumstances the court may take into consideration I will not attempt to forecast.

These observations have since then been oft-quoted by various courts in England as well as in India. Almost a century later, Astbury J. in

Anglo Continental Supply Co. Ltd., In re [1922] 2 Ch 723, reiterated (at page 736) :

Before giving its sanction to a scheme of arrangement the court will see, firstly, that the provisions of the statute have been complied with;

secondly, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not

coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and, thirdly, that the arrangement

is such as a man of business would reasonably approve.

Where the proposed arrangement of compromise is for amalgamation or merger or reconstitution of a company, the court is further to satisfy

itself that it is not contrary to public interest.

The principles enunciated in Alabama, New Orleans, Texas and Pacific Junction Railway Co., In re [1891] 1 Ch 213, were reiterated by the

Madras High Court in Coimbatore Cotton Mills Ltd. and Lakshmi Mills Co. Ltd., In re [1980] 50 Comp Cas 623, when the court summarised the

principles (at page 630) :

(1) The court should be satisfied that the resolutions are passed by the statutory majority in value and in number in accordance with section

391(2) of the Companies Act at a meeting or meetings duly convened and held. This matter is jurisdictional in the matter of confirmation of the

scheme...

(2) The court should satisfy itself that those who took part in the meeting are fairly representative of the class and that the statutory meeting did not

coerce the minority in order to promote the adverse interests of those of the class whom they purport to represent.

(3) Lastly, in exercising its discretion under sections 391 and 394 of the Act, the court is not merely acting as a rubber stamp. It is the function of

the court to see that the scheme as a whole, having regard to the general conditions and background and object of the scheme, is a reasonable one

and if the court so finds, it is not for the court to interfere with the collective wisdom of the shareholders of the company...

(4) There should not be any lack of good faith on the part of the majority.

The Bombay High Court in J.S. Davar and Another Vs. Shankar Vishnu Marathe and Others, , speaking through Chandrachud J. (as he then

was), after reviewing a number of authorities including Alabama, New Orleans, Texas and Pacific Junction Railway Co., In re [1891] 1 Ch 213

held at page 461 (at p. 557 of 37 Comp Cas) :

On a review of these authorities and from the provisions in section 153(2) of the Indian Companies Act, 1913, it seems to us clear that the

consent of the majority of creditors or shareholders to a scheme does not conclude the issue whether the scheme should be sanctioned. The

jurisdiction of the court which is called upon to sanction a scheme transcends the mere consideration that a majority of those affected by the

scheme is willing to submit to the scheme. The creditors of a company may agree to accept a fraction of the amount due to them from the company

and yet, on considerations of more lasting importance, like public or commercial morality, the court may refuse to accept the verdict of the

majority. It may also refuse to accept the scheme on the ground that it is not reasonable or that it is not feasible or that there is no chance that it will

yield to a smooth and satisfactory execution. By ''reasonable'' is generally meant that the arrangement can reasonably be supposed by sensible

business people to be for the benefit of the class which they represent. The court will also not sanction the scheme if the facts which would have

influenced the decision of the majority were not known or disclosed to the majority, or if the sponsors of the scheme have misrepresented the true

position of the company. Finally, if the acceptance of the scheme would lead to the stifling of an inquiry into the conduct of the delinquent directors,

the court would be slow to give its sanction to the scheme.

On the same point on similar lines, the Gujarat High Court expressed its view about the ambit and scope of the court''s jurisdiction, while

considering any proposed compromise or arrangement proposing a scheme for amalgamation, in In Re: Maneckchowk and Ahmedabad

Manufacturing Co. Ltd., :

How should the court approach a scheme of compromise and arrangement submitted for its sanction which is shown to have been approved by a

statutory majority of creditors and members who are directly affected by the scheme. The burden, of course, of showing that the scheme is a fair

and reasonable one initially lies on the petitioner. The petitioner must prima facie show that the scheme is pre-eminently fair and reasonable as a

prudent and reasonable shareholder would approve of and not object to. In order to show prima facie that the scheme is fair and reasonable, it is

open to the petitioner to submit that due weight must be accorded to the fact that the majority has recorded a decision in favour of the scheme and

the court must not lightly ignore or set aside that decision...

It must look at the scheme to see that it is a reasonable one and while so doing, the court will be strongly influenced by a big majority vote and the

reasons which actuated the contesting creditors in opposing the scheme. Nonetheless it is essential that the scheme must be a fair and equitable one

though it is none of the business of the court to judge upon the commercial merits which in fact is the function of the creditors and members.

Without multiplying precedents, to borrow the expression of Chandrachud J. in J.S. Davar''s case, AIR 1967 Bom 456, it is not possible to

enumerate exhaustively what materials the court is entitled to take into consideration. The court is required to examine each scheme on its own

merits and in the light of attendant circumstances. The court has to view totality of scheme and its workability primarily from the following points of

view :

(i) whether it satisfies the statutory requirement, and

(ii) whether it satisfies the test of a reasonable scheme proposed in good faith which a man of business would reasonably approve.

The appellant had contended before the learned company judge that he in his personal capacity as karta of the Hindu undivided family and

trustees of the trust settled by members of his family and its family members are holding 5 per cent. of the total share capital of the MIL. According

to the genealogical tree Mafatlal is the founding father of the Mafatlal family''s business empire. He had three sons of whom Pransukhlal died

issueless. Navinchandra''s sons are Arvind, Yogindra and Rasesh. The third brother, Bhagubhai, had only one son, Hemant, who died in 1971,

leaving behind Miheer, the present appellant, his sister and mother. At the time of the death of Miheer''s father, the shareholding of Miheer and

other members of Bhaghubhai''s branch coupled with shares held by trusts settled by Bhaghubhai''s branch was about 50 per cent. in the

aggregate, taking the Mafatlal family''s shareholding as one whole. This was in consonance with principles of sharing the estate of any Hindu

undivided family, 1/2 in the branch of Navneetlal and 1/2 in the branch of Bhagubhai. On certain disputes having arisen between Arvind and his

own brothers a family settlement took place, which is evidenced by a note prepared by Chokshi and Co. on February 24, 1979, suggesting

various alternatives of division of family interest in various companies labelled as the Mafatlal group of companies and by minutes of the meeting

held on March 1, 1979, accepting suggestion No. V in note dated February 24, 1979, with some modification. This settlement envisaged divisions

of family interests in the Mafatlal group of industries amongst the three sons of Navin Mafatlal and Miheer Hemant Mafatlal. Under the settlement

the ratio of existing interests of Navinchandra''s branch and Bhaghubhai''s branch were kept intact, that is to say, the family business was to be so

divided by adjustment of shareholdings in each of the group company so as to divided the half share of Navinchandra amongst his three sons giving

each of Navinchandra''s sons about one-sixth share in the whole, and the 1/2 share of Bhagubhai was to remain with Miheer. In this scheme,

Miheer was to be placed in absolute control of MIL and all other interests outstanding in other members were to be transferred to MHM and he

had to loss all interests in M. Fine. This settlement, which MHM claims to be binding on all concerned gives him a special interests in the

shareholdings of MIL. As a result of the machinations of ANM, the shareholding of MHM, members of his family and family trust was reduced at

the time of the proposed scheme to 5 per cent. of the total share capital. Holders of shares affected by the alleged family settlement, viz., Miheer

H. Mafatlal, the members of his family and family trusts constitute a distinct class of shareholders and their separate meeting ought to have been

called for approving the proposed scheme in terms of section 391(1) of the Act. This contention was rejected by the learned company judge,

primarily on the ground that the so called family arrangement was not one to which to company was party, nor the same had been made part of the

company''s articles of association so as to bind it. In this connection, the learned company judge has also observed that prima facie Miheer has

offered to transfer his shareholdings in MIL to ANM or his assignees on account of which the family arrangement has been superseded.

Before us, it was contended by learned counsel for the appellant that if it is held in his favour that as a result of certain rights or obligations

accruing under the alleged family arrangement in terms of note dated February 24, 1979, followed by the minutes of meeting dated March 1,

1979, the interest of the appellant, Miheer H. Mafatlal, as a shareholder of the company is distinct from other ordinary shareholders, then not only

Miheer H. Mafatlal, but all those shareholders who are affected by the said family arrangement will necessarily constitute one class of shareholders

and the category of ""distinct interests"" under the shares held by the Mafatlal family may not be confined to Miheer H. Mafatlal alone.

This was strenuously contested by Shri S.B. Vakil, learned advocate appearing for the company by stating it raised altogether new grounds

amounting to abandonment of the original plea by substituting a new plea which ought not to be permitted. On the merits it was contended that

without admitting that any such family arrangement to which Miheer H. Mafatlal was a party existed, but assuming for the sake of argument that

there is a family arrangement between the aforesaid four descendants of Mafatlal, the same does not constitute Miheer H. Mafatlal or any one of

them into a separate and distinct class of shareholders different from others for the purpose of section 391 of the Act.

So far as the first objection of learned counsel for the respondent goes, we are not impressed. The basic issue which was raised before the

learned company judge was that as a result of the family arrangement spelt out from the note of Mr. Chokshi dated February 24, 1979, followed

by the minutes dated March 1, 1979, Miheer''s interest in the company became of a distinct nature than other ordinary shareholders. The Act that

he confined this distinct classification to himself and not to others is of little consequence in so far as the court is concerned. If the court comes to

the conclusion that as a result of the family arrangement the interest of the Miheer becomes a separate and distinct interest from that of other

ordinary shareholders to justify separate classification, the further consequence is irresistible that all those whose interests are affected by the said

family arrangement will fall in the same class whether the appellant argues or does not argue to that extant. On agreeing with the objector to confer

upon him the status of a separate class of shareholders on the anvil of the family arrangement, the court cannot stop there, but will have to reach a

logical end by holding that all those affected by the said family arrangement constitute one class of shareholders. Merely by making this obvious

position as a part of the argument in appeal before us it cannot be said that the appellant has raised any new plea.

We may now examine the merits of the objection. It would be necessary here to refer to the relevant provisions in order to appreciate what is

meant by class of members and what is the nature of interest which is required for a separate classification of members and also in what set of

circumstances separate meetings are to be held u/s 391 of the Act. Sub-sections (1) and (2) of section 391 read as under :

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;

(b) between a company and its members or any class of them;

the court 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 court 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 u/s 643, by proxy, at the meeting, agree to any

compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, 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.

On a perusal of the aforesaid, we think that what is envisaged under the provisions are two types of arrangement or compromise. One type of

compromise or arrangement is such which may be between the company and its creditors as a whole or between its members as a whole; and the

other type of compromise or arrangement is such which is not between the company and its creditors or members as a whole, but may be between

the company and a class of creditors or between the company and a class of members. Where under any one single compromise or arrangement,

different terms are offered to a separate class of creditors or separate class of members resulting in creation of different interests in respect of

different class of creditors/shareholders, vis-a-vis the company, different interests come into existence or to say one single compromise; may be an

amalgamation of a separate and independent settlement between the company and a distinct class of shareholders or the creditors, as the case may

be. Sub-section (1) of section 391 envisages on an application being made, the issue of directions for ""meetings of the creditors or class of

creditors or the members or class of members as the case may be"". Likewise, sub-section (2) provides when the scheme becomes binding on all.

It provides, firstly, that in the meeting held in pursuance of directives issued u/s 391(1) it should be agreed to by a majority in number

representing three-fourths in value of creditors or class of creditors or members or class of members, as the case may be, and after such agreement

if sanctioned by the court, such compromise or arrangement shall be binding on all the creditors or all the creditors of class, all the members or all

the members of class, as the case may be.

In our opinion, a plain reading of a section does not leave any doubt that only where separate terms are offered to separate classes of

shareholders or creditors under the proposed compromise or arrangement, separate meetings are required to be held in respect of each class of

creditors or shareholders for whom separate compromise or arrangement has been offered. Otherwise, the use of the phrase ""as the case may be

in sub-section (1) for the purpose of holding separate meetings and in sub-section (2) of section 391 of the Act for the purpose of agreeing with

the propose scheme by requisite majority and its binding effect on being sanctioned by the court, would be superfluous. If in any given case,

whether the compromise or arrangement has been proposed between the company and the creditors as a whole without conferring or spelling out

different terms for different classes of creditors or between the company and its members as a whole without giving any separate package for

different class of members, separate meetings of different classes of members required to be held, the phrase ""as the case may be"" for the purpose

of ordering a meeting of creditors or a class of creditors or of the members or class of members or the requirement of a majority representing the

requisite value of creditors or class of creditors or members or a class of members, as the case may be, would carry no meaning. Whatever may

be the case, if the contention of learned counsel for the objector is to be accepted, whether the compromise is one confined to a class of members

or to a body of members as a whole would make no difference and in each case, a separate meeting will have to be called for only a class of

members irrespective of the fact whether the scheme affects the class differently or not. Or in a given case no compromise or term is offered to a

particular class of shares but may be confined to one or more than a class of shares. Therefore, before adverting to the question whether the

appellant-objector constitutes a separate class of shareholders or not, it has to be seen whether any different terms have been offered to different

classes of creditors or members and whether any classification of members is required to be made in accordance with those distinctions in terms of

the compromise offered to them and whether any such separate meeting was required to be called. The classification of members or creditors will

be founded on the basis of the difference in the terms offered under the scheme. The difference in terms of the scheme can be the only criterion for

identifying the separate class for the purpose of convening a separate meeting for such class.

It is not even the case of the shareholder-objector that any different terms have been offered to persons holding shares affected by the family

arrangement or otherwise. In fact, the entire proposal is one affecting in a like manner all the existing shareholders of the petitioner company,

namely, that under the proposed scheme M. Fine shall be amalgamated with MIL and in consideration of such amalgamation with the petitioner

company, the petitioner company shall make the members of the transferor company participants in its share capital by issuing two shares of MIL

in lieu of live shares of M. Fine to the members of M. Fine or in substance the business of M. Fine shall be acquired by MIL for consideration

which is equal to the conversion of five equity shares of the transferor company to two equity shares of the transferee company. That is to say,

instead of paying cash to the transferor company, the consideration shall be paid in terms of issue of share capital to the members of the transferor

company directly in the aforesaid ratio. That will be so because on amalgamation, the transferor company, M. Fine, shall cease to exist. We have

not been able to apprehend now these terms operate distinctly or differently for one shareholder from another shareholder of MIL vis-a-vis the

interest/rights of the company and its shareholder. Whatever may be the personal interest of the individual shareholder may affect pattern of voting.

If the personal interest of the shareholder or personal ambitions of the individual shareholder constitute a different interest requiring separate

classification then each shareholder irrespective of the terms of the scheme would constitute a class by himself, because the interest of each

shareholder in that sense would be different from others and such interest would be affected differently on the scheme being approved and

implemented. The fact that the petitioner-objector and other members of the Mafatlal family are holding a substantially large number of shares

which hithertofore were controlling MIL because they were acting in unison having now fallen apart and having their interest in conflict with each

other of wholly irrelevant for the purpose of conferring the status of distinct class to any such member so long as under the scheme they are not

treated differently. Any other view will lead to strange and chaotic results. Ought one to know that who stand today apart may be united tomorrow

and vice versa, those in conflict may unite. If such interest simpliciter were to be the relevant consideration for treating them as a separate class, any

private dispute between joint shareholders or groups of shareholders about distribution of a legacy of a legacy would result in conferring the

distinction of a separate class on each of the contesting claimants. That, in our opinion, has no place in the scheme of provisions. The class of

creditors or members envisaged u/s 391 is directly related to interrelationship between the company and the shareholder on the basis of rights and

obligations attached to the class of shares issued and such rights being affected by the proposed scheme of arrangement or compromise differently

and not personal rights of the holders of shares emanating from their right of inheritance or personal contracts between themselves. Who is on the

board of a company or is in the driver''s seat in controlling the affairs of a company is not a part of the proposed scheme or no special rights are

attached to any shareholder, but is a result of democratic functioning of the body of shareholders electing its board.

What constitutes a class of members or a class of creditors, in the context of the provisions of section 391 of the Act, is not defined under

statute. But, as discussed above, it is obvious from the scheme of provision itself that, in order to be treated as a separate class of members or

creditors claiming a right to hold a separate meeting for the purpose of approving the proposed compromise scheme or arrangement by requisite

majority, it must be such which is to be treated differently under the scheme in its implementation or intended effect of the scheme or such interest.

In Palmer''s Company Law, 24th Edition, the principle, which is germane for constituting a separate class of members or creditors requiring a

meeting in pursuance of the directions of the court under the English law, has been enunciated thus :

What constitutes a class :

The court does not itself consider at this point what classes of creditors or members should be made parties to the scheme. This is for the company

to decide, in accordance with what the scheme purports to achieve. The application for an order for meetings is a preliminary step, the applicant

taking the risk that the classes which are fixed by the judge, unusually on the applicant''s request, are sufficient for the ultimate purpose of the

section, the risk being that if in the result, and we emphasise the words ""in the result"" they reveal inadequacies, the scheme will not be approved"".

If, e.g., rights of ordinary shareholders are to be altered, but those of preference shares are not touched, a meeting of ordinary shareholders will be

necessary but not of preference shareholders. If there are different groups within a class the interests of which are different from the rest of the

class, or which are to be treated differently under the scheme, such groups must be treated as separate classes for the purpose of the scheme.

Moreover, when the company has decided what classes are necessary parties to the scheme, it may happen that one class will consist of a small

number of persons who will all be willing to be bound by the scheme. In that case, it is not the practice to hold a meeting of that class, but to make

the class a party to the scheme and to obtain the consent of all its members to be bound. It is, however, necessary for at least one class meeting to

be held in order to give the court jurisdiction under the section.

From the aforesaid, it is clear that what is the primary importance for the purpose of constituting a class requiring a separate meeting thereof, is

different treatment given to a group under the proposed scheme. No separate classification is required until a group is treated differently under the

scheme. The illustration clarifies the position transparently that where rights of ordinary shareholders are to be altered but those of preference

shares are not touched, a meeting of ordinary shareholders alone is required but not of preference shareholders. If amongst the ordinary

shareholders, some group is to be treated differently than the other group, that too, within the class of ordinary shareholders, a separate meeting

may have to be held for the purpose of binding different interests which are treated differently under the scheme. The term of ""any interest treated

differently under the scheme"" is important. The fact that the shareholder-members of the same class, offered the same terms under the scheme

perceive their interest differently or consider that their interest may be affected differently from others because of their interrelationship of their

interests other than as shareholder-simpliciter, cannot sustain their claim to constitute a class distinct from others. Such interest is to be taken care

of by way of expressing their views and voting during the course of the meeting. If that were not so, all interests would be identical and if anybody

has any interest apart from being treated differently under the scheme, likely to be affected in different manner because of the personal

circumstance of the holder of shares or creditor, as the case may be, on account of consequences of the scheme but not on account of the terms of

treatment under the scheme, would lead to the whole provisions being unworkable inasmuch as every person claiming his interest to be adversely

affected by the proposed scheme on that account will have to be treated differently resulting in classification of groups having identical interest and

identical response to the scheme.

A great deal of reliance was placed by learned counsel for the appellant on two judgments in the cases of Sovereign Life Assurance Co. v.

Dodd [1892] 2 QB 573 and Hellenic and General Trust Limited, In re [1976] 1 WLR 123.

However, a close reading of the two judgments, in our opinion, does not lead to a different conclusion, rather it fortifies the conclusion which

we have reached.

In Sovereign Life Assurance Co. v. Dodd [1892] 2 QB 573 , Mr. Dodd had taken two policies of life insurance against his own life from the

company according to which if Mr. Dodd was alive on the date, namely, May 7, 1888, the date of maturity, they would pay the money assured to

Mr. Dodd. Mr. Dodd had paid all the premia payable by him. He had also obtained two separate loans against each policy from the company.

During this period, a petition for winding up of the company was presented. During the pendency of that winding up petition, the policy matured

and the amount became payable under that policy to the assured, which was not paid to Mr. Dodd. After the policies have become matured and

the claims under them and had crystallized in July, 1889, in the first instance, the winding up order was made, and thereafter an arrangement under

the Joint Stock Companies Arrangement Act, 1870, was entered into between the plaintiff-company and another company under which it was

agreed that the plaintiff shall be transferred to another company, in lieu thereof, all the holders of the policies shall accept certain reduced payments

from the transferee company which was approved by a majority of shareholders. Mr. Dodd did not assent to the arrangement. After the scheme

was sanctioned, the plaintiff-company had filed a suit against Mr. Dodd for recovery of the two loans raised against the two policies taken out by

him. In defence, Mr. Dodd claimed full amount payable under the policy as set off which but for winding up would have been payable to him upon

the policies. The plaintiff-company put forward the said arrangement to negative the claim of set off. It is under these circumstances when the

matter reached the Court of Appeal, Bowen J., in his judgment concurring with Lord Esher M.R., stated thus (at page 583) :

If we are to construe the section as it is suggested on behalf of the plaintiffs it ought to be construed we should be holding that a class of policy

holders whose interests are uncertain may by a mere majority in value override the interests of those who have nothing to do with futurity, and

whose rights have been already ascertained. It is obvious that these two sets of interests are inconsistent, and that those whose policies are still

current are deeply interested in sacrificing the interests of those whose policies have matured. They are bound by no community of interest, and

their claims are not capable of being ascertained by any common system of valuation. Are we, then, justified in so construing the Act of Parliament

as to include these persons in one class ? The word ''class'' is vague, and to find out what is meant by it, we must look at the scope of the section,

which is a section enabling the court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the

term ''class'' as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons

whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their command interest.

It would be apparent from the aforesaid principle as applied to the facts of the case before the Court of Appeal, that the court clearly spelt out

dissimilarity of interest vis-a-vis the scheme as existed between the holders of the policy then current requiring payment on a future date of maturity,

valuation of which could not be fairly ascertained on that date and the interest of holders of policies, which on amalgamation have already been

ascertained. Therefore, the two sets of claims were quite dissimilar on the date when the arrangement was being considered vis-a-vis their rights

against the company. Therefore, it became necessary to decide whether the scheme and arrangement proposed is fair and reasonable from

ordinary business point of view. It was considered to be unreasonable that by calling a joint meeting of shareholders an unfair advantage was

offered to the majority in value, namely, those whose rights have not been ascertained to override the interests of the minority whose rights already

stood ascertained against the liquidator of the company. It is apparent that classification of creditors into two classes, namely, holders of the

policies that have been matured and holders of policies that are current are held to have an adverse affect directly as a result of the scheme on their

respective interests because of the state of the things existing on the date of calling of the meeting in relation to rights and liabilities vis-a-vis the

company.

A great deal of argument was advanced and emphasised on the basis of the principle enunciated in Hellenic and General Trust Ltd., In re

[1976] 1 WLR 123. In order to appreciate the ratio of that decision, it would be necessary to notice briefly the circumstances in which the

question had arisen. The proposed arrangement was in respect of a company ""Hellenic and General Trust Limited"". Under the arrangement, all the

ordinary shares of the company were to be cancelled and new shares were to be issued to Hambros which would make the company a wholly

owned subsidiary of Hambros. Holders of such cancelled shares were to be paid by Hambros at 48 p. In short, it was an arrangement for taking

over of the company by Hambros. 53.0 per cent. shares of the Hellenic Company were held by another company, MIT. MIT itself was a wholly

owned subsidiary company of Hambros, the proposed acquirer of the company and the present shareholders were to go out of the Hellenic

Company. u/s 209 of the Companies Act, 1948, where a scheme of take over was proposed if the objectors to the scheme held shares of the

value more than 10 per cent. of the subscribed capital notwithstanding approval by the remainder of the shareholders, they could not be coerced to

sell out their interest and cannot be appropriated by the majority. But it it is a proposed arrangement between a company and its shareholders u/s

206, notwithstanding the fact that the objectors held shares more than 10 per cent. in value if the scheme is proposed by necessary majority,

notwithstanding objections the scheme can be sanctioned and binding on the minority. In this scenario, where the majority of the shares in the

company was held by a wholly owned subsidiary of the acquirer of the company and the company had resorted to the provisions of section 206

instead of section 209, whereas in substance the scheme was of take over of the company in its entirety, the National Bank which held 13.95 per

cent. of ordinar